An economics, investment, trading and policy blog with a focus on Modern Monetary Theory (MMT). We seek the truth, avoid the mainstream and are virulently anti-neoliberalism.
Evan Soltas is a freshman this Fall at Princeton. He is 18. Here is the picture he gives of the Great Depression, and here is a short bio taken from his website:
Note that the macroeconomic calamity of the Great Depression was preceded by a massive boom-and-bust in residential construction -- that should seem familiar and perhaps raise questions of causation.
Just basic Austrian history and theory.
BTW, here's John Carney:
I’m not convinced that a return to sound money is possible. Our government is too big, our banking system too entrenched, to ever permit a reversion to gold.
But if you are going to attempt an intellectual assault on the gold standard, you can’t just point to price instability in the 1920s. The Austrians have been here before you—and they understand the period much better. And, more importantly, the value of a gold standard does not hinge on price stability in the first place.
What does the value of a gold standard hinge on in the first place?
The most important factor in support of gold and silver as money is that the amount of gold and silver cannot be artificially increased by government. That means that the government is as constrained in its nefarious schemes as much as possible and prices stated in gold and silver are reflective of real world supply and demand, not artificial stimuli.
Money artificially brought forth by the government? What has happened in this artificial stimuli? 1. Interstate system. 2. Landing man on the moon and associated technologies. 3. Numerous scientific and engineering marvels from the national labs, darpa, and other Government labs. 4. The internet. 5. And so on.
Delusionomics will have you worship an element when it is just a scam for wealthy malefactors perpetrated by their Liberlackeys.
To learn about gold and other elements and there uses see: http://www.webelements.com/
Gold's most common use is for Bling because some people get caught in a trance because it is shiny. http://www.webelements.com/gold/
As if we would have no inventions without fiat funny money funded endless wars and the boom/bust cycle that funny money induces. What a pitiful argument. The whole point of fiat funny money is to steal purchasing power from the powerless holding the existing money and transfer it to the elite and sophisticated financial experts. And you can fund endless wars with fiat funny money about which the public might object if they had to pay war taxes in real time and/or understood the scam.
BTW, did you know that the Nazis invented the tape recorder and missile technology?
Bob, if the most important factor is that the government cannot artificially create the money.. why gold or silver? Why not salt? Or would salt be fine?
Is it important to back money by something that people don't use/destroy in their daily lives.. e.g. salt?
False. There have been more severe and recurrent cycles with gold standard and free banking.
Please stop the non-sense propaganda, all that is well documented. If anything the evolution towards current system has made things more stable while permitting rapid evolution, only the assault of neoliberalism at policy positions is what has skewed wealth in the last decades.
vimothy "OT, but Tom have you listened to the most recent EconTalk? It's with Neil Barofsky, former TARP Special Investor General and author of Bailout Nation"
I have been busy lately and haven't had a chance to get into Barofsky yet. Thanks for the link to the podcast. It's on my high priority list.
I've been thinking lately about some of the differences between MMT and Monetary Realism, specifically about what gives fiat currency value. I think that a synthesis of the two perspectives is correct.
1) MMT seems correct that the reason we use the U.S. Dollar in the United States, AS OPPOSED TO another currency or gold or silver or whatever, is because our tax liability creates a very strong demand for the U.S. Dollar over other possible options. After all, I forget who said it, that anyone can create money, but the trick is getting people to accept it.
2) MR seems correct that productivity is the central component for understanding the RELATIVE VALUE between currencies. For example, the reason some currencies are more valuable to hold than others is precisley because of our ability to purchase things that we want by using that currency. If a poor country has little for sale, their currency is likely not that valuable because there isn't much to buy with it. Likewise, a country like the United States has a very valuable currency because there is a lot you can purchase with dollars.
Anyone disagree or think that I'm missing something? (besides Bob)
3. Money as social construct - economic anthropology, sociology, and institutional economics.
MMT economists deal with all of the them, however, a primary issue in modern economies is with currencies (state money) and MMT focuses on this, ergo, "Chartalism," and "Neo-Chartalism." However, MMT is not exclusively Chartalist.
MMT economists deal with all of these things but the MMT framework is based almost entirely in system math. The conclusions MMT economists come to wrt those other issues are predicated on the system foundation.
Bill Mitchell writes massively long posts with many semantic examples and anecdotes but he consistently returns to the math to drive home his point, and the math he returns to is pretty much always the same.
This is because the fundamental system is very simple, hidden in plain view.
"the MMT framework is based almost entirely in system math"
I would put it slightly differently. The MMT system is based on accounting identities rather than equations expressing functions interpreted as claims about independent and dependent variables being related causally. This is the operational description and SFC modeling of sectoral balances, for example.
