An economics, investment, trading and policy blog with a focus on Modern Monetary Theory (MMT). We seek the truth, avoid the mainstream and are virulently anti-neoliberalism.
On central banks "printing money" you say: "There's an asset that's created and a liability of equal value on both sides, for the lender and for the borrower" but "what the central bank cannot do is just give you money in exchange for nothing. It cannot just credit your bank account without getting something of equal or greater value in return. The government can do that but not the central bank."
Ordinarily this makes perfect sense, but it doesn't explain the Fed's role since the 2008 crisis. You do go on to briefly mention that a central bank can buy low quality non-performing assets but that this is very rare occurrence, and that I think is the absolutely crucial issue. Now, as far as I can gather:
1. Randall Wray, if I remember correctly, puts the Fed's bail out of Wall Street at about $29 trillion. The Fed took the literally worthless financial assets of the financial sector on to its balance sheet and in return "printed" $29 trillion, an amount far in excess of the so-called assets it was acquiring. In fact, the assets the Fed were acquiring were not only useless, they were toxic: no one wanted to hold them and no one in their right mind would acquire them. So the assets and the liabilities don't match at all. The central bank is not "getting something of equal or greater value" but worthless non-performing assets.
2. The government in fact did very little (TARP, for example) and that the Fed did all the heavy lifting because of a dysfunctional congress. So contrary to what you said, it seems that it was the Fed, not the government (by which I take you to mean the Treasury) which credited banks with money for assets that were worthless and certainly not "of equal or greater value".
The only way to reconcile the Fed's actions since 2008 is that a central bank has the authority to value an asset at whatever astronomically inflated figure it wants to and that it in fact has de facto power of a treasury to just give money away. So with respect to what you said in your video, the exact opposite seems to be the case!
The toxic financial assets the Fed swapped for reserves were all assets with maturities. The Fed just holds them to maturity. The reserves are held by the banks and don't go anywhere. Remember, banks do not lend reserves.
"The Fed took the literally worthless financial assets of the financial sector"
John they bought government securities they are hardly worthless they are 100% guaranteed by the government...
"Randall Wray, if I remember correctly, puts the Fed's bail out of Wall Street at about $29 trillion."
this is an absurd/ideologically biased claim by him they rolled over $1T in assets for 29 months this is not 29B... if Ive refinanced my 250k mortgage 4 times, Wray thinks I have borrowed 1M.... this comes from all the "bankster" schtick rhetoric that some on left are apt to use, it doesn't help... remember Wray IS still an economist from the academe so you have to take everything with a grain of salt...
Crisis was due to system liability flow being allowed to exceed proper govt net spending flow to non-govt, post the system malfunction in 2088, between 2008 and 2009, govt net spending increased by approx. 1T from about 3.2T to 4.2T while liability flow was decreased and then the system stabilized as govt spending flow was increased to a level that was adequate to support the allowed liability flow ...Fed provided 'lender of last resort' during this stabilization period which is THEIR F-ING JOB...
Also within the context of Mike's presentation here, our readers should read this too:
https://en.wikipedia.org/wiki/Factoring_(finance)
The Fed's loans are in the form of a "Factoring", this is how they obtain their required operating funds ie via the "fee paid to the factor"... amounts in excess of these fees are credited to the US Treasury account...
It's just wrong to say that no one would ever have a dollar if the treasury didn't spend them into the economy.
To see this clearly, imagine that the government and treasury decided to start operating on a pay-go basis, never issuing a single debt instrument and spending only from incoming tax revenues.
Since there would no longer be any treasury debt, there would no longer be any open market operations for the Fed to conduct involving government debt. So let's imagine that the Fed conducts monetary policy from that point forward entirely through discount window loans.
The Fed could still ensure that the monetary supply continued to grow, commensurate with overall economic growth, in a manner sufficient to supply the ongoing monetary needs of the general public and the banking system. It could even do this while maintaining a yearly central bank operating profit. In effect, it would only need to lend amounts each year to the member banks slightly larger than the amount it loaned the year before. The increasing amounts loaned into the member banking system would always be sufficient for the banks to pay off the previous year's loans. The MB supply would grow continuously. And that means the banks would be free to increase the M2 supply continuously while still meeting their payment obligations.
This also means that at any given time, the member banks would have an aggregate liability to the central bank that is slightly greater than the aggregate central bank liability to the member banks (that is, the members' aggregate reserve account deposits). And we can plausibly imagine that the general non-banking public and business sector always similarly owes slightly more to the member banks than the member banks owe to the public (loans slightly exceed deposits).
Does this mean that the private sector, and more specifically the non-bank public, can't save each year, and realize increasing wealth? Of course not. Because in addition to all of this banking activity, there is a real economy engaged in real investment and wealth creation. Real capital assets are being created each year in excess of the real assets that are lost to depreciation. People own those assets, either directly or by virtue of purchasing equity instruments that give them an ownership stake in the assets that are in turn owned by companies. So despite the fact that the public always has an aggregate liability to the banks slightly in excess of the aggregate liability of the banks to the public, the public possesses positive equity so long as its net holdings of real wealth always exceeds the size of its net debt to the banks.
Another way the central bank could conduct monetary policy is by buying and selling high quality equities on an ongoing basis. If it buys equities that are appreciating in value, it could always sell the equity back for slightly more than it purchased it. Again, the central bank would realize positive annual income and a growing positive equity position on its balance sheet, even while the money supply continued to grow continuously.
Remember, all of this is going on while our hypothetical treasury funds its expenditures entirely from taxes. The annual growth in the money supply does not at all depend on treasury spending. And that is still true if the treasury starts to issue and sell debt instruments again, debt that works just like private sector debt. The treasury could sell securities and fund the interests and principal payments on those securities by a combination of taxes and additional securities sales. If the central bank wants, it could add government security purchases and sales to its portfolio operations, adding government bonds to the discount window loans and equities that are already in the portfolio.
There are excellent reasons for government spending: the government can and should carry out many economic operations the private sector simply can't or shouldn't handle. And there are also excellent reasons for the government to run deficits: deficit spending can channel inert financial savings into useful spending. But the idea that the government needs to spend to supply the private sector with its growing numbers of dollars is wildly inaccurate. The supply of dollars grows as a result of the interaction between bank lending and central bank monetary policy. The treasury does not issue new dollars. It only issues debt instruments that it trades for dollars.
Matt is right about the Felkerson research and Wray's comments on it. If I loan you X dollars each day at 0% interest, and each day you use the loan to pay off the previous day's loan, and then at the end of 100 days you pay back the $X you owe me, then while I have in one sense "loaned you 100 times X dollars", in a more accurate sense I never had more than an $X credit exposure, and you never had more than an $X liability. And at the end of the process we are even up.
http://heteconomist.com/government-spending-or-lending-logically-precedes-tax-revenue/ Dan see this. The government "needs" to spend to supply NFA (net financial assets.)
Right, it is stocks and flows. Thought experiment: There is only £1 in existence, you owe me £100, can you pay me it back? On the face of it looks like no. But what happens is you pay £1, then I pay you £1 for doing something, pay £1 back, etc. "The supply of dollars grows as a result of the interaction between bank lending and central bank monetary policy. " In the UK we don't have this nonsense. BoE is clearly subsidiary of the Treasury. All up to the Treasury. I also guess it depends on what you mean by "dollars" or "money supply"? Bank IOUs (demand and time deposits), currency and reserves and cash. What about other IOUs?
"Real capital assets are being created each year in excess of the real assets that are lost to depreciation. People own those assets, either directly or by virtue of purchasing equity instruments that give them an ownership " Yes people can own real assets. They cannot accumulate net financial assets without government deficit spending. Since financial assets = financial liabilities the value of real assets will be driven (in extreme) to zero in a "debt deflation." Always important to distinguish between real and financial.
All the emergency lending the Fed did, whatever you want the number to be, were LOANS that were an ASSET to the Fed. Quantitative Easing was the outright PURCHASE of Treasury Securities through issuance of reserves, which are LIABILITIES to the Fed. I'm amazed at how many economists and pundits don't get this.
and I agree with Matt that it is precisely the Fed's job to provide emergency liquidity during crisis. Moral hazard issues are supposed to be dealt with BEFORE any crisis can occur, through tough regulation and supervision. Unfortunately, some progressives have taken frustration out on the Fed and Dodd-Frank had some provisions which curtailed the ability of the Fed to lend to certain types of institutions. I get the anger, but we shouldn't weaken our central banks because of previous regulatory failure.
You didn't. You just moved the process to the other half of the government sector by obfuscation.
It's not obfuscation.
First, I'm perfectly happy for the central bank to be recognized as part of the government, and so for it to be recognized in that sense that the private sector's supply of dollars can't grow if the government doesn't supply them.
But what Mike seemed to claim, and others have claimed many times before, is that the treasury needs to deficit spend in order for new dollars to get into the economy. And that is mistaken.
Also, the Fed's supply of adequate liquidity to the economy, and its ability to ensure a continuing growth in the money supply to accompany real economic growth, does not depend on the Fed "spending" dollars. It can simply loan all of the needed dollars, expanding its balance sheet gradually as the economy grows, adding both more loan assets and reserve account liabilities on the balance sheet over time. It could spend dollars into the economy instead by just buying assets outright, but that is not an absolute necessity.
Also, I purposely avoided reliance the vague and spurious concept of "net financial assets" which accompanies a lot of MMT explanations of things. An economy can save and grow even if the private sector's net financial debt to the central bank always exceeds the net financial debt of the central bank to the private sector, and even if the treasury never runs a deficit at all.
You had those two libertarian ideologue free-market-fuckheads Bernanke and Paulson at the controls... forget it!
I think Paulson is on record as saying he was content to let Lehman just fail.... these are incompetent/unqualified libertarian morons who we turn things over to regulate.... we have no chance with these libertarian people in these regulatory positions...
"An economy can save and grow even if the private sector's net financial debt to the central bank always exceeds the net financial debt of the central bank to the private sector, and even if the treasury never runs a deficit at all." Theoretically yes... But That was the standard thinking of the surplus obsessed Howard government in Australia. The problem is it doesn't work, as 2008 has shown. The private sector is revenue constrained, unlike the government. They can't "live beyond their means" forever. The credit bubble has been very damaging to households and effects continue today. Ideally you want to ban bank lending for anything other than capital development of the economy.
I don't think the difference between bailout loans and QE purchases makes all that much difference.
When a bank makes a loan, they are in effect purchasing the borrower's promissory note, which then become an asset of the bank. The bank incurs a liability - initially in the form of an increased account balance for the depositor - and in return they get an asset: the depositor's promise to pay the bank an amount equal to that liability plus interest. When the note is paid off, they have made a profit equal to the interest.
If they instead buy another kind of asset from a depositor - like an MBS - via a QE program, it is more or less the same thing: they increase the depositor's account balance, and in return get an asset from the purchase. But instead of the asset consisting of the depositor's own promise; it consists of someone else's financial promises that the depositor happened to own. If the MBS performs, then again the bank can profit. In what amout depends on how much they paid and how well the asset performs.
One thing the public should have focused on is not the size of bailout loans and/or asset purchases, but whether the Fed purchased non-performing assets which led to Fed income losses, and consequent losses to the treasury through reduced Fed distributions to the treasury. That certainly seems not to be the case, given that Fed distributions to the Treasury dramatically increased since the crisis.
But another thing people might want to look into is whether the Fed income statements and distributions to the Treasury involve some kind of spurious and obscure accounting that misrepresents the performance of some of the assets they purchased. In other words, maybe the Fed just printed dollars to buy junky, non-performing assets, and printed more dollars to send to the treasury, and is just pretending via some fancy footloose bookkeeping that the latter corresponded to income derived from the former. It was all a big accounting conspiracy. OK, so show me the accounting. But more important - if it was true, big deal! The Fed was fighting a deflationary environment. So if it actually just printed money and gave some of it away, in itself that's great.
But now we get to the nub of the issue: assuming the accounting conspiracy story is true, why didn't the Fed fight economic contraction, unemployment and deflation by giving money away to all of the regular non-bank businesses and households that were in the soup? Where was their bailout? That's what people should have been whining about instead of whining about the Fed's purchases of assets.
They don't have to live beyond their means forever. The fact that private sector entities have revenue constraints doesn't mean the private sector can't grow in a healthy and sustainable way without building up a lot of excessive and bad debt. The explosion of private sector debt was a consequence of bad and overly easy credit policies combined with the harmful effects of the upward redistribution of income flows and assets that took place across the English-speaking world.
But in any case, this just comes back to my point about the real reason for government deficit spending: it is a way of funding present spending with claims on future prosperity, and channeling an economy's existing assets out of the hands of risk averse savers and hoarders with large surpluses, and employing those assets in building national wealth.
Because that's what it was created to do: prevent and counteract recessions and depressions by advancing credit when regular banks won't or can't.
I agree that is not enough. If the private sector is too fearful, confused or uncoordinated to consume and invest its resources at the level they need to, then the government should be more assertive and do it for them. This has nothing fundamentally to do with monetary phenomena, but is a matter of social organization.
I get the anger, but we shouldn't weaken our central banks because of previous regulatory failure.
Back in the days when I used to have pieces run at Naked Capitalism, I was constantly having to battle the semi-Paultardian, populist Zero Hedge refugees who hung out there and were all about the bailouts and the Evil Fed. It's kind of a religion with them.
I get the lender of last resort, but why should central banks do anything else? Use fiscal policy. "Fed purchased non-performing assets which led to Fed income losses," This is the point. Why?
"funding present spending with claims on future prosperity" What? You mean they fund by spending MONEY. Or are you repeating "we'll have to pay off the debt, burden on future generations"... right wing garbage.
That's not the point. That's a conspiracy theory many people keep defending, but there is no evidence for it. The Fed has been making oodles and boodles of money from its portfolio, not losing money.
The Fed can't "make" or "lose" money. It's the flipping Fed!
The Fed has an income statement. It has expenses, mainly interest expense, and also has incoming revenues that come from the performance of the assets it holds in its portfolio, realized gains on sales of assets, etc. After paying statutorily required dividends to the member banks in proportion to their paid-in capital, and subtracting its operating expenses, the rest is profit that, as a matter of long-standing Fed policy, is distributed to the US treasury for the purposes of treasury debt reduction.
The bank bailout consisted in making loans and buying assets from those banks. Although there might have been losses on some of those transactions, in the net they were immensely profitable to the Fed, which is seen by the fact that they have been distributing tens of billions of dollars annually to the treasury - up actually to $100 billion last year.
To make my it simple, suppose Goldman is holding MBS securities whose market value has dropped precipitously to $1 billion from a pre-crisis value of $100 billion. Did the Fed buy the MBS at the $1 billion market value or the pre-crisis value of $100 billion? The only way for the Fed to clean up Goldman's balance sheet it to do the latter, right? Which means that the Fed can decide that an asset on its own balance sheet is worth whatever it wants to in order to make the accounting equation hold.
Chewitup: "The toxic financial assets the Fed swapped for reserves were all assets with maturities. The Fed just holds them to maturity."
The toxic assets (like mortgage backed securities) will eventually return to their true worth over time, but at the time they were bought by the Fed were they bought at the market rate (pennies on the dollar) or were they bought at an inflated value that would clean up the commercial and investments banks balance sheets? See the example at the top of the post.
An essentially bankrupt financial institution gains nothing by selling its toxic assets at the market rate - it'll still go bankrupt. What Wall Street needed was for the Fed to buy the toxic assets at something like the face value, a value far in excess of their market rate. Which means that the assets do *not* equal the liabilities, unless the Fed can claim that assets that are pennies on the market are in fact worth a full dollar.
Matt: "John they bought government securities they are hardly worthless they are 100% guaranteed by the government."
The Fed also bought plenty of worthless mortgage backed securities not guaranteed by the government. Did it buy them at the market rate, or an inflated rate to clean up the banks balance sheets? However, on the question of government securities, even if backed by the government, did their price stay unchanged during the crisis? Surely there was enough selling during the crisis to drive treasuries down. Now, if the price did change, did the Fed buy them at the market rate or an inflated rate? Again, see the example at the top of the post.
Matt and Chewitup, I'm not arguing against the Fed's actions and I understand that it didn't cost the Fed a single penny to bail out the financial sector. My question and confusion concerns the alleged equality of the assets and liabilities.
The Fed can have Negative Capital indefinitely. The Fed cannot go broke.
Correct. It's not a matter of the Fed going broke. It can't go broke. But when it has negative income in a given year, it sends no money to the Treasury in that year, but books the loss as a deferred asset. And then in subsequent years, after it returns to positive net income, it continues to stiff the Treasury until it has realized the entire amount of the accumulated deferred asset. For example, it could go like this:
Year 1
Loss: $10 billion Total Deferred Asset: $10 billion Distribution to the Treasury $0
Year 2
Loss: $10 billion Total Deferred Asset: $20 billion Distribution to the Treasury $0
Year 3
Loss: $10 billion Total Deferred Asset: $30 billion Distribution to the Treasury $0
Year 4
Profit: $10 billion Total Deferred Asset: $20 billion Distribution to the Treasury $0
Year 5
Profit: $10 billion Total Deferred Asset: $10 billion Distribution to the Treasury $0
Year 6
Profit: $10 billion Total Deferred Asset: $0 Distribution to the Treasury $0
Year 7
Profit: $10 billion Total Deferred Asset: $0 Distribution to the Treasury $10
In years 4, 5 and 6, even though the Fed books a profit, the Treasury gets nothing. Since the existence of a Fed profit in a given year roughly means that more is being paid into the Fed in that year than the Fed pays out, then those profits act functionally like a tax on the non-Fed sector of the economy. So the non-distribution of the annual $10 billion profits in years 4,5 and 6 is functionally the same as using a tax to restore the "loan" the Fed made to the private sector in years 1, 2 and 3.
So the accounting equation holds by the Fed booking negative income as a deferred asset on its balance sheet?
Obviously it isn't playing funny buggers (creative accounting) with its own balance sheet, and the Fed being the Fed it can book negative income as a deferred asset until the heat death of the universe, or presumably even longer.
You said: "To make my it simple, suppose Goldman is holding MBS securities whose market value has dropped precipitously to $1 billion from a pre-crisis value of $100 billion. Did the Fed buy the MBS at the $1 billion market value or the pre-crisis value of $100 billion? The only way for the Fed to clean up Goldman's balance sheet it to do the latter, right? Which means that the Fed can decide that an asset on its own balance sheet is worth whatever it wants to in order to make the accounting equation hold.
"The toxic assets (like mortgage backed securities) will eventually return to their true worth over time, but at the time they were bought by the Fed were they bought at the market rate (pennies on the dollar) or were they bought at an inflated value that would clean up the commercial and investments banks balance sheets? See the example at the top of the post."
"The Fed also bought plenty of worthless mortgage backed securities not guaranteed by the government. Did it buy them at the market rate, or an inflated rate to clean up the banks balance sheets? However, on the question of government securities, even if backed by the government, did their price stay unchanged during the crisis? Surely there was enough selling during the crisis to drive treasuries down. Now, if the price did change, did the Fed buy them at the market rate or an inflated rate? Again, see the example at the top of the post."
