Saturday, November 10, 2012

A Very Condensed Introduction to Currency Operations, for Erskine Bowles


If you claim to grasp the concept of situational awareness then you have to go back and ask about the fundamental change in our currency situation that occurred in 1933, when we transitioned from a gold-standard to a fiat-currency-standard. It’s quite a fundamental change, with trivially obvious consequences. Anyone not at least looking into that situational change is doing their country a grave disservice.

Would a military deploy soldiers who were not able to fully disassemble and reassemble their personal weapons in the dark? Similarly, no citizen should try to discuss fiat currency operations or fiscal policy without learning at least the simple rudiments of how they actually work.

What follows is a very condensed summary of much of the content found at Mosler's Mandatory Readings and from follow-on references where noted.

1) On a "fiat" currency regime, there is no such thing a “national debt,” there is no REAL purpose for “balanced fiat,” and it’s plain ignorant to directly compare the budget of currency users (e.g., Greece or, say, Nebraska) to currency issuers (e.g,. USA, UK, Sweden, or even the ECB [european central bank]). Countries using the “euro” are not sovereign masters of their own currency. Comparing them to sovereign currency issuers like the USA is worse than comparing apples & oranges, it’s more like comparing predators & prey.

2) “Fiat” means there’s no static asset metric that a unit of account (currency) is convertible to upon demand. Rather, the unit of account is backed purely and only by the initiative of the public issuing the currency - and it's conversion rate to static assets must float, by definition.  Simple network dynamics dictate that to make liquidity co-scale with expanding options, a growing population and economy must steadily increase fiat incomes and fiat-currency-savings, NOT maintain buying power of the unit of account.  If population & economic options are increasing, then price stability must float, although hopefully within variance tolerance limits allowing continuously smooth transitions instead of wasteful gyrations.

3) Fiat currency isn’t obtained by the issuer from anyone, hence there’s no one to “pay it back” to. The fiscal goal for a nation using fiat currency reduces to maintaining adequately distributed currency supply within tolerance limits, neither too much (contributing to EXCESS inflation) nor too little (contributing to EXCESS deflation, what is we have had in the USA from 2008-2013).

4) The concept of currency revenue is obsolete for a fiat currency ISSUER. In 1933, the entire function of taxes was changed, from getting revenue from a net currency supply dictated by gold-hoarding plutocrats, to managing net aggregate demand and shaping it’s profile (i.e., taxes as deterrents for specific transaction types).

5) Do not conflate the concepts of foreign currency (Fx) reserves, Treasury bonds, and fiat-currency budget “deficits.”

a) Countries who export to the USA are paid in $US, and THEY HAVE ALREADY BEEN PAID IN FULL! Their payments are sitting in accounts at the US Federal Reserve bank – as Fx Reserves. We DO NOT BORROW OUR OWN FIAT CURRENCY FROM ANYONE ELSE! It’s actually impossible, since the US Treasury is the monopoly issuer of $US.

b) As part of the double-entry accounting process for acknowledging currency creation (i.e., an accounting entry w/o a corresponding debit), we use TTL Accounts & T-bonds to drain banking-reserve notation from the accounts of private banks at our Central Bank, the Fed (Federal Reserve Bank). T-bonds are just a habit left over from the gold-std days. They’re simply a policy decision to spend more fiat, not to borrow fiat.
“The Treasury tax and loan account system was designed as a mechanism for minimizing the dislocations on bank reserves and the money market arising out of the sizable and irregular transfers between the Government and the public.”
Treasury tax and loan accounts and Federal Reserve open market operations

c) For countries using a fiat-currency-standard, a fiscal “deficit” is purely an accounting term, denoting the growth in net currency supply used by a growing nation. The fiat deficit is the yearly difference between currency created by Treasury spending and that amount clawed back as federal taxes. The cumulative, so-called, “public debt” is therefore equal to net private currency-savings, to the penny. Given a monopoly currency issuer and tax authority, a growing economy can only accumulate net currency-savings (credits) if the issuer commits to net issuance (debits). So fiscal "deficits" and "debts" are simply the accounting terms necessary to manage national currency supply. When the same words have different meanings in different contexts, it's YOUR responsibility to use them properly. That reality is part of what we call semantics.  For efficiency, every existing language maintains the right to assign context-specific meanings to words.  That makes language an efficient, agile tool, yet the utility of every tool depends upon intelligent use.

