Jason Smith — Mathiness in modern monetary theory

I feel a debate coming on.

Information Transfer Economics
Mathiness in modern monetary theory
Jason Smith

Neil Wilson — Banks: Reserves sorted. Now lets talk capital

Neil presses on into new territory after the debate over reserves. Banks don't lend reserves; they risk capital. There is no reserve constraint under the present system; however, there is a capital constraint. For example there are complex regulations (Basel II, III) constraining the risk banks are allowed to take against their capital. There is a required loan/capital ratio and rules for risk weighting.

On the other hand, MMT economists have observed that there is no hard capital constraint in that banks can and will obtain capital as needed to if they have creditworthy customers who are willing to borrow at a rate profitable for the bank. For example, increasing capital requirement doesn't reduce the amount of lending but rather the profitability of loans as banks have to hold more capital for the same amount of lending.

So in the final analysis, the only hard constraint on bank lending is the level of effective demand for loans profitable to the lender.

Read it at 3spoken
Banks: Reserves sorted. Now lets talk capital

by Neil Wilson

Neil Wilson — Keen vs Krugman and why it matters

Neil gives three reasons why the debate matters and ends with, "Make no mistake this debate over the nature of money is the capital debates of our time.... Keen vs. Krugman represents the start of the Kambridge Kontroversy."

Read it at 3spoken
Keen vs Krugman and why it matters

by Neil Wilson

Scott Fullwiler comments on saving at 3spoken

For the record, in case you missed it. I posted a link to Neil Wilson explanation of saving at 3spoken, Savings - Explaining the Humpty Dumpty word. MMT economist Scott Fullwiler commented.

STF said...Neil,

This is correct. Thank you. Perhaps we can end this ridiculous mountain made out of a molehill now, though my guess is it won't happen given the personalities involved.



Yes, some people get sloppy at times with terminology, particularly in blogposts, working papers, and such. Even in journal articles I've published that have been through several reviews I still find things here and there that I wish I could change. 



Well-known Keynesians and Monetarists have been sloppy at times, too, but that doesn't invalidate Keynesianism or Monetarism. 



Any reading of MMT would seem to make it obvious what S-I does and doesn't mean, and would seem to make it obvious that it doesn't mean "saving" in the traditional sense as it is defined. We've always said we are using Godley's framework, and it's clear that Godely understood this. Again, there is slopppiness here and there, but there is in every literature out there.



Saving being driven by investment spending is a well-covered topic in Post Keynesianism, some of it by Wray, Minsky, and some by endogenous money/circuitistes. This all pre-dates MMT/neo-Chartalism. One of my research papers in grad school went over this literature. MMT takes all this as given--there is no need to reinvent the wheel and there has been nothing in the recent discussions in this issue that strikes any of us as adding anything of economic significance to this literature. I'm glad many that didn't have much grounding in this literautre found the discussions useful, though.



Net saving builds on this by adding an indicator of Minskyan fragility. It is obviously not the same as saving. Domestic pvt sectors want to net save; this is borne out by data from many, many countries. And they can only do it via govt deficits or current account surpluses. 



Yes, we can break down the pvt sector's net saving into household and firms (and financial sector); the data I send out quarterly to MMTers and friends includes this breakdown. I discussed this in my wp at Levy in December 2010 in Figure 2. Rob Parenteau and Yves Smith did a post a few years ago (??) on this, too. 



The breakdown of the pvt sector is interesting to some degree because we see that the household sector is the traditional "hedge" financial unit in the economy until 1998 and then again after 2008. The firm sector moves between hedge and speculative/Ponzi (these are Minsky's well-known terms). But cyclically the two are very highly correlated, so the notion that firms can spend and reduce net saving in order to increase net saving of the household sector--while theoretically true and true in an accounting sense--doesn't hold up well empirically. Across business cycles (i.e., trend as opposed to cycles), firm net saving can and has fallen while household net saving increased (and a modest govt deficit). However, this leaves us with Minsky's dictum that stability is destabilizing (i.e., pvt sector led expansions in the cyclical or trend sense will end up creating fragility via debt accumulation, which is what happens when the household net saving is driven by firm net dissaving), and his prediction that this would be the result was largely correct in my view.

To end, let me again suggest that this whole discussion makes a mountain out of a molehill. There are many instances that are critics have been sloppy, as well. Indeed, one of them repeatedly argues that quantitative easing doesn't create "money," (http://pragcap.com/milton-friedman-misunderstood-quantitative-easing) when it certainly does if one defines money as the monetary base or deposits (which most everyone does, in fact, including the official statistics of "the money supply"). Does that mean these critics don't understand QE? Does it invalidate their entire understanding of the monetary system? No. It means there was some sloppiness. Nothing more. Who cares? Not me.

Scott Fullwiler4 March 2012 19:57STF said...BT [* see below] is correct, too. "Net loss" was clearly intended to mean "net loss of financial assets," not "net loss" in another sense. It happens. 



Similarly, there is no "Neochartalist claim" that there would be no pvt saving without a govt deficit. A govt deficit adds to pvt saving, but obviously is not the only thing (or even the main thing given investment spending) that does. 98% percent of the Neo-Chartalist literature and Godley are clear that the point is that "without a govt deficit there would be no pvt net saving." It's simply disingenuous to suggest the entirety of the literature suggests anything else. 



And even then, it's obvious there can still be household net saving without a govt deficit (though, as I alluded to above, I would argue that encouraging firm dissaving to increase household net saving is not necessarily going to accomplish this).4 March 2012 20:36STF said...In other words, OBVIOUSLY there can be an increase in financial assets without govt deficits if the former "net" to zero in that case, otherwise there would be nothing to "net" in the first place. Similarly, there can OBVIOUSLY be saving without govt deficits or a current account surplus, but not NET saving.4 March 2012 20:42

* [referred to above] 

BT (London) said...This thread is confused.



