Thursday, March 3, 2016

The Arthurian — The New Arthurian Economics

The way to read the debt-per-dollar ratio is this: It goes up until there is a big economic problem, it goes down while that problem is being solved, and it goes up again after the problem is solved...
Art demonstrates good use of math in econ.
If only they would use the accelerated repayment of debt as their main tool for fighting inflation, we could have that permanent quasi-boom.
What is the basic principle for fiscal policy on which MMT is based? Accommodate saving desire through functional finance so that private debt doesn't accumulate, leading to financial instability and economic contraction.

The New Arthurian
The New Arthurian Economics
The Arthurian

6 comments:

Neil Wilson said...

There are only two choices with those net savings - accommodate or confiscate.

Pick one.

Matt Franko said...

Isnt this pure monetarism?

"Banks lend out the deposits..."

ie M1 goes up and then there is a recovery?

????

Tom Hickey said...

"Banks lend out the deposits..."

ie M1 goes up and then there is a recovery?


The focus on debt ratios is key. Getting the right ratios is key and that depends on understanding the underlying operations.

Banks don't lend out deposits. The operative change is increased saving, however, and that is in the form of deleveraging that reduces the level of private debt. Sustained recoveries don't take place before sufficient deleveraging. Government provision of net financial assets in aggregate facilitates that. So private debt debt decreases and public debt increases in aggregate.
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Private saving doesn't create deposits, deposit creation through credit extension creates saving. Credit extension is recorded as a deposit that is a bank liability and a customer asset. This correspondingly creates a future obligation wrt to principal and interest on specific terms that is a bank asset and customer liability. All books balance. Net zero for bank and customer.

No one's savings were lent out. Private debt increases.

As the obligation is paid down, M1 decreases, which means that private debt and private saving both decrease.

As Minsky observed, the higher private debt to public debt, the less stable the financial system. In a correction, public debt rises and private debt declines.

M1 goes up owing to increase crediting of deposit accounts, which of itself creates the corresponding saving. That saving is just passed around until the obligation to the bank that extended the credit originally is cancelled by payment of the debt the credit created.

MRW said...

Tom, very succinct.

"What is the basic principle for fiscal policy on which MMT is based? Accommodate saving desire through functional finance so that private debt doesn't accumulate, leading to financial instability and economic contraction.”

netbacker said...

Tom,
Thank you for putting this so succinctly. I used your comment in a series of tweets with FRED graph to back it up :)
https://twitter.com/netbacker/status/705917891024015360

Tom Hickey said...

Thanks.

What most people overlook that in every monetary transaction one of the parties accepts munnie that was saved by the counterparty in exchange for what is sold. As long as that munnie is held by that party (seller) it continues to be saved. This continues through a chain of transactions as long as the obligation that created the credit remains unpaid. As it is paid down, that amount of saving is removed.

So loans create deposits implies that loans create savings. (M1 money stock increases). Paying down the loans destroys savings (M1 decreases).

When government creates munnie by crediting deposit accounts (M1 increases) it is creating tax credits that eventually get destroyed through payment of taxes. When banks create munnie by crediting deposit accounts (M1 increases) it is creating credits for debiting against the obligation that was created with the deposit and will be destroyed with loan repayment.

This is how the monetary circuit operates based on credit creation that increases savings (M1) and exchanging savings through transactions. Some party is always saving until the credit is destroyed either by taxation (or other payments to government like fees and fines) or loan repayment.

This is reflected for each transaction in the accounting.

In essence, it is a very simple system and entirely transparent through the accounting.

Of course, exchanges involving cash can be opaque, which a reason that TPTB want to eliminate cash in the interest of transparency, I.e., to reduce crime. Not recording and reporting transactions is illegal under the tax laws unless the transaction is inconsequential. But even here, firms are required to record petty cash.

IN this arrangement it is simple to see that government securities are simply an alternative way to hold tax credits, comparable to the chose of holding savings in cash, deposit accounts or time accounts. This is determined by liquidity preference relative to interest rate.

With this understanding, the mystification of money disappears.