If you want to at least learn the rudiments of fiat currency operations and reserve banking, here’s a Dick&Jane level primer.

After that, please read up on Marriner Eccles, the Fed chief who oversaw our transition from the gold std to our existing fiat currency.

Marriner S. Eccles and the Federal Reserve Policy, 1934-1951

Marriner Eccles – HEARINGS BEFORE THE 1933 Senate COMMITTEE ON FINANCE

DIRECT PURCHASES OF GOVERNMENT SECURITIES BY FEDERAL RESERVE BANKSMarriner Eccles, 1947

For those already steeped in financial semantics, these topics are tediously reviewd in full by Stephanie Kelton.
Can Taxes and Bonds Finance Government Spending?

Can anyone get Erskine Bowles to read this?  If so, can you also determine whether he knows the linguistic definition of semantics?

69 comments:

y said...

"a growing population and economy must steadily increase fiat incomes and savings, NOT maintain buying power of the unit of account."

can't you have both? why is inflation necessary?

Malmo's Ghost said...

After Bowles, send a copy to the intolerable crypto-hacks over at MSNBC when you get a chance.

Crake said...

Wondering: Did you mean material changes or what was written, "trivially obvious consequences"?

Bob Roddis said...

"Fiat" means an order from a SWAT team. Of course, if "there’s no static asset metric that a unit of account", the government, via its SWAT teams, is unconstrained in robbing everybody everyday all the time and transferring the loot to itself and its friends. And you guys wonder why we're heading towards a surveillance state.

Simple network dynamics dictate that to make liquidity co-scale with expanding options, a growing population and economy must steadily increase fiat incomes and savings, NOT maintain buying power of the unit of account

There is no basis in fact, logic or theory as to why a growing population and/or economy must steadily increase "fiat incomes". Everyone should always be concerned with maintaining buying power of the "unit of account" or else it isn't much of a unit of account. Everyone should be concerned with increasing their real incomes. And everyone must always be concerned about saving enough to use for investments for the future.

Obviously, the government can always steal what it wants to steal by spending money into existence but even the thieves, murderers and cutthroats who run the government are smart enough to maintain some resemblance of the current system with the old system so that taxation approximates what the government wants to spend. They are smart enough to know that the MMT proposition is insane. In fact, when average people learn that the government can spend money into existence, they will be properly appalled. The do not know because Keynesianism, being a scam for the government to loot the masses, is intentionally confusing and obscure. Thanks for making it less obscure.

Finally, the fact that the government cannot run out of "dollars" does not solve the problem of scarcity or create the $200 trillion in goods and services promised by the government. All that spending money into existence can accomplish is to steal purchasing power from a victim and transfer it to the government's buyer or recipient. Fewer people will invest when one's savings and property are never safe from the kleptocratic pillaging Keynesian state.

MMT is for people who cannot tell the difference between a free market and an anti-free market regime of price controls and for people who think the government is omniscient and benevolent. In other words, hopeless dolts of the amoral variety.

Ramanan said...
This comment has been removed by the author.
Ramanan said...

"The cumulative, so-called, “public debt” is therefore equal to net private savings, to the penny"

That is not right.

Take the case of a closed economy.

If by savings, you mean the stock of assets, then the private sector net assets is equal to the government debt plus nonfinancial assets.

What is "fiat income"?

Roger Erickson said...

'"a growing population and economy must steadily increase fiat incomes and savings, NOT maintain buying power of the unit of account."

can't you have both? why is inflation necessary?'

Already referred to this in the text. "Simple network dynamics dictate that to make liquidity co-scale with expanding options, a growing population and economy must steadily increase fiat incomes and savings, NOT maintain buying power of the unit of account ..."

