Thursday, February 5, 2015

Bill: A primary fiscal deficit Never ever?

Bill calls bullshit on Yanis here.  Pretty gutsy and powerful imo.

I only have one problem with it here Bill says:
What worries me about Greece at the moment is that we are seeing a trend around the world where politicians over promise (or lie straight out)... 
An understanding of macroeconomics will tell you (and I know the Finance Minister in question knows all this) that a government cannot guarantee to never run a primary fiscal deficit forever unless they are prepared to allow for large swings in unemployment, something I thought the new Greek government was averse to, and it is that aversion, which defines their popular appeal.
Bold emphasis mine. The "Finance Minister" is not lying.  The Finance Minister does NOT know all of this.

The Finance Minister does NOT possess the cognitive ability to know this in the way Bill asserts he does, sorry.

He is not lying or over-promising, he simply does not have an adequate understanding of the complex systems he finds himself now in administration of.

Just like the people he is up against.


sths said...

Hi Matt,

Can you give a more detailed breakdown of what you said in this post?

I know this is the wrong post to ask this question but I'd really love to be able to get my head wrapped around what you are saying here.

Ignacio said...

Matt idk if he knows or not, but I know the political appeal of talking the truth right now is close to zero. I also know that YV may know, but other 'technocrats' in the government and Greek institutions do not know, as neither do the jerks in European institutions.

But coming back to my first phrase: we are in a truly barbarian world, Matt. I've spent half an hour reading comments in some Spanish mainstream internet economic media this morning... Now, I know you don't have to take these comments (and the support they get from readers) very seriously, most probably made by propagandists and paid people, or as a reflection of society etc. but even if those nauseating comments are a shadow of reflection of the low impulses in society, I can tell this system is not worth saving, a single bit, no matter how strong MMT'ers want to believe. And is not racism what I'm talking about in case you are wondering, but pure class warfare and outright bigot nationalism. Is like we have built a time machine to 1910's. Awful.

Not only is not worth saving, we would be more successful preaching to a wall than to those barbarians. In a link below, posted by Tom, the title of the article asks 'Is the working class now neoliberal too?' and I can bluntly answer: YES.

The elites and their pundits, the economic orthodoxy, have been so successful at brainwashing the population with their non-sense, that we are entering a really dark place, which will be dominated by primitive instincts and demagogy. I'm having a hard time even convincing my educated relatives, after years of talking about the situation and trying to explain my best to them (probably most of you had similar experiences) the realities of the system, how hard would it be to break the ocean of cognitive dissonances and defence mechanisms plaguing the minds of the people?

The same establishment that created the monster, is now even more moderate than the monster they have created, a lot of economists may be more 'liberal' or 'leftists' than the same population they have brainwashed during decades. But I do not see a Keynes in sight, or someone with enough willpower and charisma to stop this insanity. We are governed by mediocre leaders and incompetent technocrats, and every 'timid' effort made even by part of the scared establishment (because then there is the reckless part) has to be tamed to not offend anyone with the freaking TRUTH. Is a strange dystopian world this Orwellian reality we live in.

And is also a dangerous game, when you bring low life sentiments to push your economic agenda, when you 'moralize' discourse. Rationality is dropped, and you end up in a complete. The same establishment who created the nightmare now will have to save it, and I do not seem as capable, or smart enough, not even interested (because this may be the end-game they wanted to achieve?).

Extremely gloomy, I know, but is not getting better IMO.


Dan Kervick said...

Bill says:

In notation this is given as

(G – T) = (S – I) – (X – M)

Which in English says for income to be stable, the fiscal deficit will equal the excess of saving over investment (which drains domestic demand) minus the excess of exports over imports (which adds to demand).

But the equation makes no reference, implicit or explicit, to the stability of income. It is a theorem that follows from the national accounting axioms. It is true in every year, and in every fiscal period without exception. If national income goes up, it remains true. If national income goes down, it remains true. If national income stays the same, it is still true.

Unknown said...


WRT the sectoral balances, I cant tell you how many times mainstreamers defy the equation with their promises and projections. Which I assume is what Bill is talking about. Just because the sectoral balances are implicit for us, doesnt mean they are for the mainstream. So Im not sure what you're complaining about. The sectoral balances serve as a parameter that cant be breached. Its like the speed of light, no physicist would be taken seriously if they made statements inconsistent with the physical laws of nature. The sectoral balances are a law of economics in a sense, and you shouldnt be taken seriously if you come out and say:

"we are going to run a govt surplus, a private surplus and a foreign surplus"

Matt Franko said...

st hs,

Still working on it caveat emptor, something like this:

Japanese Multinational Toyota

govt of Japan implements austerity

Toyota domestic Japan sales down

Toyota decides to increase volume in US in response by lowering prices in USDs in USA market

$2500 rebate on $25k Camry (10% price reduction)

Has the effect of lowering the price in USD for ALL Camry's in the US including those previously financed...

