Tuesday, March 20, 2012
JKH on the Recent MMR/MMT Debates
Read it at Modern Monetary Realism
JKH on the Recent MMR/MMT Debates
by JKH
Important. This is actually a paper rather than a blog post and can be downloaded in PDF.
JKH's contribution here constitutes a landmark iteration for MMR as a serous attempt to engage MMT and other interested economists and financial professionals in professional debate rather than more cursorily and informally in blog posts and comment repartee.
To my knowledge, this is the first time that JKH has posted anywhere instead of commenting, even though much of his commenting would have been a series of worthy posts if he had a blog.
JKH elucidates the debate to date by quoting from previous posts and comments and moves the ball significantly forward by expressing his ideas, which he has thought out carefully and worked up as a paper. Well played.
Subscribe to:
Post Comments (Atom)
111 comments:
Curiously, JKH ignores Neil Wilson's excellent contributions at 3spoken:
http://www.3spoken.co.uk/2012/02/reconciling-s-i-s-i-to-national.html
http://www.3spoken.co.uk/2012/02/savings-explaining-humpty-dumpty-word.html
Larty, What's curious about that? Neil's posts don't fit into JKH's narrative.
Neil does get a mention although fleetingly. I think it's an excellent contribution. I confess to often not understanding JKH's comments, but this moves the debate forward a great deal IMO.
I probably missed something substantial because it seemed like that was a lot of words just to say "don't refer to the private sector balance as savings".
I think that when each clarification of an X=X equation is exponentially longer then the last, then something has gone very wrong. I hope someone with credibility and lots of time to waste will dive into this and see if it has merit.
btw, memo to Tom: just putting the stuff into a pdf doesn't make it "a paper", not that there is anything wrong with blog posts.
Thousands of words.
I never found a conclusion.
If his premise is true he should be able to present a mathematical proof supporting it.
I didn't find one of those either.
I'm still a skeptic.
All,
It seems like the objection to the MMT point of view boils down to this:
from bilbo Saturday quiz 3/17/2012…
Question 1:
We are told that a country is running a small current account deficit and that the private domestic sector is saving overall. However, until we know the relative magnitudes of these balances, we are unable to conclude the state of the fiscal balance.
The answer is False.
According to JKH and others the answer is true.
This is the crux of the argument. If you can find a clearly-defined argument with Mitchell's question you are better men than I.
Not unexpectedly, JKH gets the accounting details right. I would argue there's nothing different there from the understanding that we have, though I would grant there's been sloppiness and even some with less expertise in accounting (just as I have less expertise in, say, Europe than my colleagues) that may not completely get it. but that's like saying Keynesianism is wrong because even some rather significant Keynesians get things wrong. And, as I've said before, I could go and find similar sloppiness in the writings of others that now critique MMT (I already know where to find several examples, actually), but I won't because that would be unproductive and petty. In other words, I have no problem with correcting some poor, misleading use of definitions by some; I do have a problem with the suggestion that there was thereby something "wrong" with the MMT framework. Again, there's nothing that I can see in JKH's exposition that is inconsistent with my understanding of accounting and my understanding of MMT, but then again, this particular area is my own comparative advantage within MMT.
I will just say that the sloppiness, whenever it occurs, is not desirable and there's more than anecdotal evidence that it certainly does confuse readers. My own methodology from systems theory that is the basis of my research does what JKH similarly suggests--be clear about definitions and taxonomy up front. Further, accounting is a precise field; it requires precise words or else you are (probably unwittingly) saying something you don't intend to say. And you can't do macroeconomics usefully without including accounting.
@STF
Can you describe the "sloppiness" of which they speak?
I have read their explanations many times but I still don't see it.
Paul,
Do you mean our sloppiness, or theirs? I won't go into the latter at all. But "ours" is generally related to the points JKH makes--he doesn't explain anything that I don't already understand to be part of MMT, but he does provide specific definitions of terms that MMT'ers have been admittedly "loose" with at times. I will not, however, grant that this in any way is a critique of the MMT paradigm--only a critique of sloppiness and a clarification for those that might have been confused as a result. For that, JKH's explanation is quite useful.