As an economic theory, MMT formulates hypotheses based on this foundation that make causal claims. These are empirical statements that can be tested against data, e.g., through simulations. This is where the more advanced math comes in, accounting being just basic addition and subtract of entries in accounting records.
There are also factual claims wrt the operational description of banking, especially central banking, and the relationship of intra-governmental operations.
There are also historical claims about monetary theory, which purport to be decidable factually to a great degree, although there is a significant amount of inference wrt the anthropological aspect of the development of money as a social construct based on trust, which lead to the credit-debt construct.
However, the accounting reflects the fundamental system relationships from which stocks can be derived from flows. Thus, the foundation of MMT is a systematic approach based on data entry using reported data. No assumption at this stage, other than the overall framework of accounting that is generally agreed upon and reflected in SOP and specific institutional rules. The basics of SFC macro modeling based on sectoral balances are set forth in Godely and Lavoie, Monetary Economics (2007).
When we arrive at theory, the MMT enters the field of traditional economics and adopts a Post Keynesian type of approach, assuming a great deal of previous work in the field, but integrating it from the perspective of MMT.
Randy Wray's primer, now published as Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems, and the promised -soon textbook that Randy and Bill Mitchell have been working on are the first attempts to state MMT comprehensively. Until now, it has been presented in papers and blog posts that have not been pulled together.
From this follows a framework for formulation of policy options, and, importantly, as standard for deciding which options are infeasible, e.g., because they do not conform to sectoral balance identities such as the SB's summing to zero. This is the math contraint on policy.
"the MMT framework is based almost entirely in system math"
rephrasing…
the MMT framework is based almost entirely in system IDENTITIES.
This is what I mean, I've just been hesitant to use the term "identity", and I'm not even sure that is the right term.
I hammer away at this incessantly because I think it is an important point to be made, and it has been a very difficult point to make.
These very simple relationships are at the root of every economic problem we face. Everything below this truth in the hierarchy is subordinate.
That's why I make the claim that human behavior, the social sciences, philosophy, semantics, laws, policies, everything is subordinate to these simple truths.
None of those things I mentioned has any chance of success wrt the economy if the fundamental system is not healthy, ie deprived of funds/spending.
If your TV isn't plugged in no signal will give you a picture. A million-volt signal may give you a fireworks display but it will be brief and not particularly helpful.
You can have a pefectly healthy body in every way - if the heart stops it's over. A failure in the other systems and life may still be able to go on.
This is what I mean by a fundamental truth.
If we can't get the system identity part right and in a stable dynamic, how can anything else we do wrt the economy succeed?
I say it can't. This has been another edition of "economics according to paul". ;-)
"MMT is a systematic approach based on data entry using reported data"
Not really. MMT theory operates in a perfect virtual world. There is in fact a real exact tarnsaction taking place at avery instant even though we can't report it accurately. What we report from data should be very close to the reality and we can safely assume that any discrepancy is on on our end not MMT's.
Since we're going down this road I would also like to point out that the Flow of Funds and NIPA reports are not stock-flow consistent, therefore many arguments made on the basis of what is reported fails the test of the sectoral balances.
The sectoral balances identity represents the theoretical baseline and at the very least those reports can't be used as an argument against the validity of MMT or it's theories.
The key point is that the math is based on accounting identities that are stipulated as institutional rules. Science is also math-based but it uses scientific laws that are empirical, hence can never achieve a probability of one. As long as accounting is done the way it is, it is a system of postulated rules, in which some things are ruled out. Identities just say formally that the rules are such that that accounts must balance. There are no causal claims about how things stand in the world at this point in the analysis. This is building the foundation.
"the math is based on accounting identities that are stipulated as institutional rules"
Tom, I respectfully disagree. Maybe it's semantics but a monetary economy is arranged in a certain way that is not accidental. It follows from natural relationships the evolution of which was also not accidental.
It's my view that any alternative system we could have come up with would be bound by similar if not identical arrangements.
For example it wouldn't be possible to set up a system that wasn't consistent with closed system rules.
Now maybe we could have come up with a system where people didn't have to be coaxed to perform on cue for monetary reward, but other than slavery I don't see many successful examples of those kinds of systems in history.
At the macro level, yes. Everyone stipulates this, and then acts as if the data were uniformly good, historically and globally when a lot of it is just guessing or using reporting based on different rules. I recall that one of the required readings in my Econ 101 course was, "How to Lie with Statistics."
Theoretically, everything can be traced by to the journals from which general ledgers are constructed. This is the "microfoundations."