To elaborate, the currency supply for two micro-states [say, Time1 and Time2] of a [population-economy], and all it's variables, included demands for a range of denominations, from things that "cost a penny" to things that "cost, say $1mil" at Time1. How do these get adjusted, to things that cost little or a lot at Time2 - when most things become obsolete, and of little value over increasingly shorter time periods?

There are two available strategies for adjusting the currency denominations in order to retain the adaptive range of liquidity [availability AND tempo; i.e., ease of calculation & transaction].

On the low end of the liquidity scale, you either expand the available denomination (1/4 penny, 1/8 penny, 1/32 penny, etc, etc) ... or, you restrict the denomination range, and instead adjust everyone's income.

[Preserving financial savings gets even more complicated. That's why - long term - it's often easier to think in terms of real-liquidity and real-savings, while keeping the two semi-separate, at least over long intervals?]

On the high end, there's less of a problem. You just increase the combinations of numbers already in use.

In operational practice, cultures have apparently found it most convenient to adjust currency denominations to fit the smallest unit of social credit in use (i.e., let fiat incomes float instead of trying to stabilize the buying power of fiat). As always, theory follows the trial & error of operational discovery. In our case, it's largely because accountants prefer to utilize whole numbers, and tend to don't bother propagating rounding errors smaller than $0.01 .

You can argue over which strategy is best in different contexts, but there's no denying that participants in dynamic markets vote with their feet.

Roger Erickson said...

"What is "fiat income"?"

Income denominated in whatever the local unit of account is for a given fiat currency. In our case, income in $US.

Jose Guilherme said...

Ramanan,

I thought currency, reserves and government bonds were the net financial assets of the private sector, created as a result of deficit spending.

Ramanan said...

Jose,

A slightly separate point to the "equal, to the penny" argument.

The private sector wealth also consists of nonfinancial assets.

Saving in one period adds to net worth and one needs to add them for each period.

And what about saving itself? Appeal to JKH may be useful here:

S = I + (S-I)

Jose Guilherme said...

Ramanan,

Say the government deficit spends by crediting my account with $20,000.

Private banks saw their assets increase by that amount (in the form of reserves) and their liabilities increase also by $20,000 (my deposit).

Net Financial Assets of the private sector - that is, net claims on the government - also went up by $20,000,
because reserves are a liability of the Central Bank.

Then I use the deposit to buy a HD motorbike. My deposited is debited and HD's deposit is credited. Nothing has changed in the private sector, in net financial terms.

As far as real assets are concerned, again nothing has changed In the private wector as a whole. I gained a bike as part of my real assets but HD lost one bike. Net result equals zero.

How can this example be integrated into the S = I + (S-I) framework?

Greg said...


"a growing population and economy must steadily increase fiat incomes and savings, NOT maintain buying power of the unit of account."

can't you have both? why is inflation necessary?"


The reason you cant have both is because of bank credit. Banks want a certain number of dollars back from you not a certain value of dollars back from you.

If banks would accept less dollars from you as they got more valuable it might work but tats not how it works.

Bank credit is the dominant form of money in our economy, dont see that changing by a whole lot very soon.

Ramanan said...

Jose,

I am not sure why you use the language losing the bike.

SNA doesn't like including bikes in capital formation, so instead think of houses or machines.

At the end of the day, there was fixed capital formation and it is not anyone's liability. It is an asset for the owner. So it has appeared out of nowhere loosely speaking.

Financial assets and liabilities are created in pairs.

The private sector wealth consists of government debt and nonfinancial assets.

Greg said...

I think what Ramanan is getting at, which is pertinent but doesnt make the to the penny point completely invalid is that our saving is in the form of dollars (MOE) and in things priced in dollars (MOA). Things priced in dollars can vary wildly in value at times. Interestingly as I think more about this, even the MOE has an element of price to it as currency markets will put a "value" to the dollar itself.