COMMENTS: The Fed can only buy securities issued by other federal government entities, namely the US Treasury, Fannie, and Freddie. They cannot purchase private label securities, including private MBS. They also cannot purchase debt issues of US states.
Now as a different matter a lot of bad mortgages DID end up in Fannie and Freddie securities, which the Fed did then purchase. And many banks that were holding Fannie and Freddie securities were aided in their re-capitalization efforts by the prices of their Fannie/Freddie security holdings being stabilized by Fed purchases.
When the Fed does go into the market to purchase government securities, they dont simply decide what price to pay. They go in like any other market participant and pay the current market price, which may go up AS A RESULT-- but this is different from them deliberately paying "too much" to bail out the seller.
The Fed can LEND against certain types of private bank assets, and this is what they did in addition to QE, but they cannot purchase them outright and add them to its balance sheet. This is why in my previous post I sought to distinguish between loans and purchases. The US Treasury, on the other hand, could do that. Having the Treasury buy junk Private MBS was the original plan under TARP...it was only after a few days the Treasury realized there was no way they could do this, and decided to recapitalize the banks through equity purchases instead and sort out the balance sheet later.
Yes as I said above, these are MBS from GSEs ONLY. Not private label. And this was only after they were taken into government conservatorship and given an EXPLICIT "Full faith and credit backing", when previously it was only implicit. And yes, before QE the Fed only ever purchased US Treasury securities.
I think you're missing the whole MMT point about net financial assets, or 'net saving'.
MMT authors have written, as you explained above, that money can enter the system through either government spending or lending. In simple versions the emphasis is on spending, but in subsequent pieces there is the clarification that it could be spending or lending. And the scenario you describe is hypothetically possible, in theory. But what your scenario ignores is the real-world desire of the non-government sector to accumulate net financial assets, or to 'net save'. It's this desire to net save which makes a government deficit necessary to avoid what I'll call 'economic dysfunction'.
I think you're missing the whole MMT point about net financial assets, or 'net saving'.
I'm not missing it, Philippe; I'm disagreeing with it.
I don't think there is any such thing as the desire to accumulate net financial assets. There is certainly a desire to save, accumulate assets, and increase wealth, but the satisfaction of that desire does not depend on the accumulation of financial assets that are the liabilities of an external agent (a government), and that net to some number greater than zero.
what you're suggesting is possible in theory, but it is not the case in practice. It requires that every private sector desire to save is met by an equal desire to borrow, which is not the case in the real world. When private sector agents desire to save overall (or to 'net save'), which they do, this can only be accommodated by the deficit of another sector, i.e. the government in a closed economy. In an open economy this can be accommodated by an export surplus, but that also ultimately requires a deficit from foreign governments given the savings desires of foreign private sectors.
The concept of net financial assets is not per se presented as something desired by households and firms, but a method of tracking monetary flows between sectors. In a capitalist economy there is a powerful incentive on the part of all actors to spend less than their incomes, hence a desire in aggregate to net save. This is addressed by Keynes paradox of thrift; if most participants attempt to net save spending, employment and output will fall. Economic actors do not have to consciously desire an increase in aggregate savings for net increase in financial wealth to be a mutual goal.
...the satisfaction of that desire does not depend on the accumulation of financial assets that are the liabilities of an external agent (a government)...
Yes it does.
The private sector always has a desire for risk-free assets - the bills and bonds issued by the government.
Even the (neoclassical) discipline of "Finance" recognizes this - its analysis is based on the key distinction between riskless and risky assets. If there were no risk free assets the whole edifice would simply crumble.
Not that my opinion matters (just a fellow traveler here), but Dan's ideas seem a bit nutty, I think Neil is right, you've just shifted sectors. I'm open to them though, Dan should write up an entire blog post explaining them.
"In effect, it would only need to lend amounts each year to the member banks slightly larger than the amount it loaned the year before" Sounds to me like you're just explaining credit growth, which is what we've just lived through, that Steve Keen has explained best. Or else it's like China, but in China they're "loans", meaning fiscal policy.
People do like to earn more than they spend. It is true that most people don't save in cash, they purchase other forms of assets. But, no matter what, flows must match (sectoral balances). So it seems for the private sector as a whole to take a net positive position, you would need a govt deficit. It doesn't have to be much, most of the post war period averaged just under 2% deficit.. And risk-free interest bearing assets are popular.. So maybe in theory Dan's ideas *could* work, but from an empirical pov, it seems the simpler picture is more correct; Deficits have helped grow economies, gold standard and balanced budgets don't work, etc.
Does Dan have a blog? I'd be interested in reading more.
It requires that every private sector desire to save is met by an equal desire to borrow, which is not the case in the real world.
That is only one way to save. Here's another way to save: You are the sole owner of a flower shop. The shop generates $300,000 this year in revenue. Your costs for paying workers and acquiring supplies used in the current year is $200,000. So, your net income for the year is $100,000. You consume $50,000. With the remaining $50,000, you invest in capital improvements to the shop: adding a new display case and refrigerator, a new sign and front display window, nicer carpets and curtains. You have losses due to depreciation on old equipment of $20,000. As a result the value of your shop increases by $30,000. You have saved $30,000, without anyone else dis-saving. That saving is one small part of the overall private sector saving that comes from economic growth and capital accumulation.
Here is another way to save: you own $300,000 worth of stock in Mega Flowercorp. As a result of Mega Flowercorp's revenue growth and re-investment of profits in business development, the value of Mega Flowercorp, and your shares, increases by 10%. You have again saved $30,000, without anyone else dis-saving. Again the saving is one small part of the overall private sector saving that comes from economic growth and capital accumulation.
Here is another way to save: An elderly retired couple owns a small piece of land in the woods worth $30,000. They decided to have one last fling. So they sell you the land for $30,000, which you purchase entirely out of your current year's income. They consume the entire $30,000 by taking a world tour that costs exactly $30,000. So, the couple has dis-saved, converting savings (the land) into present consumption; while you have added $30,000 to your savings.
Here is a fourth way to save: You have $200,000 in the bank. You loan $60,000 to your friend Bob for a sure thing project he has, and he promises you a 50% return. He gives you his IOU for $90,000. So Bob now has an additional $60,000 in cash assets but an additional financial liability for $90,000. You have $60,000 less in cash assets, but a financial asset worth $90,000. So you have saved $30,000, and Bob has dis-saved $30,000. (If you like, you can discount the value of the asset/liability by some risk weighting corresponding to how likely it is Bob will deliver various levels of return.)
So, of the four options we have considered, only with the second two does the saving of one person amount to the dis-saving of another. In those cases the economy as a whole hasn't saved anything: assets have just changed hands. But in the first two cases, the economy as a whole has saved in the net.
And of course, in the usual course of business in a capitalist economy, these operations are combined in ways that involve more than two parties: A lends to B, B uses the lendings to buy shares in C's business; C uses the money to grow the business and accumulate capital, etc.
This is how, in a capitalist economy, the private sector can save in the net, whether or not the government is providing any additional investment opportunities in government financial assets. Economies carry out real investments on an ongoing basis, and their net real capital stock increases as a result. In capitalism, those additions to the capital stock are individually or corporately owned, and so they represent net savings by private sector entities. The private sector will also create financial assets to convey present or promised future ownership claims on that capital stock, which moves some of the accumulating wealth around and creates corresponding pairs of assets and liabilities. Only those types of financial assets involve the saving/dis-saving "balancing out" which keeps aggregate net savings constant. But the ownership of accumulating real assets does not.
The private sector always has a desire for risk-free assets - the bills and bonds issued by the government.
Well, I have a desire for a risk-free income for the rest of my life - a job from which I can't be fired no matter how I perform. But the economic world won't fall apart if I don't get it. Risk is an inherent part of economic life.
But returning to our main issue in this thread, the chief risk-free asset that people want and need - non-interest-bearing currency - is supplied by our centralized banking system consisting of privately owned banks that are members of a public-private partnership organized under the central bank. This complex operation has everything it needs to supply adequately growing amounts of currency to a growing economy, without either inflation or deflation, by growing member bank and central bank balance sheets, even if the treasury never issues a single debt instrument and operates purely on a tax-and-spend basis.
I think there are very good reasons for the treasury to counter-cyclically deficit spend, but the reason isn't that treasury deficit spending is needed to make the monetary system work.
I also personally think that there are very good reasons to have a big and active government presence in the economy, because there are many areas in which the government allocates resources more efficiently and effectively than the private sector. Government should use the tax system to redistribute incomes and wealth, regulatory systems to establish a more effective and socially balanced income system and planning systems to direct a significant portion of national resources away from wasteful consumption and rent-farming schemes and into publicly beneficial projects and strategic national investments. But this has nothing to do with deficits and/or monetary policy, and the benefits comes just as well with tax-and spend.
Sounds to me like you're just explaining credit growth, which is what we've just lived through, that Steve Keen has explained best.
Sure. A modern, growing economy cannot function without some amount of credit, since it relies on the channeling of resources from many sources into large projects. As the economy grows, the total volume of credit should organically grow along with it. However, we should guard against dangerous growth in the ratio of private credit and debt to GDP. Just before the Great Depression, and again before the Great Recession, the private sector debt/GDP ratio was extremely high relative to historic norms. Keeping that ratio at a safe level is a job for government and central bank credit regulation policy.
"As a result of Mega Flowercorp's revenue growth and re-investment of profits in business development, the value of Mega Flowercorp, and your shares, increases by 10%. You have again saved $30,000."
Wrong, you've saved exactly nothing. You must sell that stock before you can realize the gain (your account goes up, someone else's goes down). As we saw recently, the present trading value of a stock can change rapidly and have absolutely no relation to any sort of underlying intrinsic worth of a company.
"So, the couple has dis-saved, converting savings (the land) into present consumption; while you have added $30,000 to your savings." What if it was 2008 when you purchased that land. Now it's only worth $20k and you're 10k in the hole... But yes, you've increased your assets.
I would argue only the first and fourth scenario (possibly, assuming a successful venture) represent any form of wealth/asset creation.
But of course scenario 4 only represents a tiny tiny fraction of how lending works. That scenario is how loanable funds works..
The problem with credit, imo, is that yes, it expands purchasing power right now, and can lead to productive uses, new factories/businesses/inventions etc. But then I must forgo consumption in the future to pay back the loan.. Which is what happened in 2009ish when the private sector stopped taking on credit and reversed it's net negative position to take a net positive position.. Since flows must match, the govt had to run a deficit.
I guess I'm still having trouble picturing how all the money the private sector needs can be supplied by banks expanding their balance sheets.
AFAIK Banks do that by simultaneously creating loans and deposits. Which means an increase in purchasing power now, but with a hangover later when one forgoes consumption to repay the loan. (I suppose banks end up with assets from foreclosed properties and things like that).
Or, like Dan mentioned earlier "In effect, it would only need to lend amounts each year to the member banks slightly larger than the amount it loaned the year before." But that is almost exactly the picture circa 2006, the private sector took out more and more credit each year (the central focus of keen's work) and it resulted in disaster.. maybe, just maybe, it could work if there was absolutely no mal-investment at all, no bubbles, a fairly even distribution of income..
Yes, loans can create a real asset, that I can keep, even after I pay back the loan, but all this is a delicate balancing act. Flows must match.
Wrong, you've saved exactly nothing. You must sell that stock before you can realize the gain (your account goes up, someone else's goes down). As we saw recently, the present trading value of a stock can change rapidly and have absolutely no relation to any sort of underlying intrinsic worth of a company.
But I tried to specify in the hypothetical that in this case the stock's value reflected fundamentals, and had gone up due to the firm's investment of profits in further business development, which increased the real value of the firm. There is real wealth creation there.
You don't have to realize the gain in monetary terms by selling the stock in order for your wealth to increase. An ownership stake in a valuable company is itself a form of wealth. If you own a certain percentage of a company, and the value of that company increases, then your wealth has increased.
Imagine a simplified economy in which there is only one bank. Since there is only one bank, then by default it is the "central bank". Also imagine that this is a cashless society, and that all money exists in the form of deposits at that one bank.
Suppose also that in this society all financial assets held by the non-bank public consist of bank deposits, and all financial liabilities possessed by the public consist in the amount owed by the bank. The deposits are the bank's financial liabilities and the public's financial assets; the amounts owed are the public's financial liabilities and the public's financial assets.
Let's assume a starting point where the total amount of bank deposits is $1 trillion, and the total amount owed by the public to the bank is $1.01 trillion. The bank thus has positive financial equity of $10 billion, and the public has negative financial equity of $10 billion. The public is net indebted to the bank to the tune of 101% of its financial assets.
But of course, these are not all the assets their are in the society, and so the public does not have negative equity overall. It owns lots of real, non-financial stuff. These are assets that do not correspond to someone else's liability: all the machinery, homes, cars, farmland, paintings, refrigerators, office buildings, computers, etc. out there in the world beyond money. Let's suppose the value of those assets is $10 trillion. So the net wealth of the public is $10 trillion minus $10 billion, or $9.99 trillion.
Assume that the national income in that first year is $2 trillion, so the wealth to income ratio is just slightly less than 5/1.
Now, let's imagine that as the economy grows, bank deposits and loans increase by 1% per year. The bank is always loaning more money, and the public is always paying back some of what it owes. But the result is that the public always possesses a net debt to the bank amounting to 101% of its deposits. It always possesses negative net financial equity. So in year 2, bank deposits have grown to $1.01 trillion, but what is owed to the bank is now $1.0201 trillion. In year 3, deposits have grown to $1.0201 trillion, but money owed to the bank has increased to $1.030301 trillion, etc. This never changes. The bank always has positive financial equity and the public always has negative financial equity.
The money supply for the society consists entirely of the sum of the bank deposit balances. So it is also growing by 1% per year.
But let's assume that the national income and real economic wealth of the public are also growing by 1% each year. So, in year two, national income is now $2.02 trillion and national wealth has grown to $10.1 trillion, etc. (Thus the national savings rate for real income is 10% of that income.) This continues year after year.
Basically, everything is increasing by 1%, every year. Despite the fact that the public always has negative net financial assets, it always has much more in the form of non-financial assets. It saves 10% of income every year, and its wealth grows every year.
Wish I wasnt doing my late shift week and could participate more but have tried to keep up with most of the comments. Now that I have a day off I want to put in my $.02
@Dan
I want to look at one of your comments and make some observations. You earlier said;
"That is only one way to save. Here's another way to save: You are the sole owner of a flower shop. The shop generates $300,000 this year in revenue. Your costs for paying workers and acquiring supplies used in the current year is $200,000. So, your net income for the year is $100,000. You consume $50,000. With the remaining $50,000, you invest in capital improvements to the shop: adding a new display case and refrigerator, a new sign and front display window, nicer carpets and curtains. You have losses due to depreciation on old equipment of $20,000. As a result the value of your shop increases by $30,000. You have saved $30,000, without anyone else dis-saving. That saving is one small part of the overall private sector saving that comes from economic growth and capital accumulation."
Being the holder of something which appreciates in price is not necessarily a reliable way to save....... if in fact you need 30,000$ more for something. Your business is very illiquid and it is very hard to get that 30,000$ of savings out, it is mostly unrealizable savings. Most people want and need a very liquid form of savings to meet their short and medium term needs.
"Here is another way to save: you own $300,000 worth of stock in Mega Flowercorp. As a result of Mega Flowercorp's revenue growth and re-investment of profits in business development, the value of Mega Flowercorp, and your shares, increases by 10%. You have again saved $30,000, without anyone else dis-saving. Again the saving is one small part of the overall private sector saving that comes from economic growth and capital accumulation."
Same criticism as above regarding liquidity, not to mention only a person who had 300,000 dollars to buy stock with would be able to save this way.
"Here is another way to save: An elderly retired couple owns a small piece of land in the woods worth $30,000. They decided to have one last fling. So they sell you the land for $30,000, which you purchase entirely out of your current year's income. They consume the entire $30,000 by taking a world tour that costs exactly $30,000. So, the couple has dis-saved, converting savings (the land) into present consumption; while you have added $30,000 to your savings."
Another illiquid form of saving not very useful to most people
"Here is a fourth way to save: You have $200,000 in the bank. You loan $60,000 to your friend Bob for a sure thing project he has, and he promises you a 50% return. He gives you his IOU for $90,000. So Bob now has an additional $60,000 in cash assets but an additional financial liability for $90,000. You have $60,000 less in cash assets, but a financial asset worth $90,000. So you have saved $30,000, and Bob has dis-saved $30,000. (If you like, you can discount the value of the asset/liability by some risk weighting corresponding to how likely it is Bob will deliver various levels of return."
No one argues that all above descriptions arent happening every day of the week and are perfectly valid ways of saving but the average Joe needs a supply of cash/NFA/risk free assets in order to meet lifes unexpected costs and all efforts to balance the Fed budget and restrict the flows of NFAs into the economy make this harder. A system without a govt which can be in a constant net negative position will experience Ponzi dynamics relatively quickly.
So, of the four options we have considered, only with the second two does the saving of one person amount to the dis-saving of another. In those cases the economy as a whole hasn't saved anything: assets have just changed hands. But in the first two cases, the economy as a whole has saved in the net.
Greg, in the case of the flower shop, the increase in the shop's real value consists in part in its increased ability to generate income. Investments in one year that increase its value result in more income in subsequent years. If the owner needs more liquidity, he can recycle less of that future income into the shop or other illiquid, long-term investments, and instead keep it in more liquid forms.
"not to mention only a person who had 300,000 dollars to buy stock with would be able to save this way."
Yes, but other smaller savers put money each weak into retirement funds that are invested in equities.
Most people in our society possess very little net wealth of any kind - their income comes in, and mostly goes out just as fast. That's a distribution issue. The point of all these exercises is to show that an economy as a whole doesn't have to increase its net financial assets in order to save and increase its wealth. A one-sector economy in which all financial assets and liabilities net to exactly zero at all times can still save and grow. We can't imagine that the very existence of growing economies and increasing wealth depended on governments being in the financial asset provision business.
I dont deny that the dynamic you described is and likely always will be a major portion of an economies saving but its also true that to the majority of people, me included, what is desired is cash or its equivalent in sufficient amounts to meet things like like health insurance/car insurance co pays/deductibles, vacations and other unexpected or desired short range expenditures that exceed ones monthly disposable income flows.
The financial system charges hefty fees for liquidating and maintaining accounts for all the other non cash types assets you describe. It has become terribly extractive and it looks to me as if CBs around the world are heading towards changes which will likely impose negative interest on cash deposits essentially making people buy their savings vehicles.... at greater risk than most people want to take with their life savings. All this of course is being done because of mistaken notions about "running out of money", "loanable funds" ideology and gold standard type reasoning. It seems to me that only a steady flow of NFAs from a source outside the private banking/household sector can lend some stability to the system and keep it form going ponzi.
Greg I don't deny what you are saying about the need for sufficient amounts of cash or cash equivalents to keep the economy going and demand where it needs to be. (I would add that "keeping demand where it needs to be" involves preserving a healthy balance between demand for consumption goods and demand for capital goods.)