What is being represented is actual transactions reported in nominal terms. The journals reflect the transactions where nominal means actual. So in principle, it would be possible to get back from aggregates to individual items, e.g., if all transactions were barcoded and recorded digitally onto a global supercomputer that spits out realtime reports that are available publicly for complete transparency.
Yes, that's coming in the future, but it still won't be complete without a comprehensive surveillance society. Probably also coming.
Does anyone know which are the 'strongest' currencies (in order of 'strength')? We could compare that to the 'most productive countries' to see how they match up.
"it would be possible to get back from aggregates to individual items"
It's possible now, at least for the sectoral balances.
G, T, X and M are known quantities to a pretty high level of accuracy, thus we can calculate (I - S). I'm not sure the individual terms I and S have much meaning in the economic sense so I'm not sure knowing them is particularly important.
Not only that but when I say that the reports are not stock-flow consistent I mean that they are not reporting the measure of "net savings" consistent with the sectoral balances. The reports are "out of pardigm".
Net Savings reported in the FoF/NIPA is a completely different animal than the MMT/sectoral balances version.
I don't know that you could derive MMT net savings directly from the relevant sub-accounts in these reports.
The measure of savings in the reports has little economic relevance, it ignores liabilities acquired in order to fund those savings and gives little information about the inherent instability of funding savings with debt (private debt). We know now that "savings" aren't used for anything (or at least not very much), they just represent accounting balances. Savings don't fund anything, they allow investors to "use" them to leverage new money out of thin air to finance their boondoggles.
Further complicating an already abstract construction is the definition of saving itself.
The accepted definition of saving is income not spent. This misses the larger reality that all money in its natural state is saving. Money spends all of it's time in existence in the state of saving, ie resting.
Spending is an event that occurs at a point in time with no associated time value. Spending is an event, not a state.
Another binary relationship occurring naturally in the real world.
I think that is why MMT ignores the conventional definition of saving and looks only at the net result of saving, which is to remove funds from the pool of spending. In the mainstream context it isn't particularly useful.
The brou-ha-ha over Bill Mitchells characterization of saving a few months back served merely to show that the critics didn't understand what they were talking about and weren't in a position to understand the alternate view.
I don't know that you could derive MMT net savings directly from the relevant sub-accounts in these reports.
The basic conception of accounting is that the higher level reports can in principle be traced by to individual journal entires. when an audit takes place, auditors at least sample the whole range of accounting and the "shoeboxes" where the receipts that get entered into journals get stored for the required period. If you even have an IRS audit, you will find out about this first hand, because your CPA will ask you to provide this data so s/he can make your case to the referee base on what s/he has in hand.
In accounting, saving is a residual, i.e., "income not spent in a period," which flows to the stock of savings. "Net saving" for the domestic private sector is an aggregate that means (household) income less (firm) investment (firm expenditure on capital goods and inventory).
MMT uses "net saving" somewhat differently to mean non-govt saving of NFA. This is also the outcome of SFC modeling based on accounting data in which the entries go back to actual transactions.
"In accounting, saving is a residual, i.e., "income not spent in a period," which flows to the stock of savings."
Accounting is a useful and necessary tool but it helps us to take a step back and look at this from another perspective.
Saving is a residual but that in itself doesn't tell us much of anything. It's a term that doesn't resonate with the masses.
Saving is first and foremost a demand leakage, it is damaging to the economy as a whole and is the functional equivalent of sequestering spending over the long term.
Someday it may return to the spending pool when a rich SOB dies and his worthless kids spend what they didn't earn. Until then it may as well not exist.
Worse, excess saving enables a very small subset of the population to effectively buy market power from the rest of us without really having to give up anything. Anything can be bought these days.
""Net saving" for the domestic private sector is an aggregate that means (household) income less (firm) investment (firm expenditure on capital goods and inventory)."
In the mainstream accounting of this liabilities from debt appear to be waved away, even though much of what is booked as saving is the result of someone else's debt.
This promotes a skewed view re the actual health of the economy which helped lead us to the spot we are in.
Again, I return to the basic point, which is the foundation, being based in accounting, does not require any assumptions about putative causality. That comes later for MMT, when arrows of causality are drawn wrt what identities and operations imply.
In contrast, many economic/econometric models are based on functions relating independent and dependent variables in putatively causal relationships. The causality is stipulated or justified by analysis through statistical correlation.
Hope you don't feel like I'm disagreeing with you on these core issues.
The things I've been writing are an effort to express my abstract view of the world in my own words,
Much of the time discussions get into much more complexity than is necessary in my view. People that are 99% in agreement end up arguing over trivial differences.
