Saturday, October 3, 2015

Steve Randy Waldman — Translating “net financial assets”

Steve Roth at Asymptosis offers a remarkable, detailed discussion of Modern Monetary Theory’s notion of “private sector surplus” with an emphasis on aggregate accounting. Roth’s core point is well taken: “Private sector surplus” (equivalently the increase in “private sector net financial assets”) should not be conflated with the economic saving of households. As Roth points out, household sector saving is the difference between household sector income and household sector (noninvestment) expenditure. “Private sector surplus” is likely to increase household sector income, and so in that sense it forms a component of household sector saving, but it is quantitatively small relative to total household income — especially, as Roth emphasizes, if you use comprehensive measures of income that include capital gains and losses. [1] 
Roth is right about all this. But I think he is talking past MMT economists a bit. Roth invites us to think about comprehensive saving by households. But that’s very far from what MMT’s baseline sectoral balances decomposition claims to capture. Instead “net financial assets” capture only the financial position of the aggregated (domestic) private sector, including both households and businesses. MMT enthusiasts sometimes mix these things up, and when that happens it should be called out. But this confusion has been called out a lot over the years, and I think for the most part MMT economists have become pretty precise in expressing themselves. There is a great deal of value in the MMT decomposition, not as a measure of household saving, but of something else entirely. Let’s try to understand it.
Translating “net financial assets”
Steve Randy Waldman


NeilW said...

What happens to those 'net gains' if everybody tries to spend their house?

What happens if everybody tries to spend their government pension?

That's the difference.

Random said...

Exactly Neil. This is more "higher land prices make us wealthier" BS.

Anonymous said...

Yeah, it's been pretty clear from the start that the market value of real wealth is dependent on broad distribution of NFA's. Even access to bank loans requires reliable income in fiat tax credits.

Unknown said...

If we look at the crash of 2000. The Clinton administration produced a "surplus". In other words, tax intake was greater than Government spending. The tax obligation can only be cleared by means of a net financial asset. People rarely pay the tax man until the last possible moment. Thus many people try to convert real assets into financial assets at the same time. If the net financial assets available are not sufficient to cover the sales, it causes a decline in the price of the real asset. This supposedly causes the loss of trillions of dollars. The real assets were not destroyed, but rather the net financial assets available were not sufficient to keep up the valuation of the "real asset". Thus the crash was caused by a low availability of "net financial assets"

Thus in my opinion, the "net financial assets" serve more than just an insurance purpose. Their existence is essential to maintaining the stability of the valuation of assets. Thus if the government runs a surplus, there is a "multiplier effect" in bringing about the decline in the valuation of real assets. Thus a government surplus may be in the tens of billions of dollars, but its effect on the decline in the value may be in the trillions.

Detroit Dan said...

If real assets grow but net financial assets do not, what happens? Bad things. In fact, that's what's happening now around the world! This is exactly as MMT predicted would happen in the face of the prevailing neoliberal obsession with balanced budgets. Most other economic schools felt that "QE" would stimulate economies. And the value of real assets, as measured by equity prices, has soared following numerous QE imnplementations. But because of the lack of net financial assets, the global economy is melting down.

NeilW said...

I'll be honest I'm struggling to see the point of this entire discussion.

The issue is the lack of flow, not the level of stocks.

Unknown said...

Exactly Neil, that was the point of my comment at Roth's and in the previous MNE thread. Adding NFAs in correct MMT usage simply means to expand fiscal policy which would expand demand. NFAs is a superior accounting construct because it encompasses TSY CDs and reserves. If you distinguish between TSY CDs and reserves and the CB does QE, you should expect something to happen to the macro economy. But QE has definitively proven that there really isnt that big a difference to the economy. Probably because the holders of TSY CDs are mainly wealthy people, corps, and foreigners and the holders of reserves are banks and some types of financial institutions, if we give more or less income to one of these groups or the others, it doesnt make that big a difference.

If we had a more equal distirubtion of wealth and income, we could have alot more growth and spending without the need for the govt to do much with its fiscal policy. But if its our national policy to maintain gilded age levels of income and wealth inequality, then of course savings leakages are going to be very high as the rich dont spend there money in the real economy in large enough amounts to goose GDP. And if savings leakages are very high, the deficit needs to be very high to offset that.

Unknown said...

Like you said Neil, it all comes down to flows = spending

Anonymous said...

The issue is the lack of flow, not the level of stocks.

I agree. The focus on net financial assets as an economically meaningful category is completely misconceived.

Unknown said...

How many times must you hear this Dan before you stop with your flawed commentary? Nfas are important in the sense that expanding fiscal policy necessarily increases Nfas which necessarily increases demand and thus gdp

Unknown said...

So increasing Nfas is equivalent to saying ww need to increase demand = flows

Tom Hickey said...