But what you are talking about is the money supply, changes in which are not the same thing as changes in the "flow of NFAs". The money supply can grow steadily, in an amount that is appropriate given the growth rate in the overall level of economic activity, even if the net financial asset position of the private sector does not change. And changes in the money supply are fundamentally a function of the expansion and contraction of banking system balance sheets.
Now suppose that without any significant change in the overall money, demand drops because people develop an increased desire across the economy to hold money rather than spend it. They keep money in their accounts longer, velocity drops, overall transactions drop and deflationary pressure is exerted. One thing government can do to restore demand is to tax money out of those low velocity accounts, on a progressive basis, and put it into government accounts. And then the government can spend it. So government can increase velocity and demand without increasing deficits (which is not to say that increasing deficits might not also be a good thing to do in these circumstances.) If the government spending is particularly smart - consisting of a substantial amount of wealth-building, strategic public investments, and not only of consumption boosts - then the spending can directly drive growth and enhance national wealth, apart from any additional indirect wealth-building that might occur because consumption support has multiplier effects, boosts "animal spirits", etc.
"That is only one way to save. Here's another way to save: You are the sole owner of a flower shop. The shop generates $300,000 this year in revenue. Your costs for paying workers and acquiring supplies used in the current year is $200,000. So, your net income for the year is $100,000. You consume $50,000. With the remaining $50,000, you invest in capital improvements to the shop: adding a new display case and refrigerator, a new sign and front display window, nicer carpets and curtains. You have losses due to depreciation on old equipment of $20,000. As a result the value of your shop increases by $30,000. You have saved $30,000, without anyone else dis-saving."
What you're saying is that the private sector can net save in the form of real assets, rather than financial assets. There's a couple of problems with this claim.
Firstly, it's the private sector desire to net save financial assets, i.e. the desire to spend less than its income, or to accumulate net financial wealth, which causes problems.
Secondly, in a monetary production economy, i.e. this economy, money is required in order for the investment and saving in real assets that you describe to occur. This entails borrowing.
". It seems to me that only a steady flow of NFAs from a source outside the private banking/household sector can lend some stability to the system and keep it form going ponzi."
That's basically my point too. I think that stems from the fact that flows must match, so at any given moment, if someone is net positive, then some other agent must be net negative.. Too much reliance on private credit expansion (banks growing their balance sheets) got us into this trouble to begin with. The non-bank sector being constantly net-negative, regardless of assets created by credit just doesn't seem sustainable and stable (lots of real houses were built, but still tons of people ended in financial ruin). So although Dan's ideas are a possible description, the flows works out, I don't think it's desirable or really describes actual spending and investment habits.
Seems the empirical evidence is overwhelming; Private sectors go on credit booms followed by a bust, at which point either you have a depression or the govt steps in and takes the net negative position so the non-govt can take a net positive position to repair their balance sheets. How many times has that pattern repeated itself over the last 200 years? At least a dozen I think. Being constantly financially net-negative, even though it's purely financial (meaning in total you might not be negative because real asset/wealth creation) just doesn't seem stable.
I cant disagree with anything you said with the exception of your attempt to distinguish between "money supply" and "flows of NFAs". Im not sure what point your getting at there. Certainly flows of NFAs are part of the money supply.
I actually dont like the term money supply, its too monetarist.
There was one other comment you made earlier I am perplexed by;
"I don't think there is any such thing as the desire to accumulate net financial assets. There is certainly a desire to save, accumulate assets, and increase wealth, but the satisfaction of that desire does not depend on the accumulation of financial assets that are the liabilities of an external agent (a government), and that net to some number greater than zero."
Youve been on these MMT blogs for years and Ive never heard you take issue with the NFA concept. Its a different way of expressing things from monetarists and some other PKers but its internally consistent and not at odds at all with the other things you have expressed here. Its simply a way of describing the private sectors position relative to the govt when the govt is in a position that isnt completely balanced or in surplus. Certainly you can agree that most people wish to be in a position where they have a portion of their saving in the lowest risk of assets AND most of the time the majority of people are looking for more of them not less.
Joe, I don't think an economy needs flows from outside the system to prevent Ponzi lending. It just needs to regulate its credit systems adequately. The financial crisis was caused by inadequate regulation of mortgage lending, derivatives, etc.
Everything in macroeconomics, if it makes sense at all, should make sense in a one-sector model - and that's a model where there is no "external".
Greg, I don't think there is anything monetarist about the concept of a money supply. Monetarism consists in However, there are different ways of measuring the money supply, and some definition has to be given in any specific concept to be able to reason clearly about it.
As for "net financial assets", it would be good for the people who use it to disambiguate that term as well, since there are also different ways of understanding what it means for an asset to be "financial".
There is something odd about the idea of a flow of net financial assets. Suppose I write a negotiable IOU and give it to you. You now have a newly-created financial asset, and I now have a newly-created financial liability. But the net financial assets in the economy are presumably unchanged. Now suppose you use that negotiable IOU to pay a third party. So there has been a flow of financial assets. There has been no flow of financial liabilities. Has there been a flow of net financial assets?
It's a financial liability for the govt, Dan. Net financial assets for the non-govt. "should make sense in a one-sector model - and that's a model where there is no "external"." You should see some of Neil Wilson's work on this.
"Everything in macroeconomics, if it makes sense at all, should make sense in a one-sector model"
Sure, but you can always carve it up into as many sectors as you want. Each person could be its own sector.. Or if you insist on one sector, then part of one sector will be negative or positive in relation to another sector. So your one sector model is purely credit driven from private banks (if I understand correctly). Could just as easily say the banks are their own sector.. Except for debt to a bank is real debt, it has to be paid back by forgoing consumption and taking a net positive position (well, unless more and more credit is taken out, still can't see that ever working out realistically). Govt "debt" doesn't have to be paid back, since, well, the govt creates money. Yes banks create credit money, but the bank doesn't go negative vis-a-vis you, not like the govt does.
I still think it's a flows issue. Individuals like a net positive position. Everyone can't simultaneously be net positive.
" Suppose I write a negotiable IOU and give it to you. You now have a newly-created financial asset, and I now have a newly-created financial liability. But the net financial assets in the economy are presumably unchanged. Now suppose you use that negotiable IOU to pay a third party. So there has been a flow of financial assets. There has been no flow of financial liabilities. Has there been a flow of net financial assets?"
Now your getting into the realm of levels of "moneyness", or hierarchy of money so to speak. The IOU you gave me is really only guaranteed to be negotiable with you not anyone else. Someone else might take it from me but only if they know something about your willingness/ability to redeem it. They must know that you will stay solvent til they wish to redeem it. Only one type of financial asset has the position of being the most redeemable. There must be something that has the least possibility of default. In modern economies those are the ones backed by a govt with taxation ability.
But to answer your question, I would say no there hasnt been a flow of net financial assets cuz there werent any in the example you provided. Things can be traded, economic activity can take place e.g. barter without any financial assets changing hands but it seems to me that for a monetary economy to grow in stable fashion and for incomes to rise there must be a growth in what MMT calls NFAs.
Is Dan's just trying to 100% technically accurate in speaking of these matters?
Sure, I suppose it could be purely credit based, but isn't the empirical evidence overwhelming? Govt deficits help economies grow, private sectors tend to want to be net-positive. Just pull up graphs of gdp of european countries. Even the supposedly successful Germany is barely to their pre-2009 levels. Then pull up a graph of the US's GDP. There's a small speed bump and then it continues up. We did something the Europeans didn't do....
Imo, Steve Keen has done the best work on this, http://www.forbes.com/sites/stevekeen/2015/06/18/are-surpluses-normal/ covers some of this. Post war deficit averaged just under 2% in the US, and we experienced the greatest growth and rise in standard of living the world has ever known. It just seems obvious that, on average, there should be a govt deficit. Since most ppl do not save in cash, it doesn't have to be big, but seems to be necessary for stability.
I still think it's a flows issue. Individuals like a net positive position. Everyone can't simultaneously be net positive.
They can be if you consider all assets, and not just the financial IOUs. If you consider only IOU's then of course not everyone can have net positive IOU wealth, since one person's IOU assets are other people's IOU liabilities. But there are all kinds of other assets that are not IOU's, and so it is possible for everyone to have positive net wealth.
Of course, in our society, not everybody has net positive wealth. But that is an issue pertaining to wealth distribution, not a macroeconomic necessity.
But to answer your question, I would say no there hasnt been a flow of net financial assets cuz there werent any in the example you provided. Things can be traded, economic activity can take place e.g. barter without any financial assets changing hands but it seems to me that for a monetary economy to grow in stable fashion and for incomes to rise there must be a growth in what MMT calls NFAs.
Greg, then I think you need to provide a definition on "net financial assets." I understand it to mean the value of financial assets minus the value of financial liabilities.
IOUs certainly fall into the category of financial assets. In the example I provided, clearly a financial asset changed hands in the private sector. But no financial liability changed hands, since the liability in question remains the liability of the issuer of the IOU. Also the net financial assets of the private sector remain unchanged when the IOU is issued and accepted, since a corresponding asset and liability are created.
Joe, I agree government deficits can help economies grow. But I don't think that has much to do in general with whether the private sector has a net positive, net negative or net zero financial asset position. The private sector could surge even if it has a net negative financial asset position throughout that time. Growth and demand have a lot more to do with the alacrity with which financial instruments - including money - circulate. It doesn't matter whether the net value of those instruments is a little greater than zero or a little less than zero.
"Also the net financial assets of the private sector remain unchanged when the IOU is issued and accepted, since a corresponding asset and liability are created." - exactly, because it's a within-sector asset/liability. I think what Greg (and I) mean by NFA is a financial asset who's corresponding liability is in another sector (ie the govt).
About flows- So do I have more or less money at the end of this month than I did last month? OK, I have less, since I had to pay my car payment (but hey, I own more of the car than I owe), but I'm still in the red this month, better try to earn more next month than I spend... Sure the economy grew when we all took out loans to buy cars/houses, but now we've cut back our spending to pay back loans and if too many people do that...
Can a pure credit system realistically work?.. Doesn't history hint that it doesn't? Eventually debts get too big, people get stuck in debt peonage or else the king did a jubilee.
"If you consider only IOU's then of course not everyone can have net positive IOU wealth, since one person's IOU assets are other people's IOU liabilities. But there are all kinds of other assets that are not IOU's, and so it is possible for everyone to have positive net wealth.
Of course, in our society, not everybody has net positive wealth. But that is an issue pertaining to wealth distribution, not a macroeconomic necessity."
You're missing the point. There is a private sector desire for net positive financial wealth. In other words, the private sector wants to spend less than its income. This causes economic problems, as the private sector can't accommodate this desire on its own. It can't spend less than its income unless some other sector spends more than its income. Your response to this is that it doesn't have to spend less than its income. That is irrelevant, as the fact is that it does want to spend less than its income. As such, given this desire, government deficits are a macroeconomic necessity.
If you have more financial assets than financial liabilities, you have net financial assets. So an individual can have net financial assets, or the private sector as a whole can have net financial assets.
An individual within the private sector can have net financial assets even if the private sector as a whole doesn't. The individual can achieve this due to others within the private sector having more financial liabilities than they have financial assets.
The private sector as a whole can only have net financial assets if some other sector has more financial liabilities than it has financial assets.
re my previous comment about the private sector wanting to spend less than its income.
Warren Mosler:
"Unemployment is defined as idle labor offered for sale with no buyers at that price. It will occur when the private sector, in aggregate, desires to work and earn the monetary unit of account, but doesn’t desire to spend all it would earn if fully employed."
Lets not forget to mention that a large reason the pure credit economies fail eventually has a lot to do not only with the desire of borrowers to push their borrowing envelope but also because the system puts a small cadre of people in charge of making credit assesments, essentially putting them in charge of "values". Every time they make a loan they structure it so you pay more than the object of purchase was worth. Real estate has a system of appraisers, agents and loan officers which work together to insure that the borrower gets as raw a deal as they can. They extract income to the banking sector and while the banking sector is part of the business sector/private sector in some analyses (relative to the govt/foreign) it is also outside the household sector/business sector as all households and businesses do have loans from banks. The quest for profit form the banking/Wall St sector pushes them to raise costs on everyone else which starves everyone else of buying power. It seems only a strong govt sector can offset this to any reasonable degree.
Correct we increased TGA withdrawals by about $1.5T annual... from about $2.5T to $4T...
I would assume this did not happen in EZ.... look up thread at Bill's chart of Greece withdrawals... it was CUT by about 40% they went BACK to 2004/2005 levels...
You're missing the point. There is a private sector desire for net positive financial wealth. In other words, the private sector wants to spend less than its income.
I am suggesting that there is no such desire Philippe. It is always the case that many people desire to save some of their income, and if everyone saves exactly as much of their income as they desire to save, the private sector as a whole ends up saving a certain percentage of its national income. For the most part, they do that by investing in non-consumable real assets, a sizable amount of which are produced each year (in the US gross fixed capital formation is close to 20% of GDP). There is no reason to thing that net financial assets must be non-zero for everyone to satisfy their savings desires.
Suppose I am the sole individual owner of a company, and save 25% of my $200 K income by increasing the value of my company by $100 K, financed in part by issuing a bond to you for $50 K. I have saved $50 K net: $100 K in fixed asset appreciation minus $50 K in new financial liabilities. You have saved $50 K. We have saved $100 K net. Net national wealth has increased by $100 K But net financial assets haven't increased. They are the same as they were before since the new financial asset is balanced out by a new financial liability.
Philippe, I agree completely with your definitions above. And on that basis it should be clear that the private sector can satisfy its savings desires without any increase in its net financial assets.
Matt, government deficits can sometimes help the economy grow in the same way private business deficits help an economy grow. When either the government or private business put a greater volume of accumulated savings to work by spending more than their income, and spending it on the right kinds of things, the economy grows.
Also, governments can also help an economy grow without deficits.
Dan maybe look at it this way... "saving" means "keeping" or "to keep"...
iow to save, you have to come into possession of something FIRST, and THEN give up part of that possession but not all of it, the portion you "keep" is "savings"...
So if you earn $100 or even someone just gives you $100, that is not "savings" at that point, that would be a wage or a gratuity, if you THEN spend $60 and decide to "keep" the other $40, THEN your "savings" or "keeping" is $40...
The Greek word here is sōtēría ("to save") in the scriptures it is often translated as "salvation"... it means "to save" or "keep"... to "keep" or "save" something, you have to come into possession of it FIRST....
Random housing started later (post y2k dot com crash), I have some property and it was in the toilet meanwhile I was watching everybody double their investments in an afternoon in Dr Koop dot com...
If there was data available imo you would see TGA withdrawals increasing substantially in late 90s.... y2k, Interest on Treasury Securities, etc...
Random also the fact remains that we had surpluses...
So Dan is getting at some sort of logical inconsistency here when we wee people today say "we need higher deficits!" to get the economy going better today...
If something is true, it should be true all the time....
I dont see how fomenting more savings at this point is going to help the current situation...
I think we do need to save and invest more. Personal consumption expenditures between 1951 and 1970 were 62% of GDP; between 1971 and 1990, they were 63.4% of GDP; and since 1991, they are up to 67.3% of GDP. Annual economic growth rates had a very healthy average of 4% in the first period, down to 3.3% in the second period, and a shabby 2.5% in the third. We're consuming too much, and this is contributing to long-term stagnation.
And the government needs to play a larger role in the economy: Between 1951 and 1970, federal government consumption and gross investment averaged 14.7% of GDP. Over the next 20 years, the average dipped to 10.3%. And since 1991, it's been a feeble 7.6%. By the way, government deficits were quite small during the fist 20-year period: averaging about 1/2% of GDP. Top marginal tax rates were higher. There is no reason to think that government deficits are the key to economic performance. It is the size and role of government that is most important.
These private and governmental phenomena are all related. Strong growth is a social choice. It is a social choice that Americans aren't making. We used to have the right stuff: A strong national government led the way and drove innovation and progress in a more unified and public spirited nation. We had a healthier balance of investment-to-consumption, and used more of our resources to build economic capacity and improve our children's futures. Now we prefer to consume our wasted future potential in the present, extract value from companies instead of building them, try to cover over our neglect of real factors with monetary manipulations, and put our once dynamic and leadership-oriented government out of business.
"the private sector wants to spend less than its income."
"I am suggesting that there is no such desire Philippe"
Do you agree that some people do not want to spend all of their income, and that some people do not spend all of their income?
Presumably you do agree as these are obvious facts.
So what you are suggesting is that every desire by a person in the private sector to spend less than their income is always matched by an equal desire on the part of another person in the private sector to spend more than their income (i.e. to borrow).
What you're saying is that there's never an imbalance; that it is never the case that one person's desire to spend less than their income is not matched by another person's desire to spend more than their income.
Now, in the real world, that is clearly not the case.
In the real world, it is quite possible for the desire by some people in the private sector to spend less than their income to be greater than the desire of others in the private sector to spend more than their income. When this happens, the private sector as a whole wants to spend less than its income. But this is impossible, unless another sector, i.e. the government, spends more than its income.
"the private sector as a whole doesn't have a "desire" - individual people do"
The private sector as a whole is a group of people. Groups of people can be said to have a desire.
When the desire by some in the private sector to spend less than their income is greater than the desire by others in the private sector to spend more than their income, the private sector as a whole wants to spend less than its income.
This is impossible, because as you point out spending always equals income.
So the private sector as a whole can only spend less than its income if some other sector, i.e. the government, spends more than its income.
If this desire to spend less than its income is not matched by another sector spending more than its income, the result will be unemployment, inventory accumulation, economic contraction.
Sorry for my slightly convoluted sentences, I'm just trying to be clear.
Philippe, it doesn't matter what their "desire: is. As a matter of macroeconomic logic, for any economic system considered as a single sector, it is impossible for that economy to spend less than it's income or more than it's income. If the economy spends less, it will have less income; if it has more income, it has spent more. Now of course you can divide up an economy into any number of sectors you want, and note that some sectors can be spending less than their income while some are spending more than their income. That all makes analytic sense as long as all of the respective surpluses and deficits sum to zero. But this has nothing in particular to do with one of those sectors happening to be the government.
Now if the problem is an overall drop in spending and income as a result of excessive risk-avoidance, fear about the future, desire to save and hoard, etc., there are many ways the government can counteract that contractionary pressure. One way is for the government to tax some of that income away from the people who are most disposed to hoard it, and to either spend it itself, or give it to people who are most disposed to spend. Another way is to penalize hoarding through the tax system, and incentivize spending. Other techniques involve using the regulatory apparatus to shift resources from consumption to investment, boost growth and thus raise national income overall. These three methods don't involve any thinking about net financial assets.
It is certainly possible that the government could employ techniques that do involve giving people more financial assets. Under some circumstances those might be the best techniques. It could helicopter money into the economy; or print up government bonds and mail them to people. But these are not the only techniques, and it is incorrect to point to the net financial asset position of the private sector as the explanation of why there is unemployment, stagnation, etc. and as the solution to go to when these phenomena arise.
here's a simple example to try to clarify my point:
Imagine the private sector consists of two people, A and B.
A wants to sell 100 goods, but only wants to buy 80 goods. In other words, A wants to spend less than his income.
This is possible if B buys 100 goods but only sells 80 goods, i.e. if B spends more than his income.