No problem. IIRC, the discussion started with my emphasis that MMT's foundation is an operational description based on accounting rather than assumptions involving causality. This the key thing to keep in mind in my view.
"MMT's foundation is an operational description based on accounting rather than assumptions involving causality. This the key thing to keep in mind in my view."
I agree with this characterization. I don't think my view of the world contradicts it. Will have to chew on it for a while to see if it does.
Causality is another vague concept. I haven't claimed that spending "causes" the system described by the accounting identity to function. Rather, I've been making the claim that that system will not function without spending. The identity will be static, no flow. Thus, meaningless.
Maybe this is still not what you are thinking wrt my arguments but at any rate I think of these kinds of discussions as dialog not disagreement.
I am trying to get on the same abstract page you are on to better understand the meaning of your comments as opposed to the literal translation.
paul, I am saying that MMTs approach and other methodological approach to macro is night and day since MMT is based on accounting and operational description rather than theoretical assumptions. The result is a different approach to modeling — and closer to reality.
"I am saying that MMTs approach and other methodological approach to macro is night and day since MMT is based on accounting and operational description rather than theoretical assumptions. The result is a different approach to modeling — and closer to reality."
Tom,
If that quote above is a distillation of the point you have been pressing you had me at hello.
Still, I've had the lingering feeling that even though we agree you are somehow disagreeing with something I've written or in some abstract way that I can't see. I've continued probing to try to figure out what that difference might be.
My conclusion is we're 99.9 % on the same page and I can't find the 0.1% where were not, even though it feels like that 0.1% exists.
If I had to distill my POV down to a couple of sentences it would be that the discussion of MMT vs the world is a lot simpler than most make it out to be and we should avoid a lot of the unproductive minutia that gets caked on top of the argument. It's a distraction.
What I am trying to emphasize is the basic difference between the MMT and neoclassical approaches. But are dealing with relatively simple systems in their basic models, but the MMT appraoch is based on accounting (transactions) and SFC consistency.
The neoclassical models are physical models and don't include the role of "money." The physical models are too simplistic to represent the facts they purport to model, and the absence of money's role in the system ignores one of the major factors.
So it is not just that MMT as a basic model that closely mirrors the flows in and out of stocks, but because this is based ultimately on transactions, it is stays close to reality.
Other schools base their models on assumptions that are questionably related to reality.
And this is just the starting point.
Aquinas, paraphrasing Aristotle, observed: "A small mistake in the beginning becomes a great one at the end." — De ente et essentia.
"…the basic difference between the MMT and neoclassical approaches. But are dealing with relatively simple systems in their basic models"
Yep. The neoclassical models are at the same time simple but disjointed and incomplete. The parts don't add up to a whole and the starting assumptions have incorrectly defined the problem. House of cards. Shall I go on?
There's nothing but fail here.
If MMT was 50% flapdoodle it would be better than the neoclassical approach.
As it stands, MMT's model, the sectoral balance identity, is predicated on real-world system dynamics AS THE ECONOMY IS CONSTRUCTED IN THE REAL WORD. The foundation is sound at the root. This is a f'kng BIG DEAL.
Everything else wrt MMT thinking follows from this very profound, elegantly simple basis.
Further, right off the bat most arguments coming from the neoclassical side are neutered. The only clear thinking coming from the neoclassical side is from those that momentarily suspend the foundational aspects. It's like finacial palyers that somhow make money even though they fundamentally misunderstand How Monet Works™.
The smartest people in the neoclassical paradigm are making arguments from a flat-earth perspective.
It's shameful and embarrasing but I am beginning to have contempt for their willful stupidity.
Am I being too harsh? I don't know, how can one have patience with someone trying to convince you that up is down?
41 comments:
Note that the macroeconomic calamity of the Great Depression was preceded by a massive boom-and-bust in residential construction -- that should seem familiar and perhaps raise questions of causation.
Just basic Austrian history and theory.
BTW, here's John Carney:
I’m not convinced that a return to sound money is possible. Our government is too big, our banking system too entrenched, to ever permit a reversion to gold.
But if you are going to attempt an intellectual assault on the gold standard, you can’t just point to price instability in the 1920s. The Austrians have been here before you—and they understand the period much better. And, more importantly, the value of a gold standard does not hinge on price stability in the first place.
http://www.cnbc.com/id/48806186
What does the value of a gold standard hinge on in the first place?
What does the value of a gold standard hinge on in the first place?
