Wednesday, February 29, 2012

John Carney — Accounting Identity Errors and MMT

Read it at CNBC NetNet
Accounting Identity Errors and MMT
by John Carney | Senior Editor

Look like John is trying to prod some MMT economists to come forward and clarify their position wrt recent challenges emanating from JKH's analysis at Steve Roth's place, which John links to.


mike norman said...

The government can reduce its debt and the nation can run a trade deficit and the non-government can save, but the sum of the balance of all those sectors will still add up to zero.

One recent example: in 2007 the government's deficit was -1.2% of GDP, the trade balance was -5.0% of GDP and the non-government's debt was 6.2% of GDP. That worked out well, didn't it.

Dan Kervick said...

This whole "debate" seems increasingly like a lot of sound and fury signifying very little. MMT has always talked about the balances of three sectors. Sometimes they call one of these sectors the "domestic private sector," and sometimes they call it the "private sector", and leave it up to the reader's common sense to discern that since it's not part of the external sector, it is obviously domestic.

Some people seem to find this confusing.

Mario said...

yes people can save in that environment and essentially that too is just one more "drain" on the economy. The economy would literally start "shrinking" rather than expanding at essentially every sector. Great idea! Is America a dying old man now? Is this all in the name of "small government"? Are these people closet anorexics or something?

Anonymous said...

Dan Kervick,

Would you mind addressing something for me? (it seems Cullen is getting mighty tired of you!)

One of the points that MMR seems to be stressing, that at first blush definitely seems to have some validity, is that the monopoly power of the federal government SEEMS all-powerful right now BECAUSE we're in a Balance Sheet Recession. So, they're arguing that during "normal" times, the private sector (finance/banking) has much more influence over the economy then the monopoly supplier.

How does this jive with MMT? Are they exposing a chink in the MMT armor? You have to admit, they seem VERY confident that they are on to something. And they are very bright people.

What's your bird's eye view of it all right now?

Tom Hickey said...

@ Anonymous

That's a question for Warren.

Anonymous said...

It seems John Carney doesn't have any arguments left. It's a good thing he's been writing about MMT but unfortunatly he has not contributed by making silly arguments.

Anonymous said...


It would be great to get a response from Warren. But he's usually VERY short with his responses over at the center of the universe.

It'd be nice if the MMT experts would engage the material. My sense is that in time, as the MMR people attempt to formalize their framework, that is when we'll see a more formal engagement by the MMTers.

Unfortunately for us following the "debate" in real time, we're currently mostly hearing only one side of the disagreement.

Leverage said...

"they're arguing that during "normal" times, the private sector (finance/banking) has much more influence over the economy then the monopoly supplier"

It does IMO, the private sector will expand credit until it reaches peak credit (the capacity of the population to leverage, usualy limited by the factor of rates and incomes). I don't think changing interest rates will change this fate, only the pace at which is reached, and when it does it triggers the deleveraging cycle.

However interest rates can mark the viability of the expansion, higher rates means peak credit is lower, so the aggregate level of leverage reached is lower. So CB's still have a degree of control on how much they allow credit to grow.

From a public spending point of view though governments also have a lot of influence in modern economies (States flows are a BIG part of the GDP), in defining how the structure of the economy is shaped (funding stuff, spending on certain things over other, all that has an impact on the economy on the long term; check ie. european vs. american policies, Germany policies and laws were designed to promote a certain sort of economic activity above other while USA policies and laws promote other sort of activity). So it's a complicate dynamic in reality, where you have to take in mind regulatory impacts and laws, founding, direct spending etc. which is the end probably is more important than outright weight of financial movements and 'management' of monetary policy.

Leverage said...

LMAO at the OP, seriously: People consumes less than their income -> Demand drops -> Revenues drop/Asset price deflation -> Deleverage/credit shrinking & balance sheet degradation (risky debt securities fall in price) -> Economic contraction.

If people is clueless about stuff that people like Irving Fisher got right almost a century ago, but even Marx (falling rate of profits) in the XIX cent. they shouldn't be talking about economics or accounting.

Dan Kervick said...


I don't think I have much to say, because I don't think MMT says the things Cullen and the others think it says, so they are attacking straw men. Cullen keeps mixing up the MMT assertion that the government is the monopoly supplier of the dollar together with vague claims about the power of the government to "run the economy" or "drive production" etc.

The government is the monopoly supplier of the dollar. That is true now, and will continue to be true even when we are no longer in a balance sheet recession. But both then and now, the private sector collectively has tremendous influence over the course of the economy. Where are the actual MMT statements denying this latter assertion?