I still think the point that the physical number of dollars in savings vehicles like Treasuries is equal to all the past number of dollars which made up past deficits, is a valid and helpful way to understand govt debt/deficits. Understanding it any other way can lead you down very bad policy suggestions.

paul said...

"I think what Ramanan is getting at, which is pertinent but doesnt make the to the penny point completely invalid is that our saving is in the form of dollars (MOE) and in things priced in dollars (MOA)." - Greg

The S/B identity as used in MMT is a nominal relationship, in state money issued by the government, ie net dollars and bonds.

G, T, X, and M are nominal parameters in the unit of account. Then (I-S) is a nominal expression in the unit of account. MMT proceeds from there.

"Real" exists in a parallel universe, not relevant to MMT analysis.

There has never been any pretense otherwise, and the "to the penny" point will always be true in nominal terms.

If one chooses to use real assets as parameters then of course "to the penny" will not hold. No one has ever said otherwise, and is why S = I + (S-I) has not been of interest to MMT proponents. It's apples and oranges, and besides the point.

This is not news, MMT has always been a view of the relationships, flows and dynamics of nominal financial assets (state-issued).

"Things priced in dollars can vary wildly in value at times."

…which is why they aren't applicable to the S/B identity.

Ramanan said...

Greg,

Different point Greg. The private sector holds nonfinancial assets as well in addition to financial assets.

Matt Franko said...

good post Roger....

"fiscal "deficits" and "debts" are simply the accounting terms necessary to manage national currency supply. When the same words have different meanings in different contexts, it's YOUR responsibility to use them properly. That reality is part of what we call semantics. For efficiency, every existing language maintains the right to assign context-specific meanings to words. That makes language an efficient, agile tool, yet the utility of every tool depends upon intelligent use."

The key word here is "intelligent"...

I think it is necessary to have a certain minimum level of mathematical cognitive ability to be able to discern the different contexts. And looks like the people we (who are able to understand MMT) are having trouble communicating to have little to none of these mathematical cognitive abilities...

Once these people get locked in to a particular semantic context, they cant get out. (only math can get them out, and they dont have it)

It looks like the different contexts can only be discerned through mathematics...

Perhaps think of the Elements:

A mathematical person might say: "There exists an element that has 47 protons in the nucleus" ... ie the primary identifying characteristic is based on a mathematical (quantified) objective characteristic...

A semantic person might say: "There exists "silver"..." ie the primary characteristic is based on what the element is NAMED...

But if you showed the semantic person two samples one of silver and another platinum (both look similar) and quizzed them on which was which, they CANNOT tell you without using some form of MATH.

So perhaps we can hope for these individuals to understand the limitations of their frontal lobes and do the honorable thing and turn this all over to those among us who possess the requisite mathematical cognitive abilities to design and administer currency systems...

rsp,

Jose Guilherme said...

Ramanan,

I guess we could describe the accounting in the following way.

If the government deficit-spent $20,000 into my account it's because I sold her a service.

G went up by $20,000. G is a component of GDP. GDP thus increased by $20,000 - the value of the service I provided.

Iniially, I don't spend my income that resulted from net goverment spending. So my saving as a private sector agent also increased by $20,000.

This is the end of the first round. G and S increased. Investment was zero. (S-I) went up. Deficit spending increased Net Financial Assets of the Private Sector by $20,000 - to the penny.

Second round: I buy a HD bike for $20,000. My spending (consumption) is HD's income.

If HD sold the bike out of inventory, there was a decrease of I and an increase in C for a net GDP change of zero in this second round.

But if HD sells the bike out of new production then (I) stays the same while C goes up - and GDP has increased by another $20,000 in this second round.

GDP = C + I + G = C + S + T

In the 2 rounds, GDP goes up by $40,000: C, G and S increased by $20,000 each while investment spending didn't budge.

Of course, if I had bought a newly-produced machine instead (as was your wish) then (I) and G would increase $20,000 each while S would go up by $40,000. Of these $40,000 in gross savings, 20,000 would be (S-I) that is, the net claims of the private sector over the government that resulted from the initial deficit spending.