The most important factor in support of gold and silver as money is that the amount of gold and silver cannot be artificially increased by government. That means that the government is as constrained in its nefarious schemes as much as possible and prices stated in gold and silver are reflective of real world supply and demand, not artificial stimuli.
Money artificially brought forth by the government? What has happened in this artificial stimuli?
1. Interstate system.
2. Landing man on the moon and associated technologies.
3. Numerous scientific and engineering marvels from the national labs, darpa, and other Government labs.
4. The internet.
5. And so on.
Delusionomics will have you worship an element when it is just a scam for wealthy malefactors perpetrated by their Liberlackeys.
To learn about gold and other elements and there uses see:
http://www.webelements.com/
Gold's most common use is for Bling because some people get caught in a trance because it is shiny.
http://www.webelements.com/gold/
As if we would have no inventions without fiat funny money funded endless wars and the boom/bust cycle that funny money induces. What a pitiful argument. The whole point of fiat funny money is to steal purchasing power from the powerless holding the existing money and transfer it to the elite and sophisticated financial experts. And you can fund endless wars with fiat funny money about which the public might object if they had to pay war taxes in real time and/or understood the scam.
BTW, did you know that the Nazis invented the tape recorder and missile technology?
Bob, if the most important factor is that the government cannot artificially create the money.. why gold or silver? Why not salt? Or would salt be fine?
Is it important to back money by something that people don't use/destroy in their daily lives.. e.g. salt?
"boom/bust cycle that funny money induces"
False. There have been more severe and recurrent cycles with gold standard and free banking.
Please stop the non-sense propaganda, all that is well documented. If anything the evolution towards current system has made things more stable while permitting rapid evolution, only the assault of neoliberalism at policy positions is what has skewed wealth in the last decades.
I wonder where all the luddites keep coming from.
Bob doesn't understand basic economics. Or basic politics. Or basic history.
He's just an ignoramus floating in his little dream world, full of hatred for everything that he doesn't understand.
OT, but Tom have you listened to the most recent EconTalk? It's with Neil Barofsky, former TARP Special Investor General and author of Bailout Nation:
http://www.econtalk.org/archives/2012/09/barofsky_on_bai.html
Vote for me! I despise the fact that you have a right to vote!
http://www.roddisforjustice.com/
Why not salt? Or would salt be fine?
Gee, why didn't I think of that? Try giving your girlfriend the gift of salt on Valentine's Day.
Hint: scarcity.
http://www.owngoldandsilver.com/article/gold-the-near-perfect-money.html
I also look forward to you not becoming Justice of the Michigan Supreme Court.
Bob,
Hint: scarcity is not a good feature for money. Elasticity of supply is because demand for it is very fickle.
vimothy "OT, but Tom have you listened to the most recent EconTalk? It's with Neil Barofsky, former TARP Special Investor General and author of Bailout Nation"
I have been busy lately and haven't had a chance to get into Barofsky yet. Thanks for the link to the podcast. It's on my high priority list.
Love to see what the kids models look like for his "forecast'.
Sorry to take a tangent here…
I've been thinking lately about some of the differences between MMT and Monetary Realism, specifically about what gives fiat currency value. I think that a synthesis of the two perspectives is correct.
1) MMT seems correct that the reason we use the U.S. Dollar in the United States, AS OPPOSED TO another currency or gold or silver or whatever, is because our tax liability creates a very strong demand for the U.S. Dollar over other possible options. After all, I forget who said it, that anyone can create money, but the trick is getting people to accept it.
2) MR seems correct that productivity is the central component for understanding the RELATIVE VALUE between currencies. For example, the reason some currencies are more valuable to hold than others is precisley because of our ability to purchase things that we want by using that currency. If a poor country has little for sale, their currency is likely not that valuable because there isn't much to buy with it. Likewise, a country like the United States has a very valuable currency because there is a lot you can purchase with dollars.
Anyone disagree or think that I'm missing something? (besides Bob)
JK - I think you are spot on.
There are three separate issues.
1: Money as credit-debt. Innes
2. State money - Knapp
3. Money as social construct - economic anthropology, sociology, and institutional economics.
MMT economists deal with all of the them, however, a primary issue in modern economies is with currencies (state money) and MMT focuses on this, ergo, "Chartalism," and "Neo-Chartalism." However, MMT is not exclusively Chartalist.
According to wikipedia in 2009 the five most productive countries in the world were 1.Norway, 2.Luxembourg, 3.Netherlands, 4.US, 5.Belgium.
http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)_per_hour_worked
"MMT economists deal with all of the them"
MMT economists deal with all of these things but the MMT framework is based almost entirely in system math. The conclusions MMT economists come to wrt those other issues are predicated on the system foundation.