Now let's say that B also wants to sell 100 goods but only buy 80 goods (i.e. B also wants to spend less than his income)
Now the private sector as a whole wants to spend less than its income (i.e. both A and B want to spend less than their income.
This is not possible (unless another sector spends more than its income). If no other sector spends more than its income, A and B end up selling only 80 goods each. Their saving plans are unrealised. They end up spending as much as their income, and are both left with 20 unsold goods each (an involuntary accumulation of inventory). This leads to economic contraction.
Phillipe, I think your example makes perfectly good sense, and is a good general account about about why economies can fail to achieve their production and income potential. Note it's not just A and B's savings plan that is unrealized, but their production and income plan as well.
But this failure has nothing obviously to do with financial assets. The reason they fail to achieve their savings goals isn't because there are insufficient financial assets available in which to invest the saved portion of their income. The problem is that they never obtain the desired income in the first place. Their sales and purchasing plans are mutually incompatible.
the reason why their plans are incompatible is precisely because as a whole they are trying to obtain financial assets in excess of their liabilities, i.e. they are trying to spend less than their income. As a result they end up with less income than desired and unsold goods, leading to a reduction in production.
"We had SURPLUSES in the late 90's and the economy grew like crazy..." - true, because the private sector was spending more than its income. Flows match. In the 2000's, the private sector was also spending more of its income, but then 2008/2009 this reversed and the private sector took a net positive position. Reduced spending -> reduce economic activity -> recession/depression, unless the govt steps in with a deficit.. To me this seems obvious and extremely well supported in the data. Wray and Keen both have published graphs where this is very obvious... Across the pond, presently every agent in Europe is trying to run a surplus, and they've flatlined, the US did it differently and the govt accommodated the private sectors net positive position.
"I dont see how fomenting more savings at this point is going to help the current situation..." It's not about savings per se, it's about the instantaneous flows at this moment. There's not enough spending, due to households wanting a net positive position to repair balance sheets (well, this has eased over the last couple years, but was certainly the picture post-GFC). People intuitively know their household has flows in and out, and worst case for them they match, people like being net positive. It's colloquially called "living within your means".
"that all makes analytic sense as long as all of the respective surpluses and deficits sum to zero. But this has nothing in particular to do with one of those sectors happening to be the government." it has everything to do with the govt, since the govt is the issuer of the currency, it can't go broke, the private sector net spending can go broke. Seems wholly unrealistic to expect savings/investment/spending desires to exactly balance just right to not need a deficit *on average*. 'if everyone spends spends all their income on just the right assets...' it's just not gonna happen.
It's about the flows; If I take a home loan now, there's an increase in spending in the economy, I'm net negative and someone else is net positive.. Now I have to forgo consumption to pay back the loan, ie be net positive during the repayment period, which requires someone else being net negative... If too many people do this simultaneously, it results in the familiar boom/bust. The housing bubble is a classic example. Has a credit driven boom ever had just the perfect mix of investment resulting in growth that didn't result in a bust? Govt spending is economic activity that doesn't have to be followed by a period of forgoing consumption to repay previous net spending. That's the crucial difference. Household income >= household spending. The govt has no such constraint.
"I agree government deficits can help economies grow." = "I agree if the motor is running hotter that the output has probably increased..." - now you're just being picky ("Shallow and pedantic" lol) , we've all been assuming there's the productive capacity available. Which comports well with the real world presently, we're not Zimbabwe.
Matt, we're consuming too much as a share of GDP. We're eating too much seed corn and not investing adequately in our children's future. That's why we have "secular stagnation".
"Demand" does not equal "consumption demand". We can get full employment by investing more. We can invest more if the state takes a larger role in the economy. The years of most dramatic growth in the 20th century were the years when we had the biggest state.
Transportation and energy infrastructure and education are not consumption. If we spend more on them, we are investing more, not consuming more. Same for science and technology R&D, and housing.
We've become a greedy, narcissistic, stupid country without any sense of collective responsibility for building the future we won't live in ourselves.
Dan we could "invest" in public transportation (govt to buy buses, govt to construct light rail, etc...) or perhaps just give everyone $200 in Uber/Lyft credits which I guess economists would then term "consumption"... (or some combination?)
the result would be the same people would get from here to there..... BUT.... IF they had the "money" to pay the fares charged via either method of transport which many people dont have..because the govt idiots think we are "out of money!!!" and dont issue it ...
So if we take the bus, that is "investment" but if we take an Uber then that is "consumption"? We "invest" in public transport but we "consume" Uber?
Yet the same thing happens ie people get from here to there.... ???? this is how f-ed up economists are...
Perhaps dont get sucked into the framework of all of this "Economist" terminology...
And as far as the many greedy/stupid a-holes that live among us (btw Dan, F these people....) I just talked to this black guy the other day who works down in DC and he could never get the Arab cab drivers down there to pick him up now he uses Uber and he is STOKED.... he always gets picked up by the Uber people no problem...
so enabling technologies can have major impacts on socio-economic injustices... BUT people need to have access to adequate currency balances to pay for the provision ... I dont think whether we term activity "investment" or "consumption" is very meaningful if at all .. its just more sophistry from idiot economists imo...
Matt, just giving everybody money won't help, because Americans have already proven that without strong leadership and strategic guidance, they waste their money on consumer crap - food and toys, fun and games, scamming and flim-flamming - and neglect to do what is necessary build the future. America isn't Sweden or Denmark with an emotionally mature and broadly educated population that knows how to balance long-term public needs against personal satisfaction. It's an idiocratic land of infantile teenagers gratifying their impulses.
We can't Uber our way to a more educated country, an overhauled infrastructure, a more sensible transportation, housing and health sytem. That's the dumbass laissez faire solution to everything.
@Matt Excellent point about econ terminology and its complete lack of coherence.
@Dan Those descriptions of American you point out are real but the fact still remains there are still plenty of people with the know how and the desire to build the future you speak of. There are a lot of people who are "unnecessary" so to speak. Id rather have them passing time playing games, going to concerts, smoking dope etc so long as they dont rape plunder pillage in the process. Theres nothing wrong with a large sector of society being mostly consumers. Let them work as baristas, masseuses whatever and party like hell when they are off.
We can now produce ten times the food with one tenth the people we needed 100 years ago. That will soon be true of many other things.
Our only thing holding us back is 1) morons who think we dont "have" the money to do the things you talked about 2) sociopaths who have an unsatisfiable need to acquire money and power and are in sectors like energy/transportation/healthcare/finance and are using all their efforts to hold off renewable energy, clean transportation, sane health policy and restoring banking/finance to a reasonable percentage of GDP.
Dont even get me started on the Prison Industrial Complex
Greg I agree I think we are pretty close to nailing this thing ... we have surpluses in just about everything... infrastructure is good (not great.... SOME is great...), food systems are in bumper crops with the GMOs (no access for some) , great Universities (no access), great healthcare/pharma (no access), great military (inadequate force protection tho...) I think things are pretty good as far as the basic infrastructure...
To get access you need currency balances to "pay the tolls..." so to speak and many dont have access to adequate currency balances to obtain the robust surplus levels of provision...
Dan what about the people who put together Uber? They're not idiots... They probably worked hard putting that thing together... its leading real-time geo spacial technology/software e-commerce... I think those systems are going to really take off and increase efficiencies in transportation sector... then you have the drones, robotics, etc...
We just need for everybody to have the "money" to pay the tolls...
Baristas can make more "money" as long as their customers have the "money" first for to pay with .. we dont need 20 million rocket scientists....
OK, I'm done. You guys clearly have a very different perspective than I do on how good things are, what the global perils are, and how much planning and organized change we need to tackle the things that need to be tackled.
Unfortunately, it's probably going to take a global war for us to get our act together at the national and planetary level. That's what it took in the mid-20th century.
Uber is a replacement for the taxi commissions. How really innovative are they, beyond cutting costs that their (over)regulated competitors cannot avoid?
Energy saved on investment should be higher with mass modes of transportation.
"OK, I'm done. You guys clearly have a very different perspective than I do on how good things are, what the global perils are, and how much planning and organized change we need to tackle the things that need to be tackled."
Don't go, Dan. Your critique of MMT might be wrong but your aims are probably shared by many here.
Bob I'm not talking about them being "innovative" I'm talking about them being implementers of enabling technologies...
Lets say an old person who doesnt drive anymore needs to get to the doctor and they cant afford a taxi and public transportation is not available on their route.... they might now take an Uber for $10 and get to the doctor door to door...
the morons would set up Obamacare and then forget that people have to actually get to the doctors office for their care.... what good is Obamacare if the people dont have transport?
This is the type of thinking that we are constantly treated with from our incompetent/unqualified policymakers....
Get the healthcare all set up and then people cant even get there...
Philippe, I think MMT has evolved into a kind of foolish escapism, and isn't generating any workable solutions to any social or economic problem of note. I still get all of the various emails and Facebook posts and whatnot from the global MMT cargo cult. Every once in a while someone will mention something vaguely about "real resources", but that's a topic nobody on the big team of them seem capable of thinking clearly about. They all seem to have convinced themselves that the ability to conjure money out of thin air corresponds to some Star Trek-like ability to conjure goods and services out of thin air with a monetary repplicator, without the need for any difficult political challenges related to the reallocation of existing resources.
Education, retirements, energy, health care, working class incomes? No problem!!! We can just mint coins or credit accounts and everything gets solved! Genius! The goods will just pop into existence for those dollars to buy and all the rich guys get to keep all of their dough too! We won't have to eat fewer burritos, or build cheaper football stadiums, or make billionaires poorer or anything. The slobs can have their minimum wage "starter jobs" while the rich guys still buy those fancy Mosler-mobiles. We can conjure mountains of real prosperity into existence with digital balance enhancements and Yves Smith's struggling poor little rich friends won't have to suffer any portfolio boo-boos.
Oh, and Americans keep getting to eat unlimited heaping helpings of FREEEEEDOM! We don't have to plan anything, restrict anything, re-allocate anything, or tax anybody. We all get a tax cut, and a bunch of free stuff, and blissfully eat and play ourselves into decadent oblivion while we exterminate millions of species and extract every last resource from our over-stuffed planet.
Seems to me mmt are the only people actually concerned with anything real. Everyone else is trying to actively prevent putting real resources to use because they think we're broke. Meanwhile, the europeans can't figure out why they can't all be exporters like germany.
Believing you're broke prevents you from even starting to think of solutions. What good solutions are going to get implemented by austerity? How many times do you hear people object to green energy because of it being too costly? How many people should sit at home doing nothing because supposedly there's no money to pay them to do useful work?
"We can't Uber our way to a more educated country,"
Friends of ours have enrolled their son in an SAT prep course this summer a few days a week at a local learning center.... the boy (no extra car in the household) takes Uber to the facility in the morning ($9) and then walks to a nearby friends house after the class is over and they pick him up there after work...
Deregulate the taxi business and allow them to cut corners, and they'll compete with Uber. Maybe everyone will be happy. Or maybe something tragic will happen that'll remind everyone why regulations were put there in the first place.
There are MMT enthusiasts who are as Dan describes. Utopianism comes in all stripes.
Thought that was over the top too. I see it as 180 degrees , that only the MMT people focus on whether or not there are real resources not money. Even monetarists like Sumner think money can be printed..... but ONLY by the CBs....because govts affect expectations and therefore inflation. They think money is just a neutral veil over barter which is absurd.
I think the point is that we are not resource constrained in any of the truly important areas. We dont lack space on this planet for 10 billion people, we dont lack materials to build houses for 10 billion people, we dont lack the food for 10 billion people we dont lack the capacity to educate 10 billion people, we dont lack the capacity to keep 10 billion people healthy.
What we do lack is the ability to have everyone live in a 5000 sq ft mansion consuming all the fossil fuels that an American upple middle class person does, to have them consume the meat, seafood and other animal products the typical American does, to have them water a lawn and fill a swimming pool the way many Americans do, to have them all go to Harvard or other Ivy league or to give them heart surgery within a week of onset of angina. So Americans have a particular reckoning, I agree, and we stand to lose the most relatively with a broad global view, which is why so many refuse to take that view and would just as soon exterminate much of the rest of the planet. You are correct that simply handing out checks to people will not change the reality I just described but its also not necessary to keep a significant portion of or population living below subsistence levels today right NOW while we solve the thorny political issues we are talking about. The simple things we can do today for the real improvement of many peoples existence right now really are as simple as increasing the balances in their checking accounts by a few hundred dollars a week... and stop wondering "How are we going to pay for it??!!".
Just because its simple doesnt mean its easy. We are fighting ignorance and petty political/class wars.
Actually to somewhat revise my comment above Ill just add;
Not only do we not lack the capacity to educate 10 billion people at the college level we actually dont need everyone educated TO the college level. Its okay if some people dont get that much education by age 21. We already have enough educated people to deal with the issues of concern and there are plenty of 13-15 yr olds dreaming of solving world hunger and enjoying world peace, if only their grandparents/parents wont get in their ways.
Thought that was over the top too. I see it as 180 degrees , that only the MMT people focus on whether or not there are real resources not money.
Really? Where are the MMT studies of available natural resource reserves? Of farmland and water? Of demographic projections? Of education levels? They are non-existent. MMTers wave their hands vaguely in the direction of real resources, but never actually study them, and never offer specific recommendations as to how they should be used, allocated and organized. They just blithely assume that since we can never be "out of money" that somehow the resource allocation questions will all work out with sufficient money infusions.
Even monetarists like Sumner think money can be printed..... but ONLY by the CBs....because govts affect expectations and therefore inflation. They think money is just a neutral veil over barter which is absurd.
Market monetarism and MMT are just two different forms of magic pony economics. MMT policy analysis is just monetarism administered through the fiscal side of government, instead of the central bank. Since MMTers believe that treasury operations determine the level of money - or "net financial assets" - MMT is just what you get when you take monetarism and apply that wrinkle to it. MMTers believes you can always solve the problem of inadequate aggregate demand through adjustments to money/NFA levels, and apparently believe that as long as you've solved the problem of aggregate demand, you have solved the problem of creating a morally acceptable economic order. It doesn't seem to matter to them what is "demanded".
"Really? Where are the MMT studies of available natural resource reserves? Of farmland and water? Of demographic projections? Of education levels? They are non-existent. MMTers wave their hands vaguely in the direction of real resources, but never actually study them, and never offer specific recommendations as to how they should be used, allocated and organized."
I dont think thats a fair critique Dan. Where are the neoclassicals and THEIR studies of natural resources, or other PKers or Monetarists or RBCers?. Schools of economic thought are not responsible for those studies but there are organizations like the UN and World Bank and groups (different national geologic surveys) that do try and assess those resources levels and they are accessible to all.
It should be obvious to anyone with half a brain that we arent running out of land for people to live on (the entire earths population could be fit within the boundaries of Texas and have 1000sqft per person or 4000 sqft per family of four which is way less than the population density of Manhattan) This isnt to argue that we should not, as a species, be mindful of how many children we have but simply to illustrate that we are possibly not looking at this issue quite right at this time.
Obviously there is enough trees or dirt to make bricks to construct dwellings. Clean water is an issue but that is different from not having enough water.
I think there are two levels to the economic discussion, one is how do we get our economies back on track.... today, using the metrics which we have chosen (Im not saying they are the best metrics but they are how we have decided to measure econ matters) such as GDP, unemployment levels, productivity. I think its obvious that we can restore GDP (if that is your primary goal) to 2007 levels quite simply by "goosing" aggregate demand. This obsession with "productive work" is mind boggling. No one can even agree on what true production is and how to measure it. To most people productive work just means working in the private sector for a millionaire or billionaire and not getting a govt check for pushing papers. Frankly as long as people arent being anti social in their behaviors I dont care what they do with their time or money and we can incentivize the work we need done properly. I think the 20/80 principle apples here. 20% of the population can and does do 80% of the necessary work (although the actual individuals change rather often) but that doesnt make the other 80% worthless and worthy only of our derision.
Long term we do need a differnt view towards how we generate the electricity we use, how we get to work and play, how we educate people and how we treat those who are sick or have broken the law......and that is already happening! The reason it isnt further along, it seems to me, isnt because its not a better way it is simply because of entrenched interests who dont want to lose any of their market share of whatever product they are peddling. So that longer term battle and how and when it turns out will be more political.
Obviously I would like to plan and prepare for the day of better transportaion /energy/healthcare policies and many people could be put to very useful work today in the advancement of those goals but I cant ignore todays reality..... that too many people are simply short of cash (or surplus of debt!) and that is a very simple (not easy) problem to solve.
Watching Bill Maher right now, just heard some moron talk about how we shouldn't do anything about climate change since it would "impose too much costs"... The schmuck thinks money is real and we're out of it. So he's willing to destroy the real habitat over not having large enough numbers written on a balance sheet. Tell me again who's not paying attention to real things?
I dont think thats a fair critique Dan. Where are the neoclassicals and THEIR studies of natural resources, or other PKers or Monetarists or RBCers?
It is a fair critique. First of all it is not defense of a school of economics to say, "well this school is no more blind and stupid than these other schools.
But the fact is there are many other economists and social scientist studying the economic impacts and realities of demographics and resources
Dan - only report I've seen in Aus. (2002) that models interaction of real resources with population scenarios: http://www.cse.csiro.au/publications/2002/fulldilemmasreport02-01.pdf
135 comments:
Wow, I see this is still the same sad little echo chamber from a few years ago, and Mike Norman is an even bigger buffoon now than he was back then.
Mike,
On central banks "printing money" you say: "There's an asset that's created and a liability of equal value on both sides, for the lender and for the borrower" but "what the central bank cannot do is just give you money in exchange for nothing. It cannot just credit your bank account without getting something of equal or greater value in return. The government can do that but not the central bank."
Ordinarily this makes perfect sense, but it doesn't explain the Fed's role since the 2008 crisis. You do go on to briefly mention that a central bank can buy low quality non-performing assets but that this is very rare occurrence, and that I think is the absolutely crucial issue. Now, as far as I can gather:
1. Randall Wray, if I remember correctly, puts the Fed's bail out of Wall Street at about $29 trillion. The Fed took the literally worthless financial assets of the financial sector on to its balance sheet and in return "printed" $29 trillion, an amount far in excess of the so-called assets it was acquiring. In fact, the assets the Fed were acquiring were not only useless, they were toxic: no one wanted to hold them and no one in their right mind would acquire them. So the assets and the liabilities don't match at all. The central bank is not "getting something of equal or greater value" but worthless non-performing assets.
2. The government in fact did very little (TARP, for example) and that the Fed did all the heavy lifting because of a dysfunctional congress. So contrary to what you said, it seems that it was the Fed, not the government (by which I take you to mean the Treasury) which credited banks with money for assets that were worthless and certainly not "of equal or greater value".
The only way to reconcile the Fed's actions since 2008 is that a central bank has the authority to value an asset at whatever astronomically inflated figure it wants to and that it in fact has de facto power of a treasury to just give money away. So with respect to what you said in your video, the exact opposite seems to be the case!
The toxic financial assets the Fed swapped for reserves were all assets with maturities. The Fed just holds them to maturity. The reserves are held by the banks and don't go anywhere. Remember, banks do not lend reserves.
