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The numbers do not make any sense and have to be redone.
"I have to say I have a bit of a problem understanding this one. Let’s assume we’re in a depressed state as we are now and the Government decides to run an additional $1 Trillion deficit, without, for simplicity, any corresponding debt issuance. Then, assuming that the private sector saves at the rate of 6% of GDP and the trade deficit is 4%, and, neglecting any fiscal multiplier, the additional Government deficit adds $900 Billion in aggregate demand to the US economy, $60 Billion immediately to savings, and $40 Billion to the foreign sector. So, the Government deficit spending has certainly made both the domestic non-Government sector, and the foreign sector richer in USD nominal wealth, though the domestic government sector has been made 24 times more wealthy than the foreign sector."
Now in the situation what is the additional government deficit? $1 trillion or $100bn (60+40)?
The government deficit cannot be both $1 trillion and $100 billion at the same time.
"Of course, if we take into account the fiscal multiplier on the $900 B deficit"
Now there is a third number - $900bn!
Plus where does this 24 times more wealthy number from?
"I don’t see how, since in a trade deficit we send USD to the foreign sellers in return for real wealth, thus increasing the real wealth held by Americans"
If most of the purchases are for consumption and not fixed capital formation, the import does not increase the "real wealth held by Americans."
"Maybe Paul K has real wealth in mind in the quote and not nominal wealth."
The background to this is a wonky academic debate in the blogosphere about the meaning of the idea of a “debt burden” (if there is any – it’s a hopeless debate of people talking past each other). So this is not a discussion of current conditions or policy.
He’s saying a few things from a purely academic point of view, and they are very simple points:
a) IF the economy is at full employment, it is arguable that the movement of resources from the private sector to the public sector may cause real crowding out. I think this is uncontroversial. It has nothing to do with current economic conditions.
b) Real crowding out MIGHT take the form of displacing private sector investment which MIGHT have been more productive. That’s always a debatable point, but it’s possible. Again, given full employment, that scenario MIGHT result in the economy being “poorer” when measured in terms of the stock of real investment.
c) He then turns to the case where a government deficit MIGHT lead to a higher trade deficit. If you read closely, he doesn’t worry too much about this. But IF there is a higher trade deficit, he is simply pointing out that other things equal it results in higher net international claims on existing US assets – which is a reduction in domestically held wealth. As to what other things are involved in the process of linking the two deficits, if you read closely, he’s saying its silly to worry too much about this if the thing that causes a higher trade deficit is economic expansion associated with the higher budget deficit.
In short, he’s really making an incredibly simply point that other things equal a trade deficit increases foreign claims on existing US assets – which is a reduction in domestic wealth when measured by claims on investment (it doesn’t consider the value of the imports that have been consumed – i.e. non-investment goods).
Again, this has nothing to do with current economic conditions or current economic policy.
What about a situation where even if you are at full employment, let's say the govt sector wants resources to build much needed roads and public transport (gridlock!), while the non-govt sector wants resources to open more Starbucks?
Is this "crowding out" where the non-govt wants resources to facilitate coffee consumption while the govt wants resources for investment in public infrastructure?
this doesnt seem like "crowding out" to me... because the govt is doing the "investment" not the non-govt...
"Real crowding out MIGHT take the form of displacing private sector investment which MIGHT have been more productive. That’s always a debatable point, but it’s possible."
Its a debatable point even at full employment because its a value judgement in terms of the chosen productivity mix, among other things. So I'm agreeing with you in that sense.
The point here is that there shouldn't be anything threatening in what Krugman wrote here for MMT. It's an academic point, not applicable to current circumstances. What he does here, and what he often does, is correct false intellectual arguments about arguments that support policy interpretations that may well be contrary to his own interests about what the direction of policy should be in the current environment. But he's correcting how people should be thinking about them when economic circumstances warrant thinking about them - which they certainly don't now.
The whole idea of full employment is virtually academic - so there shouldn't be a backlash against economic arguments that are correct or at least arguable or sensibly debatable under the assumption of full employment - because none of them apply to today's environment, or to hardly any environment for that matter, because when do we have full employment?
BTW, in terms of the original debate that I referred to above, the other basic thing that Krugman corrects is that one shouldn't confuse the implications of debt held by foreigners that is in effect an asset swap with debt that represents foreign net investment in the US. The latter is due to current account deficits. The former, much larger in size, is an exchange of enduring value of some sort. This is also a simple point he makes to correct the the debate.
There is some element of argument in Firestone's post but if he is addressing it to Krugman, he shouldn't be so careless with his definitions and accounting.
Same thing happened to Keen.
That was my point.
If I start arguing other things, it will start the old stuff which I don't want to get into :-).
Right thats what I thought you meant.. just to be sure tho..
As far as "crowding out", to me there is an embedded libertarianism in the whole idea. It's as if the non-govt poobahs want to build more hotels to pack with tourists but the public via the govt sector wants to end gridlock by building out the transport infrastructure, the govt is supposed to just automatically yield to the non-govt in this case, that is 100% BS imo...
IMO PK is all the time covering for his profession with obfuscations like this (wild goose chases) when his profession should be scolded all the time instead... rsp,
Yes he is saying that one shouldn't be just looking at government debt held by foreigners. That is incomplete analysis and one should look at all liabilities to foreigners - whether official sector or private sector.
For example if a foreigner who holds a government bond sells it and buys a corporate bond, it affects America very little.
But from a point of view that "government debt to foreigners is a burden on the nation", it matters a lot and that viewpoint will give the answer that the burden has reduced when the foreigner sells government bonds and buys corporate bond which is strange and hence wrong.
It (the wrong notion) actually is a position held by some economists. This is because they think that private sector borrowing is good whatever the amount because the private sector is optimal. So private indebtedness to foreigners doesn't matter in this picture. The government on the other hand (in this picture) is inefficient and government debt to foreigners is the only thing that matters.
It is ironic that the distinction Krugman DOES make between debt held by foreigners and cumulative CA surpluses accrued by foreigners is exactly the same type of distinction NOT made by Keen in his model - i.e. Keen conflates the addition of debt as a stock with entirely separable flow transactions (expenditure/ income)
about $4T in Official Reserves while only $5.4T in total... does this not change the thinking wrt "debt held by foreigners" ie it is really "debt held by foreign governments?
Which I think is an important distinction... as in any "claims" are truly "govt to govt" and not really in the non-govt realm...
ie How can these govts ever exit these positions? govt borrows their own currency from their own non-govt sector using the foreign reserves as collateral?
I dont see how they ever can get out of these positions...
if it is really 12T net then the 5.4T on the spreadsheet above is like half of the NFAs in "debt" form... foreign govts have half of US net "debt" outstanding (and the Fed has a lot too now..)
I guess "we the people" are just left to fend with whatever USD reserve balances remain...
Btw, IMO, State and Local Government's finances should also be added in the government sector. So Munis are also counted. National accountants do count it that way. (although strangely counting the central bank in the financial sector not the government sector).
Since the state and local government also hold financial assets, this should also be taken into account.
The net result is an addition of about $1.4tn (to $11-12tn from the Federal government) for the private sector and the overseas sector if they are considered as a whole.
i.e., slightly less than $12tn because the US government also holds MBS and student loans for example (separate from that held by the Federal Reserve).
"Why? Do they produce NFA's into the non-government?"
If a sector runs a deficit, as a matter of accounting, others run a surplus.
Hence if state and local governments have run cumulative deficits and hence as a result have have liabilities higher than financial assets, this means the difference is net assets for the other sectors.
So state and local government do produce NFAs into the non-government in your language.
the fund consists of bonds that in effect are a record of cumulative taxes transferred to government - tax money that has already been spent in prior unified budgets
because the money has come from taxes and is already spent, there is no NFA in the normal sense of NFA as a net stimulative effect
the bonds are used as an internal transfer pricing mechanism; they are not external debt of the government
so no "net net NFA" being emitted by the government sector here
internally, you could view them as soc sec NFA - but that would be offset by treasury NFL, which is an internal wash for a net external NFA of zero
"If a sector runs a deficit, as a matter of accounting, others run a surplus... Hence if ... governments have run cumulative deficits and hence as a result have liabilities higher than financial assets, this means the difference is net assets for the other sectors."
Isn't that why Soc Sec should be counted in NFA? Even though it is held by the government, it is held on behalf the population, so comprises part of the total non-govt surplus and net assets.
the bonds in the trust fund represent money owed to the population.
- The government collects taxes for Soc Sec, uses some of that money for benefit payments, spends the rest on other things and leaves a bond in the trust fund for that amount. That bond represents money owed to the population, part of the population's financial assets, no?
NFA emitted by state and local, I think it depends on the degree you believe the central bank has the same LLR function for state and local that it does for Treasury (Treasury in the "worst case")
It's pretty marginal I think, via potential for CB purchase of municipal bonds
But most of the state and local support function comes through the federal budget rather than the central bank
in which case the federal NFA emission covers almost all of it, and state and local NFA emission gets consolidated in the usual "non-government" category, where non-government implicitly means non federal government
what he's saying is that one person's asset is another person's liability, whether you're talking about the government and non-government, or between individuals.
My bank deposit is my "net financial asset", but it is also the bank's liability, so overall it is not a net financial asset.
A $10 note is my net financial asset, but is also the government's liability. So overall it is not a net financial asset. It is only a net financial asset for ME.
I would tend to think that is a slightly tangential issue.
For example, in the case of the Euro zone, governments do not have that facility but yet one can count the bonds held other sectors in calculating the NFA. Else one is left with a bizarre conclusion that the private sector in the Euro Area (in the abstraction that it is closed to the outside world) has zero NFA.
"what he's saying is that one person's asset is another person's liability, whether you're talking about the government and non-government, or between individuals."
y, I know what he's saying, I don't see any need to include local and state governments other than as normal transactions occurring within the non-government. NIPA does account for these things, but it isn't helpful in a discussion of NFA's.
State and local governments can't create NFA's, Why add complexity to a simple relationship?
"Hence if state and local governments have run cumulative deficits and hence as a result have have liabilities higher than financial assets, this means the difference is net assets for the other sectors.
So state and local government do produce NFAs into the non-government in your language."
You are seriously mis-understanding my language.
NET Ramanan NET. Transferring NFA's around within the economy does not increase the NET level of NFA's.
The only exception is in accruing interest on debt, because the interest monies are never created by the debt.
Thus we have liabilities accruing that can't be satisfied (mathematically) without an injection by the fiscal authority.
When the private debt/income ratio becomes high enough, these liabilities can be a problem (assuming the government hasn't provided the offsetting balances).
Then distribution of the asset and liability components of debt becomes the issue because in most cases they are held by different cohorts.
In the end, the wage-earner pays all accrued interest one way or the other in the aggregate.
The soc sec fund belongs to the population, it's held on their behalf by the government.
It's a savings account for the population held by the government. i.e. it is a government liability and the population's asset.
Think of it this way: you go to the Soc Sec savings bank (trust fund) and deposit some money. The government takes that money and spends it on a bridge, leaving a bond in your account for the amount you deposited. The bond is how much the government owes you.
So you have the spending on the bridge + the bond = an addition of NFA.
of course the deposit at the "Soc Sec savings bank" is made through taxes, and the government spends the money on current benefit payments and on other things (bridges, etc), leaving a bond in the trust fund. It's a form of mandatory national 'saving'/ government borrowing.
The software would be useful for analyzing more complex closed systems.
The economy is a simple closed system dealing only with nominal transfers. It doesn't get any simpler than that.
When I first came upon this MMT thing, someone here (Kevin Fathi?…what happened to him?) commented on a tub of water as an analogy to the economic system, and that is as perfect an analogy One could use. Or a swimming pool.
A simple hydraulic circuit that can be used to demonstrate any nominal transaction. Fluid is non-compressible, meaning if you force more in something equal must come out the other end (imagine a tube filled with ping-pong balls, push one in one end, one pops out the other) or the level rises.
The tub cannot be used as a source to fill itself or drain itself down. Changes must be external to the defined system.
Think of the water molecules as discrete NFA's.
Credit would be modelled as an external input with an accompanying drain that allowed a controlled flow out, set to stop when the borrowed water plus interest was paid back.
Every possible transaction or group of transactions can be modelled in this system.
It is probably why hbl chose it for his tutorials.
Thinking of transactions in these terms eliminates the complexity and opaqueness of accounting transactions. We don't really care what all of the individual molecules are doing,nor do we need to identify them individually. One molecule of H20 is the same as the next. One dollar is the same as the next. Aggregates rule.
One could do the same with an electrical circuit but it isn't as intuitive to the layperson.
I think you’re saying in effect that the surplus funding component of the so-called soc sec tax isn’t really a tax at all – for NFA calculation purposes. The tax terminology is misleading for that piece of it. That part of the tax is in effect not a tax, but private sector saving, reflected in government spending and internally held bonds.
That saving piece will have to be refinanced in the future with external debt, when the time comes to start repaying the liability from treasury to the soc sec fund. And that happens when soc sec stops running current surpluses and starts running current deficits.
That future external refinancing operation itself won’t change NFA – it will just redistribute the saving that already in place now – from a cumulative soc sec tax surplus to externally held bonds.
The problem I have with this is not on deficit spending side, but on the corresponding NFA side.
In a way, the arrangement satisfies the criterion for NFA generation – the soc sec tax surplus has enabled additional unified deficit spending.
But on the NFA side, the actual form of the asset is interesting. It consists of a cumulative tax surplus rather than an actual bond (or QE money) instrument held by the public. So that means there’s no liquidity associated with that asset – zero. Soc sec beneficiaries won’t be able to “cash in” or use that NFA until they get it in the form of benefits. That’s much delayed. Meanwhile, those who buy the bonds to refinance that NFA will get something that is liquid at that time.
I think this is important in interpreting exactly what “NFA” is. There’s a part of it that reflects a mirror image of deficit spending. But there’s also a part of it that is supposed to signify the satisfaction of non government demand for saving in the form of liquid assets issued by government as reserves, currency, and bonds. This soc sec NFA component – if that’s what it is – doesn’t represent that sort of liquid saving and so I think it’s questionable that it satisfies the intended meaning of NFA in full.
It doesn’t satisfy the criterion of liquid asset supply that typically corresponds to NFA – there are no bonds to sell to take advantage of that NFA production, so to speak. So people do feel more like they’ve been taxed in that sense – because they have no opportunity to use their saving to call on it for consumption purposes at any point, the way they would if bonds were held directly instead.
"But there’s also a part of it that is supposed to signify the satisfaction of non government demand for saving in the form of liquid assets issued by government as reserves, currency, and bonds. "
"NET Ramanan NET. Transferring NFA's around within the economy does not increase the NET level of NFA's."
Paul,
The terminology "Net financial assets" is not limited to the mirror of net liabilities of an institution which has the power to issue money.
It is a sectoral concept.
For example one can talk of the net financial assets of the household sector. To do this, take the market value of all the financial assets held by households and subtract the liabilities of the household sector.
See the UK Blue Book 2012 table 6.1.9 BF.90 (page 234) for households.
Let us imagine the United States federal government runs a near balanced budget in one period but the state and local governments run a non-negligible deficit. The net financial assets of the other sectors - the private sector and the rest of the world consolidated increases by the amount of the deficit of the state and the local government in that period.
"In the end, the wage-earner pays all accrued interest one way or the other in the aggregate."
Good stuff. In fact, lots of good stuff has come out in this thread. Suggest you write it up so it doesn't just disappear into an obscure comment thread.
The way the govt has decided to handle SS funds has resulted in huge confusion in the public mind. Most of the debt hawkery revolves around this confusion and compounding it. Sorting this out clearly is really important.
true. Then again if you have a private pension it will be mainly held in government bonds, and you'll typically only get it once you retire or thereabouts. With Social Security the government holds the bonds on behalf of the population, so the market doesn't have the assets to play with - but they are still non-government assets or savings nonetheless. It's a mandatory form of national saving, with fixed rules and structures, and people "pay into the fund" through taxes.
Normally when you pay a tax, the government takes the money, spends it, and doesn't promise to give it back to you with interest, etc. That's the basic difference, I think.
"The terminology "Net financial assets" is not limited to the mirror of net liabilities of an institution which has the power to issue money.
It is a sectoral concept."
In the context of the discussion it is the only NFA we are concerned with, state-issued. All other so-called NFA issued by institutions are irrelevant with respect to analysis of the closed system, which has been repeatedly defined as that of state-issued financial assets. This has never been a secret.
It is an accounting of net dollars and dollar-denominated bonds issued by the fiscal authority into the non-government.
The level is limited to those that existed at time zero (zero) plus those issued since.
The level is fixed and finite unless altered by taxing and spending operations.
No action within the non-government can change the level of NFA in the aggregate without follow-through by the fiscal authority, although private debt by it's nature causes liabilities to expand wiyhout concurrent issue of dollar assets.
What's so difficult to understand about that?
""In the end, the wage-earner pays all accrued interest one way or the other in the aggregate."
A totally irrelevant point here."
I know. I threw that in there to see (1) if you were paying attention and (2) to see if you would attempt to mount an argument againts it, although it is relevant in the respect that through private debt liabilities accrue in excess of assets on a continuous basis.
In other words, negative NFA balances accrue over time as a result of private debt.
"In the context of the discussion it is the only NFA we are concerned with, state-issued."
The context was started by me. You changed the context.
"No action within the non-government can change the level of NFA in the aggregate without follow-through by the fiscal authority, although private debt by it's nature causes liabilities to expand wiyhout concurrent issue of dollar assets."
Take the case of an economy which has a surplus in the external sector due to the fact that exports are higher than imports. So let us say that the CAB is $500bn.
Also assume the government is in surplus of $100bn.
The private sector (domestic if you like) net financial assets has increased by $400bn.
The government is in surplus but the private sector's NFA is increasing.
Do not confuse government deficit with (change in) NFA.
Also, stop inventing terminologies.
"It is an accounting of net dollars and dollar-denominated bonds issued by the fiscal authority into the non-government."
No it is not. It is just the difference in a sector (or of many sectors') difference in the value of financial assets and liabilities.
The terminology used in formal writing and statistical releases is "current transfers".
While the numbers are included in the income for households, it is subtracted to get disposable income and saving. So there is no extra saving at all in that sense. The reason for a different treatment is that the benefits are contingent. If someone dies, the benefits do not go to someone else. In case of normal assets however, the near and dear ones get the assets. Also pension entitlements are considered income, so to maintain self-consistency, pensions are not treated as reduction of assets. So to maintain further consistency, there is no saving in the sense you mention in your comment.
The social security fund is really a funny fund created and it just adds confusions on these matters.