I don't think that means that the government has the power to determine each and every interest rate charged by each and every bank. But that's no different than other monopolies. If, for example, there were a monopoly supplier of weed-whackers in the US, we would expect the supplier to have a good deal of control over the wholesale price of weed-whackers in the US, subject only to the consumer-determined demand curve for weed-whackers, which they don't control. That doesn't mean that the monopolist would be in control of each and every retail price charged for weed-whackers at every retail outlet in the country, or the rental prices charged for weed-whackers at rental agencies.

The weed-whacker monopoly no doubt could adjust those prices too, if they really set their minds to it. But to do so they would sometimes have to make such draconian adjustments in the supply of new weed-whackers, that it would probably defeat their other purposes.

The government has somewhat greater control over the market price of the dollar than the weed-whacker monopolist has over the price of weed-whackers, because the government has the power to legally demand the return of certain quantities of dollars to the government. The weed-whacker monopolist presumably would not have the the power to demand the return of used weed-whackers.

Mike Norman, our host here, has written a hundred times about the fact that the demand for credit in the real economy is what primarily drives the government's supply of dollars to the banking system, because banks are not reserve constrained in extending promises of dollars, and the government has to supply the reserves and currency demanded by the growth in bank loans in order to ensure the smooth functioning of the payments system and to hit their target interest rate. That reality is completely consistent with the claim that the government is the monopoly supplier of the currency.

I don't comment over at MMR any longer, because Cullen asked me to stop and then apparently put my comments on moderation hold. I wrote a final comment explaining I wouldn't be commenting any longer, but it wasn't posted.

I for one tried to engage with them, but they are very thin-skinned about criticism. They have a business model, it seems, that is based on strong product differentiation from MMT, so it is important to them that their characterizations of MMT are accepted as fact by their target consumers.

paul meli said...

"they're arguing that during "normal" times, the private sector (finance/banking) has much more influence over the economy then the monopoly supplier"

Depends on what they mean by influence.

They work in concert. The problem is we (not us) seem to believe that we can spend too much (too much public debt) and the wheels will come off but are in denial that credit has a finite limit more easily definable than deficit spending but we ignore it.

paul meli said...

Oh and Dan, so you don't feel too special I've been banned over there also.

paul meli said...

"The government is the monopoly supplier of the dollar. That is true now, and will continue to be true even when we are no longer in a balance sheet recession"

And if the government doesn't supply some of those monopoly dollars the balance sheet recession can never end - right now liabilities far exceed (attainable) financial assets to the tune of many trillions of dollars.

Leverage said...

Dan, while I agree with the substance of your post I think MMT exaggerates the control the State has over the money even if they are the monopoly suppliers.

In reality the State can't really "demand the return of certain quantities of dollars to the government" at will, and this is one of my major grips with MMT: in practice taxes can't be used to control inflation /conduct monetary policy through taxation). Hold, they can be used, I know they are already used (specially on one side: increasing NFA by cutting taxes, common practice in the USA) but with (serious) limitations.

The taxation structure is very important and increasing or decreasing taxes is not a minor task, basically all the political process revolves around the issue of taxation (who do you tax, how much, and what for) and to change taxes there are political constraints. Actually it would be easier for governments to stop issuing public debt securities than to use taxation effectively as a way of controlling monetary policy when they have to remove inflation (specially when, at the very beginning of this policy move, taxes will make prices higher, until the "money supply" is reduced and trickles down through the economy), at least in a democratic system.

It's a political matter, and as such, it's always going to be problematic and subject to group interests conflicts.

That's one of the great "accomplishments" of neoliberal/monetarist thinking, in presenting institutions like CB's as independent, conducting policy using some sort of irrefutable pristine economic laws they can scape the scrutiny and critics of the public, albeit not for long when real trouble starts, as we are seeing now.

Economy is always political, and presenting it as 'neutral' is an other form of doing politics (in this, neoliberalism and MMR go in hand).

paul meli said...

This interview is germane to the dispute at hand:

Notably questions 3 and 4 and the responses.

Steve Roth said...

I thought to post a comment over there pointing out my own mea culpa after schooling by SRW and JKH, but you have to tell them your social security number and great-grandmother's maiden name before you can post, so I didn't.

Dan Kervick said...

Leverage, everything you say is true, which to my way of thinking only adds to the point that the public monopoly over the supply of dollars doesn't entail that our government micromanages economic activity.