"The Fed took the literally worthless financial assets of the financial sector"
John they bought government securities they are hardly worthless they are 100% guaranteed by the government...
"Randall Wray, if I remember correctly, puts the Fed's bail out of Wall Street at about $29 trillion."
this is an absurd/ideologically biased claim by him they rolled over $1T in assets for 29 months this is not 29B... if Ive refinanced my 250k mortgage 4 times, Wray thinks I have borrowed 1M.... this comes from all the "bankster" schtick rhetoric that some on left are apt to use, it doesn't help... remember Wray IS still an economist from the academe so you have to take everything with a grain of salt...
Crisis was due to system liability flow being allowed to exceed proper govt net spending flow to non-govt, post the system malfunction in 2088, between 2008 and 2009, govt net spending increased by approx. 1T from about 3.2T to 4.2T while liability flow was decreased and then the system stabilized as govt spending flow was increased to a level that was adequate to support the allowed liability flow ...Fed provided 'lender of last resort' during this stabilization period which is THEIR F-ING JOB...
Also within the context of Mike's presentation here, our readers should read this too:
https://en.wikipedia.org/wiki/Factoring_(finance)
The Fed's loans are in the form of a "Factoring", this is how they obtain their required operating funds ie via the "fee paid to the factor"... amounts in excess of these fees are credited to the US Treasury account...
rsp,
It's just wrong to say that no one would ever have a dollar if the treasury didn't spend them into the economy.
To see this clearly, imagine that the government and treasury decided to start operating on a pay-go basis, never issuing a single debt instrument and spending only from incoming tax revenues.
Since there would no longer be any treasury debt, there would no longer be any open market operations for the Fed to conduct involving government debt. So let's imagine that the Fed conducts monetary policy from that point forward entirely through discount window loans.
The Fed could still ensure that the monetary supply continued to grow, commensurate with overall economic growth, in a manner sufficient to supply the ongoing monetary needs of the general public and the banking system. It could even do this while maintaining a yearly central bank operating profit. In effect, it would only need to lend amounts each year to the member banks slightly larger than the amount it loaned the year before. The increasing amounts loaned into the member banking system would always be sufficient for the banks to pay off the previous year's loans. The MB supply would grow continuously. And that means the banks would be free to increase the M2 supply continuously while still meeting their payment obligations.
This also means that at any given time, the member banks would have an aggregate liability to the central bank that is slightly greater than the aggregate central bank liability to the member banks (that is, the members' aggregate reserve account deposits). And we can plausibly imagine that the general non-banking public and business sector always similarly owes slightly more to the member banks than the member banks owe to the public (loans slightly exceed deposits).
Does this mean that the private sector, and more specifically the non-bank public, can't save each year, and realize increasing wealth? Of course not. Because in addition to all of this banking activity, there is a real economy engaged in real investment and wealth creation. Real capital assets are being created each year in excess of the real assets that are lost to depreciation. People own those assets, either directly or by virtue of purchasing equity instruments that give them an ownership stake in the assets that are in turn owned by companies. So despite the fact that the public always has an aggregate liability to the banks slightly in excess of the aggregate liability of the banks to the public, the public possesses positive equity so long as its net holdings of real wealth always exceeds the size of its net debt to the banks.
Another way the central bank could conduct monetary policy is by buying and selling high quality equities on an ongoing basis. If it buys equities that are appreciating in value, it could always sell the equity back for slightly more than it purchased it. Again, the central bank would realize positive annual income and a growing positive equity position on its balance sheet, even while the money supply continued to grow continuously.
Remember, all of this is going on while our hypothetical treasury funds its expenditures entirely from taxes. The annual growth in the money supply does not at all depend on treasury spending. And that is still true if the treasury starts to issue and sell debt instruments again, debt that works just like private sector debt. The treasury could sell securities and fund the interests and principal payments on those securities by a combination of taxes and additional securities sales. If the central bank wants, it could add government security purchases and sales to its portfolio operations, adding government bonds to the discount window loans and equities that are already in the portfolio.
In effect, this is the system we have.
There are excellent reasons for government spending: the government can and should carry out many economic operations the private sector simply can't or shouldn't handle. And there are also excellent reasons for the government to run deficits: deficit spending can channel inert financial savings into useful spending. But the idea that the government needs to spend to supply the private sector with its growing numbers of dollars is wildly inaccurate. The supply of dollars grows as a result of the interaction between bank lending and central bank monetary policy. The treasury does not issue new dollars. It only issues debt instruments that it trades for dollars.
Matt is right about the Felkerson research and Wray's comments on it. If I loan you X dollars each day at 0% interest, and each day you use the loan to pay off the previous day's loan, and then at the end of 100 days you pay back the $X you owe me, then while I have in one sense "loaned you 100 times X dollars", in a more accurate sense I never had more than an $X credit exposure, and you never had more than an $X liability. And at the end of the process we are even up.
http://heteconomist.com/government-spending-or-lending-logically-precedes-tax-revenue/
Dan see this.
The government "needs" to spend to supply NFA (net financial assets.)
Right, it is stocks and flows.
Thought experiment:
There is only £1 in existence, you owe me £100, can you pay me it back?
On the face of it looks like no.
But what happens is you pay £1, then I pay you £1 for doing something, pay £1 back, etc.
"The supply of dollars grows as a result of the interaction between bank lending and central bank monetary policy. "
In the UK we don't have this nonsense. BoE is clearly subsidiary of the Treasury. All up to the Treasury.
I also guess it depends on what you mean by "dollars" or "money supply"? Bank IOUs (demand and time deposits), currency and reserves and cash. What about other IOUs?
Mule Rider:
Yes. I am a buffoon. Awesome comment.
"Real capital assets are being created each year in excess of the real assets that are lost to depreciation. People own those assets, either directly or by virtue of purchasing equity instruments that give them an ownership "
Yes people can own real assets. They cannot accumulate net financial assets without government deficit spending.
Since financial assets = financial liabilities the value of real assets will be driven (in extreme) to zero in a "debt deflation."
Always important to distinguish between real and financial.
The government "needs" to spend to supply NFA (net financial assets.)
I think that analysis is incorrect Random. I just explained why at length.
"I think that analysis is incorrect Random. I just explained why at length."
You didn't. You just moved the process to the other half of the government sector by obfuscation.
https://originofspecious.wordpress.com/2015/08/05/2420/
New post.
All the emergency lending the Fed did, whatever you want the number to be, were LOANS that were an ASSET to the Fed. Quantitative Easing was the outright PURCHASE of Treasury Securities through issuance of reserves, which are LIABILITIES to the Fed. I'm amazed at how many economists and pundits don't get this.
and I agree with Matt that it is precisely the Fed's job to provide emergency liquidity during crisis. Moral hazard issues are supposed to be dealt with BEFORE any crisis can occur, through tough regulation and supervision. Unfortunately, some progressives have taken frustration out on the Fed and Dodd-Frank had some provisions which curtailed the ability of the Fed to lend to certain types of institutions. I get the anger, but we shouldn't weaken our central banks because of previous regulatory failure.
You didn't. You just moved the process to the other half of the government sector by obfuscation.
It's not obfuscation.
First, I'm perfectly happy for the central bank to be recognized as part of the government, and so for it to be recognized in that sense that the private sector's supply of dollars can't grow if the government doesn't supply them.
But what Mike seemed to claim, and others have claimed many times before, is that the treasury needs to deficit spend in order for new dollars to get into the economy. And that is mistaken.
Also, the Fed's supply of adequate liquidity to the economy, and its ability to ensure a continuing growth in the money supply to accompany real economic growth, does not depend on the Fed "spending" dollars. It can simply loan all of the needed dollars, expanding its balance sheet gradually as the economy grows, adding both more loan assets and reserve account liabilities on the balance sheet over time. It could spend dollars into the economy instead by just buying assets outright, but that is not an absolute necessity.
Also, I purposely avoided reliance the vague and spurious concept of "net financial assets" which accompanies a lot of MMT explanations of things. An economy can save and grow even if the private sector's net financial debt to the central bank always exceeds the net financial debt of the central bank to the private sector, and even if the treasury never runs a deficit at all.
Justin,
"previous regulatory failure."
You had those two libertarian ideologue free-market-fuckheads Bernanke and Paulson at the controls... forget it!
I think Paulson is on record as saying he was content to let Lehman just fail.... these are incompetent/unqualified libertarian morons who we turn things over to regulate.... we have no chance with these libertarian people in these regulatory positions...
rsp,
"An economy can save and grow even if the private sector's net financial debt to the central bank always exceeds the net financial debt of the central bank to the private sector, and even if the treasury never runs a deficit at all."
Theoretically yes... But
That was the standard thinking of the surplus obsessed Howard government in Australia. The problem is it doesn't work, as 2008 has shown.
The private sector is revenue constrained, unlike the government. They can't "live beyond their means" forever. The credit bubble has been very damaging to households and effects continue today.
Ideally you want to ban bank lending for anything other than capital development of the economy.
I don't think the difference between bailout loans and QE purchases makes all that much difference.
When a bank makes a loan, they are in effect purchasing the borrower's promissory note, which then become an asset of the bank. The bank incurs a liability - initially in the form of an increased account balance for the depositor - and in return they get an asset: the depositor's promise to pay the bank an amount equal to that liability plus interest. When the note is paid off, they have made a profit equal to the interest.
If they instead buy another kind of asset from a depositor - like an MBS - via a QE program, it is more or less the same thing: they increase the depositor's account balance, and in return get an asset from the purchase. But instead of the asset consisting of the depositor's own promise; it consists of someone else's financial promises that the depositor happened to own. If the MBS performs, then again the bank can profit. In what amout depends on how much they paid and how well the asset performs.
One thing the public should have focused on is not the size of bailout loans and/or asset purchases, but whether the Fed purchased non-performing assets which led to Fed income losses, and consequent losses to the treasury through reduced Fed distributions to the treasury. That certainly seems not to be the case, given that Fed distributions to the Treasury dramatically increased since the crisis.
But another thing people might want to look into is whether the Fed income statements and distributions to the Treasury involve some kind of spurious and obscure accounting that misrepresents the performance of some of the assets they purchased. In other words, maybe the Fed just printed dollars to buy junky, non-performing assets, and printed more dollars to send to the treasury, and is just pretending via some fancy footloose bookkeeping that the latter corresponded to income derived from the former. It was all a big accounting conspiracy. OK, so show me the accounting. But more important - if it was true, big deal! The Fed was fighting a deflationary environment. So if it actually just printed money and gave some of it away, in itself that's great.
But now we get to the nub of the issue: assuming the accounting conspiracy story is true, why didn't the Fed fight economic contraction, unemployment and deflation by giving money away to all of the regular non-bank businesses and households that were in the soup? Where was their bailout? That's what people should have been whining about instead of whining about the Fed's purchases of assets.
Why should "central banks" "fight" anything? The American obsession with Fed is annoying.
They can't "live beyond their means" forever.
They don't have to live beyond their means forever. The fact that private sector entities have revenue constraints doesn't mean the private sector can't grow in a healthy and sustainable way without building up a lot of excessive and bad debt. The explosion of private sector debt was a consequence of bad and overly easy credit policies combined with the harmful effects of the upward redistribution of income flows and assets that took place across the English-speaking world.
But in any case, this just comes back to my point about the real reason for government deficit spending: it is a way of funding present spending with claims on future prosperity, and channeling an economy's existing assets out of the hands of risk averse savers and hoarders with large surpluses, and employing those assets in building national wealth.
Why should "central banks" "fight" anything?
Because that's what it was created to do: prevent and counteract recessions and depressions by advancing credit when regular banks won't or can't.
I agree that is not enough. If the private sector is too fearful, confused or uncoordinated to consume and invest its resources at the level they need to, then the government should be more assertive and do it for them. This has nothing fundamentally to do with monetary phenomena, but is a matter of social organization.
I get the anger, but we shouldn't weaken our central banks because of previous regulatory failure.
Back in the days when I used to have pieces run at Naked Capitalism, I was constantly having to battle the semi-Paultardian, populist Zero Hedge refugees who hung out there and were all about the bailouts and the Evil Fed. It's kind of a religion with them.
I get the lender of last resort, but why should central banks do anything else? Use fiscal policy.
"Fed purchased non-performing assets which led to Fed income losses,"
This is the point. Why?
"funding present spending with claims on future prosperity"
What? You mean they fund by spending MONEY. Or are you repeating "we'll have to pay off the debt, burden on future generations"... right wing garbage.
This is the point. Why?
That's not the point. That's a conspiracy theory many people keep defending, but there is no evidence for it. The Fed has been making oodles and boodles of money from its portfolio, not losing money.
The Fed can't "make" or "lose" money. It's the flipping Fed!
It's not a conspiracy theory that they bailed out the banks.
The Fed can't "make" or "lose" money. It's the flipping Fed!
The Fed has an income statement. It has expenses, mainly interest expense, and also has incoming revenues that come from the performance of the assets it holds in its portfolio, realized gains on sales of assets, etc. After paying statutorily required dividends to the member banks in proportion to their paid-in capital, and subtracting its operating expenses, the rest is profit that, as a matter of long-standing Fed policy, is distributed to the US treasury for the purposes of treasury debt reduction.
The bank bailout consisted in making loans and buying assets from those banks. Although there might have been losses on some of those transactions, in the net they were immensely profitable to the Fed, which is seen by the fact that they have been distributing tens of billions of dollars annually to the treasury - up actually to $100 billion last year.
The Fed can have Negative Capital indefinitely.
The Fed cannot go broke.
http://www.newyorkfed.org/research/staff_reports/sr684.pdf
To make my it simple, suppose Goldman is holding MBS securities whose market value has dropped precipitously to $1 billion from a pre-crisis value of $100 billion. Did the Fed buy the MBS at the $1 billion market value or the pre-crisis value of $100 billion? The only way for the Fed to clean up Goldman's balance sheet it to do the latter, right? Which means that the Fed can decide that an asset on its own balance sheet is worth whatever it wants to in order to make the accounting equation hold.
Chewitup: "The toxic financial assets the Fed swapped for reserves were all assets with maturities. The Fed just holds them to maturity."
The toxic assets (like mortgage backed securities) will eventually return to their true worth over time, but at the time they were bought by the Fed were they bought at the market rate (pennies on the dollar) or were they bought at an inflated value that would clean up the commercial and investments banks balance sheets? See the example at the top of the post.
An essentially bankrupt financial institution gains nothing by selling its toxic assets at the market rate - it'll still go bankrupt. What Wall Street needed was for the Fed to buy the toxic assets at something like the face value, a value far in excess of their market rate. Which means that the assets do *not* equal the liabilities, unless the Fed can claim that assets that are pennies on the market are in fact worth a full dollar.
Matt: "John they bought government securities they are hardly worthless they are 100% guaranteed by the government."
The Fed also bought plenty of worthless mortgage backed securities not guaranteed by the government. Did it buy them at the market rate, or an inflated rate to clean up the banks balance sheets? However, on the question of government securities, even if backed by the government, did their price stay unchanged during the crisis? Surely there was enough selling during the crisis to drive treasuries down. Now, if the price did change, did the Fed buy them at the market rate or an inflated rate? Again, see the example at the top of the post.
Matt and Chewitup, I'm not arguing against the Fed's actions and I understand that it didn't cost the Fed a single penny to bail out the financial sector. My question and confusion concerns the alleged equality of the assets and liabilities.
The Fed can have Negative Capital indefinitely.
The Fed cannot go broke.
Correct. It's not a matter of the Fed going broke. It can't go broke. But when it has negative income in a given year, it sends no money to the Treasury in that year, but books the loss as a deferred asset. And then in subsequent years, after it returns to positive net income, it continues to stiff the Treasury until it has realized the entire amount of the accumulated deferred asset. For example, it could go like this:
Year 1
Loss: $10 billion
Total Deferred Asset: $10 billion
Distribution to the Treasury $0
Year 2
Loss: $10 billion
Total Deferred Asset: $20 billion
Distribution to the Treasury $0
Year 3
Loss: $10 billion
Total Deferred Asset: $30 billion
Distribution to the Treasury $0
Year 4
Profit: $10 billion
Total Deferred Asset: $20 billion
Distribution to the Treasury $0
Year 5
Profit: $10 billion
Total Deferred Asset: $10 billion
Distribution to the Treasury $0
Year 6
Profit: $10 billion
Total Deferred Asset: $0
Distribution to the Treasury $0
Year 7
Profit: $10 billion
Total Deferred Asset: $0
Distribution to the Treasury $10
In years 4, 5 and 6, even though the Fed books a profit, the Treasury gets nothing. Since the existence of a Fed profit in a given year roughly means that more is being paid into the Fed in that year than the Fed pays out, then those profits act functionally like a tax on the non-Fed sector of the economy. So the non-distribution of the annual $10 billion profits in years 4,5 and 6 is functionally the same as using a tax to restore the "loan" the Fed made to the private sector in years 1, 2 and 3.
So the accounting equation holds by the Fed booking negative income as a deferred asset on its balance sheet?
Obviously it isn't playing funny buggers (creative accounting) with its own balance sheet, and the Fed being the Fed it can book negative income as a deferred asset until the heat death of the universe, or presumably even longer.
John, here are some of my comments:
You said: "To make my it simple, suppose Goldman is holding MBS securities whose market value has dropped precipitously to $1 billion from a pre-crisis value of $100 billion. Did the Fed buy the MBS at the $1 billion market value or the pre-crisis value of $100 billion? The only way for the Fed to clean up Goldman's balance sheet it to do the latter, right? Which means that the Fed can decide that an asset on its own balance sheet is worth whatever it wants to in order to make the accounting equation hold.
"The toxic assets (like mortgage backed securities) will eventually return to their true worth over time, but at the time they were bought by the Fed were they bought at the market rate (pennies on the dollar) or were they bought at an inflated value that would clean up the commercial and investments banks balance sheets? See the example at the top of the post."
"The Fed also bought plenty of worthless mortgage backed securities not guaranteed by the government. Did it buy them at the market rate, or an inflated rate to clean up the banks balance sheets? However, on the question of government securities, even if backed by the government, did their price stay unchanged during the crisis? Surely there was enough selling during the crisis to drive treasuries down. Now, if the price did change, did the Fed buy them at the market rate or an inflated rate? Again, see the example at the top of the post."
COMMENTS: The Fed can only buy securities issued by other federal government entities, namely the US Treasury, Fannie, and Freddie. They cannot purchase private label securities, including private MBS. They also cannot purchase debt issues of US states.
Now as a different matter a lot of bad mortgages DID end up in Fannie and Freddie securities, which the Fed did then purchase. And many banks that were holding Fannie and Freddie securities were aided in their re-capitalization efforts by the prices of their Fannie/Freddie security holdings being stabilized by Fed purchases.
When the Fed does go into the market to purchase government securities, they dont simply decide what price to pay. They go in like any other market participant and pay the current market price, which may go up AS A RESULT-- but this is different from them deliberately paying "too much" to bail out the seller.