I believe that when MMT folks use "NFA," even without specifying it explicitly, what is understood is net financial assets in a currency that are held by non-government in aggregate. Perhaps this could be clarified by writing something like NFA* or Winterspeak's NFA(e). See Winterspeak, The Myth of High Powered Money
"Take the case of an economy which has a surplus in the external sector due to the fact that exports are higher than imports. So let us say that the CAB is $500bn. "
You're being obtuse. If an economy is in surplus with respect to exports and that economy is the US, the US would have to issue dollars to the import country to enable the transaction. Then we would have claims on their production.
This is creation of NFA. By the US government. To be spent into the domestic non-government.
I have purposely limited my comments to the domestic economy in an attempt to avoid these rabbit-hole excursions, but I can see rabbit-holes are your specialty. It doesn't really matter, the principles remain the same, but it gives you more alley-ways to slink back into. No wonder virtually all of the MMT academics ignore you.
You are not a problem solver. You're part of the problem.
You keep moving the goalposts.
The bottom line is, if you had grasp of the abstract concepts in discussion we wouldn't be having trouble with these kinds of misunderstandings.
You should spend most of your time in discussions with Nick Rowe. That way you would both be talking past each other but neither one of you would be aware of it. Both of you would be happy.
I think that the issue is the (M - X) >0 does not imply that foreign govts can create USD, as "in increase the stock of." The saving of USD in the KAS was not created by the exporter as an add to the stock of USD.
That is to say that while flows can change the holding of NFA(e) (Winterspeak) in a period it cannot add to the stock of NFA(e) in existence. This is what it means for a currency sovereign to be the monopoly supplier of the currency. While the cb can increase the stock of reserves, reserves don't increase the money stock unless they are held by non-govt outside of banks' reserve accounts and cash vaults. That only happens through bank lending (net zero) and govt injection in excess of withdrawal (net > 0). In the latter case, the stock is a function of cumulative govt activity.
NFA is a simple. It is someone (a person, a firm, a sector or many sectors') difference between financial assets and liabilities.
It is secondary which currency these assets and/or liabilities are denominated in. It doesn't mean they are unimportant, though.
If the United States becomes a net exporter and its current account balance moves into surplus, both the government deficit and the current account surplus will add to the NFA of the private sector.
Not even MMTers reserve the usage of NFA to the liabilities of the government. When the private sector and the rest of the world are consolidated into one, we can say that the government liabilities are NFA of the private sector. But the equality is not an equivalence of the terminologies associated.
"any NFA concept is offset by balance sheet equity"
JKH,
Assuming this is true (I'm not sure what you are getting at), it wouldn't enter into any calculation wrt a closed system of nominal dollar NFA's (net dollars and bonds issued by the government).
If you are implying that the "real" asset side of the balance sheet is where most of the "wealth" lies, that "wealth" is essentially untethered from the flow of dollars. There is no direct relationship.
The value of wealth can plummet (and has) drastically overnight with no change whatsoever on the level of NFA, dollar assets and dollar liabilities recorded on balance sheets in the aggregate.
You are right that some of the tax paid into the Social Security trust fund is used to pay current benefits, so it's basically a current transfer.
The difference is that any money you pay in, the government OWES to you in return.
You get it back over time further down the road. Plus you get interest and all the rest.
So you are essentially lending money to the government, which they are spending in the present, and which they promise to pay back to you in future.
Unlike normal government borrowing, soc sec contributions are obligatory for workers, so they take the form of a tax.
That tax payment is basically the same as paying into a retirement fund or insurance fund... it is a form of saving.
However, I think that only the part NOT spent on current benefit payments is actually counted as "saving" (or addition to NFA), as that is the part invested in treasury bonds and spent on other things.
Possible but not the most general. It is also possible that they aren't passed to the near and dear ones. Even if the spouse gets it, when the spouse dies it ceases. But the couple's assets can be passed on to their children - not the entitlements.
So my example probably wasn't the best - I should have taken the opposite case. (Although the example I gave was what I read in the System of National Accounts).
What I am saying is that there is a contingency associated.
Take the example in which a person continues to live long long and long. While his/her entitlements are proportional to the participation, the payments continue to happen and do not stop at some point. Compare that to an income plan with a mutual fund which stops if the person survives for long and the value of his units goes to zero.
So unlike this, pensioners treat their pensions as income rather than a reduction of their assets.
Because of contingencies involved, the treatment is different.
NFA are net dollar assets including cash and bonds held by the public issued by the government into the non-government.
Thes NFA's are held and recorded on real-world balance sheets in the non-government distributed between the domesic and foreign sectors.
These NFA have no offsetting liabilities against them in the non-government, which distinguishes them from private debt, for which there is a matching liability for every dollar issued, except for the accrued interest of the debt, which would be constantly growing unless offset by fiscal transfers.
I started the discussion by saying that state and local government finances are included by many in the government sector when talking of sectoral balances.
You were the one moving goalposts.
Before you pontificate on these matters, learn some good accounting rather than appealing to thermodynamics.
"I have purposely limited my comments to the domestic economy in an attempt to avoid these rabbit-hole excursions"
Yes but I also gave you an example of a closed economy.
"NFA are net dollar assets including cash and bonds held by the public issued by the government into the non-government"
NFA of a person or a sector is just the difference between its financial assets and liabilities.
If you take the private sector and the rest of the world and calculate their net financial assets, it will turn out to be the net liability of the government sector.
But that is different from declaring "NFA is" the way you did.
"Children of a retired, disabled or deceased worker receive benefits as a "dependent" or "survivor" if they are under the age of 18, or as long as attending primary or secondary school up to age 19 years, 2 months; or are over the age of 18 and were disabled before the age of 22."
The current transfer is not between taxpayer and social security recipient. Special accounting treatment social security receives inside the government doesn't make it an exception to "taxes don't fund spending".
The current transfer happens in real resources when the social security recipient spends their check.
I agree with what you are saying about the difference between individually held assets and social security. But the government bonds in the social security trust fund are still 'non-government' net financial assets.
"Yes but I also gave you an example of a closed economy."
You don't seem to understand the difference between a closed economy and a closed system. They aren't the same thing. Closed economy refers to a specific definition, closed system is applicable in any context, and can be defined as a matter of convenience.
You gave no coherent example of a transaction within a closed economy that created NFA as I have defined it for your convenience upthread a post or two.
ok, I agree with that but you can also use conventional language to describe the process too, which is what I was doing. It's a current transfer of purchasing power. Some people lose some of their income in the present and others gain income in the present.
"You gave no coherent example of a transaction within a closed economy that created NFA as I have defined it for your convenience upthread a post or two."
You can construct any sector you like, and then interpret "generic" NFA very specifically in the context of that sector.
In all cases, the NFA piece is offset by an equivalent amount of balance sheet equity or net worth (I should have said equivalent before).
That equity piece is on top of the rest of the balance sheet equity that isn't offset by NFA.
But the (e) in NFA(e) adds nothing to the idea of NFA, because (e) is intrinsic to NFA in any context.
On the rest of the discussion, I think it helps at least to keep in mind the sector context in which the NFA idea is being used. Even in MMT, there are different sector decompositions and sets of constituent NFA positions that aggregate up to the standard non government NFA position. And in the context of the side discussion on soc sec, however you want to define NFA, I think it helps to at least keep in mind that the soc sec piece is somewhat different than the public reserve, currency, and bond piece, at least in terms of its liquidity characteristics.
Rather than apply for immediate membership in Matt's "moron club", I'd like to reflect on this.
The NFA discussion in general is an interesting one, because you do want all the pieces to add up to a coherent whole. And there's a fair bit of complexity in the detail.
In the aggregate, if households SHARE of NFA increases (a flow), business MUST run a deficit under the first condition. No other outcome is possible.
Which is consistent with what I have been saying. One entity can only acquire NFA at the expense of another. A budget surplus merely reduces the level of NFA in the aggregate.
In the aggregate NFA will remain the same or decline slightly based on your scenario.
Eventually (like soon), firms must recoup any increase in NFA transferred to households or go out of business, for they would be taking a loss. This condition couldn't last long.
In the end, transactions between business entities and households in the aggregate must result in a net transfer of NFA (or debt acquired assets) from households to the business entities, otherwise it would be impossible for business entities to make a profit.
it's a current transfer of purchasing power. Some people lose some of their income in the present and others gain income in the present.
The thing I'm getting hung up on is characterizing it as a transfer. Yes, taxes reduced income for some people and some spending increased income for some people but as we observe for federal taxes and spending in general, the two aren't linked.
When we call it a transfer, it implies discrete quantities of something scarce being moved from one person to another with a dependency that the quantity transferred must first exist with the person who is taxed in order for the spending to occur. This is true for the real resources. Applying it to federal taxes/spending is out-of-paradigm backsliding that logically lends support to cuts based on dollar "affordability".
Seems to me that the argument is over a closed system (currency zone) in which there are two kinds of money, inside and outside. Inside money nets to zero by accounting definition. Wrt outside money, net financial liabilities of govt and net financial assets of non-govt net to zero. Net financial assets wrt inside money must always be zero. Net financial assets held by nongovt wrt outside money may be greater than, less than or equal to zero depending on govt activity.
I take it that this is what paul is saying about a closed currency system being closed.
I don't recall the source now, but IIRC, FDR realized that SS "tax" did not actually pay for SS and the budget deal that was made in the 80's to use SS as part of the general fund and substitute bonds for it also recognized it. This was just a way to confuse the issue purposely to create the facade of saving "paying for" SS and later FICA including a "premium " for Medicare insurance.
Of course, people think of it that way, because that is the way it is intentionally misrepresented. It is this intentional misrepresentation and the accounting subterfuge that it involves that is creating the illusion of "savings" paying for SS and Medicare.
Paul's also talking about the sustainability of inside credit in the absense of injections from the outside, I think. However 'non-government NFA' can also be degraded by inflation, and destroyed by hyperinflation or voluntary government default.
It's also worth pondering whether government credit is really sustainable in the absence of some form of private credit, i.e. whether an economy can function without the latter.
"The thing I'm getting hung up on is characterizing it as a transfer."
A transfer is a payment in which an economic unit provides goods and services or an asset without getting anything in return as a direct counterpart.
It is true that in the case being discussed, the unit receives something but that is in the future not now and is not quantifiable to full certainty.
Hence they are still called transfers.
It has nothing to do if one is in paradigm or "out of paradigm". Neither does it have to do with "discrete quantities of something scarce being moved from one person to another"
"But the (e) in NFA(e) adds nothing to the idea of NFA, because (e) is intrinsic to NFA in any context."
Sorry, didn't mean to imply that I was commenting on that particular item…I wasn't, but I agree with your characterization.
"I think it helps at least to keep in mind the sector context in which the NFA idea is being used. Even in MMT, there are different sector decompositions and sets of constituent NFA positions that aggregate up to the standard non government NFA position."
In general terms I don't disagree with this either.
My particular tack on this discussion is to always look at NFA and flows in general from the aggregate top-down point-of-view. I look at Inter-sector transactions (within the domestic economy) with a particular purpose in mind.
Using principles of closed systems, I (anyone) can define sectors as desired to make the problem less complex. Any group or combination of groups can be defined as a closed system. How one chooses these groupings determines the level of complexity.
Simplifying the problem does not limit the value or accuracy of the solution.
The correct definition of component boundaries is the most important step in an analysis. In engineering we say that "The first step in solving a problem is to define the problem correctly".
The solution then becomes simple.
Conversely one can define boundaries in a hap-hazard way or by strict sectors and make the analysis very complicated. Engineers (and I presume scientists) avoid these situations, otherwise the solution to many problems becomes indeterminate.
For example, "where is the beginning of a circle?"
Answer: Anywhere you choose it to be. And so it is with the boundaries of closed systems.
"The thing I'm getting hung up on is characterizing it as a transfer."
A transfer is a payment in which an economic unit provides goods and services or an asset without getting anything in return as a direct counterpart.
Different meanings of "transfer." People think of "redistribution" in terms of a transfer from one party to another through the power of govt to tax ("coerce").
A transfer payment is a technical term, indicating one way that "redistribution" is carried out.
According to MMT, this misconceives the role of taxation and expenditure in a modern monetary economy.
the person 'paying into' soc sec gets a claim on future soc sec payments. They don't get to hold their own personal government bond, but that is still something owed to them that is guaranteed by the full faith and credit of the US.
In practice part of that is held in the form of soc sec trust fund bonds and the rest is, I suppose, 'unfunded government liabilities'.
JKH I'm unclear - do you think that the soc sec bonds constitute NFA and saving or no? Or not sure?
I don't think so. It looks to me like an accounting "convenience" to move funds from one account to another. As I envision it, the SS funds held as reserves had been in a separate TSY account that was used to pay SS transfers, and the account was in surplus YoY. Congress decided to move that idle surplus in the SS account to the general fund and did so by replacing the reserve with special bonds that remain in the account and can be exchanged for reserves. Thus the transaction is within govt so does not affect amount of non-govt NFA.
I regard this as "ledgerdemain" to continue the illusion that taxes pay for SS in order to distinguish them from "welfare" transfers, which was FDR's original intention as I recall. He believed that this accounting illusion would protect SS politically down the road and he was largely correct.
Now the cry is that the country can't afford to raise taxes to pay the "unfunded obligations" of the future. So that illusion is no longer operating now that the surpluses in the SS account represented by bonds are insufficient to pay for the coming expenses anticipated over the next 75 years.
"It's also worth pondering whether government credit is really sustainable in the absence of some form of private credit, i.e. whether an economy can function without the latter."
Seems to me you meant to say the opposite:
An economy cannot function on private credit alone. Notice I'm not hedging. It could function on fiscal spending alone, and they can work effectively together.
On the other hand, a wage-earner is nuts if he/she finances consumer spending with private debt.
All one is doing is spending one's income from the future now.
It shifts one's consumption backward in time. The piper must be paid however.
Making matters worse, debt effectively reduces ones spending power, unless inflation shrinks your debt burden, which efectively lowers your interest rate.
"the person 'paying into' soc sec gets a claim on future soc sec payments. They don't get to hold their own personal government bond, but that is still something owed to them that is guaranteed by the full faith and credit of the US."
The fact that they are guaranteed are slightly tangential to the issue.
The person is not holding a bond really because there is a limit on how much the bonds can be liquidated and spent. The person cannot include it in his/her will.
On the other hand, a wage-earner is nuts if he/she finances consumer spending with private debt.
When I was young, consumer credit was severely limited by banks. Credit was generally understood to be for investment. That changed with the advent of the credit card and progressive easing of consumer credit. This was not consumer profligacy. It was engineered institutionally and driven by rent-seeking. Then the game of musical chairs began that was sure to end in tears. Of course, banks were not willing to take responsibility for their engineering the collapse and demanded to be paid in full either by borrowers or public bailouts.
"Nominal value, e.g., loan denomination, remains the same, real value (purchasing power of the currency) changes."
Right, This is another way of saying the nominal system remains unchanged (it's a closed system after all). The changes occurring are external…values for example and the relative purchasing power of the dollar.
That's why inflation is the friend of the debtor normally, but not in the case where the debtor's wage is not being dragged up by inflation.
We are being hit with the double-whammy currently.
Part of the problem is that soc sec taxes are called taxes - when they're really contributions to a type of pension fund; that doesn't help thinking about this clearly
All pension funds pay out according to pension plans with life contingent uncertainties, so soc sec doesn't seem that different in that regard
And if the Fed flow of funds report reported household net worth in respect of soc sec contributions the same way as pension fund reserves, the bonds held by the soc sec fund would show up as a claim of the household sector, wouldn't they?
meanwhile, Tom also seems to be arguing something more along the lines of my earlier $ 12 trillion NFA guestimate
With due respect, you are mixing many things. A myth-bursting approach has its limitations. Whether myths exist or not is not relevant to a very direct question asked by JKH.
But generally if an opinion is needed (for JKH), the Flow of Funds doesn't treat it as part of financial assets of households or include it in saving. The transfers received are however included in income and/or saving.
Self-consistency (and stock-flow consistency) can be driven to argue one way or another, not myth-bursting.
If soc sec were equivalent to a pension fund, and IF it were currently fully funded by cumulative soc sec "taxes", what do you think the size of the bond portfolio would be?
BTW, for the historical record, consumer credit was largely spearheaded by department store credit. although most small stores also offered credit to good customers, but this was very limited. Department stores had a larger customer base and their lending was much less personal This was the start of the credit card. It was only a matter of time before bankers realized that they could monetize this this and profit from the value added of a universally accepted card. Prior to this most consumer credit was business related, e.g., America Express and Diner's Club. It was used to keep track of expense accounts as well as to avoid business people from having to bear the expense out of pocket and wait to be reimbursed later. So the between the department store credit and business cards, the ground was prepared for the introduction of the credit card. See Dee Hock's description of the founding of Visa in The Birth of the Chaordic Age (1999).
Ramanan, the myth is is that taxes fund spending. IIRC FDR got this and didn't want to create SS on that basis since he feared that down the line the argument would be mounted that SS was just a welfare giveaway. So they concocted to sequester the SS funds in a separate account from which SS payments would be made so that it could later be argue that benefits were previous "paid for." They knew at the time that this is the way it actually works. In that sense it was the intentional creation of an illusion that was unnecessary operationally. It was a policy choice for political purposes, just as the arguments now are politically based and not related to operational reality —as Greenspan himself admitted in testimony to Congress.
Also for the record, consumer or household debt is mostly home mortgages, which account for some $11 Trillion of the $13+ Trillion debt held by households.
And, as I noted earlier, most all of the interest paid on the $54 Trillion total debt outstanding is borne by the wage-earner, absorbed as a cost of production and passed on in prices.
If the average interest rate is 2% the current loss of dollar assets annually is about $1 Trillion. Cancelling out an equivalent amount of income.
No wonder we are running big deficits year-in-year-out.
Yes, and previously those mortgages were put out with a minimum down of 20% and held by local ad regional banks. Then came the advent of the agencies (Fannie) which purchased the mortgages from the banks, so the banks would have more space for new lending on housing. Recently 90% of mortgages are agency loans. Whu use the banks as middlemen at all and let the govt lend instead. Lots of ways this could be structured administratively just as efficiently as the present system.
"Part of the problem is that soc sec taxes are called taxes - when they're really contributions to a type of pension fund; that doesn't help thinking about this clearly"
Yes very true.
"All pension funds pay out according to pension plans with life contingent uncertainties, so soc sec doesn't seem that different in that regard"
Yes but even if there is a private firm running the thing, it is treated as the same way in which the contributions go to the government isn't it?
However a distinction needs to be made with regards to some kind of annuities which some of these pension funds or even mutual funds may run.
I think may be easier to make up one's mind by actually thinking of a private sector firm doing the job. For example the fund may have a tiny net worth compared to the kind of transactions it is processing - that kind of intuition.
About the number, yes I am close to the $12tn as opposed to $15tn.