Creates loan asset impairment for banks as the collateral value of the financed autos is falling...

They need to shore up the asset side of the US bank balance sheets in response to remain in compliance... as near 100% of capital is always employed by banks..

They do this by "selling Yen buying USDs" (simplifying) and then positioning these new USDs on US bank balance sheets... sellers of these USDs demand MORE Yen and the exchange rate is seen to go down...

system stabilizes...

So the changes in the real trade terms (autos/components) implemented by the non-bank firms is what is causal when we see the big moves in the forex.... the firms are reducing their real terms on a price basis (hoping to drive volume...) and then this results in the change in the exchange rate in the banking system...

So we should be able to follow trade terms and then see a response in the forex ... rsp

Tom Hickey said...

Unpacking what Auburn said, the accounting identities and SFC modeling are boundary conditions. Everything possible in that system has to take place within the logical space of the boundaries, which in this case is accounting space defined by the rules of double-entry and stock-flow consistency.

The specific boundaries are invariant unless the accounting rules are changed, which is a legal-regulatory matter in contemporary society, although firms have some choice within the boundaries, e.g., LIFO or FIFO.

It's possible to game the system to some degree, but not very much, since that is what double-entry accounting is designed to prevent, as well as outright fraud and embezzlement, which are crimes in addition to being illegal moves.

But, as Auburn further says, most people and many decision makers don't have a good conception of either double entry accounting or SFC. But without it, capitalism cannot work, as we see amply demonstrated.

Keynes suggested this and Post Keynesians have worked it out in considerable detail, so that is no longer any excuse for the travesty that is conventional economics and policymaking based on it.

Again, we come back to the question as to whether this is a result of ignorance, culpable since this is now understood, or intentionally gaming the system based on interests.

I have no trouble explaining MMT to friends who are accountants, finance people, scientists and engineers. In fact, they usually react like why are you telling me the obvious.

Dan Kervick said...

Auburn, I'm not complaining about anything other than the fact that Bill didn't describe what the equation says accurately. The equation doesn't say that for income to be stable, the fiscal deficit must equal the excess of saving over investment.

What you and Tom are running on about I have no idea.

Tom Hickey said...

Bill I wonder how any Finance Minister who aims to create full employment and expand equity and undo years of deliberately imposed neo-liberal hardship can claim his nation will “Never, never, never!” record a primary fiscal deficit again. That comment has to be dismissed as political rhetoric rather than an expression of a serious evaluation of reality. What worries me about Greece at the moment is that we are seeing a trend around the world where politicians over promise (or lie straight out) about their intentions to apparently appease the multitude of vested interests then proceed to do what they like.

Unfortunately, that's the way politics is played in the current world and YV is making choices now as a politician and negotiator rather than an economist. so are the eurocrats, even though some of them at least, may know better economically.

Tom Hickey said...

Dan, I see you haven't commented at Bill's on this yet. Perhaps he has something to say about it.

Unknown said...

"The equation doesn't say that for income to be stable, the fiscal deficit must equal the excess of saving over investment."

Not statically as you are analysing it,

But dynamically over time it does do.

You wouldn't add much to the clarity on a blog by wrapping the thing in integral characters.

Perhaps time to stop being so picky? You know what Bill is getting at - trying to reduce one number just causes a feedback loop via the others because everything has to balance in the end.

peterc said...

"Bill says:

In notation this is given as

(G – T) = (S – I) – (X – M)

Which in English says for income to be stable, the fiscal deficit will equal the excess of saving over investment (which drains domestic demand) minus the excess of exports over imports (which adds to demand)."

One way of viewing this statement is in terms of non-government intentions (plans, desires).

At the current level of income, the saving and spending propensities of the domestic private sector and foreigners imply a desired level of (S - I) and (M - X). Unless the government deficit happens to match the sum of those two desired surpluses, income will change.

The sectoral balances will still sum to zero, but at a different level of income.

peterc said...

I can relate to Ignacio's perception above of a barbarian world gone mad and possibly beyond salvaging. I seem to bounce back and forth between such gloom and bursts of optimism.

I'm pretty sure it's not bipolar disorder. It might be projection.

Ken said...

I just asked this over there, but I'll ask it here to ... looking at Bill's graph:

How did they manage to sustain a negative external balance for so long? For example, during the Drachma era …. does this imply leakage of Drachma abroad …. foreigners wanted to hold them? For example, that explains why the US can run a consistent external deficit …. rest of the world wants to hold dollars. Having a hard time seeing that for Greece.

Or is it all explained by borrowing abroad either in foreign currencies, or in recent times, Euros?

Tom Hickey said...

The euro (new DM really) made it possible for awhile but it was not sustainable under the EZ arrangements.

But it could work like the USD works for the US states. That would mean changing existing arrangements or interpreting the existing arrangements more loosely, which the North (Germany) is not wont to do at this point.