Ant the total wealth of the private sector would sum up to $40,000 - $20,000 of NFAs and $20,000 of a real asset (a machine or a bike, depending on the case).

Matt Franko said...

Ramanan,

"The Personal Saving Rate (PSR) is the fraction of personal income that is not consumed. Is is in the 4% range in the United States."

http://pages.stern.nyu.edu/~nroubini/bci/PersonalSavingRate.html

doesnt look like it has anything to do with a price increase of real assets... based on this specific context dispensed by Roubini here...

Can you see Roger's over-arching point about "context specific usage" of words/terms? Do you see this?

rsp,

Ramanan said...

Jose,

Yeah.

But the private sector net wealth is not EQUAL to the public debt to the penny. (My point)

Ramanan said...

"context specific usage"

Matt,

Can 1+2=4 in specific context?

Matt Franko said...

Ram,

No. And this is interesting because it demonstrates that mathematics may be (think about this) the ONLY way to discern contradiction within semantics...

as in semantics, the context can change (and often does!), while this is impossible in mathematics...

I look at you as a person who has "a foot in both camps" so to speak... while myself for sure (and perhaps Paul) am not semantic hardly at all... the words dont have much import with me (not saying "I am better" etc..)

that said looks like we humans as a group need BOTH math and semantics to maximize our function in this world...

rsp,

Jose Guilherme said...

Ramanan,

In other words, there is an economy beyond deficit spending.

There has to be one. Deficits are 5 or 6% of GDP and usually even less. The other 95% of the economy have to be accounted for.

The function of deficit spending is to provide new means of payment and net private savings in a growing economy. And to stabilize the business cycle.

It certainly is no magic recipe for the productivity, innovation and hard work necessary for having a successful economy on the supply side.

Deficits manage demand. No one has yet figured out what is the secret for managing supply in the best way possible.

Roger Erickson said...

@ Ramanan

"private sector net wealth is not EQUAL to the public debt to the penny. (My point)"

No one ever said it was. Private sector "savings" [financial savings, to be context specific] has to balance public sector "deficit" accounting.

Don't confuse REAL wealth/capabilities with fiat transaction accounting or liquidity.

You altered the accepted or at least intended semantics of the word "savings."

To usefully pursue your point, you'd have to also include growing net national capabilities on the issuer's side. If you try to tinker with one side of an equation but not the other, you're not helping either logic or the audiences that use it.

Roger Erickson said...

Why do academics so frequently get bogged down in dotting i's & crossing t's?

At the end of every day, social species still have a TEAM trying to make the most of their situation, with no time to lose. If you keep everyone close to ongoing operations, the unpredictable solution-permutations always surface pretty quickly. Recognizing them is a function of team communication properties, NOT individual predictions or individual convictions developed w/o adequately distributed feedback. No plan survives contact with reality. There's always another gotcha lurking, so the goal is to enlist everyone available to help detect the next thing YOU and/or WE are gonna stub toes on.

Natural selection ain't rocket science. It's simple feedback operations.

For a social unit to progress, it needs to drive interaction rates and limit social isolation. Otherwise, natural selection can't converge to adaptive patterns fast enough.

geerussell said...

You altered the accepted or at least intended semantics of the word "savings."

That happens consistently. Saving is a "trigger word" that will cause some readers to completely ignore everything that preceded it and substitute whatever concept they most strongly associate with the word even if it's something completely different.

Ramanan said...

"Don't confuse REAL wealth/capabilities with fiat transaction accounting or liquidity."

No I am not confusing.

Your original statement is not right because it tinkers with the definition of wealth to your own definition of wealth (which is financial assets only, presumably).

Ramanan said...

"You altered the accepted or at least intended semantics of the word "savings."

It is you who altered.

Nobody defines savings to only mean financial assets.

Roger Erickson said...

@Ramanan

"Your original statement is not right because it tinkers with the definition of wealth to your own definition of wealth (which is financial assets only, presumably)."