Bill Mitchell writes massively long posts with many semantic examples and anecdotes but he consistently returns to the math to drive home his point, and the math he returns to is pretty much always the same.
This is because the fundamental system is very simple, hidden in plain view.
"the MMT framework is based almost entirely in system math"
I would put it slightly differently. The MMT system is based on accounting identities rather than equations expressing functions interpreted as claims about independent and dependent variables being related causally. This is the operational description and SFC modeling of sectoral balances, for example.
As an economic theory, MMT formulates hypotheses based on this foundation that make causal claims. These are empirical statements that can be tested against data, e.g., through simulations. This is where the more advanced math comes in, accounting being just basic addition and subtract of entries in accounting records.
There are also factual claims wrt the operational description of banking, especially central banking, and the relationship of intra-governmental operations.
There are also historical claims about monetary theory, which purport to be decidable factually to a great degree, although there is a significant amount of inference wrt the anthropological aspect of the development of money as a social construct based on trust, which lead to the credit-debt construct.
However, the accounting reflects the fundamental system relationships from which stocks can be derived from flows. Thus, the foundation of MMT is a systematic approach based on data entry using reported data. No assumption at this stage, other than the overall framework of accounting that is generally agreed upon and reflected in SOP and specific institutional rules. The basics of SFC macro modeling based on sectoral balances are set forth in Godely and Lavoie, Monetary Economics (2007).
When we arrive at theory, the MMT enters the field of traditional economics and adopts a Post Keynesian type of approach, assuming a great deal of previous work in the field, but integrating it from the perspective of MMT.
Randy Wray's primer, now published as Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems, and the promised -soon textbook that Randy and Bill Mitchell have been working on are the first attempts to state MMT comprehensively. Until now, it has been presented in papers and blog posts that have not been pulled together.
From this follows a framework for formulation of policy options, and, importantly, as standard for deciding which options are infeasible, e.g., because they do not conform to sectoral balance identities such as the SB's summing to zero. This is the math contraint on policy.
"the MMT framework is based almost entirely in system math"
rephrasing…
the MMT framework is based almost entirely in system IDENTITIES.
This is what I mean, I've just been hesitant to use the term "identity", and I'm not even sure that is the right term.
I hammer away at this incessantly because I think it is an important point to be made, and it has been a very difficult point to make.
These very simple relationships are at the root of every economic problem we face. Everything below this truth in the hierarchy is subordinate.
That's why I make the claim that human behavior, the social sciences, philosophy, semantics, laws, policies, everything is subordinate to these simple truths.
None of those things I mentioned has any chance of success wrt the economy if the fundamental system is not healthy, ie deprived of funds/spending.
If your TV isn't plugged in no signal will give you a picture. A million-volt signal may give you a fireworks display but it will be brief and not particularly helpful.
You can have a pefectly healthy body in every way - if the heart stops it's over. A failure in the other systems and life may still be able to go on.
This is what I mean by a fundamental truth.
If we can't get the system identity part right and in a stable dynamic, how can anything else we do wrt the economy succeed?
I say it can't. This has been another edition of "economics according to paul". ;-)
"MMT is a systematic approach based on data entry using reported data"
Not really. MMT theory operates in a perfect virtual world. There is in fact a real exact tarnsaction taking place at avery instant even though we can't report it accurately. What we report from data should be very close to the reality and we can safely assume that any discrepancy is on on our end not MMT's.
Since we're going down this road I would also like to point out that the Flow of Funds and NIPA reports are not stock-flow consistent, therefore many arguments made on the basis of what is reported fails the test of the sectoral balances.
The sectoral balances identity represents the theoretical baseline and at the very least those reports can't be used as an argument against the validity of MMT or it's theories.
Those reports are a cartoon of the Real Thing™.
The key point is that the math is based on accounting identities that are stipulated as institutional rules. Science is also math-based but it uses scientific laws that are empirical, hence can never achieve a probability of one. As long as accounting is done the way it is, it is a system of postulated rules, in which some things are ruled out. Identities just say formally that the rules are such that that accounts must balance. There are no causal claims about how things stand in the world at this point in the analysis. This is building the foundation.
"the math is based on accounting identities that are stipulated as institutional rules"
Tom, I respectfully disagree. Maybe it's semantics but a monetary economy is arranged in a certain way that is not accidental. It follows from natural relationships the evolution of which was also not accidental.
It's my view that any alternative system we could have come up with would be bound by similar if not identical arrangements.
For example it wouldn't be possible to set up a system that wasn't consistent with closed system rules.