I think the soc sec bonds would be analogous to private sector pension fund reserves in the Fed report
Those are financial assets rather than actuarial reserves - pension funds can be in deficit or in surplus in that regard
Soc sec has an asset reserve - the bonds - but is in actuarial deficit; that was in the nature of my question to Y above
my guess is that soc sec was designed more as a pay as you go type plan as opposed to a funded plan - which is why its assets don't show up in the household sector on the Fed report I think
BTW, if they did show up, then I think you'd see the full $ 16 trillion show up in government liability accounts on the Fed report - I don't think it does now?
Ramanan, I didn't repeat it from my first comment to the second but it's the idea social security as current transfer from taxpayer to social security recipient I object to. As Tom pointed out, it's a myth for social security just as much as any other variation of "taxes fund spending" at the federal level.
I understand there are many myths -although I personally do not use the phrase "taxes do not fund anything". But I know what you are talking of.
My general point was that there are general economic reasons for presenting national accounts in a way or the opposite - the kind "y" has been asking.
There are arguments in both directions and these can be looked into without worrying about alarms raised by some sections of the public debate. I actually think that debunking the alarms takes one's mind off from some interesting questions raised by "y".
MMT does not like the approach of including actuarial liabilities in interpreting the operational functions of the monetary system - and I don't blame them
But the question of the soc sec bonds isn't at the same level as the actuarial liability treatment; it's somewhat more legitimate for looking at things like NFA issues
I don't know. Pretty massive. But it would just be numbers piling up on the government's 'internal scoreboard' of 'unfunded liabilities', I suppose.
The part covered by trust fund bonds has already been spent by the government on things other than social security. This part is a definite 'debt' resulting from deficit spending, and a form of non-govt NFA.
The part spent on 'current transfers' eliminates some previous government liabilities and replaces them with other future liabilities, whose precise scale can't be known exactly. (I think)
I realize that some of us are interested chiefly in the operations and others of us in the policy and presentation. Of course, we need to get the the former straight but it has to be be presented in a simple enough way for informed policy discussion among fifteen year olds, or maybe twelve years olds. What's happening now is that complexity is allowing a lot of policy as well as business practice that is either misunderstood by most people or misrepresented to them. What I think we are doing at MNE is working on a simple presentation that is both accessible and correct. As Paul said, that is going to require some simplification of a pretty complex system with lots of moving parts.
You should want to simplify it, but simplify it in a consistent way.
Unfortunately, that involves reconciling the detail. Can't avoid it, because the issue of interpreting or misinterpreting the complexity is always going to be out there.
'current transfers' move outstanding government liabilities from one person to another (one person is taxed, another is paid) whilst adding to future liabilities (money is now owed to the person taxed, though the actual sum to be paid out in future can't be known precisely).
If WM believes this then he must also believe that when the intra-governmental holdings were created the reserves were transferred through the Treasury and spent into the economy.
Maybe this accounts for the $2.6 Trillion in off-budget spending.
You should want to simplify it, but simplify it in a consistent way.
Unfortunately, that involves reconciling the detail. Can't avoid it, because the issue of interpreting or misinterpreting the complexity is always going to be out there.
Completely agree. It's why I think that what we are up to here is important even though some see it as carping. I assume we have a common objective of getting an understandable presentation right. I look at the debate now as being between the "bean counters" and the policy and advocacy types "who don't know beans."
Any presentation that enters the mainstream is going to encounter opposition from experts, and the beans had better be accounted for correctly, or the presentation won't hold water.
"When program revenues exceed payments (i.e., the program is in surplus) the extra funds are borrowed and used by the government for other purposes, but a legal obligation to program recipients is created to the extent this occurs. These surpluses add to the Trust Fund. At the end of 2011, the Trust Fund contained (or alternatively, was owed) $2.7 trillion, up $69 billion from 2010. The fund is required by law to be invested in non-marketable securities issued and guaranteed by the "full faith and credit" of the federal government.
The trust fund represents a legal obligation to Social Security program recipients and is considered "intra-governmental" debt, a component of the "public" or "national" debt. As of April 2012, the intragovernmental debt was $4.8 trillion of the $15.7 trillion national debt."
"the issue of interpreting or misinterpreting the complexity is always going to be out there."
JKH, I submit that the complexity is way less than you think it is.
The S/B identity is very simple.
The underlying accounting can be complex but doesn't add to the understanding.
Doing so implies that for some reason one has to parade out various accounting transactions to prove something that has already been proved.
We already know 2+2=4. It follows that every form of that relationship is also true, no matter what mathematical operation is applied to it algebraically.
The economy can be described with a simple graphic that nails down all of the important relationships in a way that bypasses all accounting detail (yes, I'm working on it and it's almost ready).
I've already intimated one of those relationships in this thread. No one has questioned it or commented on it. What I wrote was either assumed to be true or too obtuse to comment on.
Could it be that simple? We will have to wait and see.
On the taxes fund spending model, the FICA reserves adds to the SS account that were transferred to the TGA and used for spending are already back in the economy. So the problem then becomes where the reserves will come from for the IOUs in the SS account with they are drawn on. If the IOUs in the SS account are presumed to equal reserves for spending, then the reserves from taxes will be spent twice. Therefore the IOUs just represent promises to tax as needed to meet SS obligations.
so it's both "intragovernmental" debt and debt owed to 'program recipients' (what I was vaguely referring to as 'the population').
That has to be a net financial asset for them as a whole, i.e. 'non-government NFA', even if it's not counted as such in the Fed flow of funds report. Possibly because it is held by the government "on their behalf"?
Though it is odd as it's not owed specifically to any one person.
"An economy cannot function on private credit alone. Notice I'm not hedging. It could function on fiscal spending alone, and they can work effectively together."
An economy without any form of private credit is basically an economy without intra-private sector lending and borrowing. Yes it can function, in theory, up to a point. But governments that eliminate private credit, such as communist governments, tend to end up with very 'weak credit'.
A well-functioning private credit system strengthens the government credit, and vice versa. In that sense they're 'interdependent'.
I would point out that the Mosaic Law did allow for lending, but at 0% interest (no usury).
This perhaps was due to their situation back then where they had no IT to be able to track total liabilities and hence the corresponding interest requirements (avoided chaos by just legislating interest at 0%).
This supports y's point that we do perhaps today we need both deficit spending and private lending in conjunction, but with 0% interest on the private loans or..... as an option today have the govt pay the interest, if non-zero, directly to the private lenders as principle is paid down by the borrower.... rsp,
"A well-functioning private credit system strengthens the government credit, and vice versa. In that sense they're 'interdependent'."
That's pretty much what I said above, fiscal and private credit can work in concert…an economy cannot function on a credit circuit alone. I don't get what you mean by the "government credit" part though.
Unless you are implying the government has to"borrow" to spend. In actuality, the government must pay a "ransom" to spend, but it's a ransom it can afford at no cost real or otherwise.
In the US there is no "government credit", if what you mean is that the government has to "borrow". The mechanics of money creation do not equate to borrowing.
In the private sector borrowing transfers use of an asset from one party to another and creates no new NFA.
When the government issues bonds to the non-government, no one gives up the use of an asset, and new NFA ARE created.
The mechanics are not remotely similar. The only similarity is the word "debt".
"perhaps today we need both deficit spending and private lending in conjunction"
Matt, We do need both because of business investment requirements.
We DO NOT need private credit. It introduces a "time bomb" into the system that creates instability. We have witnessed this time and time again.
Even in Biblical times debt jubilees were needed to reset the system occasionally. Now, instead of resets, we just transfer all of the wealth to the top, and the hard-earned gains of wage-earners evaporates.
Matt, I think he does too but I recoil when the implication is that the government needs "credit", must "borrow" to spend.
I guess I'm anal that way, but as far as I'm concerned that implication is a destructive meme when it comes to trying to explain fiat currency systems to the brainwashed masses.
But these people are sick Paul (pleonexia IE 'more having', sick disgraced human beings Paul).
As far as debt jubilees, it looks like chaos reached a level where the authorities had to intervene... ie cooler heads prevailed... we dont have this kind of leadership today unfortunately for now...
We DO have the IT to keep track of all of this today, but our morons do not understand our capabilities again unfortunately.
We could perhaps just let these sick humans have enough to let them get by until they of course die at which point they know "they cant take it with them".
Meanwhile the righteous among us can have a wonderful life...
We could look at "total loans" and ask ourselves: "where are the balances to pay all of the associated interest?" And make sure they are available...
sorry by 'government credit' I meant 'government money' (currency).
Money is a credit/debt relationship where the issuer is the 'debtor' and the receiver is the 'creditor'.
MMTers call money a 'tax credit' because it can also be used to eliminate debts imposed by the government (taxes). But the issuer of the money is still a 'debtor'.
If a government has 'strong credit' it means people want to accumulate its money, want to exchange it for goods and services, want to export goods to the country to get it, want to save it, want to borrow it, etc.
A government with 'strong credit' can do things other countries can't do, such as build enough nuclear weapons to destroy the world many times over, or send robots to Mars. That kind of thing.
I was saying a well-functioning private credit system strengthens the government's credit.
"We could look at "total loans" and ask ourselves: "where are the balances to pay all of the associated interest?" And make sure they are available..."
Matt, exactly. We can provide the balances or watch the system either collapse or limp along crushing millions of peoples lives along the way.
I'm not worried for myself or even my kids - they are resourceful, skilled and capable of living in any world thrown at them.
I worry about the millions of people that don't have the tools or the confidence to make it in a dog-eat-dog world, or what is becoming a world with 10 dogs and only 6 bones.
I know I'm a bit late to the thread but I'd still like to seize this opportunity to try to clear up the key concept of "Net Financial Assets" by appealing to Winterspeak - again.
Let's see how things really work in the U.S. by following a recent demonstration provided by Marc Lavoie.
Let's say the Treasury deficit spends by issuing $100 million in T-bills that it sells to private banks.
An immediate step taken after this is government deposits being shifted from the commercial banks to the Fed, thus creating a negative reserve position for banks.
The Fed then takes compensatory measures, purchasing back the T-bills on the secondary markets, thus eliminating the deficiency in bank reserves at the Fed.
It's only after this step that the Treasury cuts the checks and makes the payments - that is, it effectively engages in deficit-spending. This means deposits being credited at private banks and banks being credited with reserves at the Fed. The Fed funds rate goes down, triggering an OMO to drain excess reserves.
Treasuries fly again into the banking sector, but since there will be additional demand for reserves and banknotes the Fed will end up keeping some of the Treasury bills originally issued to fund deficit spending.
If, say the required reserve ratio is 10% and households and firms demand $10 in banknotes for every $100 in new deposits, at the end of the process the amount of High Powered Money will be composed of $9 million of reserves and $10 million of banknotes in circulation, for a grand total of $19 million.
New household bank deposits will be $90 million.
Original deficit spending was $100 million.
My question is a simple one: whatis precisely - to the penny - the total amount of NFAs created in the whole process?
My question is a simple one: whatis precisely - to the penny - the total amount of NFAs created in the whole process?
According to my understanding, the non-govt NFA add has to be precisely the same as the amount of tsys issued, regardless of changes in composition of how they are held subsequently, e.g., through cb ops, or bank lending (which nets to zero necessarily).
So in this example, Tsy issuance of $100 mil means an add of $100 mil to non-govt NFA, "to the penny," as Warren would say.
The T-bills are discounted from par at auction, and the discount is the interest paid, i.e., yield, so that the value of the tsys newly made available is $100 mil, even though less in reserves was realized from the auction.
The way the govt issues currency under the present system it bu tsy issuance and then expenditure of the realized reserves from the sale. That expenditure plus interest on the tsys is an add to non-govt NFA.
"the non-govt NFA add has to be precisely the same as the amount of tsys issued".
Yes, I understand that the amount of NFAs cannot exceed $100 million but apparently they are being held as currency and bank deposits, not Treasuries.
In the example, the private sector (households and firms) ends up owning $90 million in bank deposits plus $10 million in currency - for a total of NFAs added to the system via deficit spending of $100 million.
But they do not receive the interest on the T-bonds because these are held by the banks.
Considering that total NFAs of the private sector are $100 million ("to the penny") the banks cannot count as "private sector" in the example.
Say the interest rate on the bonds is 3% annually. At year-end the banks will have received $2.7 million (a part of this may be re-passed to households and firms as interest on deposits) and the Fed $0.3 million that it will send back to the Treasury.
Money has increased by $100 million and HPM by $19 million.
But Treasuries were not "the" NFAs created as "savings" of the private sector. In the example it seems that the NFAs are being held as "money".
Let's drop the detail of the discount on T-bills for simplicity.
Say the government sold $100 million and it will have to pay back $103 million in one year.
My point is: the private sector will have $100 million in new NFAs.
But these are held as money, not T-bills.
So, for the numbers to add up we'll have to exclude the banks from the private sector. The T-bills on the banks' books (as well as those held by the Fed, of course) can't be the new NFAs of the private sector.
Is this the MMT view on NFAs created by deficit spending? Or is there room for further clarification here?
In the example, deposits are assets of the household/corporate sector with no corresponding liability. Just like currency is. A total of $100 million ($90 million deposits plus $10 million currency).
Whereas the T-bills or bonds on the banks' books do have a corresponding liability, namely deposits.
As for T-bills held by the Fed they mean nothing. It's just an accounting gimmick, since the Fed is a branch of "the U.S." that originally issued the securities.
So, again: in real life (the process described is the way deficit spending really happens in the U.S.)it seems as if "money" - not T-bills or bonds- is the "NFA" that ends up in the private sector's hands after a round of deficit spending.
The banks "are owed" $90 million in tsys and "owe" the same amount in deposits.Their NFAs add up to zero.
Households and corporations own $90 million of deposits and $10 million in currency and owe nothing. They were the beneficiaries of the government deficit spending. They own (have "net saved") $100 million in new NFAs - in the form of "money", not tsys.
"The T-Bills are net financial assets to the 'non-government' as a whole"
Let's sub-divide the private sector into financial (banks) and non-financial (households and corporations).
The balance sheet of the financial sub-sector has $90 million tsys as assets and $90 million deposits as liabilities.
The balance sheet of the non-financial sector has $100 million deposits plus currency as assets and zero dollars as liabilities.
Deficit spending equals $100 million - the "money" held as an asset with no corresponding liability by the private sector, to the penny. The NFA of the private sector is equal to the government deficit.
Whereas the tsys are held partly by the banks - and are matched by corresponding liabilities on their banks - and partly by the public sector Fed. By definition, the tsys cannot be considered the NFAs of the private scetor.
Of course, there is nothing that prevents households and/or corporations to go to the banks and propose a swap: give us those tsys and cancel our deposits.
Then- and only then - yes, tsys will become the NFAs of the private sector.
1. Treasury spends $100 million from its Fed account (which always has several billion $ positive balance). Bank reserve accounts are credited by $100 million, bank customer deposit accounts are credited by $100 million.
2. Treasury sells $100 million T-bills to the banks. Their reserve accounts are debited by $100 million and the Treasury's Fed account is credited by $100 million.
I think what you mean is that when the government spends, the deficit is financed by issuing Treasury securities, settlement balances of banks and issuance of currency notes (to the extent the latter two are demanded by the private sector).
So you take issue with the claim increase in Treasury securities issued itself is the increase in NFA of the private sector whoever made that claim.
Is that what you are asking?
I agree these matters should be handled properly.
For example ...
The Treasury can purchase financial assets by incurring liabilities and hence this results in the increase of the public debt but this cannot be said to increase the NFA of the private sector.
Net financial assets of the consolidated non-government sector consist of reserves, currency, and Treasury securities.
And the consolidated non-government sector tends to be the “iconic” MMT view.
The ultimate holders of all wealth are individuals, and to drill down to that level within the consolidated non government sector, you have to examine the household sector, and you have to do that for all individual countries that are potential holders of Treasury and Fed liabilities.
Very few Treasuries (as a proportion of the total) are held in portfolio by commercial banks. Therefore, very few net financial assets are reflected as commercial bank deposits held by the US household sector in respect of that particular source. The typical academic presentation of the bank buying and holding Treasuries isn’t very applicable in the real world.
But the massive excess reserves currently held by commercial banks do reflect deposit and other liability creation on the other side of bank balance sheets, which would be reflected as household assets either directly or indirectly (indirectly via corporate holdings of bank deposits or other bank liabilities). This is because almost all of the Treasuries sold to the Fed from QE originally came from non-bank portfolios – not bank portfolios. That’s consistent with the general trend of banks holding a small proportion of treasuries in their own portfolios. The banking system (including bank owned dealers) acts mostly as broker in QE – not as a principal source of Treasury supply. And it acts mostly as broker in the (normal) reverse direction of bond distribution as well – not so much as a principal end demander and holder of Treasuries.
There’s a broad distribution of Treasury holdings held directly across households, hedge funds (Fed statistics for Treasury holdings of hedge funds are actually consolidated into those for households due to data collection limitations), mutual funds, insurance companies, and pension funds (including state and municipal pension funds).
Unlike soc sec, those pension fund assets tend to be reflected as explicit household sector asset claims in the Fed flow of funds and balance sheet reports (as actuarial liabilities of the pension funds).
But more than $ 5 trillion of Treasuries are held outside of the US. So you have to explore all those balance sheets to get the ultimate household NFA claims there, as a major component in the overall non US government NFA.
There is the issue that primary dealers are expected to bid for bonds at auction. But if you consider a hypothetical (although extreme and quite unlikely) situation where end buyers don't want treasuries, you have to consider the possibility that dealers simply give up their dealership under such dire conditions - if nothing else to avoid chronic capital losses on bonds.
Yes, I'm questioning the claim sometimes made during debates over these issues that the increase in NFAs that results from deficit spending is the increase in Treasuries issued.
In my example (taken from Lavoie) it simply can't be so. Part of the original Treasuries are on the Fed's books - and everyone agrees the Fed is not part of the private sector.
Also, the Treasuries held by the banks have deposits on the other side of the balance sheet - so, they are not "net" assets.
In the example - which could be a real-life case, if agents behave in the manner described where households and corporations do not buy tsys - the NFAs are in the form of currency and bank deposits held by the non-financial private sector.
JKH says that NFAs are composed of reserves, currency and Treasury securities. I agree there are situations where this could be so, namely when households and corporations do buy Treasuries for their portfolios - but only on the condition that we do not add those items up, for otherwise total NFAs would exceed the amount of original deficit spending by including those tsys that are on the Fed's books.
No double-counting should be allowed, correct?
And JKH's claim that very few Treasuries end up on the commercial banks' books does not correspond to the current situation in many eurozone countries.
"Yes, I'm questioning the claim sometimes made during debates over these issues that the increase in NFAs that results from deficit spending is the increase in Treasuries issued."
Yes that claim is not right.
Also the general claim that NFA of the private sector is reserves, currency notes and Treasury securities is also not completely right because the Treasury holds assets such as MBS and Student Loan ABS. It even holds some foreign currency assets.