The Fed can LEND against certain types of private bank assets, and this is what they did in addition to QE, but they cannot purchase them outright and add them to its balance sheet. This is why in my previous post I sought to distinguish between loans and purchases. The US Treasury, on the other hand, could do that. Having the Treasury buy junk Private MBS was the original plan under TARP...it was only after a few days the Treasury realized there was no way they could do this, and decided to recapitalize the banks through equity purchases instead and sort out the balance sheet later.
Your claim that the Fed can only purchase other government securities is incorrect.
See: https://research.stlouisfed.org/fred2/series/MBST
Until the crisis, the Fed never held MBS on its balance sheet. It now holds approximately $2 trillion of MBS.
John,
Yes as I said above, these are MBS from GSEs ONLY. Not private label. And this was only after they were taken into government conservatorship and given an EXPLICIT "Full faith and credit backing", when previously it was only implicit. And yes, before QE the Fed only ever purchased US Treasury securities.
See page 12 here: http://www.federalreserve.gov/monetarypolicy/files/quarterly_balance_sheet_developments_report_201505.pdf
and footnote #2 on that page.
We care.
What does it mean to say "decided to recapitalize the banks through equity purchases instead and sort out the balance sheet later."
What exactly does equity purchase mean? Buying stock in the bank or something like that?
Dan Kervick,
I think you're missing the whole MMT point about net financial assets, or 'net saving'.
MMT authors have written, as you explained above, that money can enter the system through either government spending or lending. In simple versions the emphasis is on spending, but in subsequent pieces there is the clarification that it could be spending or lending. And the scenario you describe is hypothetically possible, in theory. But what your scenario ignores is the real-world desire of the non-government sector to accumulate net financial assets, or to 'net save'. It's this desire to net save which makes a government deficit necessary to avoid what I'll call 'economic dysfunction'.
I think you're missing the whole MMT point about net financial assets, or 'net saving'.
I'm not missing it, Philippe; I'm disagreeing with it.
I don't think there is any such thing as the desire to accumulate net financial assets. There is certainly a desire to save, accumulate assets, and increase wealth, but the satisfaction of that desire does not depend on the accumulation of financial assets that are the liabilities of an external agent (a government), and that net to some number greater than zero.
Neither should governments necessarily satisfy that desire regardless, that's bad policy.
what you're suggesting is possible in theory, but it is not the case in practice. It requires that every private sector desire to save is met by an equal desire to borrow, which is not the case in the real world. When private sector agents desire to save overall (or to 'net save'), which they do, this can only be accommodated by the deficit of another sector, i.e. the government in a closed economy. In an open economy this can be accommodated by an export surplus, but that also ultimately requires a deficit from foreign governments given the savings desires of foreign private sectors.
^Dan Kervick
The concept of net financial assets is not per se presented as something desired by households and firms, but a method of tracking monetary flows between sectors. In a capitalist economy there is a powerful incentive on the part of all actors to spend less than their incomes, hence a desire in aggregate to net save. This is addressed by Keynes paradox of thrift; if most participants attempt to net save spending, employment and output will fall. Economic actors do not have to consciously desire an increase in aggregate savings for net increase in financial wealth to be a mutual goal.
right.
...the satisfaction of that desire does not depend on the accumulation of financial assets that are the liabilities of an external agent (a government)...
Yes it does.
The private sector always has a desire for risk-free assets - the bills and bonds issued by the government.
Even the (neoclassical) discipline of "Finance" recognizes this - its analysis is based on the key distinction between riskless and risky assets. If there were no risk free assets the whole edifice would simply crumble.
Not that my opinion matters (just a fellow traveler here), but Dan's ideas seem a bit nutty, I think Neil is right, you've just shifted sectors. I'm open to them though, Dan should write up an entire blog post explaining them.
"In effect, it would only need to lend amounts each year to the member banks slightly larger than the amount it loaned the year before" Sounds to me like you're just explaining credit growth, which is what we've just lived through, that Steve Keen has explained best. Or else it's like China, but in China they're "loans", meaning fiscal policy.
People do like to earn more than they spend. It is true that most people don't save in cash, they purchase other forms of assets. But, no matter what, flows must match (sectoral balances). So it seems for the private sector as a whole to take a net positive position, you would need a govt deficit. It doesn't have to be much, most of the post war period averaged just under 2% deficit.. And risk-free interest bearing assets are popular.. So maybe in theory Dan's ideas *could* work, but from an empirical pov, it seems the simpler picture is more correct; Deficits have helped grow economies, gold standard and balanced budgets don't work, etc.
Does Dan have a blog? I'd be interested in reading more.
It requires that every private sector desire to save is met by an equal desire to borrow, which is not the case in the real world.
That is only one way to save. Here's another way to save: You are the sole owner of a flower shop. The shop generates $300,000 this year in revenue. Your costs for paying workers and acquiring supplies used in the current year is $200,000. So, your net income for the year is $100,000. You consume $50,000. With the remaining $50,000, you invest in capital improvements to the shop: adding a new display case and refrigerator, a new sign and front display window, nicer carpets and curtains. You have losses due to depreciation on old equipment of $20,000. As a result the value of your shop increases by $30,000. You have saved $30,000, without anyone else dis-saving. That saving is one small part of the overall private sector saving that comes from economic growth and capital accumulation.
Here is another way to save: you own $300,000 worth of stock in Mega Flowercorp. As a result of Mega Flowercorp's revenue growth and re-investment of profits in business development, the value of Mega Flowercorp, and your shares, increases by 10%. You have again saved $30,000, without anyone else dis-saving. Again the saving is one small part of the overall private sector saving that comes from economic growth and capital accumulation.
Here is another way to save: An elderly retired couple owns a small piece of land in the woods worth $30,000. They decided to have one last fling. So they sell you the land for $30,000, which you purchase entirely out of your current year's income. They consume the entire $30,000 by taking a world tour that costs exactly $30,000. So, the couple has dis-saved, converting savings (the land) into present consumption; while you have added $30,000 to your savings.
Here is a fourth way to save: You have $200,000 in the bank. You loan $60,000 to your friend Bob for a sure thing project he has, and he promises you a 50% return. He gives you his IOU for $90,000. So Bob now has an additional $60,000 in cash assets but an additional financial liability for $90,000. You have $60,000 less in cash assets, but a financial asset worth $90,000. So you have saved $30,000, and Bob has dis-saved $30,000. (If you like, you can discount the value of the asset/liability by some risk weighting corresponding to how likely it is Bob will deliver various levels of return.)
So, of the four options we have considered, only with the second two does the saving of one person amount to the dis-saving of another. In those cases the economy as a whole hasn't saved anything: assets have just changed hands. But in the first two cases, the economy as a whole has saved in the net.
And of course, in the usual course of business in a capitalist economy, these operations are combined in ways that involve more than two parties: A lends to B, B uses the lendings to buy shares in C's business; C uses the money to grow the business and accumulate capital, etc.
This is how, in a capitalist economy, the private sector can save in the net, whether or not the government is providing any additional investment opportunities in government financial assets. Economies carry out real investments on an ongoing basis, and their net real capital stock increases as a result. In capitalism, those additions to the capital stock are individually or corporately owned, and so they represent net savings by private sector entities. The private sector will also create financial assets to convey present or promised future ownership claims on that capital stock, which moves some of the accumulating wealth around and creates corresponding pairs of assets and liabilities. Only those types of financial assets involve the saving/dis-saving "balancing out" which keeps aggregate net savings constant. But the ownership of accumulating real assets does not.
Joe, I do have a blog, but no longer actively maintain it.
The private sector always has a desire for risk-free assets - the bills and bonds issued by the government.
Well, I have a desire for a risk-free income for the rest of my life - a job from which I can't be fired no matter how I perform. But the economic world won't fall apart if I don't get it. Risk is an inherent part of economic life.
But returning to our main issue in this thread, the chief risk-free asset that people want and need - non-interest-bearing currency - is supplied by our centralized banking system consisting of privately owned banks that are members of a public-private partnership organized under the central bank. This complex operation has everything it needs to supply adequately growing amounts of currency to a growing economy, without either inflation or deflation, by growing member bank and central bank balance sheets, even if the treasury never issues a single debt instrument and operates purely on a tax-and-spend basis.
I think there are very good reasons for the treasury to counter-cyclically deficit spend, but the reason isn't that treasury deficit spending is needed to make the monetary system work.
I also personally think that there are very good reasons to have a big and active government presence in the economy, because there are many areas in which the government allocates resources more efficiently and effectively than the private sector. Government should use the tax system to redistribute incomes and wealth, regulatory systems to establish a more effective and socially balanced income system and planning systems to direct a significant portion of national resources away from wasteful consumption and rent-farming schemes and into publicly beneficial projects and strategic national investments. But this has nothing to do with deficits and/or monetary policy, and the benefits comes just as well with tax-and spend.
Sounds to me like you're just explaining credit growth, which is what we've just lived through, that Steve Keen has explained best.
Sure. A modern, growing economy cannot function without some amount of credit, since it relies on the channeling of resources from many sources into large projects. As the economy grows, the total volume of credit should organically grow along with it. However, we should guard against dangerous growth in the ratio of private credit and debt to GDP. Just before the Great Depression, and again before the Great Recession, the private sector debt/GDP ratio was extremely high relative to historic norms. Keeping that ratio at a safe level is a job for government and central bank credit regulation policy.
Yes Joe exactly. That is what TARP ended up being
"As a result of Mega Flowercorp's revenue growth and re-investment of profits in business development, the value of Mega Flowercorp, and your shares, increases by 10%. You have again saved $30,000."
Wrong, you've saved exactly nothing. You must sell that stock before you can realize the gain (your account goes up, someone else's goes down). As we saw recently, the present trading value of a stock can change rapidly and have absolutely no relation to any sort of underlying intrinsic worth of a company.
"So, the couple has dis-saved, converting savings (the land) into present consumption; while you have added $30,000 to your savings."
What if it was 2008 when you purchased that land. Now it's only worth $20k and you're 10k in the hole... But yes, you've increased your assets.
I would argue only the first and fourth scenario (possibly, assuming a successful venture) represent any form of wealth/asset creation.
But of course scenario 4 only represents a tiny tiny fraction of how lending works. That scenario is how loanable funds works..
The problem with credit, imo, is that yes, it expands purchasing power right now, and can lead to productive uses, new factories/businesses/inventions etc. But then I must forgo consumption in the future to pay back the loan.. Which is what happened in 2009ish when the private sector stopped taking on credit and reversed it's net negative position to take a net positive position.. Since flows must match, the govt had to run a deficit.
I guess I'm still having trouble picturing how all the money the private sector needs can be supplied by banks expanding their balance sheets.
AFAIK Banks do that by simultaneously creating loans and deposits. Which means an increase in purchasing power now, but with a hangover later when one forgoes consumption to repay the loan. (I suppose banks end up with assets from foreclosed properties and things like that).
Or, like Dan mentioned earlier "In effect, it would only need to lend amounts each year to the member banks slightly larger than the amount it loaned the year before." But that is almost exactly the picture circa 2006, the private sector took out more and more credit each year (the central focus of keen's work) and it resulted in disaster.. maybe, just maybe, it could work if there was absolutely no mal-investment at all, no bubbles, a fairly even distribution of income..
Yes, loans can create a real asset, that I can keep, even after I pay back the loan, but all this is a delicate balancing act. Flows must match.
Wrong, you've saved exactly nothing. You must sell that stock before you can realize the gain (your account goes up, someone else's goes down). As we saw recently, the present trading value of a stock can change rapidly and have absolutely no relation to any sort of underlying intrinsic worth of a company.
But I tried to specify in the hypothetical that in this case the stock's value reflected fundamentals, and had gone up due to the firm's investment of profits in further business development, which increased the real value of the firm. There is real wealth creation there.
You don't have to realize the gain in monetary terms by selling the stock in order for your wealth to increase. An ownership stake in a valuable company is itself a form of wealth. If you own a certain percentage of a company, and the value of that company increases, then your wealth has increased.
Imagine a simplified economy in which there is only one bank. Since there is only one bank, then by default it is the "central bank". Also imagine that this is a cashless society, and that all money exists in the form of deposits at that one bank.
Suppose also that in this society all financial assets held by the non-bank public consist of bank deposits, and all financial liabilities possessed by the public consist in the amount owed by the bank. The deposits are the bank's financial liabilities and the public's financial assets; the amounts owed are the public's financial liabilities and the public's financial assets.
Let's assume a starting point where the total amount of bank deposits is $1 trillion, and the total amount owed by the public to the bank is $1.01 trillion. The bank thus has positive financial equity of $10 billion, and the public has negative financial equity of $10 billion. The public is net indebted to the bank to the tune of 101% of its financial assets.
But of course, these are not all the assets their are in the society, and so the public does not have negative equity overall. It owns lots of real, non-financial stuff. These are assets that do not correspond to someone else's liability: all the machinery, homes, cars, farmland, paintings, refrigerators, office buildings, computers, etc. out there in the world beyond money. Let's suppose the value of those assets is $10 trillion. So the net wealth of the public is $10 trillion minus $10 billion, or $9.99 trillion.
Assume that the national income in that first year is $2 trillion, so the wealth to income ratio is just slightly less than 5/1.
Now, let's imagine that as the economy grows, bank deposits and loans increase by 1% per year. The bank is always loaning more money, and the public is always paying back some of what it owes. But the result is that the public always possesses a net debt to the bank amounting to 101% of its deposits. It always possesses negative net financial equity. So in year 2, bank deposits have grown to $1.01 trillion, but what is owed to the bank is now $1.0201 trillion. In year 3, deposits have grown to $1.0201 trillion, but money owed to the bank has increased to $1.030301 trillion, etc. This never changes. The bank always has positive financial equity and the public always has negative financial equity.
The money supply for the society consists entirely of the sum of the bank deposit balances. So it is also growing by 1% per year.
But let's assume that the national income and real economic wealth of the public are also growing by 1% each year. So, in year two, national income is now $2.02 trillion and national wealth has grown to $10.1 trillion, etc. (Thus the national savings rate for real income is 10% of that income.) This continues year after year.
Basically, everything is increasing by 1%, every year. Despite the fact that the public always has negative net financial assets, it always has much more in the form of non-financial assets. It saves 10% of income every year, and its wealth grows every year.
Excellent thread!
Wish I wasnt doing my late shift week and could participate more but have tried to keep up with most of the comments. Now that I have a day off I want to put in my $.02
@Dan
I want to look at one of your comments and make some observations. You earlier said;
"That is only one way to save. Here's another way to save: You are the sole owner of a flower shop. The shop generates $300,000 this year in revenue. Your costs for paying workers and acquiring supplies used in the current year is $200,000. So, your net income for the year is $100,000. You consume $50,000. With the remaining $50,000, you invest in capital improvements to the shop: adding a new display case and refrigerator, a new sign and front display window, nicer carpets and curtains. You have losses due to depreciation on old equipment of $20,000. As a result the value of your shop increases by $30,000. You have saved $30,000, without anyone else dis-saving. That saving is one small part of the overall private sector saving that comes from economic growth and capital accumulation."
Being the holder of something which appreciates in price is not necessarily a reliable way to save....... if in fact you need 30,000$ more for something. Your business is very illiquid and it is very hard to get that 30,000$ of savings out, it is mostly unrealizable savings. Most people want and need a very liquid form of savings to meet their short and medium term needs.
"Here is another way to save: you own $300,000 worth of stock in Mega Flowercorp. As a result of Mega Flowercorp's revenue growth and re-investment of profits in business development, the value of Mega Flowercorp, and your shares, increases by 10%. You have again saved $30,000, without anyone else dis-saving. Again the saving is one small part of the overall private sector saving that comes from economic growth and capital accumulation."
Same criticism as above regarding liquidity, not to mention only a person who had 300,000 dollars to buy stock with would be able to save this way.
"Here is another way to save: An elderly retired couple owns a small piece of land in the woods worth $30,000. They decided to have one last fling. So they sell you the land for $30,000, which you purchase entirely out of your current year's income. They consume the entire $30,000 by taking a world tour that costs exactly $30,000. So, the couple has dis-saved, converting savings (the land) into present consumption; while you have added $30,000 to your savings."
Another illiquid form of saving not very useful to most people
"Here is a fourth way to save: You have $200,000 in the bank. You loan $60,000 to your friend Bob for a sure thing project he has, and he promises you a 50% return. He gives you his IOU for $90,000. So Bob now has an additional $60,000 in cash assets but an additional financial liability for $90,000. You have $60,000 less in cash assets, but a financial asset worth $90,000. So you have saved $30,000, and Bob has dis-saved $30,000. (If you like, you can discount the value of the asset/liability by some risk weighting corresponding to how likely it is Bob will deliver various levels of return."
No one argues that all above descriptions arent happening every day of the week and are perfectly valid ways of saving but the average Joe needs a supply of cash/NFA/risk free assets in order to meet lifes unexpected costs and all efforts to balance the Fed budget and restrict the flows of NFAs into the economy make this harder. A system without a govt which can be in a constant net negative position will experience Ponzi dynamics relatively quickly.
So, of the four options we have considered, only with the second two does the saving of one person amount to the dis-saving of another. In those cases the economy as a whole hasn't saved anything: assets have just changed hands. But in the first two cases, the economy as a whole has saved in the net.
Sorry about that last paragraph, it makes my comment very confusing, it is left over form my cut and paste of Dans comment
Greg, in the case of the flower shop, the increase in the shop's real value consists in part in its increased ability to generate income. Investments in one year that increase its value result in more income in subsequent years. If the owner needs more liquidity, he can recycle less of that future income into the shop or other illiquid, long-term investments, and instead keep it in more liquid forms.
"not to mention only a person who had 300,000 dollars to buy stock with would be able to save this way."
Yes, but other smaller savers put money each weak into retirement funds that are invested in equities.
Most people in our society possess very little net wealth of any kind - their income comes in, and mostly goes out just as fast. That's a distribution issue. The point of all these exercises is to show that an economy as a whole doesn't have to increase its net financial assets in order to save and increase its wealth. A one-sector economy in which all financial assets and liabilities net to exactly zero at all times can still save and grow. We can't imagine that the very existence of growing economies and increasing wealth depended on governments being in the financial asset provision business.
I dont deny that the dynamic you described is and likely always will be a major portion of an economies saving but its also true that to the majority of people, me included, what is desired is cash or its equivalent in sufficient amounts to meet things like like health insurance/car insurance co pays/deductibles, vacations and other unexpected or desired short range expenditures that exceed ones monthly disposable income flows.
The financial system charges hefty fees for liquidating and maintaining accounts for all the other non cash types assets you describe. It has become terribly extractive and it looks to me as if CBs around the world are heading towards changes which will likely impose negative interest on cash deposits essentially making people buy their savings vehicles.... at greater risk than most people want to take with their life savings. All this of course is being done because of mistaken notions about "running out of money", "loanable funds" ideology and gold standard type reasoning. It seems to me that only a steady flow of NFAs from a source outside the private banking/household sector can lend some stability to the system and keep it form going ponzi.
Greg I don't deny what you are saying about the need for sufficient amounts of cash or cash equivalents to keep the economy going and demand where it needs to be. (I would add that "keeping demand where it needs to be" involves preserving a healthy balance between demand for consumption goods and demand for capital goods.)