Yes, it all comes down to flows — AND targets, and direction. That's a reason that fiscal is superior to monetary. Rifle versus shotgun. They are different tools that operate differently and are suited to different jobs.

It's also a reason that just talking about broad aggregates is to broad. It's the targeting and direction that gives fiscal its power to generate demand with the largest multipliers relative to the amount. The top line spending is where to look first. That's where the process begins and the targets are chosen.

Anonymous said...

Nfas are important in the sense that expanding fiscal policy necessarily increases Nfas which necessarily increases demand and thus gdp.

First, as I have pointed out before, that is not necessarily true. Whether or not expanded fiscal policy increases NFAs depends in part on complementary central bank decisions.

Second, whether or not it does increase NFAs is a completely secondary matter of doubtful economic significance. Fiscal expansion also increases the number of private sector invoices to the government. But no one thinks the net quantity of invoices issued is an important economic category. The same is true of NFA's: they are an ex post by product of treasury and central bank policy, and are not a useful tool for measuring the efficacy of that policy.

Third, you can have a fiscal expansion that doesn't expand the deficit. If the government doubles its gross investment and consumption expenditures, and increases its revenue by the same amount, that might provide a very strong fiscal boost even if the deficit doesn't change. It all depends on how the taxes are assessed. If you tax the funds away from parts of the private sector that are hoarding dollars in safe asset storage vehicles, and moving their dollars with low velocity, and hand them over to the public which is willing to spend them in productive ways, you get the needed fiscal action.

As you said yourself, what is important are the flows, not the stocks. NFA's are a balance sheet quantity - a stock. People should be focused on accelerating the movement of money and spending throughout the economy, and targeting specific goals for that expanded economic activity, and not on whether or not the public's net balance sheet position is changing.

NeilW said...

"Whether or not expanded fiscal policy increases NFAs depends in part on complementary central bank decisions."

Not really. The central bank is a creature of government and does what it is told to do.

There is a philosophical issue that some central bankers have with taking the action necessary to make the space for government discretionary spending (the "you should tax if you want space" argument - which is of course batting for the private sector to have first call over the resources).

But really you just fire those central bankers and hire those with the opposite philosophy:- The government has first call on the resources for the required public purpose, then the private sector gets to play with what is left. Finally any resources left the private sector doesn't want to use are deployed for the 'nice to have' public purpose.

What the budget balances ends up as is largely irrelevant. Your taxation policy is there to ensure that you have stable prices and that the distribution of wealth and income is appropriate given the government's philosophical leanings.

It annoys the hell out of me when people keep conflating the total tax take with the distribution of the tax take. The two are largely separate and certainly should be considered separately

NeilW said...

"The central bank is a creature of government and does what it is told to do"

Make that *ought* to do what it is told to do. Obviously the lobbying power of bankers tends to head off any change ahead of time - as we're already seeing with Labour in the UK.

Jose Guilherme said...

The ECB is a very important (and under studied) exception as far as central banks are concerned.

It is not a "creature of government" because there is no government of the eurozone.

It is a creature of a treaty that cannot be changed without the unanimous consent and iniciative of the governments who signed it.

The ECB is likely the most powerful and unaccountable of all the central banks that ever existed.

No theory of central banking can be considered satisfactory that abstracts from the unique case of ECB, the currency issuer that oversees 20% of the world's GDP.

Anonymous said...

The central bank is a creature of government and does what it is told to do.

Whoever decides what the central bank does, whether the legislature delegates all of their monetary policy-making power to the central bank governors and lets them call most of the shots, or instead closely manages or micromanages monetary policy from the legislative houses directly, the same conclusion holds: whether or not fiscal policy increases or decreases net financial assets does not depend on fiscal policy alone, but also on what the central bank does.

Tom Hickey said...

A central bank does essentially two things operationally.

First and foremost, it operates the payments system that underlies the modern financial system. Whether the central bank acting as a lender of last resort is a choice. Generally modern central banks do in order for the system always to clear. The ECB refusing to do this in the case of Greece, shows that there is choice involved. This is a politically choice and a politically independent central bank may be delegated to do this, or it may be instructed to clear.

Secondly, the central bank conducts monetary policy, setting the policy rate and influencing the yield curve as it chooses if it is politically independent.

In just about every case, the central bank is staffed by personnel drawn either from the financial industry or economics academia. This may bias the central bank toward the financial and business classes.

NeilW said...

"whether or not fiscal policy increases or decreases net financial assets does not depend on fiscal policy alone, but also on what the central bank does."

That's a bit like saying that driving a car depends upon whether the driver presses the accelerator or the brake.

It's pretty obvious that it generally isn't a smart idea to press both at the same time, press the brake if you want to speed up, or the accelerator if you want to slow down.

And if the car has dual controls, then more so.

Yet driving instructors seem to be able to manage it and there is no doubt who is actually in ultimate control of the car even if there is a learner in the driving seat.