Only in the abstraction that these assets are not held by the Treasury is this right.
Jose, you have to seperate the T-bills from the deposits. The T-bills are bank assets and treasury liabilities. The deposits are bank liabilities and household assets.
(Ignoring the cash and reserves) the T-bills are the only assets in the example that have no corresponding liability in the private sector.
However, the only entity in your example which has no liabilities is the household sector. Odd innit?
José, the composition of assets constituting NFA held by non-govt is immaterial. OMO does not chave amount of net financial assets held by non-govt, only their composition.
Banks hold two categories of rb in their Fed accounts. One category is unborrowed and constitutes NFA in that there is no private sector liability for the private sector asset. The other is borrowed and doesn't constitute NFA, i.e, there is a private sector liability corresponding to the private sector asset, so net is zero.
Interest paid to non-govt is a govt liability and therefore adds to non-govt NFA.
IN the US NFA are added to non-govt by Tsy issuance with equal spending of reservers, which leaves the previous amount of reserves unchanged and a net add of the Tsy issuance. The interest payments (flow) also increase non-govt NFA and add to the stock.
Monetary ops like OMO and POMO don't alter non-govt NFA stock only composition, i.e., tsys, unborrowed rb or cash in the hands of the public.
Has to be this way in a closed system of inside money and outside money as structured institutionally in the US under present rules. There may be exceptions in extremis, but the normal ops are as described, I believe.
the T-bills, reserves and cash are Net Financial Assets (NFA). However the banks in your example don't have 'net financial assets', their assets equal their liabilities.
The Housholds have 'net financial assets', but only the cash they hold is a Net Financial Asset (NFA) !
confusing - you have to specify what you mean precisely.
Thanks for calling attention to this post here, Matt. And thanks to all for the astonishing outpouring of discussion related to the Post. I'm always amazed at the interest in a Krugman topic post.
Conclusion: the government has deficit-spent 100 and the household sector holds 100 of NFAs in currency and deposits.
Neither reserves nor Treasuries can be considered part of the NFAs held by the private sector, in this example. The interest on the Treasuries is captured by the banks and also by the Fed.
Your example is actually pointlessly complicated. What you are saying could be demonstrated in a much simpler way. There's absolutely no reason to include all those details.
Anyway,
There is a basic miscommunication going on here.
Combine the household sector and the banks into one consolidated entity called 'the private sector'.
Now focus on the bank deposits and ignore everything else in your example.
The bank deposits are household assets and bank liabilities.
The example is complicated because in real life - as opposed to the sanitized version you may find in economics texts, including some MMT ones - deficit spending is a rather complicated process.
Anyway, let's properly consolidate the private sector as is your wish.
The private sector has total assets of 190: Reserves - 9 T-bills - 81 Household deposits - 90 Currency held by the public - 10
It has 90 in liabilities: Household deposits (a liability for banks; households end up with zero liabilities in the example) - 90
So, gross assets of the private sector minus gross liabilities of the private sector equals net financial assets of the private sector, right?
190 minus 90 equals 100 in NFAs, created as a result of deficit spending. The same amount of the original $100 deficit spending by the government.
And where do we find those NFAs? In the hands or pockets of households as bank deposits (90) and currency (10).
I hope it's now clear that in this (realistic) example neither reserves nor Treasuries can be considered part of the consolidated private sector's net (underline "net") net financial assets.
I would add to the above, in the case of borrowed reserves, the bank doing the borrowing at the discount window normally has to put up tsys as collateral, effectively making this a temporary asset swap with the loan repaid on schedule. This is different from unborrowed reserves, which come from net govt expenditure.
Go to his paper "Helicopter drops are fiscal operations".
Take a look at figure 6, that shows the effects of deficit spending on the recipient's balance sheet and that of his/her bank.
It's clear that the NFAs are the bank deposits of the recipient.
In his example there are no tsys.
In Lavoie´s (real life) example the tsys are held by the Fed and commercial banks. But the NFAs are still the deposits of the private sector, not the tsys.
First, NFA is not restricted to something about the "non-government sector". It can be used to denote the financial assets less financial liabilities of a economic unit or a group of units such as a sector.
Second, the definition you provided - written by STF is contextual and not the most general. Governments can hold equities of private corporations (think TARP) and to get the NFA of the "non government sector" (your terminology, not mine) one also has to take this into consideration. Equities are not "loans".
Third, a full definition is not so easy to give. Imagine if the government own a bank. The deposits of the bank are also liabilities of the government sector.
Ramanan, we have been around and around the block on this. MMT proponents use "NFA" as shorthand to mean net financial assets held in aggregate by consolidated non-government sectors. I suggested previously that something like NFA* be used to indicate this shorthand so there is no confusion about it. This is useful in a closed system (currency zone) wrt to inside and outside money, where inside money must net to zero and outside money may be net positive, negative or zero wrt to consolidated nongovt sectors depending on govt activity.
José, when President Lincoln funded the Civil War using "greenbacks," i.e. direct issuance, there was no offset in tsys and the currency injected into non-government to pay salaries, buy equipement, etc. was all an add to the net financial assets of consolidated non-govt (NFA*).
Whether the USD are held as tsys, rb or cash makes zero difference as far as total NFA* is concerned. That is to say, the composition of the assets held is of no relevance because when the composition changes the amount remains the same, as it has to in a closed system, like energy in a physical system.
The Treasuries held by the banks are assets offset by liabilities. Thus, they are not NFAs.
The deposits and currency held by the household and corporate sector have no corresponding liabilities - they are net financial assets.
If households and corporations bought Treasuries from banks (swapping deposits for T-bills), then Treasuries would become part of NFAs.
If the government would deficit-spend by buying services from banks then in that specific case banks would gain assets not offset by liabilities.
So, I do consider banks to be part of the private sector. It's just that in the Lavoie example households, not banks, were the beneficiaries of deficit spending and thus the ultimate owners of "NFAs".
Whether the USD are held as tsys, rb or cash makes zero difference as far as total NFA* is concerned
Exactly. It all depends on the situation, on how deficit-spending was "financed".
In the U.S. today a substantial amount of Treasuries end up being held by banks or the Fed and thus do not constitute NFAs.
Total NFAs held by the private sector are always exactly equal in dollar amount to the original deficit spending. But currency and deposits held by households and corporations are usually a substantial portion of these NFAs. The remaining amount will likely be composed of Treasuries and other assets.
José, MMT looks at this from the viewpoint of a closed system model, govt and non-govt. when the govt wishes to either transfer private goods to puboic use or to make transfer payments, pay interest, etc. it has different choices operationally. I could just directly credit its account with reserves to clear its deposits, or it could issue cash. That would be a direct add to NFA*.
However, this is no longer permitted in the US. Instead, govt must issue tsys to obtain reserves from non-govt through auction. So the process of issuance is "indirect," through tsys. Tsys issues tsys with the Fed auction and credits the Tsy account with reserves, which Tsy disburses into non-govt. Now non-govt has all the reserves it had to purchase the tsys and also holds the tsys. So NFA* has increased by the amount of the tsys issuance (plus accrued interest).
"Ramanan, we have been around and around the block on this. MMT proponents use "NFA" as shorthand to mean net financial assets held in aggregate by consolidated non-government sectors. I suggested previously that something like NFA* be used to indicate this shorthand so there is no confusion about it. "
True but usually the statements are made in specific contexts where the usage of the shorthand is fair.
But certain commentators here make general statements where there is no context and statements can be ambiguous and nonsensical.
On your other statement supposedly on "closed systems", that is not right. Government bond prices change intra-day and it changes the total value of assets held change/fluctuate all the time.
Imagine a shift in the yields by 15bp on a given day and an average duration of 7yrs. For a debt/gdp of 100%, this changes the total value of government bonds by about 1% (which is not "small").
Third, typically the government sector is defined in a particular way in national accounts. You cannot throw a state level government into the "private sector" :-) :-)
(Or use the terminology "non-federal government domestic sector" or whatever).
In the U.S. today a substantial amount of Treasuries end up being held by banks or the Fed and thus do not constitute NFAs.
When the Fed purchases tsys for its account through POMO, it exchanges rb for tsys. The rb then are the NFA*. Those rb may be owned by banks, if they were the owners of the tsys that the Fed purchased. Of the rb may correspond to the deposits account holding of non-bank entities in non-govt received in exchange for the sale of tsys.
Change in composition of NFA* but not the amount.
Whether a bank holds a tsys (savings acct at Fed) or rb (deposit acct at Fed) on its own account then it is part of NFA*, too. Bank-owned assets are in the consolidated nongovt. sector. NFA* here can be held as rb, tsys or vault cash and the composition is always shifting among banks and between banks and the Fed. Amount of NFA* remains the same regardless of whom is holding what.
Jose, I didn't mean to sound rude -I think lavoie's example is great, it's just that a less intricate example does the job just as well for the point that you're making.
"deficit spending is a rather complicated process"
Lavoie's example is quite complicated, but there's no reason why it couldn't also be roughly as simple as the one I suggested, or some variant of it.
He aslo seems to assume that the Treasury has nothing in its account before the process begins, which is not the case.
"And where do we find those NFAs? In the hands or pockets of households as bank deposits (90) and currency (10)."
If we're talking about what I'm now going to refer to as "consolidated non-government NFA", then the NFAs are:
Reserves (9) T-bills (81) currency (10)
Total = 100
However: 'net financial assets' are specific to a given system, sector, or subsector, all the way down to the individual.
It can be confusing because people use the same term to mean different things. All that's needed is to clarify why one's referring to, I think.
MMTers use NFA to mean consolidated non-government NFA. I presume that this is because the government is the only sector that can always pay its debts within the currency zone (given that it issues the currency).
This is important because it is central to the analysis of financial fragility and over-leveraging that can result in credit crunches and the like.
(This is why the government-issued assets are referred to as NFA by commenters above).
However, you are right that, if you divide up the private sector and look at who has what within it, you find that the household sector has net assets and the banks assets equal their liabilities. So the household sector has intra-private sector 'net financial assets', in the sense that its assets exceed its liabilties. But when you look at the sector as a whole you find that these assets have corresponding liabilities WITHIN the private sector, so represent intra-private sector debt.
Overall the intra-private sector liabilities and assets net to zero.
On your other statement supposedly on "closed systems", that is not right. Government bond prices change intra-day and it changes the total value of assets held change/fluctuate all the time.
Imagine a shift in the yields by 15bp on a given day and an average duration of 7yrs. For a debt/gdp of 100%, this changes the total value of government bonds by about 1% (which is not "small").
Yes, and inflation rate and fx rates are shifting all the time, too, affecting the value of the currency.
But we still use the nominal value of the currency and tsys at par, even though these fluctuate moment to moment.
"Yes, and inflation rate and fx rates are shifting all the time, too, affecting the value of the currency.
But we still use the nominal value of the currency and tsys at par, even though these fluctuate moment to moment."
The general rise in prices of goods and services doesn't affect nominal values of something and not the real value of something.
Second, the flow of funds (or anybody else) don't value Treasuries at par.
(An example to illustrate this would be imagine two government bonds of different dates of issue but same maturity and having different coupons. Certainly one is more valuable than the other)
Jose is right to point out that, in his example, the reason why the household sector ends up with assets and no liabilities, is due to the govt deficit spending.
But these household assets are dependent upon there being equal NFA* somewhere in the system, in this case held as T-bills by the banks (and as cash too, of course).
While all this is true, and necessary for a comprehensive analysis, I am interested in a simple way to present this to fifteen year olds in a policy context.
I don't have the time or inclination to go through the accounting details and leave that to experts. I am interested in being able to explain the basic principles that are operative without making it so complex as to be unaccessible.
I appreciate where you are coming from and agree that getting the details correct is important - but not in a simple model if it is to be accessible.
i agree with paul, here. Start with a simple closed system and build out from there as needed, but don't through the whole thing at people to begin with when they don't need that level of detail and providing will simply confuse.
Moreover, if experts disagree over details or manner of professional expesssion, not being an expert in this, I have nothing to add to the discussion.
btw Lavoie's giving a presentation as part of the 'modern money and public purpose' series along with Scott Fullwiler, with Dean Baker as moderator! Should be epic.
these household assets are dependent upon there being equal NFA* somewhere in the system
My point is that these household assets (deposits) are THE NFAs remaining in the system after deficit-spending.
Tom,
The accounting details are also important to enable teaching to 15-year olds, because they'll prevent us from selling to them a simplistic "NFAs equal Treasuries issued by the government" story-line.
Trying to near 100% accuracy should be part of the MMT approach to the wider public, IMO.
262 comments:
1 – 200 of 262 Newer› Newest»Complete hodgepodge.
The numbers do not make any sense and have to be redone.
"I have to say I have a bit of a problem understanding this one. Let’s assume we’re in a depressed state as we are now and the Government decides to run an additional $1 Trillion deficit, without, for simplicity, any corresponding debt issuance. Then, assuming that the private sector saves at the rate of 6% of GDP and the trade deficit is 4%, and, neglecting any fiscal multiplier, the additional Government deficit adds $900 Billion in aggregate demand to the US economy, $60 Billion immediately to savings, and $40 Billion to the foreign sector. So, the Government deficit spending has certainly made both the domestic non-Government sector, and the foreign sector richer in USD nominal wealth, though the domestic government sector has been made 24 times more wealthy than the foreign sector."
Now in the situation what is the additional government deficit? $1 trillion or $100bn (60+40)?
The government deficit cannot be both $1 trillion and $100 billion at the same time.
"Of course, if we take into account the fiscal multiplier on the $900 B deficit"
Now there is a third number - $900bn!
Plus where does this 24 times more wealthy number from?
"I don’t see how, since in a trade deficit we send USD to the foreign sellers in return for real wealth, thus increasing the real wealth held by Americans"
If most of the purchases are for consumption and not fixed capital formation, the import does not increase the "real wealth held by Americans."
"Maybe Paul K has real wealth in mind in the quote and not nominal wealth."
???
The background to this is a wonky academic debate in the blogosphere about the meaning of the idea of a “debt burden” (if there is any – it’s a hopeless debate of people talking past each other). So this is not a discussion of current conditions or policy.
He’s saying a few things from a purely academic point of view, and they are very simple points:
a) IF the economy is at full employment, it is arguable that the movement of resources from the private sector to the public sector may cause real crowding out. I think this is uncontroversial. It has nothing to do with current economic conditions.
b) Real crowding out MIGHT take the form of displacing private sector investment which MIGHT have been more productive. That’s always a debatable point, but it’s possible. Again, given full employment, that scenario MIGHT result in the economy being “poorer” when measured in terms of the stock of real investment.
c) He then turns to the case where a government deficit MIGHT lead to a higher trade deficit. If you read closely, he doesn’t worry too much about this. But IF there is a higher trade deficit, he is simply pointing out that other things equal it results in higher net international claims on existing US assets – which is a reduction in domestically held wealth. As to what other things are involved in the process of linking the two deficits, if you read closely, he’s saying its silly to worry too much about this if the thing that causes a higher trade deficit is economic expansion associated with the higher budget deficit.
In short, he’s really making an incredibly simply point that other things equal a trade deficit increases foreign claims on existing US assets – which is a reduction in domestic wealth when measured by claims on investment (it doesn’t consider the value of the imports that have been consumed – i.e. non-investment goods).
Again, this has nothing to do with current economic conditions or current economic policy.
JKH,
What about a situation where even if you are at full employment, let's say the govt sector wants resources to build much needed roads and public transport (gridlock!), while the non-govt sector wants resources to open more Starbucks?
Is this "crowding out" where the non-govt wants resources to facilitate coffee consumption while the govt wants resources for investment in public infrastructure?
this doesnt seem like "crowding out" to me... because the govt is doing the "investment" not the non-govt...
rsp,
JKH,
"(it doesn’t consider the value of the imports that have been consumed – i.e. non-investment goods)."
These foreigners are actually over here now on visas building major bridges and roadways and bringing the steel with them too ... rsp,
Ramanan,
This is the one:
"Or to put it a bit more simply, sure, budget deficits can make us poorer as a nation if they lead to bigger trade deficits.”
What Joe shows (to me) is that if govt relaxes fiscal and domestic wealth increases by 6 while foreign claims increase by 4, how are we "poorer"?
Not to mention we have a real new Bay Bridge in San Francisco out of it....
rsp,
Matt,
Re "crowding out", that's why I said:
"Real crowding out MIGHT take the form of displacing private sector investment which MIGHT have been more productive. That’s always a debatable point, but it’s possible."
Its a debatable point even at full employment because its a value judgement in terms of the chosen productivity mix, among other things. So I'm agreeing with you in that sense.
The point here is that there shouldn't be anything threatening in what Krugman wrote here for MMT. It's an academic point, not applicable to current circumstances. What he does here, and what he often does, is correct false intellectual arguments about arguments that support policy interpretations that may well be contrary to his own interests about what the direction of policy should be in the current environment. But he's correcting how people should be thinking about them when economic circumstances warrant thinking about them - which they certainly don't now.
The whole idea of full employment is virtually academic - so there shouldn't be a backlash against economic arguments that are correct or at least arguable or sensibly debatable under the assumption of full employment - because none of them apply to today's environment, or to hardly any environment for that matter, because when do we have full employment?
BTW, in terms of the original debate that I referred to above, the other basic thing that Krugman corrects is that one shouldn't confuse the implications of debt held by foreigners that is in effect an asset swap with debt that represents foreign net investment in the US. The latter is due to current account deficits. The former, much larger in size, is an exchange of enduring value of some sort. This is also a simple point he makes to correct the the debate.
P.S.
right, Ramanan?
Matt,
There is some element of argument in Firestone's post but if he is addressing it to Krugman, he shouldn't be so careless with his definitions and accounting.
Same thing happened to Keen.
That was my point.
If I start arguing other things, it will start the old stuff which I don't want to get into :-).
JKH,
Right thats what I thought you meant.. just to be sure tho..
As far as "crowding out", to me there is an embedded libertarianism in the whole idea. It's as if the non-govt poobahs want to build more hotels to pack with tourists but the public via the govt sector wants to end gridlock by building out the transport infrastructure, the govt is supposed to just automatically yield to the non-govt in this case, that is 100% BS imo...
IMO PK is all the time covering for his profession with obfuscations like this (wild goose chases) when his profession should be scolded all the time instead... rsp,
JKH,
Yes he is saying that one shouldn't be just looking at government debt held by foreigners. That is incomplete analysis and one should look at all liabilities to foreigners - whether official sector or private sector.
For example if a foreigner who holds a government bond sells it and buys a corporate bond, it affects America very little.
But from a point of view that "government debt to foreigners is a burden on the nation", it matters a lot and that viewpoint will give the answer that the burden has reduced when the foreigner sells government bonds and buys corporate bond which is strange and hence wrong.