But what you are talking about is the money supply, changes in which are not the same thing as changes in the "flow of NFAs". The money supply can grow steadily, in an amount that is appropriate given the growth rate in the overall level of economic activity, even if the net financial asset position of the private sector does not change. And changes in the money supply are fundamentally a function of the expansion and contraction of banking system balance sheets.
Now suppose that without any significant change in the overall money, demand drops because people develop an increased desire across the economy to hold money rather than spend it. They keep money in their accounts longer, velocity drops, overall transactions drop and deflationary pressure is exerted. One thing government can do to restore demand is to tax money out of those low velocity accounts, on a progressive basis, and put it into government accounts. And then the government can spend it. So government can increase velocity and demand without increasing deficits (which is not to say that increasing deficits might not also be a good thing to do in these circumstances.) If the government spending is particularly smart - consisting of a substantial amount of wealth-building, strategic public investments, and not only of consumption boosts - then the spending can directly drive growth and enhance national wealth, apart from any additional indirect wealth-building that might occur because consumption support has multiplier effects, boosts "animal spirits", etc.
Dan Kervick,
"That is only one way to save. Here's another way to save: You are the sole owner of a flower shop. The shop generates $300,000 this year in revenue. Your costs for paying workers and acquiring supplies used in the current year is $200,000. So, your net income for the year is $100,000. You consume $50,000. With the remaining $50,000, you invest in capital improvements to the shop: adding a new display case and refrigerator, a new sign and front display window, nicer carpets and curtains. You have losses due to depreciation on old equipment of $20,000. As a result the value of your shop increases by $30,000. You have saved $30,000, without anyone else dis-saving."
What you're saying is that the private sector can net save in the form of real assets, rather than financial assets. There's a couple of problems with this claim.
Firstly, it's the private sector desire to net save financial assets, i.e. the desire to spend less than its income, or to accumulate net financial wealth, which causes problems.
Secondly, in a monetary production economy, i.e. this economy, money is required in order for the investment and saving in real assets that you describe to occur. This entails borrowing.
"You have saved $30,000, without anyone else dis-saving."
Dan certainly. But see my point on debt deflation and financial vs real above.
". It seems to me that only a steady flow of NFAs from a source outside the private banking/household sector can lend some stability to the system and keep it form going ponzi."
That's basically my point too. I think that stems from the fact that flows must match, so at any given moment, if someone is net positive, then some other agent must be net negative.. Too much reliance on private credit expansion (banks growing their balance sheets) got us into this trouble to begin with. The non-bank sector being constantly net-negative, regardless of assets created by credit just doesn't seem sustainable and stable (lots of real houses were built, but still tons of people ended in financial ruin). So although Dan's ideas are a possible description, the flows works out, I don't think it's desirable or really describes actual spending and investment habits.
Seems the empirical evidence is overwhelming; Private sectors go on credit booms followed by a bust, at which point either you have a depression or the govt steps in and takes the net negative position so the non-govt can take a net positive position to repair their balance sheets. How many times has that pattern repeated itself over the last 200 years? At least a dozen I think.
Being constantly financially net-negative, even though it's purely financial (meaning in total you might not be negative because real asset/wealth creation) just doesn't seem stable.
Definitely a fun discussion.
@Dan 10:25
I cant disagree with anything you said with the exception of your attempt to distinguish between "money supply" and "flows of NFAs". Im not sure what point your getting at there. Certainly flows of NFAs are part of the money supply.
I actually dont like the term money supply, its too monetarist.
There was one other comment you made earlier I am perplexed by;
"I don't think there is any such thing as the desire to accumulate net financial assets. There is certainly a desire to save, accumulate assets, and increase wealth, but the satisfaction of that desire does not depend on the accumulation of financial assets that are the liabilities of an external agent (a government), and that net to some number greater than zero."
Youve been on these MMT blogs for years and Ive never heard you take issue with the NFA concept. Its a different way of expressing things from monetarists and some other PKers
but its internally consistent and not at odds at all with the other things you have expressed here. Its simply a way of describing the private sectors position relative to the govt when the govt is in a position that isnt completely balanced or in surplus.
Certainly you can agree that most people wish to be in a position where they have a portion of their saving in the lowest risk of assets AND most of the time the majority of people are looking for more of them not less.
Joe, I don't think an economy needs flows from outside the system to prevent Ponzi lending. It just needs to regulate its credit systems adequately. The financial crisis was caused by inadequate regulation of mortgage lending, derivatives, etc.
Everything in macroeconomics, if it makes sense at all, should make sense in a one-sector model - and that's a model where there is no "external".
Greg, I don't think there is anything monetarist about the concept of a money supply. Monetarism consists in However, there are different ways of measuring the money supply, and some definition has to be given in any specific concept to be able to reason clearly about it.
As for "net financial assets", it would be good for the people who use it to disambiguate that term as well, since there are also different ways of understanding what it means for an asset to be "financial".
There is something odd about the idea of a flow of net financial assets. Suppose I write a negotiable IOU and give it to you. You now have a newly-created financial asset, and I now have a newly-created financial liability. But the net financial assets in the economy are presumably unchanged. Now suppose you use that negotiable IOU to pay a third party. So there has been a flow of financial assets. There has been no flow of financial liabilities. Has there been a flow of net financial assets?
It's a financial liability for the govt, Dan. Net financial assets for the non-govt.
"should make sense in a one-sector model - and that's a model where there is no "external"."
You should see some of Neil Wilson's work on this.
"Everything in macroeconomics, if it makes sense at all, should make sense in a one-sector model"
Sure, but you can always carve it up into as many sectors as you want. Each person could be its own sector.. Or if you insist on one sector, then part of one sector will be negative or positive in relation to another sector. So your one sector model is purely credit driven from private banks (if I understand correctly). Could just as easily say the banks are their own sector.. Except for debt to a bank is real debt, it has to be paid back by forgoing consumption and taking a net positive position (well, unless more and more credit is taken out, still can't see that ever working out realistically). Govt "debt" doesn't have to be paid back, since, well, the govt creates money. Yes banks create credit money, but the bank doesn't go negative vis-a-vis you, not like the govt does.
I still think it's a flows issue. Individuals like a net positive position. Everyone can't simultaneously be net positive.
" Suppose I write a negotiable IOU and give it to you. You now have a newly-created financial asset, and I now have a newly-created financial liability. But the net financial assets in the economy are presumably unchanged. Now suppose you use that negotiable IOU to pay a third party. So there has been a flow of financial assets. There has been no flow of financial liabilities. Has there been a flow of net financial assets?"
Now your getting into the realm of levels of "moneyness", or hierarchy of money so to speak. The IOU you gave me is really only guaranteed to be negotiable with you not anyone else. Someone else might take it from me but only if they know something about your willingness/ability to redeem it. They must know that you will stay solvent til they wish to redeem it. Only one type of financial asset has the position of being the most redeemable. There must be something that has the least possibility of default. In modern economies those are the ones backed by a govt with taxation ability.
But to answer your question, I would say no there hasnt been a flow of net financial assets cuz there werent any in the example you provided. Things can be traded, economic activity can take place e.g. barter without any financial assets changing hands but it seems to me that for a monetary economy to grow in stable fashion and for incomes to rise there must be a growth in what MMT calls NFAs.
Is Dan's just trying to 100% technically accurate in speaking of these matters?
Sure, I suppose it could be purely credit based, but isn't the empirical evidence overwhelming? Govt deficits help economies grow, private sectors tend to want to be net-positive. Just pull up graphs of gdp of european countries. Even the supposedly successful Germany is barely to their pre-2009 levels. Then pull up a graph of the US's GDP. There's a small speed bump and then it continues up. We did something the Europeans didn't do....
Imo, Steve Keen has done the best work on this, http://www.forbes.com/sites/stevekeen/2015/06/18/are-surpluses-normal/ covers some of this. Post war deficit averaged just under 2% in the US, and we experienced the greatest growth and rise in standard of living the world has ever known. It just seems obvious that, on average, there should be a govt deficit. Since most ppl do not save in cash, it doesn't have to be big, but seems to be necessary for stability.
I still think it's a flows issue. Individuals like a net positive position. Everyone can't simultaneously be net positive.
They can be if you consider all assets, and not just the financial IOUs. If you consider only IOU's then of course not everyone can have net positive IOU wealth, since one person's IOU assets are other people's IOU liabilities. But there are all kinds of other assets that are not IOU's, and so it is possible for everyone to have positive net wealth.
Of course, in our society, not everybody has net positive wealth. But that is an issue pertaining to wealth distribution, not a macroeconomic necessity.
But to answer your question, I would say no there hasnt been a flow of net financial assets cuz there werent any in the example you provided. Things can be traded, economic activity can take place e.g. barter without any financial assets changing hands but it seems to me that for a monetary economy to grow in stable fashion and for incomes to rise there must be a growth in what MMT calls NFAs.
Greg, then I think you need to provide a definition on "net financial assets." I understand it to mean the value of financial assets minus the value of financial liabilities.
IOUs certainly fall into the category of financial assets. In the example I provided, clearly a financial asset changed hands in the private sector. But no financial liability changed hands, since the liability in question remains the liability of the issuer of the IOU. Also the net financial assets of the private sector remain unchanged when the IOU is issued and accepted, since a corresponding asset and liability are created.
Joe, I agree government deficits can help economies grow. But I don't think that has much to do in general with whether the private sector has a net positive, net negative or net zero financial asset position. The private sector could surge even if it has a net negative financial asset position throughout that time. Growth and demand have a lot more to do with the alacrity with which financial instruments - including money - circulate. It doesn't matter whether the net value of those instruments is a little greater than zero or a little less than zero.
"Also the net financial assets of the private sector remain unchanged when the IOU is issued and accepted, since a corresponding asset and liability are created." - exactly, because it's a within-sector asset/liability. I think what Greg (and I) mean by NFA is a financial asset who's corresponding liability is in another sector (ie the govt).
About flows-
So do I have more or less money at the end of this month than I did last month? OK, I have less, since I had to pay my car payment (but hey, I own more of the car than I owe), but I'm still in the red this month, better try to earn more next month than I spend... Sure the economy grew when we all took out loans to buy cars/houses, but now we've cut back our spending to pay back loans and if too many people do that...
Can a pure credit system realistically work?.. Doesn't history hint that it doesn't? Eventually debts get too big, people get stuck in debt peonage or else the king did a jubilee.
Dan Kervick,
"If you consider only IOU's then of course not everyone can have net positive IOU wealth, since one person's IOU assets are other people's IOU liabilities. But there are all kinds of other assets that are not IOU's, and so it is possible for everyone to have positive net wealth.
Of course, in our society, not everybody has net positive wealth. But that is an issue pertaining to wealth distribution, not a macroeconomic necessity."
You're missing the point. There is a private sector desire for net positive financial wealth. In other words, the private sector wants to spend less than its income. This causes economic problems, as the private sector can't accommodate this desire on its own. It can't spend less than its income unless some other sector spends more than its income. Your response to this is that it doesn't have to spend less than its income. That is irrelevant, as the fact is that it does want to spend less than its income. As such, given this desire, government deficits are a macroeconomic necessity.
If you have more financial assets than financial liabilities, you have net financial assets. So an individual can have net financial assets, or the private sector as a whole can have net financial assets.
An individual within the private sector can have net financial assets even if the private sector as a whole doesn't. The individual can achieve this due to others within the private sector having more financial liabilities than they have financial assets.
The private sector as a whole can only have net financial assets if some other sector has more financial liabilities than it has financial assets.
re my previous comment about the private sector wanting to spend less than its income.
Warren Mosler:
"Unemployment is defined as idle labor offered for sale with no buyers at that price. It will occur when the private sector, in aggregate, desires to work and earn the monetary unit of account, but doesn’t desire to spend all it would earn if fully employed."
http://moslereconomics.com/mandatory-readings/full-employment-and-price-stability/
Lets not forget to mention that a large reason the pure credit economies fail eventually has a lot to do not only with the desire of borrowers to push their borrowing envelope but also because the system puts a small cadre of people in charge of making credit assesments, essentially putting them in charge of "values". Every time they make a loan they structure it so you pay more than the object of purchase was worth. Real estate has a system of appraisers, agents and loan officers which work together to insure that the borrower gets as raw a deal as they can. They extract income to the banking sector and while the banking sector is part of the business sector/private sector in some analyses (relative to the govt/foreign) it is also outside the household sector/business sector as all households and businesses do have loans from banks. The quest for profit form the banking/Wall St sector pushes them to raise costs on everyone else which starves everyone else of buying power. It seems only a strong govt sector can offset this to any reasonable degree.
"We did something the Europeans didn't do...."
Correct we increased TGA withdrawals by about $1.5T annual... from about $2.5T to $4T...
I would assume this did not happen in EZ.... look up thread at Bill's chart of Greece withdrawals... it was CUT by about 40% they went BACK to 2004/2005 levels...
EZ as a whole probably is flat-lined at best...
You're missing the point. There is a private sector desire for net positive financial wealth. In other words, the private sector wants to spend less than its income.
I am suggesting that there is no such desire Philippe. It is always the case that many people desire to save some of their income, and if everyone saves exactly as much of their income as they desire to save, the private sector as a whole ends up saving a certain percentage of its national income. For the most part, they do that by investing in non-consumable real assets, a sizable amount of which are produced each year (in the US gross fixed capital formation is close to 20% of GDP). There is no reason to thing that net financial assets must be non-zero for everyone to satisfy their savings desires.
Suppose I am the sole individual owner of a company, and save 25% of my $200 K income by increasing the value of my company by $100 K, financed in part by issuing a bond to you for $50 K. I have saved $50 K net: $100 K in fixed asset appreciation minus $50 K in new financial liabilities. You have saved $50 K. We have saved $100 K net. Net national wealth has increased by $100 K But net financial assets haven't increased. They are the same as they were before since the new financial asset is balanced out by a new financial liability.
"I agree government deficits can help economies grow." = "I agree if the motor is running hotter that the output has probably increased..."
Philippe, I agree completely with your definitions above. And on that basis it should be clear that the private sector can satisfy its savings desires without any increase in its net financial assets.
Matt, government deficits can sometimes help the economy grow in the same way private business deficits help an economy grow. When either the government or private business put a greater volume of accumulated savings to work by spending more than their income, and spending it on the right kinds of things, the economy grows.
Also, governments can also help an economy grow without deficits.
Dan maybe look at it this way... "saving" means "keeping" or "to keep"...
iow to save, you have to come into possession of something FIRST, and THEN give up part of that possession but not all of it, the portion you "keep" is "savings"...
So if you earn $100 or even someone just gives you $100, that is not "savings" at that point, that would be a wage or a gratuity, if you THEN spend $60 and decide to "keep" the other $40, THEN your "savings" or "keeping" is $40...
The Greek word here is sōtēría ("to save") in the scriptures it is often translated as "salvation"... it means "to save" or "keep"... to "keep" or "save" something, you have to come into possession of it FIRST....
rsp,
"Also, governments can also help an economy grow without deficits."
We had SURPLUSES in the late 90's and the economy grew like crazy...
rsp,
Matt,
"We" abandoned underwriting standards in the 90s. Housing bubble started along with tech.
Correct is ex post.
Top line spending.
Random housing started later (post y2k dot com crash), I have some property and it was in the toilet meanwhile I was watching everybody double their investments in an afternoon in Dr Koop dot com...
If there was data available imo you would see TGA withdrawals increasing substantially in late 90s.... y2k, Interest on Treasury Securities, etc...
rsp,
Random also the fact remains that we had surpluses...
So Dan is getting at some sort of logical inconsistency here when we wee people today say "we need higher deficits!" to get the economy going better today...
If something is true, it should be true all the time....
I dont see how fomenting more savings at this point is going to help the current situation...
rsp,
"Our roads are crumbling!"
"I got it! we need to sell savings bonds!!!!"
??????
I think we do need to save and invest more. Personal consumption expenditures between 1951 and 1970 were 62% of GDP; between 1971 and 1990, they were 63.4% of GDP; and since 1991, they are up to 67.3% of GDP. Annual economic growth rates had a very healthy average of 4% in the first period, down to 3.3% in the second period, and a shabby 2.5% in the third. We're consuming too much, and this is contributing to long-term stagnation.
And the government needs to play a larger role in the economy: Between 1951 and 1970, federal government consumption and gross investment averaged 14.7% of GDP. Over the next 20 years, the average dipped to 10.3%. And since 1991, it's been a feeble 7.6%. By the way, government deficits were quite small during the fist 20-year period: averaging about 1/2% of GDP. Top marginal tax rates were higher. There is no reason to think that government deficits are the key to economic performance. It is the size and role of government that is most important.
These private and governmental phenomena are all related. Strong growth is a social choice. It is a social choice that Americans aren't making. We used to have the right stuff: A strong national government led the way and drove innovation and progress in a more unified and public spirited nation. We had a healthier balance of investment-to-consumption, and used more of our resources to build economic capacity and improve our children's futures. Now we prefer to consume our wasted future potential in the present, extract value from companies instead of building them, try to cover over our neglect of real factors with monetary manipulations, and put our once dynamic and leadership-oriented government out of business.
Dan Kervick,
"the private sector wants to spend less than its income."
"I am suggesting that there is no such desire Philippe"
Do you agree that some people do not want to spend all of their income, and that some people do not spend all of their income?
Presumably you do agree as these are obvious facts.
So what you are suggesting is that every desire by a person in the private sector to spend less than their income is always matched by an equal desire on the part of another person in the private sector to spend more than their income (i.e. to borrow).
What you're saying is that there's never an imbalance; that it is never the case that one person's desire to spend less than their income is not matched by another person's desire to spend more than their income.
Philippe, the private sector as a whole doesn't have a "desire" - individual people do.
As a matter of macroeconomic identity, spending always equals income. There is an income approach to measuring GDP and an expenditure approach.
Nevertheless, the economy as a whole always does manage to net save, because there is ongoing expenditure on capital formation and inventory building.
cont:
Now, in the real world, that is clearly not the case.
In the real world, it is quite possible for the desire by some people in the private sector to spend less than their income to be greater than the desire of others in the private sector to spend more than their income. When this happens, the private sector as a whole wants to spend less than its income. But this is impossible, unless another sector, i.e. the government, spends more than its income.
Dan Kervick,
"the private sector as a whole doesn't have a "desire" - individual people do"
The private sector as a whole is a group of people. Groups of people can be said to have a desire.
When the desire by some in the private sector to spend less than their income is greater than the desire by others in the private sector to spend more than their income, the private sector as a whole wants to spend less than its income.
This is impossible, because as you point out spending always equals income.
So the private sector as a whole can only spend less than its income if some other sector, i.e. the government, spends more than its income.
If this desire to spend less than its income is not matched by another sector spending more than its income, the result will be unemployment, inventory accumulation, economic contraction.
Sorry for my slightly convoluted sentences, I'm just trying to be clear.
Philippe, it doesn't matter what their "desire: is. As a matter of macroeconomic logic, for any economic system considered as a single sector, it is impossible for that economy to spend less than it's income or more than it's income. If the economy spends less, it will have less income; if it has more income, it has spent more. Now of course you can divide up an economy into any number of sectors you want, and note that some sectors can be spending less than their income while some are spending more than their income. That all makes analytic sense as long as all of the respective surpluses and deficits sum to zero. But this has nothing in particular to do with one of those sectors happening to be the government.