But here's something to think about for those who say that the private sector can "create" dollars, and so there is no public monopoly at all: Suppose Ben Bernanke and his merry men, acting with the support of the full government, decided to become Reserve Nazis, and told every bank tomorrow, "No more reserves for you!" They immediately close the discount window, stop buying treasuries on the open market, and jack up the overdraft penalties on banks' reserve accounts at the Fed to some astronomical level. What would happen?

The creation of additional bank credit would freeze in its tracks, that's what! Bank deposits are just IOUs for dollars, and most payments in our economy ultimately involve Fedwire transfers of dollars from one bank's reserve account to another bank's account. As the total volume of bank deposits and economic activity increases, the volume of payments increases as well. If reserves were not permitted to grow, lending would grind rapidly to a halt. Many banks wouldn't even be able to make their current volume of payments, and would become insolvent. The Fed funds rate would soar through the roof.

Nor would these banks be able to say to the Fed: "We don't need you! We'll make our own money!" These banks are mostly members of the Federal Reserve System and have a public charter. They can only do what we let them do.

The reason that our government doesn't do things like that, and plays a much more friendly and accommodating role, is not that it can't. The reason is that the public dollar monopoly exists to serve public purposes, not to maximize the "profits" of the government. There is no public purpose served by crashing the economy of dollar exchange, so our government would never use those latent powers it has.

Dan Kervick said...

Paulie, I guess our engagement with MMR wasn't engaging enough :)

John Carney said...


Yes. Our commenting system is horrendous. Sometimes I can't even figure it out.

Also, I wasn't really picking on you. I was using your post as an example of the sort of thing that I hear a lot from MMT influenced people. Sometimes it's just a verbal slip. Sometimes it is a real misconception about the world.

Just last night I had a back and forth on twitter where I said "people can save regardless of what the government's balance sheet says" and someone argued that the "private sector" could not save without another sector running a deficit.

That's the very error I was trying to address, conflating "people" with "the private sector." That makes no more sense than assuming "people" means the public sector. In reality, "people"--meaning everyone--cannot net save financial assets because everyone's financial asset is some eles's financial liability.

But so what? People can save in real terms. In fact, every sector can save at the same exact time. There's no accounting identity that prevents that.

paul meli said...


Save what?

Leverage said...

Sorry John, but you are wrong:

"Savings" can only increase as long as there is a continued credit expansion. There is no single example in history where credit can increase parabolic forever. Exponential laws DO NOT work in nature very well.

Increasing savings also have an effect on economic activity. Now, I'm not against savings and in favour of reckless indebtedness, but that's just how the system works, if there wasn't an increase of leverage in the private sector the economy would collapse.

It's very funny, because in past civilizations, in times where there was stagnation of growth (but the economy was fairly stable) only the state interventionism precluded a collapse of savings, because governments literally spent money into existence. And the other part was liquidationism, when the private sector couldn't go no more part of the debts where wiped out.

What never ever has happened is that everyone could save in an economy at the same time without anyone 'deficit spending' money into existence (don't call it government if you want, call it gold mine if you prefer) and not saving.

Dan Kervick said...

In fact, every sector can save at the same exact time. There's no accounting identity that prevents that.

John, if this just means:

It is possible that there is an interval of time T such that for each sector S some people in S are are saving at T.

then it is right. But if it means:

It is possible that there is an interval of time T such that for each sector S, S is net saving at T

Then it is not correct.

I don't see that your statement at the top of this comment is more naturally interpreted in the first way than the second way.

The net saving for a sector is all of the sector's income that is left over after you subtract consumption spending, investment spending and taxes.

Anonymous said...

One question I have had regarding this whole debate is whether MMT states that:
"The private sector cannot net save without a public decifit (assuming balanced trade)" OR does MMT state that "The private sector cannot net save without a public decifit and still maintain GDP". Is this qualifier about GDP assumed?

Stated a little differently - sectoral balances makes prefect, intuitive sense to me when considered retrospectively (i.e., looking at prior quarters where GDP has already been determined). But I am less sure what is the causal mechanism to ensure balance looking forward, when GDP has yet to be determind. Does this question even make sense? I am not doubting that such a mechanism exists, but it is one aspect that I have struggled with a little, and any insight would be helpful...

Dan Kervick said...
This comment has been removed by the author.
Dan Kervick said...

"The private sector cannot net save without a public decifit and still maintain GDP". Is this qualifier about GDP assumed?"