It (the wrong notion) actually is a position held by some economists. This is because they think that private sector borrowing is good whatever the amount because the private sector is optimal. So private indebtedness to foreigners doesn't matter in this picture. The government on the other hand (in this picture) is inefficient and government debt to foreigners is the only thing that matters.
Ramanan,
"that is 100% BS imo"
there you go again, making arguments sympathetic to MMT
:)
I agree with the point though; which is why I qualified the argument above
as far as the PK post is concerned, there are an awful lot of cross currents within his comments, due to the previous debate he is referencing
Ramanan,
It is ironic that the distinction Krugman DOES make between debt held by foreigners and cumulative CA surpluses accrued by foreigners is exactly the same type of distinction NOT made by Keen in his model - i.e. Keen conflates the addition of debt as a stock with entirely separable flow transactions (expenditure/ income)
Ramanan/JKH,
One thing I noticed recently is that almost all of the US "debt" held by foreigners is in the form of Official Reserves.
Look at the bottom of this Treasury spreadsheet:
http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt
about $4T in Official Reserves while only $5.4T in total... does this not change the thinking wrt "debt held by foreigners" ie it is really "debt held by foreign governments?
Which I think is an important distinction... as in any "claims" are truly "govt to govt" and not really in the non-govt realm...
ie How can these govts ever exit these positions? govt borrows their own currency from their own non-govt sector using the foreign reserves as collateral?
I dont see how they ever can get out of these positions...
rsp,
It's an important point, Matt.
BTW, OT, one thing you guys should clear up some time is that the US government generated NFA is not $ 16 trillion in debt
It's closer to $ 12 trillion, due to the Soc Sec trust fund (which represents cumulative taxes)
I've made the point to Mosler several times, but he ignores it/me
that makes it even lower (worse!) right?
It's certainly misleading for people to be tossing around that $ 16 trillion number - for whatever purpose
you need to consolidate the consolidation - one of my favorite perspectives, as you must know by now!
:)
if it is really 12T net then the 5.4T on the spreadsheet above is like half of the NFAs in "debt" form... foreign govts have half of US net "debt" outstanding (and the Fed has a lot too now..)
I guess "we the people" are just left to fend with whatever USD reserve balances remain...
Btw, IMO, State and Local Government's finances should also be added in the government sector. So Munis are also counted. National accountants do count it that way. (although strangely counting the central bank in the financial sector not the government sector).
Since the state and local government also hold financial assets, this should also be taken into account.
The net result is an addition of about $1.4tn (to $11-12tn from the Federal government) for the private sector and the overseas sector if they are considered as a whole.
"It's closer to $ 12 trillion, due to the Soc Sec trust fund (which represents cumulative taxes)"
$11.7 Trillion as of 12/31/2011, but what about the some $2.6 Trillion in off-budget spending?
i.e., slightly less than $12tn because the US government also holds MBS and student loans for example (separate from that held by the Federal Reserve).
"State and Local Government's finances should also be added in the government sector."
Why? Do they produce NFA's into the non-government?
Where would such entries show up in the S/B?
also means more leverage (compared to popular perception) in whatever the QE bond vacuuming effect is - positive or negative
what's in that off budget spending, Paul?
JKH @October 19, 2012 7:55 AM.
"that is 100% BS imo"
Missed this earlier - but wasn't this said by Matt, not me.
doesn't the Soc Sec trust fund 'belong' to the population? i.e. it's part of the population's net financial assets?
oops, sorry Ram
Paul @8:29AM,
"Why? Do they produce NFA's into the non-government?"
If a sector runs a deficit, as a matter of accounting, others run a surplus.
Hence if state and local governments have run cumulative deficits and hence as a result have have liabilities higher than financial assets, this means the difference is net assets for the other sectors.
So state and local government do produce NFAs into the non-government in your language.
y,
the fund consists of bonds that in effect are a record of cumulative taxes transferred to government - tax money that has already been spent in prior unified budgets
because the money has come from taxes and is already spent, there is no NFA in the normal sense of NFA as a net stimulative effect
the bonds are used as an internal transfer pricing mechanism; they are not external debt of the government
so no "net net NFA" being emitted by the government sector here
internally, you could view them as soc sec NFA - but that would be offset by treasury NFL, which is an internal wash for a net external NFA of zero
"If a sector runs a deficit, as a matter of accounting, others run a surplus... Hence if ... governments have run cumulative deficits and hence as a result have liabilities higher than financial assets, this means the difference is net assets for the other sectors."
Isn't that why Soc Sec should be counted in NFA? Even though it is held by the government, it is held on behalf the population, so comprises part of the total non-govt surplus and net assets.
"So state and local government do produce NFAs into the non-government in your language."
Sorry Ramanan this is flat-out wrong. If true it would violate closed-system principles, which is impossible.
No need to parse your accounting. Accounting can't violate closed-system principles either.
JKH,
the bonds in the trust fund represent money owed to the population.
- The government collects taxes for Soc Sec, uses some of that money for benefit payments, spends the rest on other things and leaves a bond in the trust fund for that amount. That bond represents money owed to the population, part of the population's financial assets, no?
re:
NFA emitted by state and local, I think it depends on the degree you believe the central bank has the same LLR function for state and local that it does for Treasury (Treasury in the "worst case")
It's pretty marginal I think, via potential for CB purchase of municipal bonds
But most of the state and local support function comes through the federal budget rather than the central bank
in which case the federal NFA emission covers almost all of it, and state and local NFA emission gets consolidated in the usual "non-government" category, where non-government implicitly means non federal government
Paul,
"Sorry Ramanan this is flat-out wrong. If true it would violate closed-system principles, which is impossible.
No need to parse your accounting. Accounting can't violate closed-system principles either."
Whatever that means!
"what's in that off budget spending, Paul?"
Good question, I don't know. That's why I asked.
Here's a link to the series (xls):
https://dl.dropbox.com/u/33741/hist01z1.xls
Paul,
what he's saying is that one person's asset is another person's liability, whether you're talking about the government and non-government, or between individuals.
My bank deposit is my "net financial asset", but it is also the bank's liability, so overall it is not a net financial asset.
A $10 note is my net financial asset, but is also the government's liability. So overall it is not a net financial asset. It is only a net financial asset for ME.
JKH @October 19, 2012 8:58 AM,
I would tend to think that is a slightly tangential issue.
For example, in the case of the Euro zone, governments do not have that facility but yet one can count the bonds held other sectors in calculating the NFA. Else one is left with a bizarre conclusion that the private sector in the Euro Area (in the abstraction that it is closed to the outside world) has zero NFA.
"No need to parse your accounting. Accounting can't violate closed-system principles either."
"Whatever that means!"
It means in a closed system nominal dollars can not be created or destroyed.
Define the municipality entity as the closed system.
The municipality gets it's funds from the taxpayer and from Federal transfer payments.
The municipality spends or accumulates savings (funds it hasn't spent).
What goes in must equal what goes out plus what was held back.
How are NFA's created?
y,
the bond represents money owed by treasury to the soc sec fund
internal to gov, its a wash
in total, the population outside the government has paid taxes - not bought a bond from the government
and there was no NFA injection from government to non government corresponding to those taxes paid and resulting spending
taxes funded the bond purchase which funded gov spending - net is that taxes funded spending with the bond being internal
"what he's saying is that one person's asset is another person's liability, whether you're talking about the government and non-government, or between individuals."
y, I know what he's saying, I don't see any need to include local and state governments other than as normal transactions occurring within the non-government. NIPA does account for these things, but it isn't helpful in a discussion of NFA's.
State and local governments can't create NFA's, Why add complexity to a simple relationship?
Ram 9:04
good point, I'll think about that
leaving now,thx
"Hence if state and local governments have run cumulative deficits and hence as a result have have liabilities higher than financial assets, this means the difference is net assets for the other sectors.
So state and local government do produce NFAs into the non-government in your language."
You are seriously mis-understanding my language.
NET Ramanan NET. Transferring NFA's around within the economy does not increase the NET level of NFA's.
The only exception is in accruing interest on debt, because the interest monies are never created by the debt.
Thus we have liabilities accruing that can't be satisfied (mathematically) without an injection by the fiscal authority.
When the private debt/income ratio becomes high enough, these liabilities can be a problem (assuming the government hasn't provided the offsetting balances).
Then distribution of the asset and liability components of debt becomes the issue because in most cases they are held by different cohorts.
In the end, the wage-earner pays all accrued interest one way or the other in the aggregate.
JKH,
The soc sec fund belongs to the population, it's held on their behalf by the government.
It's a savings account for the population held by the government. i.e. it is a government liability and the population's asset.
Think of it this way: you go to the Soc Sec savings bank (trust fund) and deposit some money. The government takes that money and spends it on a bridge, leaving a bond in your account for the amount you deposited. The bond is how much the government owes you.
So you have the spending on the bridge + the bond = an addition of NFA.
of course the deposit at the "Soc Sec savings bank" is made through taxes, and the government spends the money on current benefit payments and on other things (bridges, etc), leaving a bond in the trust fund. It's a form of mandatory national 'saving'/ government borrowing.
Paul,
FYI:
http://www.usc.edu/mirror/testcenter/
Some sort of software tool for examining closed systems...
rsp,
More data here Paul,
http://thermofluids.sdsu.edu/testhome/booksite/index.html
rsp
Matt, thanks. Interesting link.
The software would be useful for analyzing more complex closed systems.
The economy is a simple closed system dealing only with nominal transfers. It doesn't get any simpler than that.
When I first came upon this MMT thing, someone here (Kevin Fathi?…what happened to him?) commented on a tub of water as an analogy to the economic system, and that is as perfect an analogy One could use. Or a swimming pool.
A simple hydraulic circuit that can be used to demonstrate any nominal transaction. Fluid is non-compressible, meaning if you force more in something equal must come out the other end (imagine a tube filled with ping-pong balls, push one in one end, one pops out the other) or the level rises.
The tub cannot be used as a source to fill itself or drain itself down. Changes must be external to the defined system.
Think of the water molecules as discrete NFA's.
Credit would be modelled as an external input with an accompanying drain that allowed a controlled flow out, set to stop when the borrowed water plus interest was paid back.
Every possible transaction or group of transactions can be modelled in this system.
It is probably why hbl chose it for his tutorials.
Thinking of transactions in these terms eliminates the complexity and opaqueness of accounting transactions. We don't really care what all of the individual molecules are doing,nor do we need to identify them individually. One molecule of H20 is the same as the next. One dollar is the same as the next. Aggregates rule.
One could do the same with an electrical circuit but it isn't as intuitive to the layperson.
Y,
I think you’re saying in effect that the surplus funding component of the so-called soc sec tax isn’t really a tax at all – for NFA calculation purposes. The tax terminology is misleading for that piece of it. That part of the tax is in effect not a tax, but private sector saving, reflected in government spending and internally held bonds.
That saving piece will have to be refinanced in the future with external debt, when the time comes to start repaying the liability from treasury to the soc sec fund. And that happens when soc sec stops running current surpluses and starts running current deficits.
That future external refinancing operation itself won’t change NFA – it will just redistribute the saving that already in place now – from a cumulative soc sec tax surplus to externally held bonds.
The problem I have with this is not on deficit spending side, but on the corresponding NFA side.
In a way, the arrangement satisfies the criterion for NFA generation – the soc sec tax surplus has enabled additional unified deficit spending.
But on the NFA side, the actual form of the asset is interesting. It consists of a cumulative tax surplus rather than an actual bond (or QE money) instrument held by the public. So that means there’s no liquidity associated with that asset – zero. Soc sec beneficiaries won’t be able to “cash in” or use that NFA until they get it in the form of benefits. That’s much delayed. Meanwhile, those who buy the bonds to refinance that NFA will get something that is liquid at that time.
I think this is important in interpreting exactly what “NFA” is. There’s a part of it that reflects a mirror image of deficit spending. But there’s also a part of it that is supposed to signify the satisfaction of non government demand for saving in the form of liquid assets issued by government as reserves, currency, and bonds. This soc sec NFA component – if that’s what it is – doesn’t represent that sort of liquid saving and so I think it’s questionable that it satisfies the intended meaning of NFA in full.
It doesn’t satisfy the criterion of liquid asset supply that typically corresponds to NFA – there are no bonds to sell to take advantage of that NFA production, so to speak. So people do feel more like they’ve been taxed in that sense – because they have no opportunity to use their saving to call on it for consumption purposes at any point, the way they would if bonds were held directly instead.
"But there’s also a part of it that is supposed to signify the satisfaction of non government demand for saving in the form of liquid assets issued by government as reserves, currency, and bonds. "
This is "it" imo... rsp,
"NET Ramanan NET. Transferring NFA's around within the economy does not increase the NET level of NFA's."
Paul,
The terminology "Net financial assets" is not limited to the mirror of net liabilities of an institution which has the power to issue money.
It is a sectoral concept.
For example one can talk of the net financial assets of the household sector. To do this, take the market value of all the financial assets held by households and subtract the liabilities of the household sector.
See the UK Blue Book 2012 table 6.1.9 BF.90 (page 234) for households.
http://www.ons.gov.uk/ons/rel/naa1-rd/united-kingdom-national-accounts/the-blue-book--2012-edition/index.html
Now coming to state and local governments:
Let us imagine the United States federal government runs a near balanced budget in one period but the state and local governments run a non-negligible deficit. The net financial assets of the other sectors - the private sector and the rest of the world consolidated increases by the amount of the deficit of the state and the local government in that period.
"In the end, the wage-earner pays all accrued interest one way or the other in the aggregate."
A totally irrelevant point here.
JKH @ October 19, 2012 11:26 AM
Good stuff. In fact, lots of good stuff has come out in this thread. Suggest you write it up so it doesn't just disappear into an obscure comment thread.
The way the govt has decided to handle SS funds has resulted in huge confusion in the public mind. Most of the debt hawkery revolves around this confusion and compounding it. Sorting this out clearly is really important.
JKH,
true. Then again if you have a private pension it will be mainly held in government bonds, and you'll typically only get it once you retire or thereabouts. With Social Security the government holds the bonds on behalf of the population, so the market doesn't have the assets to play with - but they are still non-government assets or savings nonetheless.
It's a mandatory form of national saving, with fixed rules and structures, and people "pay into the fund" through taxes.
Normally when you pay a tax, the government takes the money, spends it, and doesn't promise to give it back to you with interest, etc. That's the basic difference, I think.
"The terminology "Net financial assets" is not limited to the mirror of net liabilities of an institution which has the power to issue money.
It is a sectoral concept."
In the context of the discussion it is the only NFA we are concerned with, state-issued. All other so-called NFA issued by institutions are irrelevant with respect to analysis of the closed system, which has been repeatedly defined as that of state-issued financial assets. This has never been a secret.
It is an accounting of net dollars and dollar-denominated bonds issued by the fiscal authority into the non-government.
The level is limited to those that existed at time zero (zero) plus those issued since.
The level is fixed and finite unless altered by taxing and spending operations.
No action within the non-government can change the level of NFA in the aggregate without follow-through by the fiscal authority, although private debt by it's nature causes liabilities to expand wiyhout concurrent issue of dollar assets.
What's so difficult to understand about that?
""In the end, the wage-earner pays all accrued interest one way or the other in the aggregate."
A totally irrelevant point here."
I know. I threw that in there to see (1) if you were paying attention and (2) to see if you would attempt to mount an argument againts it, although it is relevant in the respect that through private debt liabilities accrue in excess of assets on a continuous basis.
In other words, negative NFA balances accrue over time as a result of private debt.
"In the context of the discussion it is the only NFA we are concerned with, state-issued."
The context was started by me. You changed the context.
"No action within the non-government can change the level of NFA in the aggregate without follow-through by the fiscal authority, although private debt by it's nature causes liabilities to expand wiyhout concurrent issue of dollar assets."
Take the case of an economy which has a surplus in the external sector due to the fact that exports are higher than imports. So let us say that the CAB is $500bn.
Also assume the government is in surplus of $100bn.
The private sector (domestic if you like) net financial assets has increased by $400bn.
The government is in surplus but the private sector's NFA is increasing.
Do not confuse government deficit with (change in) NFA.
Also, stop inventing terminologies.
"It is an accounting of net dollars and dollar-denominated bonds issued by the fiscal authority into the non-government."
No it is not. It is just the difference in a sector (or of many sectors') difference in the value of financial assets and liabilities.
"All other so-called NFA issued by ..."
Institutions "do not issue NFA".
y,
The terminology used in formal writing and statistical releases is "current transfers".
While the numbers are included in the income for households, it is subtracted to get disposable income and saving. So there is no extra saving at all in that sense. The reason for a different treatment is that the benefits are contingent. If someone dies, the benefits do not go to someone else. In case of normal assets however, the near and dear ones get the assets. Also pension entitlements are considered income, so to maintain self-consistency, pensions are not treated as reduction of assets. So to maintain further consistency, there is no saving in the sense you mention in your comment.
The social security fund is really a funny fund created and it just adds confusions on these matters.
I believe that when MMT folks use "NFA," even without specifying it explicitly, what is understood is net financial assets in a currency that are held by non-government in aggregate. Perhaps this could be clarified by writing something like NFA* or Winterspeak's NFA(e). See Winterspeak, The Myth of High Powered Money
"Take the case of an economy which has a surplus in the external sector due to the fact that exports are higher than imports. So let us say that the CAB is $500bn. "
You're being obtuse. If an economy is in surplus with respect to exports and that economy is the US, the US would have to issue dollars to the import country to enable the transaction. Then we would have claims on their production.
This is creation of NFA. By the US government. To be spent into the domestic non-government.
I have purposely limited my comments to the domestic economy in an attempt to avoid these rabbit-hole excursions, but I can see rabbit-holes are your specialty. It doesn't really matter, the principles remain the same, but it gives you more alley-ways to slink back into. No wonder virtually all of the MMT academics ignore you.
You are not a problem solver. You're part of the problem.
You keep moving the goalposts.
The bottom line is, if you had grasp of the abstract concepts in discussion we wouldn't be having trouble with these kinds of misunderstandings.
You should spend most of your time in discussions with Nick Rowe. That way you would both be talking past each other but neither one of you would be aware of it. Both of you would be happy.
I think that the issue is the (M - X) >0 does not imply that foreign govts can create USD, as "in increase the stock of." The saving of USD in the KAS was not created by the exporter as an add to the stock of USD.
That is to say that while flows can change the holding of NFA(e) (Winterspeak) in a period it cannot add to the stock of NFA(e) in existence. This is what it means for a currency sovereign to be the monopoly supplier of the currency. While the cb can increase the stock of reserves, reserves don't increase the money stock unless they are held by non-govt outside of banks' reserve accounts and cash vaults. That only happens through bank lending (net zero) and govt injection in excess of withdrawal (net > 0). In the latter case, the stock is a function of cumulative govt activity.
soc sec benefits can be passed on to surviving spouses or children if someone dies.