Just let it follow context Ram. If you accept the context-specific meaning of public deficit, private savings as "private, fiat-currency savings" follows, by context.

Except, maybe, for those who can't follow their own context-specific logic?

If we define terms, converging to agreement is trivial. Depends on whether that's what you want.

Roger Erickson said...

I'm gonna bow out here, Ramanan, and let your CPU cycles catch up with past testimony (see above).

WillORNG said...

Roger the currency is obsolete for revenue link comes up dangerous path when I click on it.

jeg3 said...

S=I+(S-I)
or
S-S=I-I
or
0=0
saying zero equals zero is nonsense.

Roger Erickson said...

"Roger the currency is obsolete for revenue link comes up dangerous path when I click on it."

Interesting! That link worked for a LONG time (and even early this morning). I'll change the link.

You can always find a work-around by googling "Beardsley Ruml TAXES FOR REVENUE ARE OBSOLETE"

Roger Erickson said...

"saying zero equals zero is nonsense"

You mean obvious - at least to most who bother to actually define terms?

So try to politely ignore all the orthodox economists who notice NEITHER how obvious it is NOR all the obvious implications?

May we all move along now? There are lots who haven't yet joined this choir.

Greg said...

Ramanan

It is certainly true to say, with the govt debt at 16 trillion that non govt sector savings can be valued at AT LEAST 16 trillion AND that the collective level of all savings which are purely govt bonds or cash is 16 trillion.

Yes there may be other things like stocks, or corporate bonds or even canoes (Nick Rowe likes to save canoes) that people are collecting but that doesnt change the above statement.

Ramanan said...
This comment has been removed by the author.
Ramanan said...
This comment has been removed by the author.
Ramanan said...

Greg,

"AT LEAST 16 trillion"

Yes not equal to ... to the penny.

Matt Franko said...

Here's a blog on the FOFA and NIPA definitions of "Savings Rate":

http://www.mymoneyblog.com/national-personal-savings-rate-definitions-nipa-vs-fofa.html

The semantics are a little different in each case...

rsp,

paul said...

"Yes not equal to ... to the penny."

NFA's existing in the non-government = ∑(G-T) over history …"to the penny", unless there are off-budget items that haven't been accounted for…and if they were accounted for, that would be "to the penny also".

If off-budget spending includes Intragovernmental Holdings, which were ultimately spent into the non-government, then National Debt = "debt to the penny" as the Treasury states.

Entirely consistent with the Sectoral Balances. This isn't rocket science…it's simple arithmetic.

Ramanan said...

Yes simple arithmetic.

The net wealth is the sum of net financial assets plus the stock of nonfinancial assets.

The net wealth is not equal to the government debt to the penny.

paul said...

"The net wealth is not equal to the government debt to the penny."

This is exactly where the argument goes circular over and over again.

MMT… Net (nominal) Savings is the sum of (G-T) over history…the total amount of net dollars and bonds held by the public over history.

MMT detractors…"The net wealth is not equal to the government debt to the penny."

MMT…"we never said that or implied it".

MMT detractors…"yes you did".

MMT…"you can't read".

MMT detractors…"your definintions are arsed".

MMT…"your math is arsed, and you just don't understand MMT".

MMT and it's use of the sectoral balances identity is NEVER referring to anything but net nominal dollars and bonds held by the public…NFA…in any discussion re monetary economics.

Real assets and wealth are in a separate universe, at best only indirectly related to…and dependent upon…the nominal relationships.

MMT detractors need to either figure out what MMT is and isn't or shut up about it.

We have more important things to do than argue with MMT detractor's that don't even bother to get the MMT definitions right.

geerussell said...

Yes simple arithmetic.

The net wealth is the sum of net financial assets plus the stock of nonfinancial assets.

The net wealth is not equal to the government debt to the penny.


Fortunately the original post is still there for review. Have another look. You don't see the word wealth. Or the phrase net wealth. You are arguing for precision on terminology that was never used.

Of course wealth can include real assets, not just financial but wealth wasn't brought up until you mentioned it.