Anonymous, no this qualifier is not required. The sectoral balances equation is simply derived logically from two different equations that divide up national income - GDP - in two different ways. If these systems for dividing up national income are correct and aren't missing anything, then the sectoral balances equation is correct as well as a matter of logic, for any level of GDP, and no matter whether GDP is trending up, trending down or staying the same.

Leverage said...


I commented this in other thread, when you are looking at how the equation adds up arithmetically it's a photography of time.

This won't tell you nothing about causality or trends logically, which is why this problem isn't well framed at all and does not make any sense to start with. You can't say if you can or can't save looking at a static photography, you have to watch the film!

You need a dynamic model that describes the flows in the economy, looking at an arithmetic equation will only tell you that one thing must equal other thing, but that's how far the tautology can go, it won't tell you if you can net save or not or if GDP can rise or at least not fall with an increase in savings.

You can't do that with accounting, because you can't do that with arithmetical equations, that's a dynamic function which describes flows, so you want to identify the different variables and use derivatives to model how does it work. If you don't want to build math models you can follow the process logically, but you can't imply nothing about how the private sector can net save only by looking at that identity at some point in time and at other point in time, it's a fallacy, you have to look at the flow of funds and empirical data (MMT does this for CB operations for example).

Clonal said...

Leverage, you point out something very important in your response to Anon. This is where the divide between the MMT economists, and the rest of the Economics world appears. This includes many Keynsians, and many MMT sympathizers. The critical role of stock/flow modelling in MMT. See in particular my responses to Joe Firestone's articles about Dean Baker at Daily Kos

Trixie said...

Paulie46: Oh and Dan, so you don't feel too special I've been banned over there also.

Bah, and here I thought this whole time I was "somebody":

But I made the "list" first so I'm pretty sure that makes me superior. Try to keep up gentlemen. ;)

Tom Hickey said...

It seems John Carney doesn't have any arguments left. It's a good thing he's been writing about MMT but unfortunately he has not contributed by making silly arguments.

As an educator, I dont think that there are any silly questions or silly arguments, as long as they are sincere. If a point is not clear, then it needs to be clarified, since some people, often astute, aren't getting the nuance.

Tom Hickey said...

The government as monopolist has the same influence all the time. It just depends on how much influence its desires to use. For example, social conditions could change in the US to the degree that it would politically necessary for the government assert its currency monopoly through direct issuance and closing the private banking franchises that now create credit money. Some people are already agitating for this. Government could impose a 1005 capital requirement on banks. Etc. The monopolist is in charge of what it holds a monopoly over. What is so difficult to get about this? People may not like it, but that is how the system works, as Libertarians weel understand and want to change it completely.

Tom Hickey said...

Anonymous, , from Bill Mitchell here, the sectoral balance identities are derived from the fundamental macro identity:

Y = C + I + G + (X-M)

where Y is equivalent to national income, which is equivalent to GDP (one persons spending is another's income).

GDP = C + I + G + (X – M) [sources]

GDP = C + S + T [uses]


C + S + T = C + I + G + (X – M)


(I – S) + (G – T) + (X – M) = 0

That is the three balances have to sum to zero. The sectoral balances derived are:
The private domestic balance (I – S) – positive if in deficit, negative if in surplus.
The Budget Deficit (G – T) – negative if in surplus, positive if in deficit.
The Current Account balance (X – M) – positive if in surplus, negative if in deficit.

These balances are usually expressed as a per cent of GDP but that doesn’t alter the accounting rules that they sum to zero, it just means the balance to GDP ratios sum to zero.

A simplification is to add (I – S) + (X – M) and call it the non-government sector. Then you get the basic result that the government balance equals exactly $-for-$ (absolutely or as a per cent of GDP) the non-government balance (the sum of the private domestic and external balances). This is also a basic rule derived from the national accounts and has to apply at all times.

John Carney said...


Let me explain what I meant when I wrote: "In fact, every sector can save at the same exact time. There's no accounting identity that prevents that."

They might not be able to "net save financial assets" but they can certainly save. That's right. Every single sector can "net save" real assets all at the same time.

Imagine a closed economy of a private sector only grows corn, the public sector that produces only weapons. There's no accounting identity that says everyone cannot consume less than they made.

So my point was really just an attempt to emphasize the economic reality that is often obscured by the financial accounting.

Dan Kervick said...

John, I don't disagree with anything you have said. But geez, MMT is just Modern Monetary Theory. It's all about the financial and monetary dimension of the economy. It's not a total theory of value and its creation.

Tom Hickey said...