Neil is right and has helpfully pointed out the 'financial view' of S-I. 

One would hope this would resolve things for people like Ramanan who think that Neil doesn't understand the horizontal credit/debt portion of the money stock.



Yes, horizontal credit can still expand while governments run surpluses and there is a current account deficit. But even though credit is growing, there is still a 'net loss' of credit relative to debt in the horizontal system.



You guys are arguing over the meaning of 'net'. Ramanan thinks 'net loss' means an absolute decline in the stock of credit relative to a previous time point. It doesn't. It means a decline relative to the stock of debt.4 March 2012 13:04

Neil Wilson — Savings - Explaining the Humpty Dumpty word

Read it a 3spoken
Savings - Explaining the Humpty Dumpty word

by Neil Wilson

Neil Wilson — Reconciling S = I + (S - I) to the national accounts

Read it at 3spoken
Reconciling S = I + (S - I) to the national accounts
by Neil Wilson
(h/t Kevin Fathi via email)

Neil Wilson — MMT and why implementation order matters

Scott [Fullwiler] mentioned on another thread: 

Actually, the NAIRU model is all about, explicitly, making sure there are enough people unemployed to ensure inflation doesn’t rise above the target.

The way they do this is to dehumanise the population affected. They start talking in optimal percentages (4%) rather than in real people.

Real people means (in the case of the US) six million real walking, talking human beings, all with hopes and dreams and aspirations, who cannot and will not be able to obtain sufficient to feed and house themselves and the people that depend upon them.

And their only hope of advancement is to replace themselves in that pool of hopelessness by swapping themselves with somebody currently outside it.

Dehumanization and individualization of a systemic problem are the tools by which this carnage is justified. It stinks and it must be stopped.

Which is why an income/something-to-do guarantee of some description has to be the first piece of an MMT style policy programme implemented.

Read the rest at 3spoken
MMT and why implementation order matters
by Neil Wilson

Steve Keen — MMT Convergence?

Neil Wilson recently posted A Double Entry View on the Keen Circuit Model

at 3spoken.

This elicited some excellent comments, including a couple of extensive contributions by JKH.

Keven Fathi emailed me that Steve Roth just posted at angry Bear that he regards Neil's post as The Most Important Econoblog Post This Year.

Congratulations, Neil, on moving this debate significantly forward.

Neil Wilson responds to one of John Carney's objections to the MMT JG

John Carney asserts....

...The JG is a creature of happier times and smaller economies. Bill Mitchell explains that he thought up the idea while he was a student at the University of Melbourne. The total employed population of Australia is only about 11.5 milllion. Australia currently has an unemployment rate of around 5.3 percent, which translates into 635,800 jobless people. In other words, a jobs guarantee in Australia might be workable. But it doesn't scale to fit the United States. source

Neil Wilson responds in a comment here.....

Of course it scales.



Once you state that the government will fund the employment of anybody unemployed at a fixed price (restricted to non-profit making entities presumably) then two things will happen.

(i) non-profit making entities will go wild recruiting
(ii) profit making entities will go wild recruiting to service the demand created by (i).



And then you see where it stops - bearing in mind that (ii) necessarily disciplines (i) because (i) is at a fixed price and can't compete.



Eventually you'll reach a higher level of employment across the economy - and then you see what is left on the unemployment register.



John Carney keeps repeating nonsense I have already debunked.



There is no increased bureaucracy - the state just pays the wages at a fixed price to certain entities. If the US hasn't got a system to do that, then it just needs to copy the UK one. We can certainly do it with the public systems already in place.



If 'undermining' the private sector means getting rid of slave labour jobs worse than the guaranteed jobs, then I consider that a win. The private sector does not have a right to exist, or profit at the cost of anybody else. 



Remember the other job of the government is to eliminate the private sector's tendency to create externalities.



The objections I've seen so far basically boil down to a crowding out argument: "I want the unemployed to be paid less, so I can have more"



Yet surely, morally, if you advocate a system where necessarily there are people unemployed, then you should fully compensate them for their loss due to your system design.



Unemployment is a systemic failure. It need not exist. MMT shows how to eliminate it.

January 6, 2012 5:09 AM

Neil Wilson — JG not that difficult

Read it at 3spoken
Job Guarantee - it's really not that difficult

by Neil Wilson

Neil Wilson on the MMT JG

Neil Wilson, who frequently comments here, has two posts up on the MMT JG  that should be on the record.

Read them at 3spoken

Job Guarantee is a required part of MMT - official

CofFEE Job Guarantee Report - alternative source

UK Sectoral Balances and Private Debt Levels

Charts up at 3spoken
UK Sectoral Balances and Private Debt Levels

by Neil Wilson

Suggestions for improvement of MMT explication

Neil Wilson has put up a post at 3Spoken that critiques MMT regarding areas needing explication in greater detail. Neil is a frequent contributor to MMT sites, including this one, and his writing is always clear and incisive.

Musings on MMT - Exposing the Soft Bits

Links — Two short summaries of MMT principles

• James Juniper, Forget surpluses – a government’s true task is to keep us employed

James Juniper lectures in Economics at the University of Newcastle. He is an Associate of the Centre of Full Employment and Equity, whose director is Bill Mitchell, one the developers of MMT.

• Neil Wilson, MMT Transaction Model - A Variation

Neil Wilson is the publisher of 3Spoken, which provides economic analysis from an MMT perspective. He is a frequent contributor to MMT blogs. Neil is based in the UK.