Tom,
NFA(e)
redundant, uninformative notation I'm afraid
any NFA concept is offset by balance sheet equity (as opposed to a liability or an equity security claim)
Tom,
Appeal to Winterspeak :-)
NFA is a simple. It is someone (a person, a firm, a sector or many sectors') difference between financial assets and liabilities.
It is secondary which currency these assets and/or liabilities are denominated in. It doesn't mean they are unimportant, though.
If the United States becomes a net exporter and its current account balance moves into surplus, both the government deficit and the current account surplus will add to the NFA of the private sector.
Not even MMTers reserve the usage of NFA to the liabilities of the government. When the private sector and the rest of the world are consolidated into one, we can say that the government liabilities are NFA of the private sector. But the equality is not an equivalence of the terminologies associated.
"any NFA concept is offset by balance sheet equity"
JKH,
Assuming this is true (I'm not sure what you are getting at), it wouldn't enter into any calculation wrt a closed system of nominal dollar NFA's (net dollars and bonds issued by the government).
If you are implying that the "real" asset side of the balance sheet is where most of the "wealth" lies, that "wealth" is essentially untethered from the flow of dollars. There is no direct relationship.
The value of wealth can plummet (and has) drastically overnight with no change whatsoever on the level of NFA, dollar assets and dollar liabilities recorded on balance sheets in the aggregate.
Ramanan,
You are right that some of the tax paid into the Social Security trust fund is used to pay current benefits, so it's basically a current transfer.
The difference is that any money you pay in, the government OWES to you in return.
You get it back over time further down the road. Plus you get interest and all the rest.
So you are essentially lending money to the government, which they are spending in the present, and which they promise to pay back to you in future.
Unlike normal government borrowing, soc sec contributions are obligatory for workers, so they take the form of a tax.
That tax payment is basically the same as paying into a retirement fund or insurance fund... it is a form of saving.
However, I think that only the part NOT spent on current benefit payments is actually counted as "saving" (or addition to NFA), as that is the part invested in treasury bonds and spent on other things.
y,
Possible but not the most general. It is also possible that they aren't passed to the near and dear ones. Even if the spouse gets it, when the spouse dies it ceases. But the couple's assets can be passed on to their children - not the entitlements.
So my example probably wasn't the best - I should have taken the opposite case. (Although the example I gave was what I read in the System of National Accounts).
What I am saying is that there is a contingency associated.
Take the example in which a person continues to live long long and long. While his/her entitlements are proportional to the participation, the payments continue to happen and do not stop at some point. Compare that to an income plan with a mutual fund which stops if the person survives for long and the value of his units goes to zero.
So unlike this, pensioners treat their pensions as income rather than a reduction of their assets.
Because of contingencies involved, the treatment is different.
From the MMT perspective…
NFA are net dollar assets including cash and bonds held by the public issued by the government into the non-government.
Thes NFA's are held and recorded on real-world balance sheets in the non-government distributed between the domesic and foreign sectors.
These NFA have no offsetting liabilities against them in the non-government, which distinguishes them from private debt, for which there is a matching liability for every dollar issued, except for the accrued interest of the debt, which would be constantly growing unless offset by fiscal transfers.
paul @October 19, 2012 1:42 PM,
Total rant as usual.
I started the discussion by saying that state and local government finances are included by many in the government sector when talking of sectoral balances.
You were the one moving goalposts.
Before you pontificate on these matters, learn some good accounting rather than appealing to thermodynamics.
"I have purposely limited my comments to the domestic economy in an attempt to avoid these rabbit-hole excursions"
Yes but I also gave you an example of a closed economy.
"NFA are net dollar assets including cash and bonds held by the public issued by the government into the non-government"
NFA of a person or a sector is just the difference between its financial assets and liabilities.
If you take the private sector and the rest of the world and calculate their net financial assets, it will turn out to be the net liability of the government sector.
But that is different from declaring "NFA is" the way you did.
Ramanan,
"Children of a retired, disabled or deceased worker receive benefits as a "dependent" or "survivor" if they are under the age of 18, or as long as attending primary or secondary school up to age 19 years, 2 months; or are over the age of 18 and were disabled before the age of 22."
The current transfer is not between taxpayer and social security recipient. Special accounting treatment social security receives inside the government doesn't make it an exception to "taxes don't fund spending".
The current transfer happens in real resources when the social security recipient spends their check.
I agree with what you are saying about the difference between individually held assets and social security. But the government bonds in the social security trust fund are still 'non-government' net financial assets.
y,
My comment @October 19, 2012 2:33 PM was in response to your October 19, 2012 2:05 PM comment.
"Yes but I also gave you an example of a closed economy."
You don't seem to understand the difference between a closed economy and a closed system. They aren't the same thing. Closed economy refers to a specific definition, closed system is applicable in any context, and can be defined as a matter of convenience.
You gave no coherent example of a transaction within a closed economy that created NFA as I have defined it for your convenience upthread a post or two.
geerussell,
ok, I agree with that but you can also use conventional language to describe the process too, which is what I was doing. It's a current transfer of purchasing power. Some people lose some of their income in the present and others gain income in the present.
"You gave no coherent example of a transaction within a closed economy that created NFA as I have defined it for your convenience upthread a post or two."
Govt budget balanced or slightly in surplus.
Firms' run a deficit.
Households' NFA increases.
you just have to specify whose NFA you're talking about.
Government liabilities are private sector net financial assets. Overall there are no net financial assets.
Paul 2:27
You can construct any sector you like, and then interpret "generic" NFA very specifically in the context of that sector.
In all cases, the NFA piece is offset by an equivalent amount of balance sheet equity or net worth (I should have said equivalent before).
That equity piece is on top of the rest of the balance sheet equity that isn't offset by NFA.
But the (e) in NFA(e) adds nothing to the idea of NFA, because (e) is intrinsic to NFA in any context.
On the rest of the discussion, I think it helps at least to keep in mind the sector context in which the NFA idea is being used. Even in MMT, there are different sector decompositions and sets of constituent NFA positions that aggregate up to the standard non government NFA position. And in the context of the side discussion on soc sec, however you want to define NFA, I think it helps to at least keep in mind that the soc sec piece is somewhat different than the public reserve, currency, and bond piece, at least in terms of its liquidity characteristics.
Y 12:34
You're making some good points.
Rather than apply for immediate membership in Matt's "moron club", I'd like to reflect on this.
The NFA discussion in general is an interesting one, because you do want all the pieces to add up to a coherent whole. And there's a fair bit of complexity in the detail.
"Govt budget balanced or slightly in surplus.
Firms' run a deficit.
Households' NFA increases."
In the aggregate, if households SHARE of NFA increases (a flow), business MUST run a deficit under the first condition. No other outcome is possible.
Which is consistent with what I have been saying. One entity can only acquire NFA at the expense of another. A budget surplus merely reduces the level of NFA in the aggregate.
In the aggregate NFA will remain the same or decline slightly based on your scenario.
Eventually (like soon), firms must recoup any increase in NFA transferred to households or go out of business, for they would be taking a loss. This condition couldn't last long.
In the end, transactions between business entities and households in the aggregate must result in a net transfer of NFA (or debt acquired assets) from households to the business entities, otherwise it would be impossible for business entities to make a profit.
it's a current transfer of purchasing power. Some people lose some of their income in the present and others gain income in the present.
The thing I'm getting hung up on is characterizing it as a transfer. Yes, taxes reduced income for some people and some spending increased income for some people but as we observe for federal taxes and spending in general, the two aren't linked.
When we call it a transfer, it implies discrete quantities of something scarce being moved from one person to another with a dependency that the quantity transferred must first exist with the person who is taxed in order for the spending to occur. This is true for the real resources. Applying it to federal taxes/spending is out-of-paradigm backsliding that logically lends support to cuts based on dollar "affordability".
JKH,
That is one club you will NEVER get in friend! ;) rsp
Seems to me that the argument is over a closed system (currency zone) in which there are two kinds of money, inside and outside. Inside money nets to zero by accounting definition. Wrt outside money, net financial liabilities of govt and net financial assets of non-govt net to zero. Net financial assets wrt inside money must always be zero. Net financial assets held by nongovt wrt outside money may be greater than, less than or equal to zero depending on govt activity.
I take it that this is what paul is saying about a closed currency system being closed.
I don't recall the source now, but IIRC, FDR realized that SS "tax" did not actually pay for SS and the budget deal that was made in the 80's to use SS as part of the general fund and substitute bonds for it also recognized it. This was just a way to confuse the issue purposely to create the facade of saving "paying for" SS and later FICA including a "premium " for Medicare insurance.
Of course, people think of it that way, because that is the way it is intentionally misrepresented. It is this intentional misrepresentation and the accounting subterfuge that it involves that is creating the illusion of "savings" paying for SS and Medicare.
The faster we ditch that illusion, the better.
Paul's also talking about the sustainability of inside credit in the absense of injections from the outside, I think. However 'non-government NFA' can also be degraded by inflation, and destroyed by hyperinflation or voluntary government default.
It's also worth pondering whether government credit is really sustainable in the absence of some form of private credit, i.e. whether an economy can function without the latter.
"The thing I'm getting hung up on is characterizing it as a transfer."
A transfer is a payment in which an economic unit provides goods and services or an asset without getting anything in return as a direct counterpart.
It is true that in the case being discussed, the unit receives something but that is in the future not now and is not quantifiable to full certainty.
Hence they are still called transfers.
It has nothing to do if one is in paradigm or "out of paradigm". Neither does it have to do with "discrete quantities of something scarce being moved from one person to another"
JKH,
"But the (e) in NFA(e) adds nothing to the idea of NFA, because (e) is intrinsic to NFA in any context."
Sorry, didn't mean to imply that I was commenting on that particular item…I wasn't, but I agree with your characterization.
"I think it helps at least to keep in mind the sector context in which the NFA idea is being used. Even in MMT, there are different sector decompositions and sets of constituent NFA positions that aggregate up to the standard non government NFA position."
In general terms I don't disagree with this either.
My particular tack on this discussion is to always look at NFA and flows in general from the aggregate top-down point-of-view. I look at Inter-sector transactions (within the domestic economy) with a particular purpose in mind.
Using principles of closed systems, I (anyone) can define sectors as desired to make the problem less complex. Any group or combination of groups can be defined as a closed system. How one chooses these groupings determines the level of complexity.
Simplifying the problem does not limit the value or accuracy of the solution.
The correct definition of component boundaries is the most important step in an analysis. In engineering we say that "The first step in solving a problem is to define the problem correctly".
The solution then becomes simple.
Conversely one can define boundaries in a hap-hazard way or by strict sectors and make the analysis very complicated. Engineers (and I presume scientists) avoid these situations, otherwise the solution to many problems becomes indeterminate.
For example, "where is the beginning of a circle?"
Answer: Anywhere you choose it to be. And so it is with the boundaries of closed systems.
Tom,
"the illusion of "savings" paying for SS and Medicare"
I'm unclear - do you think that the soc sec bonds constitute NFA and saving or no? Or not sure?
"A transfer is a payment "
Sorry meant transaction, not payment.
"I take it that this is what paul is saying about a closed currency system being closed."
Tom, yes, you are understanding me correctly.
Again, noting the exception whereby liabilities accrue naturally within the system as a result of the interest, and must eventually be dealt with.
"The thing I'm getting hung up on is characterizing it as a transfer."
A transfer is a payment in which an economic unit provides goods and services or an asset without getting anything in return as a direct counterpart.
Different meanings of "transfer." People think of "redistribution" in terms of a transfer from one party to another through the power of govt to tax ("coerce").
A transfer payment is a technical term, indicating one way that "redistribution" is carried out.
According to MMT, this misconceives the role of taxation and expenditure in a modern monetary economy.
Ramanan,
the person 'paying into' soc sec gets a claim on future soc sec payments. They don't get to hold their own personal government bond, but that is still something owed to them that is guaranteed by the full faith and credit of the US.
In practice part of that is held in the form of soc sec trust fund bonds and the rest is, I suppose, 'unfunded government liabilities'.
"The faster we ditch that illusion, the better."
Tom, nearly all things conventional wisdom are illusions.
"However 'non-government NFA' can also be degraded by inflation, and destroyed by hyperinflation or voluntary government default."
y, In my view these things are functions of government actions, not the underlying math that guides the system.
JKH I'm unclear - do you think that the soc sec bonds constitute NFA and saving or no? Or not sure?
I don't think so. It looks to me like an accounting "convenience" to move funds from one account to another. As I envision it, the SS funds held as reserves had been in a separate TSY account that was used to pay SS transfers, and the account was in surplus YoY. Congress decided to move that idle surplus in the SS account to the general fund and did so by replacing the reserve with special bonds that remain in the account and can be exchanged for reserves. Thus the transaction is within govt so does not affect amount of non-govt NFA.
I regard this as "ledgerdemain" to continue the illusion that taxes pay for SS in order to distinguish them from "welfare" transfers, which was FDR's original intention as I recall. He believed that this accounting illusion would protect SS politically down the road and he was largely correct.
Now the cry is that the country can't afford to raise taxes to pay the "unfunded obligations" of the future. So that illusion is no longer operating now that the surpluses in the SS account represented by bonds are insufficient to pay for the coming expenses anticipated over the next 75 years.
"It's also worth pondering whether government credit is really sustainable in the absence of some form of private credit, i.e. whether an economy can function without the latter."
Seems to me you meant to say the opposite:
An economy cannot function on private credit alone. Notice I'm not hedging. It could function on fiscal spending alone, and they can work effectively together.
On the other hand, a wage-earner is nuts if he/she finances consumer spending with private debt.
All one is doing is spending one's income from the future now.
It shifts one's consumption backward in time. The piper must be paid however.
Making matters worse, debt effectively reduces ones spending power, unless inflation shrinks your debt burden, which efectively lowers your interest rate.
Paul
hyperinflation could be seen as a government overextending itself, or letting the private sector get out of control.
This is similar perhaps to a private sector credit collapse being due to overextension or 'irresponsible lending'...?
"However 'non-government NFA' can also be degraded by inflation, and destroyed by hyperinflation or voluntary government default."
y, In my view these things are functions of government actions, not the underlying math that guides the system.
Nominal value, e.g., loan denomination, remains the same, real value (purchasing power of the currency) changes.
y, I think if you examine the major hyperinflations you will find the cause was related to a radical drop in production.
y,
"the person 'paying into' soc sec gets a claim on future soc sec payments. They don't get to hold their own personal government bond, but that is still something owed to them that is guaranteed by the full faith and credit of the US."
The fact that they are guaranteed are slightly tangential to the issue.
The person is not holding a bond really because there is a limit on how much the bonds can be liquidated and spent. The person cannot include it in his/her will.
On the other hand, a wage-earner is nuts if he/she finances consumer spending with private debt.
When I was young, consumer credit was severely limited by banks. Credit was generally understood to be for investment. That changed with the advent of the credit card and progressive easing of consumer credit. This was not consumer profligacy. It was engineered institutionally and driven by rent-seeking. Then the game of musical chairs began that was sure to end in tears. Of course, banks were not willing to take responsibility for their engineering the collapse and demanded to be paid in full either by borrowers or public bailouts.
"Nominal value, e.g., loan denomination, remains the same, real value (purchasing power of the currency) changes."
Right, This is another way of saying the nominal system remains unchanged (it's a closed system after all). The changes occurring are external…values for example and the relative purchasing power of the dollar.
That's why inflation is the friend of the debtor normally, but not in the case where the debtor's wage is not being dragged up by inflation.
We are being hit with the double-whammy currently.
if government restricted demand in response to the fall in supply prices wouldn't hyperinflate, would they?
"if government restricted demand in response to the fall in supply prices wouldn't hyperinflate, would they?"
Maybe not but in general we're talking about food here.
Kind of hard to give up eating.
Ramanan,
I'm rethinking this a bit, with 'y' as catalyst
Part of the problem is that soc sec taxes are called taxes - when they're really contributions to a type of pension fund; that doesn't help thinking about this clearly
All pension funds pay out according to pension plans with life contingent uncertainties, so soc sec doesn't seem that different in that regard
And if the Fed flow of funds report reported household net worth in respect of soc sec contributions the same way as pension fund reserves, the bonds held by the soc sec fund would show up as a claim of the household sector, wouldn't they?
meanwhile, Tom also seems to be arguing something more along the lines of my earlier $ 12 trillion NFA guestimate
Tom @October 19, 2012 3:54 PM,
With due respect, you are mixing many things. A myth-bursting approach has its limitations. Whether myths exist or not is not relevant to a very direct question asked by JKH.
But generally if an opinion is needed (for JKH), the Flow of Funds doesn't treat it as part of financial assets of households or include it in saving. The transfers received are however included in income and/or saving.
Self-consistency (and stock-flow consistency) can be driven to argue one way or another, not myth-bursting.
Y,
If soc sec were equivalent to a pension fund, and IF it were currently fully funded by cumulative soc sec "taxes", what do you think the size of the bond portfolio would be?
BTW, for the historical record, consumer credit was largely spearheaded by department store credit. although most small stores also offered credit to good customers, but this was very limited. Department stores had a larger customer base and their lending was much less personal This was the start of the credit card. It was only a matter of time before bankers realized that they could monetize this this and profit from the value added of a universally accepted card. Prior to this most consumer credit was business related, e.g., America Express and Diner's Club. It was used to keep track of expense accounts as well as to avoid business people from having to bear the expense out of pocket and wait to be reimbursed later. So the between the department store credit and business cards, the ground was prepared for the introduction of the credit card. See Dee Hock's description of the founding of Visa in The Birth of the Chaordic Age (1999).
Ram,
4:10, 4:11
1 minute apart on the Fed flow of funds connection
not bad
:)
Ramanan, the myth is is that taxes fund spending. IIRC FDR got this and didn't want to create SS on that basis since he feared that down the line the argument would be mounted that SS was just a welfare giveaway. So they concocted to sequester the SS funds in a separate account from which SS payments would be made so that it could later be argue that benefits were previous "paid for." They knew at the time that this is the way it actually works. In that sense it was the intentional creation of an illusion that was unnecessary operationally. It was a policy choice for political purposes, just as the arguments now are politically based and not related to operational reality —as Greenspan himself admitted in testimony to Congress.
Also for the record, consumer or household debt is mostly home mortgages, which account for some $11 Trillion of the $13+ Trillion debt held by households.
And, as I noted earlier, most all of the interest paid on the $54 Trillion total debt outstanding is borne by the wage-earner, absorbed as a cost of production and passed on in prices.
If the average interest rate is 2% the current loss of dollar assets annually is about $1 Trillion. Cancelling out an equivalent amount of income.
No wonder we are running big deficits year-in-year-out.