Hence my comment about triggers...

Greg said...

"The net wealth is not equal to the government debt to the penny"

I really do wonder the exact quibble you have with Moslers common statement Ramanan. You are obviously a very bright guy so you have to realize that Mosler has never made the statement you quoted above. Now to people just visiting his site for the first time and neophytes to economics I can see where his statement could be misconstrued to be in fact saying;
"The only wealth/saving we have is the govt debt" but that is easily cleared up to someone who wants to ask Warren that one simple question.

I cant figure why you continue to argue against Warrens point

Surely you dont deny that every dollar spent by govt and not taxed away ends up as a dollar balance in the banking system. As they add up one can turn those dollar balances into Treasuries, and when someone does that they call it saving (one way of saving not the only) The collective level of Treasuries measures how many dollars we have accumulated as savings in Treasuries....... to the penny. It has to

It is not the entirety or even, arguably, the most important type of saving we do. But it is saving and people like them.

Joe said...

Wouldn't it more correct to say that pre-1933 the only difference in the monetary system was that the govt was only allowed to deficit spend on purchases of gold? Income has always equaled spending, deficits always have matched surpluses, etc. But now the govt can deficit spend on anything.

Ramanan said...

Greg,

"I cant figure why you continue to argue against Warrens point"

Did I quote Warren here? I was quoting the author of this post till now.

"It is not the entirety or even, arguably, the most important type of saving we do. But it is saving and people like them."

Yes but a slightly different matter.

Paul,

Stop pontificating. Learn some accounting.

paul said...

"Stop pontificating. Learn some accounting."

Ramanan, stop pontificating. Learn some MMT.

Ramanan said...

Ha!.

Here is your source of confusion. Amazingly it is quite common.

The nominal vs real distinction is quite different to financial versus financial assets.

You got confused by the usage of real in "real assets".

This was prevalent during the saving net saving debate and seems to not have gone.

paul said...

With MMT we only speak of nfa's created by the government and spent into the economy.

In our world there are dollars and bonds and nothing else. There is no other elements to consider, so there is no place for non-financial "savings" or real assets or anything else.

Those things do not exist in the MMT universe.

Why is that so hard to grasp?

John Zelnicker said...

Ramanan, Paul, Greg, geerussell, and Roger -- Maybe it would make it easier to avoid confusion if we used the term Net FIAT Assets.

y said...

Bob, I'd just like to say that almost everything you write is garbage. Not everything, but almost everything.

y said...
This comment has been removed by the author.
y said...

"Those things do not exist in the MMT universe."

That's not correct Paul.

y said...

Bob, I see that no one voted for you to join the Michigan supreme court. That is very good news.

paul said...

""Those things do not exist in the MMT universe."

That's not correct Paul."
-y

Y, it would be helpful if you could include the why part of your disagreement.

If you mean literally, then yes, I agree…another semantic interlude…

…but mathematically…no.

The sectoral balances identity wrt MMT is laser-focused on the number of net dollars in the system. Period.

When counting the number of marbles in a jar we only count marbles.

Any further relationship between the level of dollars and real assets or value is based on inference…there is no discernable mathematical relationship between real and nominal.

y said...

You should probably clarify exactly what you mean when making your statements.

Focusing on real outcomes and real constraints is precisely what MMT is supposed to be about.

paul said...

"Focusing on real outcomes and real constraints is precisely what MMT is supposed to be about." - y

You are responding to an argument no one is making. My point was simply that when counting net dollars in the system keeping track of real assets is not helpful. It is not relevant. It takes a major lapse in logic to argue for it's inclusion.

MMT focuses on real outcomes by examining the flow of net dollars in a closed system (aggregate) environment. It is a mathematical analysis pure and simple…an analysis that is based on nothing more than addition and subtraction of dollars and bonds within the container defined as the non-government.

How to apply MMT isn't the subject of the original post or the basis of the disagreement.