Now if the problem is an overall drop in spending and income as a result of excessive risk-avoidance, fear about the future, desire to save and hoard, etc., there are many ways the government can counteract that contractionary pressure. One way is for the government to tax some of that income away from the people who are most disposed to hoard it, and to either spend it itself, or give it to people who are most disposed to spend. Another way is to penalize hoarding through the tax system, and incentivize spending. Other techniques involve using the regulatory apparatus to shift resources from consumption to investment, boost growth and thus raise national income overall. These three methods don't involve any thinking about net financial assets.
It is certainly possible that the government could employ techniques that do involve giving people more financial assets. Under some circumstances those might be the best techniques. It could helicopter money into the economy; or print up government bonds and mail them to people. But these are not the only techniques, and it is incorrect to point to the net financial asset position of the private sector as the explanation of why there is unemployment, stagnation, etc. and as the solution to go to when these phenomena arise.
Dan,
here's a simple example to try to clarify my point:
Imagine the private sector consists of two people, A and B.
A wants to sell 100 goods, but only wants to buy 80 goods. In other words, A wants to spend less than his income.
This is possible if B buys 100 goods but only sells 80 goods, i.e. if B spends more than his income.
Now let's say that B also wants to sell 100 goods but only buy 80 goods (i.e. B also wants to spend less than his income)
Now the private sector as a whole wants to spend less than its income (i.e. both A and B want to spend less than their income.
This is not possible (unless another sector spends more than its income). If no other sector spends more than its income, A and B end up selling only 80 goods each. Their saving plans are unrealised. They end up spending as much as their income, and are both left with 20 unsold goods each (an involuntary accumulation of inventory). This leads to economic contraction.
Phillipe, I think your example makes perfectly good sense, and is a good general account about about why economies can fail to achieve their production and income potential. Note it's not just A and B's savings plan that is unrealized, but their production and income plan as well.
But this failure has nothing obviously to do with financial assets. The reason they fail to achieve their savings goals isn't because there are insufficient financial assets available in which to invest the saved portion of their income. The problem is that they never obtain the desired income in the first place. Their sales and purchasing plans are mutually incompatible.
Dan,
the reason why their plans are incompatible is precisely because as a whole they are trying to obtain financial assets in excess of their liabilities, i.e. they are trying to spend less than their income. As a result they end up with less income than desired and unsold goods, leading to a reduction in production.
"We had SURPLUSES in the late 90's and the economy grew like crazy..." - true, because the private sector was spending more than its income. Flows match. In the 2000's, the private sector was also spending more of its income, but then 2008/2009 this reversed and the private sector took a net positive position. Reduced spending -> reduce economic activity -> recession/depression, unless the govt steps in with a deficit.. To me this seems obvious and extremely well supported in the data. Wray and Keen both have published graphs where this is very obvious... Across the pond, presently every agent in Europe is trying to run a surplus, and they've flatlined, the US did it differently and the govt accommodated the private sectors net positive position.
"I dont see how fomenting more savings at this point is going to help the current situation..." It's not about savings per se, it's about the instantaneous flows at this moment. There's not enough spending, due to households wanting a net positive position to repair balance sheets (well, this has eased over the last couple years, but was certainly the picture post-GFC). People intuitively know their household has flows in and out, and worst case for them they match, people like being net positive. It's colloquially called "living within your means".
"that all makes analytic sense as long as all of the respective surpluses and deficits sum to zero. But this has nothing in particular to do with one of those sectors happening to be the government." it has everything to do with the govt, since the govt is the issuer of the currency, it can't go broke, the private sector net spending can go broke. Seems wholly unrealistic to expect savings/investment/spending desires to exactly balance just right to not need a deficit *on average*. 'if everyone spends spends all their income on just the right assets...' it's just not gonna happen.
It's about the flows; If I take a home loan now, there's an increase in spending in the economy, I'm net negative and someone else is net positive.. Now I have to forgo consumption to pay back the loan, ie be net positive during the repayment period, which requires someone else being net negative... If too many people do this simultaneously, it results in the familiar boom/bust. The housing bubble is a classic example. Has a credit driven boom ever had just the perfect mix of investment resulting in growth that didn't result in a bust? Govt spending is economic activity that doesn't have to be followed by a period of forgoing consumption to repay previous net spending. That's the crucial difference. Household income >= household spending. The govt has no such constraint.
"I agree government deficits can help economies grow." = "I agree if the motor is running hotter that the output has probably increased..." - now you're just being picky ("Shallow and pedantic" lol) , we've all been assuming there's the productive capacity available. Which comports well with the real world presently, we're not Zimbabwe.
"We're consuming too much,"
Yeah like food, housing, medical care, energy, education, transportation, arts & entertainment....
????????
c'mon here Dan its a slippery slope into the realm of Herr Schauble..... rsp,
Matt, we're consuming too much as a share of GDP. We're eating too much seed corn and not investing adequately in our children's future. That's why we have "secular stagnation".
"Demand" does not equal "consumption demand". We can get full employment by investing more. We can invest more if the state takes a larger role in the economy. The years of most dramatic growth in the 20th century were the years when we had the biggest state.
Transportation and energy infrastructure and education are not consumption. If we spend more on them, we are investing more, not consuming more. Same for science and technology R&D, and housing.
We've become a greedy, narcissistic, stupid country without any sense of collective responsibility for building the future we won't live in ourselves.
Dan we could "invest" in public transportation (govt to buy buses, govt to construct light rail, etc...) or perhaps just give everyone $200 in Uber/Lyft credits which I guess economists would then term "consumption"... (or some combination?)
the result would be the same people would get from here to there..... BUT.... IF they had the "money" to pay the fares charged via either method of transport which many people dont have..because the govt idiots think we are "out of money!!!" and dont issue it ...
So if we take the bus, that is "investment" but if we take an Uber then that is "consumption"? We "invest" in public transport but we "consume" Uber?
Yet the same thing happens ie people get from here to there.... ???? this is how f-ed up economists are...
Perhaps dont get sucked into the framework of all of this "Economist" terminology...
And as far as the many greedy/stupid a-holes that live among us (btw Dan, F these people....) I just talked to this black guy the other day who works down in DC and he could never get the Arab cab drivers down there to pick him up now he uses Uber and he is STOKED.... he always gets picked up by the Uber people no problem...
so enabling technologies can have major impacts on socio-economic injustices... BUT people need to have access to adequate currency balances to pay for the provision ... I dont think whether we term activity "investment" or "consumption" is very meaningful if at all .. its just more sophistry from idiot economists imo...
rsp,
Matt, just giving everybody money won't help, because Americans have already proven that without strong leadership and strategic guidance, they waste their money on consumer crap - food and toys, fun and games, scamming and flim-flamming - and neglect to do what is necessary build the future. America isn't Sweden or Denmark with an emotionally mature and broadly educated population that knows how to balance long-term public needs against personal satisfaction. It's an idiocratic land of infantile teenagers gratifying their impulses.
We can't Uber our way to a more educated country, an overhauled infrastructure, a more sensible transportation, housing and health sytem. That's the dumbass laissez faire solution to everything.
@Matt
Excellent point about econ terminology and its complete lack of coherence.
@Dan
Those descriptions of American you point out are real but the fact still remains there are still plenty of people with the know how and the desire to build the future you speak of. There are a lot of people who are "unnecessary" so to speak. Id rather have them passing time playing games, going to concerts, smoking dope etc so long as they dont rape plunder pillage in the process. Theres nothing wrong with a large sector of society being mostly consumers. Let them work as baristas, masseuses whatever and party like hell when they are off.
We can now produce ten times the food with one tenth the people we needed 100 years ago. That will soon be true of many other things.
Our only thing holding us back is 1) morons who think we dont "have" the money to do the things you talked about 2) sociopaths who have an unsatisfiable need to acquire money and power and are in sectors like energy/transportation/healthcare/finance and are using all their efforts to hold off renewable energy, clean transportation, sane health policy and restoring banking/finance to a reasonable percentage of GDP.
Dont even get me started on the Prison Industrial Complex
Greg I agree I think we are pretty close to nailing this thing ... we have surpluses in just about everything... infrastructure is good (not great.... SOME is great...), food systems are in bumper crops with the GMOs (no access for some) , great Universities (no access), great healthcare/pharma (no access), great military (inadequate force protection tho...) I think things are pretty good as far as the basic infrastructure...
To get access you need currency balances to "pay the tolls..." so to speak and many dont have access to adequate currency balances to obtain the robust surplus levels of provision...
Dan what about the people who put together Uber? They're not idiots... They probably worked hard putting that thing together... its leading real-time geo spacial technology/software e-commerce... I think those systems are going to really take off and increase efficiencies in transportation sector... then you have the drones, robotics, etc...
We just need for everybody to have the "money" to pay the tolls...
Baristas can make more "money" as long as their customers have the "money" first for to pay with .. we dont need 20 million rocket scientists....
rsp,
Great points by Greg and Matt!
OK, I'm done. You guys clearly have a very different perspective than I do on how good things are, what the global perils are, and how much planning and organized change we need to tackle the things that need to be tackled.
Unfortunately, it's probably going to take a global war for us to get our act together at the national and planetary level. That's what it took in the mid-20th century.
Uber is a replacement for the taxi commissions. How really innovative are they, beyond cutting costs that their (over)regulated competitors cannot avoid?
Energy saved on investment should be higher with mass modes of transportation.
"OK, I'm done. You guys clearly have a very different perspective than I do on how good things are, what the global perils are, and how much planning and organized change we need to tackle the things that need to be tackled."
Don't go, Dan. Your critique of MMT might be wrong but your aims are probably shared by many here.
Bob I'm not talking about them being "innovative" I'm talking about them being implementers of enabling technologies...
Lets say an old person who doesnt drive anymore needs to get to the doctor and they cant afford a taxi and public transportation is not available on their route.... they might now take an Uber for $10 and get to the doctor door to door...
the morons would set up Obamacare and then forget that people have to actually get to the doctors office for their care.... what good is Obamacare if the people dont have transport?
This is the type of thinking that we are constantly treated with from our incompetent/unqualified policymakers....
Get the healthcare all set up and then people cant even get there...
rsp,
Philippe, I think MMT has evolved into a kind of foolish escapism, and isn't generating any workable solutions to any social or economic problem of note. I still get all of the various emails and Facebook posts and whatnot from the global MMT cargo cult. Every once in a while someone will mention something vaguely about "real resources", but that's a topic nobody on the big team of them seem capable of thinking clearly about. They all seem to have convinced themselves that the ability to conjure money out of thin air corresponds to some Star Trek-like ability to conjure goods and services out of thin air with a monetary repplicator, without the need for any difficult political challenges related to the reallocation of existing resources.
Education, retirements, energy, health care, working class incomes? No problem!!! We can just mint coins or credit accounts and everything gets solved! Genius! The goods will just pop into existence for those dollars to buy and all the rich guys get to keep all of their dough too! We won't have to eat fewer burritos, or build cheaper football stadiums, or make billionaires poorer or anything. The slobs can have their minimum wage "starter jobs" while the rich guys still buy those fancy Mosler-mobiles. We can conjure mountains of real prosperity into existence with digital balance enhancements and Yves Smith's struggling poor little rich friends won't have to suffer any portfolio boo-boos.
Oh, and Americans keep getting to eat unlimited heaping helpings of FREEEEEDOM! We don't have to plan anything, restrict anything, re-allocate anything, or tax anybody. We all get a tax cut, and a bunch of free stuff, and blissfully eat and play ourselves into decadent oblivion while we exterminate millions of species and extract every last resource from our over-stuffed planet.
wow dan, that seemed a bit over the top.
Seems to me mmt are the only people actually concerned with anything real. Everyone else is trying to actively prevent putting real resources to use because they think we're broke. Meanwhile, the europeans can't figure out why they can't all be exporters like germany.
Believing you're broke prevents you from even starting to think of solutions. What good solutions are going to get implemented by austerity? How many times do you hear people object to green energy because of it being too costly? How many people should sit at home doing nothing because supposedly there's no money to pay them to do useful work?
"We can't Uber our way to a more educated country,"
Friends of ours have enrolled their son in an SAT prep course this summer a few days a week at a local learning center.... the boy (no extra car in the household) takes Uber to the facility in the morning ($9) and then walks to a nearby friends house after the class is over and they pick him up there after work...
So he IS Ubering his way to more education...
Deregulate the taxi business and allow them to cut corners, and they'll compete with Uber. Maybe everyone will be happy. Or maybe something tragic will happen that'll remind everyone why regulations were put there in the first place.
There are MMT enthusiasts who are as Dan describes. Utopianism comes in all stripes.
@Dan
Thought that was over the top too. I see it as 180 degrees , that only the MMT people focus on whether or not there are real resources not money. Even monetarists like Sumner think money can be printed..... but ONLY by the CBs....because govts affect expectations and therefore inflation. They think money is just a neutral veil over barter which is absurd.
I think the point is that we are not resource constrained in any of the truly important areas. We dont lack space on this planet for 10 billion people, we dont lack materials to build houses for 10 billion people, we dont lack the food for 10 billion people we dont lack the capacity to educate 10 billion people, we dont lack the capacity to keep 10 billion people healthy.
What we do lack is the ability to have everyone live in a 5000 sq ft mansion consuming all the fossil fuels that an American upple middle class person does, to have them consume the meat, seafood and other animal products the typical American does, to have them water a lawn and fill a swimming pool the way many Americans do, to have them all go to Harvard or other Ivy league or to give them heart surgery within a week of onset of angina. So Americans have a particular reckoning, I agree, and we stand to lose the most relatively with a broad global view, which is why so many refuse to take that view and would just as soon exterminate much of the rest of the planet. You are correct that simply handing out checks to people will not change the reality I just described but its also not necessary to keep a significant portion of or population living below subsistence levels today right NOW while we solve the thorny political issues we are talking about. The simple things we can do today for the real improvement of many peoples existence right now really are as simple as increasing the balances in their checking accounts by a few hundred dollars a week... and stop wondering "How are we going to pay for it??!!".
Just because its simple doesnt mean its easy. We are fighting ignorance and petty political/class wars.
Actually to somewhat revise my comment above Ill just add;
Not only do we not lack the capacity to educate 10 billion people at the college level we actually dont need everyone educated TO the college level. Its okay if some people dont get that much education by age 21. We already have enough educated people to deal with the issues of concern and there are plenty of 13-15 yr olds dreaming of solving world hunger and enjoying world peace, if only their grandparents/parents wont get in their ways.
Thought that was over the top too. I see it as 180 degrees , that only the MMT people focus on whether or not there are real resources not money.
Really? Where are the MMT studies of available natural resource reserves? Of farmland and water? Of demographic projections? Of education levels? They are non-existent. MMTers wave their hands vaguely in the direction of real resources, but never actually study them, and never offer specific recommendations as to how they should be used, allocated and organized. They just blithely assume that since we can never be "out of money" that somehow the resource allocation questions will all work out with sufficient money infusions.
Even monetarists like Sumner think money can be printed..... but ONLY by the CBs....because govts affect expectations and therefore inflation. They think money is just a neutral veil over barter which is absurd.
Market monetarism and MMT are just two different forms of magic pony economics. MMT policy analysis is just monetarism administered through the fiscal side of government, instead of the central bank. Since MMTers believe that treasury operations determine the level of money - or "net financial assets" - MMT is just what you get when you take monetarism and apply that wrinkle to it. MMTers believes you can always solve the problem of inadequate aggregate demand through adjustments to money/NFA levels, and apparently believe that as long as you've solved the problem of aggregate demand, you have solved the problem of creating a morally acceptable economic order. It doesn't seem to matter to them what is "demanded".
"Really? Where are the MMT studies of available natural resource reserves? Of farmland and water? Of demographic projections? Of education levels? They are non-existent. MMTers wave their hands vaguely in the direction of real resources, but never actually study them, and never offer specific recommendations as to how they should be used, allocated and organized."
I dont think thats a fair critique Dan. Where are the neoclassicals and THEIR studies of natural resources, or other PKers or Monetarists or RBCers?. Schools of economic thought are not responsible for those studies but there are organizations like the UN and World Bank and groups (different national geologic surveys) that do try and assess those resources levels and they are accessible to all.
It should be obvious to anyone with half a brain that we arent running out of land for people to live on (the entire earths population could be fit within the boundaries of Texas and have 1000sqft per person or 4000 sqft per family of four which is way less than the population density of Manhattan) This isnt to argue that we should not, as a species, be mindful of how many children we have but simply to illustrate that we are possibly not looking at this issue quite right at this time.
Obviously there is enough trees or dirt to make bricks to construct dwellings. Clean water is an issue but that is different from not having enough water.
I think there are two levels to the economic discussion, one is how do we get our economies back on track.... today, using the metrics which we have chosen (Im not saying they are the best metrics but they are how we have decided to measure econ matters) such as GDP, unemployment levels, productivity. I think its obvious that we can restore GDP (if that is your primary goal) to 2007 levels quite simply by "goosing" aggregate demand. This obsession with "productive work" is mind boggling. No one can even agree on what true production is and how to measure it. To most people productive work just means working in the private sector for a millionaire or billionaire and not getting a govt check for pushing papers. Frankly as long as people arent being anti social in their behaviors I dont care what they do with their time or money and we can incentivize the work we need done properly. I think the 20/80 principle apples here. 20% of the population can and does do 80% of the necessary work (although the actual individuals change rather often) but that doesnt make the other 80% worthless and worthy only of our derision.
Long term we do need a differnt view towards how we generate the electricity we use, how we get to work and play, how we educate people and how we treat those who are sick or have broken the law......and that is already happening! The reason it isnt further along, it seems to me, isnt because its not a better way it is simply because of entrenched interests who dont want to lose any of their market share of whatever product they are peddling. So that longer term battle and how and when it turns out will be more political.
Obviously I would like to plan and prepare for the day of better transportaion /energy/healthcare policies and many people could be put to very useful work today in the advancement of those goals but I cant ignore todays reality..... that too many people are simply short of cash (or surplus of debt!) and that is a very simple (not easy) problem to solve.
Dan re real resources. Good point this is understated.
What precisely are you looking for?
Look up "Levy Institute"
Watching Bill Maher right now, just heard some moron talk about how we shouldn't do anything about climate change since it would "impose too much costs"... The schmuck thinks money is real and we're out of it. So he's willing to destroy the real habitat over not having large enough numbers written on a balance sheet. Tell me again who's not paying attention to real things?
I dont think thats a fair critique Dan. Where are the neoclassicals and THEIR studies of natural resources, or other PKers or Monetarists or RBCers?
It is a fair critique. First of all it is not defense of a school of economics to say, "well this school is no more blind and stupid than these other schools.
But the fact is there are many other economists and social scientist studying the economic impacts and realities of demographics and resources
Dan see Malthus......
Joe those same people say "we're running out of water!"
So if the ice melts, then we wont be "out of water!"
Dan - only report I've seen in Aus. (2002) that models interaction of real resources with population scenarios: http://www.cse.csiro.au/publications/2002/fulldilemmasreport02-01.pdf
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