Now maybe we could have come up with a system where people didn't have to be coaxed to perform on cue for monetary reward, but other than slavery I don't see many successful examples of those kinds of systems in history.
"Those reports are a cartoon of the Real Thing™."
At the macro level, yes. Everyone stipulates this, and then acts as if the data were uniformly good, historically and globally when a lot of it is just guessing or using reporting based on different rules. I recall that one of the required readings in my Econ 101 course was, "How to Lie with Statistics."
Theoretically, everything can be traced by to the journals from which general ledgers are constructed. This is the "microfoundations."
What is being represented is actual transactions reported in nominal terms. The journals reflect the transactions where nominal means actual. So in principle, it would be possible to get back from aggregates to individual items, e.g., if all transactions were barcoded and recorded digitally onto a global supercomputer that spits out realtime reports that are available publicly for complete transparency.
Yes, that's coming in the future, but it still won't be complete without a comprehensive surveillance society. Probably also coming.
Does anyone know which are the 'strongest' currencies (in order of 'strength')? We could compare that to the 'most productive countries' to see how they match up.
Tom,
"it would be possible to get back from aggregates to individual items"
It's possible now, at least for the sectoral balances.
G, T, X and M are known quantities to a pretty high level of accuracy, thus we can calculate (I - S). I'm not sure the individual terms I and S have much meaning in the economic sense so I'm not sure knowing them is particularly important.
Not only that but when I say that the reports are not stock-flow consistent I mean that they are not reporting the measure of "net savings" consistent with the sectoral balances. The reports are "out of pardigm".
Net Savings reported in the FoF/NIPA is a completely different animal than the MMT/sectoral balances version.
I don't know that you could derive MMT net savings directly from the relevant sub-accounts in these reports.
The measure of savings in the reports has little economic relevance, it ignores liabilities acquired in order to fund those savings and gives little information about the inherent instability of funding savings with debt (private debt). We know now that "savings" aren't used for anything (or at least not very much), they just represent accounting balances.
Savings don't fund anything, they allow investors to "use" them to leverage new money out of thin air to finance their boondoggles.
Further complicating an already abstract construction is the definition of saving itself.
The accepted definition of saving is income not spent. This misses the larger reality that all money in its natural state is saving. Money spends all of it's time in existence in the state of saving, ie resting.
Spending is an event that occurs at a point in time with no associated time value. Spending is an event, not a state.
Another binary relationship occurring naturally in the real world.
I think that is why MMT ignores the conventional definition of saving and looks only at the net result of saving, which is to remove funds from the pool of spending. In the mainstream context it isn't particularly useful.
The brou-ha-ha over Bill Mitchells characterization of saving a few months back served merely to show that the critics didn't understand what they were talking about and weren't in a position to understand the alternate view.
I don't know that you could derive MMT net savings directly from the relevant sub-accounts in these reports.
The basic conception of accounting is that the higher level reports can in principle be traced by to individual journal entires. when an audit takes place, auditors at least sample the whole range of accounting and the "shoeboxes" where the receipts that get entered into journals get stored for the required period. If you even have an IRS audit, you will find out about this first hand, because your CPA will ask you to provide this data so s/he can make your case to the referee base on what s/he has in hand.
In accounting, saving is a residual, i.e., "income not spent in a period," which flows to the stock of savings. "Net saving" for the domestic private sector is an aggregate that means (household) income less (firm) investment (firm expenditure on capital goods and inventory).
MMT uses "net saving" somewhat differently to mean non-govt saving of NFA. This is also the outcome of SFC modeling based on accounting data in which the entries go back to actual transactions.
"In accounting, saving is a residual, i.e., "income not spent in a period," which flows to the stock of savings."
Accounting is a useful and necessary tool but it helps us to take a step back and look at this from another perspective.
Saving is a residual but that in itself doesn't tell us much of anything. It's a term that doesn't resonate with the masses.
Saving is first and foremost a demand leakage, it is damaging to the economy as a whole and is the functional equivalent of sequestering spending over the long term.
Someday it may return to the spending pool when a rich SOB dies and his worthless kids spend what they didn't earn. Until then it may as well not exist.
Worse, excess saving enables a very small subset of the population to effectively buy market power from the rest of us without really having to give up anything. Anything can be bought these days.
""Net saving" for the domestic private sector is an aggregate that means (household) income less (firm) investment (firm expenditure on capital goods and inventory)."
In the mainstream accounting of this liabilities from debt appear to be waved away, even though much of what is booked as saving is the result of someone else's debt.
This promotes a skewed view re the actual health of the economy which helped lead us to the spot we are in.