Yes, and previously those mortgages were put out with a minimum down of 20% and held by local ad regional banks. Then came the advent of the agencies (Fannie) which purchased the mortgages from the banks, so the banks would have more space for new lending on housing. Recently 90% of mortgages are agency loans. Whu use the banks as middlemen at all and let the govt lend instead. Lots of ways this could be structured administratively just as efficiently as the present system.
JKH,
"Part of the problem is that soc sec taxes are called taxes - when they're really contributions to a type of pension fund; that doesn't help thinking about this clearly"
Yes very true.
"All pension funds pay out according to pension plans with life contingent uncertainties, so soc sec doesn't seem that different in that regard"
Yes but even if there is a private firm running the thing, it is treated as the same way in which the contributions go to the government isn't it?
However a distinction needs to be made with regards to some kind of annuities which some of these pension funds or even mutual funds may run.
I think may be easier to make up one's mind by actually thinking of a private sector firm doing the job. For example the fund may have a tiny net worth compared to the kind of transactions it is processing - that kind of intuition.
About the number, yes I am close to the $12tn as opposed to $15tn.
Ram,
I think the soc sec bonds would be analogous to private sector pension fund reserves in the Fed report
Those are financial assets rather than actuarial reserves - pension funds can be in deficit or in surplus in that regard
Soc sec has an asset reserve - the bonds - but is in actuarial deficit; that was in the nature of my question to Y above
my guess is that soc sec was designed more as a pay as you go type plan as opposed to a funded plan - which is why its assets don't show up in the household sector on the Fed report I think
BTW, if they did show up, then I think you'd see the full $ 16 trillion show up in government liability accounts on the Fed report - I don't think it does now?
Ramanan, I didn't repeat it from my first comment to the second but it's the idea social security as current transfer from taxpayer to social security recipient I object to. As Tom pointed out, it's a myth for social security just as much as any other variation of "taxes fund spending" at the federal level.
JKH @October 19, 2012 4:15 PM,
:)
Tom,
I understand there are many myths -although I personally do not use the phrase "taxes do not fund anything". But I know what you are talking of.
My general point was that there are general economic reasons for presenting national accounts in a way or the opposite - the kind "y" has been asking.
There are arguments in both directions and these can be looked into without worrying about alarms raised by some sections of the public debate. I actually think that debunking the alarms takes one's mind off from some interesting questions raised by "y".
BTW,
MMT does not like the approach of including actuarial liabilities in interpreting the operational functions of the monetary system - and I don't blame them
But the question of the soc sec bonds isn't at the same level as the actuarial liability treatment; it's somewhat more legitimate for looking at things like NFA issues
About the number, yes I am close to the $12tn as opposed to $15tn
As JKH pointed out those funds that were transferred to the general account have already been spent.
And as W famously pointed out, all that remains of the FICA collected and spent is some IOU's in a file cabinet somewhere.
WM believes NFA is $ 16 trillion
JKH,
I don't know. Pretty massive. But it would just be numbers piling up on the government's 'internal scoreboard' of 'unfunded liabilities', I suppose.
The part covered by trust fund bonds has already been spent by the government on things other than social security. This part is a definite 'debt' resulting from deficit spending, and a form of non-govt NFA.
The part spent on 'current transfers' eliminates some previous government liabilities and replaces them with other future liabilities, whose precise scale can't be known exactly. (I think)
I realize that some of us are interested chiefly in the operations and others of us in the policy and presentation. Of course, we need to get the the former straight but it has to be be presented in a simple enough way for informed policy discussion among fifteen year olds, or maybe twelve years olds. What's happening now is that complexity is allowing a lot of policy as well as business practice that is either misunderstood by most people or misrepresented to them. What I think we are doing at MNE is working on a simple presentation that is both accessible and correct. As Paul said, that is going to require some simplification of a pretty complex system with lots of moving parts.
You should want to simplify it, but simplify it in a consistent way.
Unfortunately, that involves reconciling the detail. Can't avoid it, because the issue of interpreting or misinterpreting the complexity is always going to be out there.
no that's wrong,
perhaps:
'current transfers' move outstanding government liabilities from one person to another (one person is taxed, another is paid) whilst adding to future liabilities (money is now owed to the person taxed, though the actual sum to be paid out in future can't be known precisely).
?
"WM believes NFA is $ 16 trillion"
If WM believes this then he must also believe that when the intra-governmental holdings were created the reserves were transferred through the Treasury and spent into the economy.
Maybe this accounts for the $2.6 Trillion in off-budget spending.
You should want to simplify it, but simplify it in a consistent way.
Unfortunately, that involves reconciling the detail. Can't avoid it, because the issue of interpreting or misinterpreting the complexity is always going to be out there.
Completely agree. It's why I think that what we are up to here is important even though some see it as carping. I assume we have a common objective of getting an understandable presentation right. I look at the debate now as being between the "bean counters" and the policy and advocacy types "who don't know beans."
Any presentation that enters the mainstream is going to encounter opposition from experts, and the beans had better be accounted for correctly, or the presentation won't hold water.
here's wikipedia:
"When program revenues exceed payments (i.e., the program is in surplus) the extra funds are borrowed and used by the government for other purposes, but a legal obligation to program recipients is created to the extent this occurs. These surpluses add to the Trust Fund. At the end of 2011, the Trust Fund contained (or alternatively, was owed) $2.7 trillion, up $69 billion from 2010. The fund is required by law to be invested in non-marketable securities issued and guaranteed by the "full faith and credit" of the federal government.
The trust fund represents a legal obligation to Social Security program recipients and is considered "intra-governmental" debt, a component of the "public" or "national" debt. As of April 2012, the intragovernmental debt was $4.8 trillion of the $15.7 trillion national debt."
http://en.wikipedia.org/wiki/Social_Security_Trust_Fund
"the issue of interpreting or misinterpreting the complexity is always going to be out there."
JKH, I submit that the complexity is way less than you think it is.
The S/B identity is very simple.
The underlying accounting can be complex but doesn't add to the understanding.
Doing so implies that for some reason one has to parade out various accounting transactions to prove something that has already been proved.
We already know 2+2=4. It follows that every form of that relationship is also true, no matter what mathematical operation is applied to it algebraically.
The economy can be described with a simple graphic that nails down all of the important relationships in a way that bypasses all accounting detail (yes, I'm working on it and it's almost ready).
I've already intimated one of those relationships in this thread. No one has questioned it or commented on it. What I wrote was either assumed to be true or too obtuse to comment on.
Could it be that simple? We will have to wait and see.
On the taxes fund spending model, the FICA reserves adds to the SS account that were transferred to the TGA and used for spending are already back in the economy. So the problem then becomes where the reserves will come from for the IOUs in the SS account with they are drawn on. If the IOUs in the SS account are presumed to equal reserves for spending, then the reserves from taxes will be spent twice. Therefore the IOUs just represent promises to tax as needed to meet SS obligations.
so it's both "intragovernmental" debt and debt owed to 'program recipients' (what I was vaguely referring to as 'the population').
That has to be a net financial asset for them as a whole, i.e. 'non-government NFA', even if it's not counted as such in the Fed flow of funds report. Possibly because it is held by the government "on their behalf"?
Though it is odd as it's not owed specifically to any one person.
Paul,
coming back to what you said above:
"An economy cannot function on private credit alone. Notice I'm not hedging. It could function on fiscal spending alone, and they can work effectively together."
An economy without any form of private credit is basically an economy without intra-private sector lending and borrowing. Yes it can function, in theory, up to a point. But governments that eliminate private credit, such as communist governments, tend to end up with very 'weak credit'.
A well-functioning private credit system strengthens the government credit, and vice versa. In that sense they're 'interdependent'.
I would point out that the Mosaic Law did allow for lending, but at 0% interest (no usury).
This perhaps was due to their situation back then where they had no IT to be able to track total liabilities and hence the corresponding interest requirements (avoided chaos by just legislating interest at 0%).
This supports y's point that we do perhaps today we need both deficit spending and private lending in conjunction, but with 0% interest on the private loans or..... as an option today have the govt pay the interest, if non-zero, directly to the private lenders as principle is paid down by the borrower.... rsp,
"A well-functioning private credit system strengthens the government credit, and vice versa. In that sense they're 'interdependent'."
That's pretty much what I said above, fiscal and private credit can work in concert…an economy cannot function on a credit circuit alone. I don't get what you mean by the "government credit" part though.
Unless you are implying the government has to"borrow" to spend. In actuality, the government must pay a "ransom" to spend, but it's a ransom it can afford at no cost real or otherwise.
In the US there is no "government credit", if what you mean is that the government has to "borrow". The mechanics of money creation do not equate to borrowing.
In the private sector borrowing transfers use of an asset from one party to another and creates no new NFA.
When the government issues bonds to the non-government, no one gives up the use of an asset, and new NFA ARE created.
The mechanics are not remotely similar. The only similarity is the word "debt".
I think he means deficit spending Paul.... rsp,
"perhaps today we need both deficit spending and private lending in conjunction"
Matt, We do need both because of business investment requirements.
We DO NOT need private credit. It introduces a "time bomb" into the system that creates instability. We have witnessed this time and time again.
Even in Biblical times debt jubilees were needed to reset the system occasionally. Now, instead of resets, we just transfer all of the wealth to the top, and the hard-earned gains of wage-earners evaporates.
"I think he means deficit spending Paul.... rsp,"
Matt, I think he does too but I recoil when the implication is that the government needs "credit", must "borrow" to spend.
I guess I'm anal that way, but as far as I'm concerned that implication is a destructive meme when it comes to trying to explain fiat currency systems to the brainwashed masses.
Right,
But these people are sick Paul (pleonexia IE 'more having', sick disgraced human beings Paul).
As far as debt jubilees, it looks like chaos reached a level where the authorities had to intervene... ie cooler heads prevailed... we dont have this kind of leadership today unfortunately for now...
We DO have the IT to keep track of all of this today, but our morons do not understand our capabilities again unfortunately.
We could perhaps just let these sick humans have enough to let them get by until they of course die at which point they know "they cant take it with them".
Meanwhile the righteous among us can have a wonderful life...
We could look at "total loans" and ask ourselves: "where are the balances to pay all of the associated interest?" And make sure they are available...
rsp,
I recoil at those words too Paul as imo they help perpetuate the falsehoods about what is REALLY going on... rsp
Paul,
sorry by 'government credit' I meant 'government money' (currency).
Money is a credit/debt relationship where the issuer is the 'debtor' and the receiver is the 'creditor'.
MMTers call money a 'tax credit' because it can also be used to eliminate debts imposed by the government (taxes). But the issuer of the money is still a 'debtor'.
If a government has 'strong credit' it means people want to accumulate its money, want to exchange it for goods and services, want to export goods to the country to get it, want to save it, want to borrow it, etc.
A government with 'strong credit' can do things other countries can't do, such as build enough nuclear weapons to destroy the world many times over, or send robots to Mars. That kind of thing.
I was saying a well-functioning private credit system strengthens the government's credit.
"We could look at "total loans" and ask ourselves: "where are the balances to pay all of the associated interest?" And make sure they are available..."
Matt, exactly. We can provide the balances or watch the system either collapse or limp along crushing millions of peoples lives along the way.
I'm not worried for myself or even my kids - they are resourceful, skilled and capable of living in any world thrown at them.
I worry about the millions of people that don't have the tools or the confidence to make it in a dog-eat-dog world, or what is becoming a world with 10 dogs and only 6 bones.
"I was saying a well-functioning private credit system strengthens the government's credit."
y, I agree with that completely.
Sorry, I get carried away any more when I see or even think I see something about public debt and it's "burden".
I've become a reactionary on that issue.
@ Tom and Ramanan
I know I'm a bit late to the thread but I'd still like to seize this opportunity to try to clear up the key concept of "Net Financial Assets" by appealing to Winterspeak - again.
Let's see how things really work in the U.S. by following a recent demonstration provided by Marc Lavoie.
Let's say the Treasury deficit spends by issuing $100 million in T-bills that it sells to private banks.
An immediate step taken after this is government deposits being shifted from the commercial banks to the Fed, thus creating a negative reserve position for banks.
The Fed then takes compensatory measures, purchasing back the T-bills on the secondary markets, thus eliminating the deficiency in bank reserves at the Fed.
It's only after this step that the Treasury cuts the checks and makes the payments - that is, it effectively engages in deficit-spending. This means deposits being credited at private banks and banks being credited with reserves at the Fed. The Fed funds rate goes down, triggering an OMO to drain excess reserves.
Treasuries fly again into the banking sector, but since there will be additional demand for reserves and banknotes the Fed will end up keeping some of the Treasury bills originally issued to fund deficit spending.
If, say the required reserve ratio is 10% and households and firms demand $10 in banknotes for every $100 in new deposits, at the end of the process the amount of High Powered Money will be composed of $9 million of reserves and $10 million of banknotes in circulation, for a grand total of $19 million.
New household bank deposits will be $90 million.
Original deficit spending was $100 million.
My question is a simple one: whatis precisely - to the penny - the total amount of NFAs created in the whole process?
My question is a simple one: whatis precisely - to the penny - the total amount of NFAs created in the whole process?
According to my understanding, the non-govt NFA add has to be precisely the same as the amount of tsys issued, regardless of changes in composition of how they are held subsequently, e.g., through cb ops, or bank lending (which nets to zero necessarily).
So in this example, Tsy issuance of $100 mil means an add of $100 mil to non-govt NFA, "to the penny," as Warren would say.
The T-bills are discounted from par at auction, and the discount is the interest paid, i.e., yield, so that the value of the tsys newly made available is $100 mil, even though less in reserves was realized from the auction.
The way the govt issues currency under the present system it bu tsy issuance and then expenditure of the realized reserves from the sale. That expenditure plus interest on the tsys is an add to non-govt NFA.
"the non-govt NFA add has to be precisely the same as the amount of tsys issued".
Yes, I understand that the amount of NFAs cannot exceed $100 million but apparently they are being held as currency and bank deposits, not Treasuries.
In the example, the private sector (households and firms) ends up owning $90 million in bank deposits plus $10 million in currency - for a total of NFAs added to the system via deficit spending of $100 million.
But they do not receive the interest on the T-bonds because these are held by the banks.
Considering that total NFAs of the private sector are $100 million ("to the penny") the banks cannot count as "private sector" in the example.
Say the interest rate on the bonds is 3% annually. At year-end the banks will have received $2.7 million (a part of this may be re-passed to households and firms as interest on deposits) and the Fed $0.3 million that it will send back to the Treasury.
Money has increased by $100 million and HPM by $19 million.
But Treasuries were not "the" NFAs created as "savings" of the private sector. In the example it seems that the NFAs are being held as "money".
@ Y,
Let's drop the detail of the discount on T-bills for simplicity.
Say the government sold $100 million and it will have to pay back $103 million in one year.
My point is: the private sector will have $100 million in new NFAs.
But these are held as money, not T-bills.
So, for the numbers to add up we'll have to exclude the banks from the private sector. The T-bills on the banks' books (as well as those held by the Fed, of course) can't be the new NFAs of the private sector.
Is this the MMT view on NFAs created by deficit spending? Or is there room for further clarification here?
In the example, deposits are assets of the household/corporate sector with no corresponding liability. Just like currency is. A total of $100 million ($90 million deposits plus $10 million currency).
Whereas the T-bills or bonds on the banks' books do have a corresponding liability, namely deposits.
As for T-bills held by the Fed they mean nothing. It's just an accounting gimmick, since the Fed is a branch of "the U.S." that originally issued the securities.
So, again: in real life (the process described is the way deficit spending really happens in the U.S.)it seems as if "money" - not T-bills or bonds- is the "NFA" that ends up in the private sector's hands after a round of deficit spending.
To clarify once again:
The banks "are owed" $90 million in tsys and "owe" the same amount in deposits.Their NFAs add up to zero.
Households and corporations own $90 million of deposits and $10 million in currency and owe nothing. They were the beneficiaries of the government deficit spending. They own (have "net saved") $100 million in new NFAs - in the form of "money", not tsys.
hmm interesting, I have to think some more
"The T-Bills are net financial assets to the 'non-government' as a whole"
Let's sub-divide the private sector into financial (banks) and non-financial (households and corporations).
The balance sheet of the financial sub-sector has $90 million tsys as assets and $90 million deposits as liabilities.
The balance sheet of the non-financial sector has $100 million deposits plus currency as assets and zero dollars as liabilities.
Deficit spending equals $100 million - the "money" held as an asset with no corresponding liability by the private sector, to the penny. The NFA of the private sector is equal to the government deficit.
Whereas the tsys are held partly by the banks - and are matched by corresponding liabilities on their banks - and partly by the public sector Fed. By definition, the tsys cannot be considered the NFAs of the private scetor.
Of course, there is nothing that prevents households and/or corporations to go to the banks and propose a swap: give us those tsys and cancel our deposits.
Then- and only then - yes, tsys will become the NFAs of the private sector.
yes I think you're right
that's a really good example.
Is that presentation by Marc Lavoie online?
Yes.
The monetary and fiscal nexus of neo-chartalism, October 2011.
"the post-chartalist view"
how about this as a simple possible alternative:
1. Treasury spends $100 million from its Fed account (which always has several billion $ positive balance). Bank reserve accounts are credited by $100 million, bank customer deposit accounts are credited by $100 million.
2. Treasury sells $100 million T-bills to the banks. Their reserve accounts are debited by $100 million and the Treasury's Fed account is credited by $100 million.
A bit simpler?
Jose Guilherme,
I think what you mean is that when the government spends, the deficit is financed by issuing Treasury securities, settlement balances of banks and issuance of currency notes (to the extent the latter two are demanded by the private sector).
So you take issue with the claim increase in Treasury securities issued itself is the increase in NFA of the private sector whoever made that claim.
Is that what you are asking?
I agree these matters should be handled properly.
For example ...
The Treasury can purchase financial assets by incurring liabilities and hence this results in the increase of the public debt but this cannot be said to increase the NFA of the private sector.
Net financial assets of the consolidated non-government sector consist of reserves, currency, and Treasury securities.
And the consolidated non-government sector tends to be the “iconic” MMT view.
The ultimate holders of all wealth are individuals, and to drill down to that level within the consolidated non government sector, you have to examine the household sector, and you have to do that for all individual countries that are potential holders of Treasury and Fed liabilities.
Very few Treasuries (as a proportion of the total) are held in portfolio by commercial banks. Therefore, very few net financial assets are reflected as commercial bank deposits held by the US household sector in respect of that particular source. The typical academic presentation of the bank buying and holding Treasuries isn’t very applicable in the real world.
But the massive excess reserves currently held by commercial banks do reflect deposit and other liability creation on the other side of bank balance sheets, which would be reflected as household assets either directly or indirectly (indirectly via corporate holdings of bank deposits or other bank liabilities). This is because almost all of the Treasuries sold to the Fed from QE originally came from non-bank portfolios – not bank portfolios. That’s consistent with the general trend of banks holding a small proportion of treasuries in their own portfolios. The banking system (including bank owned dealers) acts mostly as broker in QE – not as a principal source of Treasury supply. And it acts mostly as broker in the (normal) reverse direction of bond distribution as well – not so much as a principal end demander and holder of Treasuries.
