Thursday, October 17, 2013

Brian Romanchuk — Some Further Comments On My “Debt Ceiling” Model (Wonkish)

I just want to make some additional comments on the Stock-Flow Consistent (SFC) model for a hard debt ceiling I introduced in this recent article. (To be clear, the model dynamics are based on the models in the text "Monetary Economics" by Wynne Godley and Marc Lavoie. But since I am using the "beta version" of my own modelling framework, any modelling errors are my responsibility.)

As was pointed out in the comment by Ralph Musgrave, there are negative connotations associated with the word “debt”; hence the political appeal of reducing government debt. But one of the basic principles of Stock-Flow Consistent modelling (and hence Modern Monetary Theory (MMT)) is that financial instruments end up on two entities’ balance sheets. Government debt is the flip side to the “net financial assets” of the non-government sector; and so attempts to reduce government debt if the private sector is attempting to increase savings is likely to end badly.
Bond Economics
Some Further Comments On My “Debt Ceiling” Model (Wonkish)
Brian Romanchuk

3 comments:

Matt Franko said...

Looks like Brian here is calling BS on "S=I"....

This from the wiki on 'Savings Identity":

http://en.wikipedia.org/wiki/Savings_identity

"Adam Smith notes this in The Wealth of Nations and it figures into the question of general equilibrium and the general glut controversy. In the general equilibrium model savings must equal investment for the economy to clear.[1] The economy grows as division of labor increases productivity of laborers. This increased productivity in laborers creates a surplus that will be split between capitalists’ expenditure on goods for themselves and investment in other capital"

Sounds like Kalecki's profits equation where he assumes 'workers do not save'... which is an ABSURD assumption in our current system as Brian is pointing out here...

It looks to me that "S=I" only holds if workers do not save and you have to assume a "general equilibrium" framework...

rsp,

Tom Hickey said...

S always equals I (across sectors) even if workers save. I includes inventory and if income recipients save, then if another sector doesn't offset, unplanned inventory builds and firms cut investment. Then, without offset, income recipients must save less, spend less (lower living standard), borrow, or dip into savings to maintain out put at full employment.

What generally happens if other sectors don't offset is that private borrowing increases, which is unsustainable over time without an increase in income, or else economic contraction develops.

Brian Romanchuk said...

S=I is an identity; my complaint is the implications that are usually drawn (higher personal savings means more real investment).

In the context of my model, personal savings turned into inventory investment, which was unwanted, and reduced future growth as production was cut. (if you change the model, other things could happen. If people purchase less services, which are not held in inventory, profits in the service sector would fall, reducing business saving,

I think circuit (Fractional Reserve Barking) did a good article on this; I did not find it when I searched quickly for it yesterday.