Again, I return to the basic point, which is the foundation, being based in accounting, does not require any assumptions about putative causality. That comes later for MMT, when arrows of causality are drawn wrt what identities and operations imply.
In contrast, many economic/econometric models are based on functions relating independent and dependent variables in putatively causal relationships. The causality is stipulated or justified by analysis through statistical correlation.
The causality is stipulated or justified by analysis through statistical correlation."
Often incorrectly I might add.
paul, this is the advantage of the MMT starting point and foundation-building that I have been emphasizing.
Tom,
I'm pretty sure we're on the same page here.
Hope you don't feel like I'm disagreeing with you on these core issues.
The things I've been writing are an effort to express my abstract view of the world in my own words,
Much of the time discussions get into much more complexity than is necessary in my view. People that are 99% in agreement end up arguing over trivial differences.
I'm a card-carrying member of the KISS club.
No problem. IIRC, the discussion started with my emphasis that MMT's foundation is an operational description based on accounting rather than assumptions involving causality. This the key thing to keep in mind in my view.
"MMT's foundation is an operational description based on accounting rather than assumptions involving causality. This the key thing to keep in mind in my view."
I agree with this characterization. I don't think my view of the world contradicts it. Will have to chew on it for a while to see if it does.
Causality is another vague concept. I haven't claimed that spending "causes" the system described by the accounting identity to function. Rather, I've been making the claim that that system will not function without spending. The identity will be static, no flow. Thus, meaningless.
Maybe this is still not what you are thinking wrt my arguments but at any rate I think of these kinds of discussions as dialog not disagreement.
I am trying to get on the same abstract page you are on to better understand the meaning of your comments as opposed to the literal translation.
You know, the "cartoon" thing.
paul, I am saying that MMTs approach and other methodological approach to macro is night and day since MMT is based on accounting and operational description rather than theoretical assumptions. The result is a different approach to modeling — and closer to reality.
"I am saying that MMTs approach and other methodological approach to macro is night and day since MMT is based on accounting and operational description rather than theoretical assumptions. The result is a different approach to modeling — and closer to reality."
Tom,
If that quote above is a distillation of the point you have been pressing you had me at hello.
Still, I've had the lingering feeling that even though we agree you are somehow disagreeing with something I've written or in some abstract way that I can't see. I've continued probing to try to figure out what that difference might be.
My conclusion is we're 99.9 % on the same page and I can't find the 0.1% where were not, even though it feels like that 0.1% exists.
If I had to distill my POV down to a couple of sentences it would be that the discussion of MMT vs the world is a lot simpler than most make it out to be and we should avoid a lot of the unproductive minutia that gets caked on top of the argument. It's a distraction.
What I am trying to emphasize is the basic difference between the MMT and neoclassical approaches. But are dealing with relatively simple systems in their basic models, but the MMT appraoch is based on accounting (transactions) and SFC consistency.
The neoclassical models are physical models and don't include the role of "money." The physical models are too simplistic to represent the facts they purport to model, and the absence of money's role in the system ignores one of the major factors.
So it is not just that MMT as a basic model that closely mirrors the flows in and out of stocks, but because this is based ultimately on transactions, it is stays close to reality.
Other schools base their models on assumptions that are questionably related to reality.
And this is just the starting point.
Aquinas, paraphrasing Aristotle, observed: "A small mistake in the beginning becomes a great one at the end." — De ente et essentia.
"…the basic difference between the MMT and neoclassical approaches. But are dealing with relatively simple systems in their basic models"
Yep. The neoclassical models are at the same time simple but disjointed and incomplete. The parts don't add up to a whole and the starting assumptions have incorrectly defined the problem. House of cards. Shall I go on?
There's nothing but fail here.
If MMT was 50% flapdoodle it would be better than the neoclassical approach.
As it stands, MMT's model, the sectoral balance identity, is predicated on real-world system dynamics AS THE ECONOMY IS CONSTRUCTED IN THE REAL WORD. The foundation is sound at the root. This is a f'kng BIG DEAL.
Everything else wrt MMT thinking follows from this very profound, elegantly simple basis.
Further, right off the bat most arguments coming from the neoclassical side are neutered. The only clear thinking coming from the neoclassical side is from those that momentarily suspend the foundational aspects. It's like finacial palyers that somhow make money even though they fundamentally misunderstand How Monet Works™.
The smartest people in the neoclassical paradigm are making arguments from a flat-earth perspective.
It's shameful and embarrasing but I am beginning to have contempt for their willful stupidity.
Am I being too harsh? I don't know, how can one have patience with someone trying to convince you that up is down?
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