The arithmetic is being questioned, as is what aggregate MMT is examining. Parameters like "real assets" and their "value" are not part of the equation, so…they can't be included in the analysis.

The S/B equation tracks aggregate net dollar financial assets in the U.S.. If applied to the UK it would track net pounds, Japan net yen, etc.,etc.

I didn't write all of this previously because I didn't think it was necessary. I still don't.

Matt Franko said...

"MT focuses on real outcomes by examining the flow of net dollars in a closed system (aggregate) environment."

Right if those flows are not managed and administered correctly, all citizens cannot conduct real exchange as the law requires settlement in USD balances.... no balances: no exchange.

rsp,

Roger Erickson said...

Face it, there are many people who are semantically challenged, and cannot adroitly follow context-specific use of words with multiple, context-specific meanings. To be fair, that's exactly what happens when we spawn growing numbers of people who are, by necessity, increasingly narrowly trained relative to the increasing breadth of varying contexts we try to maintain an agile, small-vocabulary language to.

So, to make the statement Ramanan is confused about literally dripping with context specificity, I changed the word "savings" to currency-savings in several places.

Let's see if this relieves the bee in his semantic bonnet.

ps: Ask any linguistics PhD. This phenomenon is exactly why all ancient languages were so precise. Their vocabularies tended to be highly tuned to their exact environment or context. With scaling human populations tasked with more rapidly interleaved contexts, we end up with semi-pidgin or market languages like English, and the phenomenon of increasingly micro-context-specific word meanings.

That's why the 1st thing reasonable people do is accurately define their terms. Those that refuse to do so usually want to extend an inane argument for some ulterior motive.

Maybe Ramanan is on the payroll of what's left of the British East India Company? Maybe he gets paid for every extra hour he keeps the MMT community distracted with semantics. Suggested solution: contact the India Linguistics Society and report Ramanan as a closet Babu, and a threat to national security. Maybe they'll "caste" out the semantic demon! :)

geerussell said...

This is how you slay a semantic monster:

XKCD rocket science in plain english.

MMT would probably require half the words and use a simpler diagram.

Roger Erickson said...

@geerussell "This is how you slay a semantic monster:"

Thanks, GR. Classic.

No simple solution, however, no matter how concise, survives contact with the next generation trained on yet another "new math".

There are people who think "context" means an IM thumbed from prison.

y said...

I don't think Ramanan's argument is pointless but it doesn't add anything new - all of this has been covered before. I was just surprised by your statement Paul, which seemed bizarre:

"In our world there are dollars and bonds and nothing else. There is no other elements to consider, so there is no place for non-financial "savings" or real assets or anything else.

Those things do not exist in the MMT universe."

Um?

paul said...

Y, did you read my comment at 11/12/2012 @ 11:30 AM?

Did that not clarify it?

The quote of mine you provided in your last comment is posted out of context...I was referring to the MMT use of the sectoral balances identity, you make it appear as if I made the statement out of the blue.

The objects of interest that exist within the context of the S/B in the MMT framework are net dollar financial assets.

Are you disputing that?

paul said...

"I don't think Ramanan's argument is pointless but it doesn't add anything new"

So, what was his argument again? I still haven't figured it out.

DAB said...

Paul you are being suckered in... of nearly all people on the planet Ramanan is one of the few that you can bet your life knows exactly the context of your post and the equation identity.

We are talking NFA here and only NFA here and everyone knows it. What anyone stating anything different has to gain I'm not sure...

paul said...

DAB,

I'm certainly puzzled about all the fuss. The idea is not complicated.

The only thing I can think of that might be behind it is it's so simple they are rejecting the idea because...it can't be that simple.

Reminds me of that quote by John Kenneth Galbraith.

Matt Franko said...

wealth = savings ? rsp,

paul said...

"the process by which money is created is so simple it repels the mind." - John Kenneth Galbraith

paul said...

"wealth = savings ?"

That is what Ram claims we were saying, which we weren't.

From the beginning we have only claimed that Net Savings = NFA = ∑(G-T) over history.

Of course that alone is a very big deal.