There’s a broad distribution of Treasury holdings held directly across households, hedge funds (Fed statistics for Treasury holdings of hedge funds are actually consolidated into those for households due to data collection limitations), mutual funds, insurance companies, and pension funds (including state and municipal pension funds).
Unlike soc sec, those pension fund assets tend to be reflected as explicit household sector asset claims in the Fed flow of funds and balance sheet reports (as actuarial liabilities of the pension funds).
But more than $ 5 trillion of Treasuries are held outside of the US. So you have to explore all those balance sheets to get the ultimate household NFA claims there, as a major component in the overall non US government NFA.
if for some reason investors decided they didn't want to buy treasuries any more, do you think the banks would just have to buy and keep them all?
y 5:36
CTRB, with no bonds issued - here:
http://monetaryrealism.com/treasury-and-the-central-bank-a-contingent-institutional-approach/
P.S.
There is the issue that primary dealers are expected to bid for bonds at auction. But if you consider a hypothetical (although extreme and quite unlikely) situation where end buyers don't want treasuries, you have to consider the possibility that dealers simply give up their dealership under such dire conditions - if nothing else to avoid chronic capital losses on bonds.
Wouldn't the Fed be breaking its mandate if it ever let it come to that?
"maximum employment, stable prices and moderate long-term interest rates"
(also its duty to "maintain the stability of the financial system")
Ramanan,
Yes, I'm questioning the claim sometimes made during debates over these issues that the increase in NFAs that results from deficit spending is the increase in Treasuries issued.
In my example (taken from Lavoie) it simply can't be so. Part of the original Treasuries are on the Fed's books - and everyone agrees the Fed is not part of the private sector.
Also, the Treasuries held by the banks have deposits on the other side of the balance sheet - so, they are not "net" assets.
In the example - which could be a real-life case, if agents behave in the manner described where households and corporations do not buy tsys - the NFAs are in the form of currency and bank deposits held by the non-financial private sector.
JKH says that NFAs are composed of reserves, currency and Treasury securities. I agree there are situations where this could be so, namely when households and corporations do buy Treasuries for their portfolios - but only on the condition that we do not add those items up, for otherwise total NFAs would exceed the amount of original deficit spending by including those tsys that are on the Fed's books.
No double-counting should be allowed, correct?
And JKH's claim that very few Treasuries end up on the commercial banks' books does not correspond to the current situation in many eurozone countries.
Y,
In your simpler example NFAs are composed exclusively of bank deposits held by bank customers.
Jose,
"Yes, I'm questioning the claim sometimes made during debates over these issues that the increase in NFAs that results from deficit spending is the increase in Treasuries issued."
Yes that claim is not right.
Also the general claim that NFA of the private sector is reserves, currency notes and Treasury securities is also not completely right because the Treasury holds assets such as MBS and Student Loan ABS. It even holds some foreign currency assets.
Only in the abstraction that these assets are not held by the Treasury is this right.
Jose, you have to seperate the T-bills from the deposits. The T-bills are bank assets and treasury liabilities. The deposits are bank liabilities and household assets.
(Ignoring the cash and reserves) the T-bills are the only assets in the example that have no corresponding liability in the private sector.
However, the only entity in your example which has no liabilities is the household sector. Odd innit?
José, the composition of assets constituting NFA held by non-govt is immaterial. OMO does not chave amount of net financial assets held by non-govt, only their composition.
Banks hold two categories of rb in their Fed accounts. One category is unborrowed and constitutes NFA in that there is no private sector liability for the private sector asset. The other is borrowed and doesn't constitute NFA, i.e, there is a private sector liability corresponding to the private sector asset, so net is zero.
Interest paid to non-govt is a govt liability and therefore adds to non-govt NFA.
IN the US NFA are added to non-govt by Tsy issuance with equal spending of reservers, which leaves the previous amount of reserves unchanged and a net add of the Tsy issuance. The interest payments (flow) also increase non-govt NFA and add to the stock.
Monetary ops like OMO and POMO don't alter non-govt NFA stock only composition, i.e., tsys, unborrowed rb or cash in the hands of the public.
Has to be this way in a closed system of inside money and outside money as structured institutionally in the US under present rules. There may be exceptions in extremis, but the normal ops are as described, I believe.
SO in your (full) example:
the T-bills, reserves and cash are Net Financial Assets (NFA). However the banks in your example don't have 'net financial assets', their assets equal their liabilities.
The Housholds have 'net financial assets', but only the cash they hold is a Net Financial Asset (NFA) !
confusing - you have to specify what you mean precisely.
'tis why JKH went out of his way to say: "Net financial assets of the consolidated non-government sector"
Thanks for calling attention to this post here, Matt. And thanks to all for the astonishing outpouring of discussion related to the Post. I'm always amazed at the interest in a Krugman topic post.
Let's recap the ending balance sheets of every step in the Marc Lavoie example, just to clear up our analysis.
Step one: the Treasury engages in 100 (million dollars) of deficit spending by selling that amount of tsys to the commercial banks.
Bank´s BS:
Assets +100 tsys
Liablities +100 government deposits
Step two: government deposits are shifted to Fed
Fed BS:
Liabilities +100 govt deposits
minus 100 bank deposits
Banks' BS:
Assets minus 100 reserves
+100 tsys
Liabilities minus 100 govt deposits
Step three: Fed engages in OMO to eliminate reserve deficiency of banks
Fed BS:
Assets +100 tsys
Liabilities +100 govt deposits
Bank's BS:
Assets zero reserves, zero tsys
Liabilities zero govt deposits
Step four - Treasury deficit spends by crediting bank accounts
Fed BS:
Assets +100 tsys
Liabilities +100 bank deposits
Banks' BS:
Assets +100 reserves, zero tsys
Liabilities +100 household deposits
Step five (Final): excess reserves are drained from banks via OMO; banks maintain a 10% reserve ratio and the public demands 10 units of currency
Fed BS:
Assets +19 tsys
Liabilities +10 bank deposits
+9 banknotes
Banks' BS:
Assets +81 tsys
+9 reserves
Liabilities +90 Household deposits
Conclusion: the government has deficit-spent 100 and the household sector holds 100 of NFAs in currency and deposits.
Neither reserves nor Treasuries can be considered part of the NFAs held by the private sector, in this example. The interest on the Treasuries is captured by the banks and also by the Fed.
Jose,
Your example is actually pointlessly complicated. What you are saying could be demonstrated in a much simpler way. There's absolutely no reason to include all those details.
Anyway,
There is a basic miscommunication going on here.
Combine the household sector and the banks into one consolidated entity called 'the private sector'.
Now focus on the bank deposits and ignore everything else in your example.
The bank deposits are household assets and bank liabilities.
So, the consolidated private sector has:
+1 asset (deposits) (households)
-1 liability (deposits)(banks)
+1-1 = 0
the deposits = 0 NET financial assets for the consolidated private sector 'as a whole'.
Get it?
Now focus just on the T-bills (ignore those held by the Fed).
Combine the banks and the household sector into one consolidated entity called 'the private sector'
The T-bills are private sector assets and government liabilities.
They are therefore net financial assets for the consolidated private sector 'as a whole'.
y,
The example is complicated because in real life - as opposed to the sanitized version you may find in economics texts, including some MMT ones - deficit spending is a rather complicated process.
Anyway, let's properly consolidate the private sector as is your wish.
The private sector has total assets of 190:
Reserves - 9
T-bills - 81
Household deposits - 90
Currency held by the public - 10
It has 90 in liabilities:
Household deposits (a liability for banks; households end up with zero liabilities in the example) - 90
So, gross assets of the private sector minus gross liabilities of the private sector equals net financial assets of the private sector, right?
190 minus 90 equals 100 in NFAs, created as a result of deficit spending. The same amount of the original $100 deficit spending by the government.
And where do we find those NFAs? In the hands or pockets of households as bank deposits (90) and currency (10).
I hope it's now clear that in this (realistic) example neither reserves nor Treasuries can be considered part of the consolidated private sector's net (underline "net") net financial assets.
Scott Fullwiler: "...NFA is currency + reserve balances + treasuries - govt/cb loans to the pvt sector." (sourcee)
I would add to the above, in the case of borrowed reserves, the bank doing the borrowing at the discount window normally has to put up tsys as collateral, effectively making this a temporary asset swap with the loan repaid on schedule. This is different from unborrowed reserves, which come from net govt expenditure.
Tom,
Good that you quote Fullwiler.
Go to his paper "Helicopter drops are fiscal operations".
Take a look at figure 6, that shows the effects of deficit spending on the recipient's balance sheet and that of his/her bank.
It's clear that the NFAs are the bank deposits of the recipient.
In his example there are no tsys.
In Lavoie´s (real life) example the tsys are held by the Fed and commercial banks. But the NFAs are still the deposits of the private sector, not the tsys.
Tom,
First, NFA is not restricted to something about the "non-government sector". It can be used to denote the financial assets less financial liabilities of a economic unit or a group of units such as a sector.
Second, the definition you provided - written by STF is contextual and not the most general. Governments can hold equities of private corporations (think TARP) and to get the NFA of the "non government sector" (your terminology, not mine) one also has to take this into consideration. Equities are not "loans".
Third, a full definition is not so easy to give. Imagine if the government own a bank. The deposits of the bank are also liabilities of the government sector.
Jose,
"But the NFAs are still the deposits of the private sector, not the tsys."
I am unsure as to where you are headed.
In your examples you have banks holding Treasuries but somehow you don't seem to count banks in the private sector
Ramanan, we have been around and around the block on this. MMT proponents use "NFA" as shorthand to mean net financial assets held in aggregate by consolidated non-government sectors. I suggested previously that something like NFA* be used to indicate this shorthand so there is no confusion about it. This is useful in a closed system (currency zone) wrt to inside and outside money, where inside money must net to zero and outside money may be net positive, negative or zero wrt to consolidated nongovt sectors depending on govt activity.
José, when President Lincoln funded the Civil War using "greenbacks," i.e. direct issuance, there was no offset in tsys and the currency injected into non-government to pay salaries, buy equipement, etc. was all an add to the net financial assets of consolidated non-govt (NFA*).
Whether the USD are held as tsys, rb or cash makes zero difference as far as total NFA* is concerned. That is to say, the composition of the assets held is of no relevance because when the composition changes the amount remains the same, as it has to in a closed system, like energy in a physical system.
Ramanan,
The Treasuries held by the banks are assets offset by liabilities. Thus, they are not NFAs.
The deposits and currency held by the household and corporate sector have no corresponding liabilities - they are net financial assets.
If households and corporations bought Treasuries from banks (swapping deposits for T-bills), then Treasuries would become part of NFAs.
If the government would deficit-spend by buying services from banks then in that specific case banks would gain assets not offset by liabilities.
So, I do consider banks to be part of the private sector. It's just that in the Lavoie example households, not banks, were the beneficiaries of deficit spending and thus the ultimate owners of "NFAs".
Tom,
Whether the USD are held as tsys, rb or cash makes zero difference as far as total NFA* is concerned
Exactly. It all depends on the situation, on how deficit-spending was "financed".
In the U.S. today a substantial amount of Treasuries end up being held by banks or the Fed and thus do not constitute NFAs.
Total NFAs held by the private sector are always exactly equal in dollar amount to the original deficit spending. But currency and deposits held by households and corporations are usually a substantial portion of these NFAs. The remaining amount will likely be composed of Treasuries and other assets.
José, MMT looks at this from the viewpoint of a closed system model, govt and non-govt. when the govt wishes to either transfer private goods to puboic use or to make transfer payments, pay interest, etc. it has different choices operationally. I could just directly credit its account with reserves to clear its deposits, or it could issue cash. That would be a direct add to NFA*.
However, this is no longer permitted in the US. Instead, govt must issue tsys to obtain reserves from non-govt through auction. So the process of issuance is "indirect," through tsys. Tsys issues tsys with the Fed auction and credits the Tsy account with reserves, which Tsy disburses into non-govt. Now non-govt has all the reserves it had to purchase the tsys and also holds the tsys. So NFA* has increased by the amount of the tsys issuance (plus accrued interest).
"Ramanan, we have been around and around the block on this. MMT proponents use "NFA" as shorthand to mean net financial assets held in aggregate by consolidated non-government sectors. I suggested previously that something like NFA* be used to indicate this shorthand so there is no confusion about it. "
True but usually the statements are made in specific contexts where the usage of the shorthand is fair.
But certain commentators here make general statements where there is no context and statements can be ambiguous and nonsensical.
On your other statement supposedly on "closed systems", that is not right. Government bond prices change intra-day and it changes the total value of assets held change/fluctuate all the time.
Imagine a shift in the yields by 15bp on a given day and an average duration of 7yrs. For a debt/gdp of 100%, this changes the total value of government bonds by about 1% (which is not "small").
Third, typically the government sector is defined in a particular way in national accounts. You cannot throw a state level government into the "private sector" :-) :-)
(Or use the terminology "non-federal government domestic sector" or whatever).
In the U.S. today a substantial amount of Treasuries end up being held by banks or the Fed and thus do not constitute NFAs.
When the Fed purchases tsys for its account through POMO, it exchanges rb for tsys. The rb then are the NFA*. Those rb may be owned by banks, if they were the owners of the tsys that the Fed purchased. Of the rb may correspond to the deposits account holding of non-bank entities in non-govt received in exchange for the sale of tsys.
Change in composition of NFA* but not the amount.
Whether a bank holds a tsys (savings acct at Fed) or rb (deposit acct at Fed) on its own account then it is part of NFA*, too. Bank-owned assets are in the consolidated nongovt. sector. NFA* here can be held as rb, tsys or vault cash and the composition is always shifting among banks and between banks and the Fed. Amount of NFA* remains the same regardless of whom is holding what.
Jose, I didn't mean to sound rude -I think lavoie's example is great, it's just that a less intricate example does the job just as well for the point that you're making.
"deficit spending is a rather complicated process"
Lavoie's example is quite complicated, but there's no reason why it couldn't also be roughly as simple as the one I suggested, or some variant of it.
He aslo seems to assume that the Treasury has nothing in its account before the process begins, which is not the case.
"And where do we find those NFAs? In the hands or pockets of households as bank deposits (90) and currency (10)."
If we're talking about what I'm now going to refer to as "consolidated non-government NFA", then the NFAs are:
Reserves (9)
T-bills (81)
currency (10)
Total = 100
However: 'net financial assets' are specific to a given system, sector, or subsector, all the way down to the individual.
It can be confusing because people use the same term to mean different things. All that's needed is to clarify why one's referring to, I think.
MMTers use NFA to mean consolidated non-government NFA. I presume that this is because the government is the only sector that can always pay its debts within the currency zone (given that it issues the currency).
This is important because it is central to the analysis of financial fragility and over-leveraging that can result in credit crunches and the like.
(This is why the government-issued assets are referred to as NFA by commenters above).
However, you are right that, if you divide up the private sector and look at who has what within it, you find that the household sector has net assets and the banks assets equal their liabilities. So the household sector has intra-private sector 'net financial assets', in the sense that its assets exceed its liabilties. But when you look at the sector as a whole you find that these assets have corresponding liabilities WITHIN the private sector, so represent intra-private sector debt.
Overall the intra-private sector liabilities and assets net to zero.
"I suggested previously that something like NFA* be used to indicate this shorthand so there is no confusion about it"
Makes sense
On your other statement supposedly on "closed systems", that is not right. Government bond prices change intra-day and it changes the total value of assets held change/fluctuate all the time.
Imagine a shift in the yields by 15bp on a given day and an average duration of 7yrs. For a debt/gdp of 100%, this changes the total value of government bonds by about 1% (which is not "small").
Yes, and inflation rate and fx rates are shifting all the time, too, affecting the value of the currency.
But we still use the nominal value of the currency and tsys at par, even though these fluctuate moment to moment.
"Yes, and inflation rate and fx rates are shifting all the time, too, affecting the value of the currency.
But we still use the nominal value of the currency and tsys at par, even though these fluctuate moment to moment."
The general rise in prices of goods and services doesn't affect nominal values of something and not the real value of something.
Second, the flow of funds (or anybody else) don't value Treasuries at par.
(An example to illustrate this would be imagine two government bonds of different dates of issue but same maturity and having different coupons. Certainly one is more valuable than the other)
Jose,
Still unsure.
The deposits are assets to households and liabilities of banks and cancel out (when netting for NFA)
"In the U.S. today a substantial amount of Treasuries end up being held by banks or the Fed and thus do not constitute NFAs."
In the United States, banks' holding of US Treasuries is quite less compared to others' holdings.
Jose is right to point out that, in his example, the reason why the household sector ends up with assets and no liabilities, is due to the govt deficit spending.
But these household assets are dependent upon there being equal NFA* somewhere in the system, in this case held as T-bills by the banks (and as cash too, of course).
While all this is true, and necessary for a comprehensive analysis, I am interested in a simple way to present this to fifteen year olds in a policy context.
I don't have the time or inclination to go through the accounting details and leave that to experts. I am interested in being able to explain the basic principles that are operative without making it so complex as to be unaccessible.
I appreciate where you are coming from and agree that getting the details correct is important - but not in a simple model if it is to be accessible.
i agree with paul, here. Start with a simple closed system and build out from there as needed, but don't through the whole thing at people to begin with when they don't need that level of detail and providing will simply confuse.
Moreover, if experts disagree over details or manner of professional expesssion, not being an expert in this, I have nothing to add to the discussion.
btw Lavoie's giving a presentation as part of the 'modern money and public purpose' series along with Scott Fullwiler, with Dean Baker as moderator! Should be epic.
http://www.modernmoneyandpublicpurpose.com/seminar-6-fiscal-vs-monetary-policy.html
As an FYI, the Sectoral Balances identity is a nominal relationship ...
G, T, X, M are knowns expressed in nominal terms.
Thus, the solution for (I-S) ie "net savings" must be nominal or it would not be stock-flow consistent.
I suppose FoF and NIPA accountants are free to substitute real values for nominal values but this would not be stock-flow consistent.
The MMT view of the Sectoral Balances is the nominal view.
If folks wish to speak MMT, they must speak nominal.
Only under these conditions would the principles of closed systems hold.
y,
these household assets are dependent upon there being equal NFA* somewhere in the system
My point is that these household assets (deposits) are THE NFAs remaining in the system after deficit-spending.
Tom,
The accounting details are also important to enable teaching to 15-year olds, because they'll prevent us from selling to them a simplistic "NFAs equal Treasuries issued by the government" story-line.
Trying to near 100% accuracy should be part of the MMT approach to the wider public, IMO.
The Eye has spoken.
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