John, you seem to be referring to what the Austrian school calls "real saving" (flow) and "real savings" (stock). This refers to change in stock and flow of non-financial assets. To the best of my knowledge, they are the only economic school using this terminology.

Most economists use "real" in contrast to "nominal." So your example seems idiosyncratic in its semantics. Most economists wouldn't deny the basic idea, but would phrase it differently.

Add to this ordinary language use of terms like "saving" and "investment," and the terms become quite ambiguous. This calls for precise technical definition in economics, finance, and accounting in order to avoid unnecessary confusion.

Generally speaking, the economic definition of saving is monetary, i.e., the accounting residual resulting from income that is not accounted for as expenditure on consumption. Saving, consumption and investment are technically defined terms, and they are expressed in nominal values in that they are based on data resulting from accounting records.

In this sense, committing more corn to the stock of seed corn instead of committing it to the stock of feed corn leads to an increase in real assets, hence net worth. Shouldn't this flow into the stock of real assets be booked as investment like planned inventory rather than saving?

When I chop wood for my wood pile to be burned in the cold weather, is this saving? When I have a child, do my real assets increase? Does this count as either saving or investment?

I recall MMT economists often saying that while bank credit nets to zero, its use in investment can lead to increase in real assets ("property"), therefore, an increase in net worth, since the financial value of property is included in net worth. This value fluctuates with marginal price.

On the other hand, the government's "tax credits," which is basically what currency amounts to according to Warren, have a fixed nominal value as the unit of account as do one's tax obligations, which are denominated in the unit of account. Saving these tax credits in the amount required to pay one's tax liability in a period is a sine qua non of participating in the economy.

This accumulation of these tax credits as financial assets is provided by government through its disbursement (expenditure and transfers). Since the liability is on the side of the government these tax credits as financial assets do not net to zero in non-government and constitute non-government net financial assets.

The flow of net financial assets to non-govt shifts with changes in the government fiscal balance, thereby affecting the ability of non-government to accumulate them. To the degree that govt makes net financial assets available to non-govt in excess of tax obligations, they can be accumulated as saving of net financial assets.

paul meli said...


This is very well said and about as good an overview of the system dynamic of "how it works" (MMT) as I've seen anywhere for the layman.

Now if we could come up with a set of equations other than the sectoral balances to demonstrate this logic in mathematical terms we wouldn't have the problem (as much) of people mining datasets to conjure up their own (synthesized) equations to fog the issue.

Or maybe they really just don't understand…

vimothy said...


Real saving refers to the value at relative prices (or constant prices) of the flow of saving.

It does NOT refer to "non-financial" saving.

And BTW, in John's non-monetary economy, saving and investment are the same thing.

Letsgetitdone said...

"I for one tried to engage with them, but they are very thin-skinned about criticism. They have a business model, it seems, that is based on strong product differentiation from MMT, so it is important to them that their characterizations of MMT are accepted as fact by their target consumers."

Don't know if I've been banned yet. I've made a few comments over there and got into a circular thing with Cullen, yesterday. He claimed that MMT critics of MMR were being personal, and said that everyone should be civil. I said that he was very personal in his comments in discussions. He denied this, and said we should agree to disagree. I agreed, but told him to ask his collaborators, about his lack of civility because they would tell him the truth. I haven't heard anything since then, which may mean I've been banned because I had set up notification of further comments.

Letsgetitdone said...

"As an educator, I dont think that there are any silly questions or silly arguments, as long as they are sincere. If a point is not clear, then it needs to be clarified, since some people, often astute, aren't getting the nuance."

Isn't it a silly argument to suggest that there's confusion engendered by MMT when it says that the private sector cannot save when the current account balance of the foreign sector is positive and when the Government isn't running a large enough deficit to overcome that positive current account balance. That is, MMT is a macroeconomic theory, isn't it?

Also, isn't it silly to say:

"What Brooks gets and Wray misses, however, is that government spending priorities are economically damaging.. . . "? without providing any sort of empirical evidence that government spending produces more real costs than real benefits?

I think this is a silly ideological slogan, variants of which John provides to us all too frequently.

Tom Hickey said...

Joe, I qualified my assertion with "sincere." And I am inclined to give the benefit of the doubt.

Not all silly questions are sincere and they should not be taken seriously if they are loaded questions. But, generally speaking, I take questions to be sincere until it becomes clear that they are not.

Similarly with misunderstandings of one's position. I presume it it due to lack of clarity, until it becomes obvious that the other person is wearing ideological blinders or is feigning to gain advantage.