Paulie,
Regarding Bill's question, it would have been better if "saving overall" had been replaced with "net saving." The private sector can save without in fact net saving. The household sector can save while the total private sector does not "net save." Etc. So, if one grants that "saving overall" means net saving, then Bill is right. If one argues that "saving overall" refers to total saving, then JKH/Ramanan are right.
MarioLa wrote: "btw, memo to Tom: just putting the stuff into a pdf doesn't make it "a paper", not that there is anything wrong with blog posts."
My point was that JKH wrote about this is in considerable detail in blog posts, going back quite a way on different blogs. This has been an ongoing conversation, generally conducted politely but informally.
JKH is a very meticulous and through guy, and he often takes time to think things though before he responds. This time, and for the first time, he took the time to go beyond is normal practice of commenting to post and to work something up that goes well beyond the scope of most blog posts. Moreover, he provides specific reference to the previous debate.
This is a step up to a new level for JKH and an advance for MMR. It ups the ante.
It is also good for MMT. As Scott observes, it is necessary to keep the details straight. I remember one thing above all in my training as a naval offer, "Attention to detail."
In a technical subject, precision is essential. That is what JKH is striving for, and so should the rest of us, even in blogging.
I am not saying who is correct here, since that is beyond my professional capacity. But if it is OK with Scott, with the qualification, "I do have a problem with the suggestion that there was thereby something "wrong" with the MMT framework," then it is OK with me. Let's see what other experts in the field say.
The claim that there is something wrong with the MMT framework is now the issue and JKH has specified it. Scott does not think JKH has demonstrated that in a compelling way. So the next step seems to be to drill down into this claim.
The basic issue is JKH's assertion, "I concur with John Carney when he says “This is not Economics”.
That is a direct challenge. However, I would point out here that JKH and John Carney are at a disadvantage here in that they are not professional economists. At least the presumption is that JKH is a financial professional rather than an economist, but since he is anonymous. his credentials are unknown.
However, their challenge cannot be dismissed simply on that score. However, the presumption is that neither of them may fully understand what professional economist consider the criteria of economics.
I knew JKH must be working on something. He disappeared for a while. I wish he had done a little more synthesis to try to pull out two or three main takeaways instead of responding to each and every little thing that was said over two weeks.
Oh well, lots of reading to do.
I feel like there is an extremely simple set of MMT ideas that are being lost and obfuscated by obsessing over an endless and unresolvable semantic tangle of conflicting accounting conventions. The ideas, as I would articulate them, are these:
1. No matter how many sectors into which one divides the dollar-using economy, for any given period of time one can look at the total dollar receipts and dollar-denominated assets acquired by each of those sectors, on the one hand, and at the total dollar payments and dollar denominated liabilities incurred by each of those sectors, on the other hand. The sum of the balances of these flows for all sectors combined will always be zero.
2. Every sector has a stock of net financial assets that can be measured at the beginning of the period in question and at the end of the period in question.
3. For any sector that does not include the national government, the flows described in Point 1, represent a corresponding increase or decrease in the stocks described in Point 2. Each of these sectors runs a financial deficit or financial surplus that exactly equals the change in its financial stocks.
4. Uniquely among all the sectors, as the monopoly supplier of dollars to the economy, the government can run a pure deficit or a pure surplus, which does not correspond to an equivalent change in its financial stocks.
5. As the monopoly producer of dollars, the whole idea of the government possessing a finite stock of dollars is inherently meaningless.
Tom,
thanks for that. the reason I can't agree that JKH has demonstrated "MMT is wrong" is that JKH's description of things is the same way that I understand them. Unless I'm not MMT, how can MMT be wrong? (Not to mention that I learned some of this stuff from Randy's writings in the early 1990s, in fact.)
Dan,
Interesting. In the interest of clarity, though, I hope you do not mind if I suggest that one should never say that the govt is the "monopoly supplier of dollars." The govt supplies currency, reserve balances, and Treasuries, which are NFA. It is the monopoly supplier of those things that it produces. It is not the monopoly suppliers of all media of exchange that one might call "dollars"--bank deposits, etc.
Again, I imagine one can find instances that even MMT economists have done this. I think from an understanding of the MMT framework it should be clear what the intent is, however--otherwise why would I know the difference?
sorry. "in the interest of clarity," I should clarify that NFA is currency + reserve balances + treasuries - govt/cb loans to the pvt sector. See how easy it is to be "sloppy"? And see how obvious it is that I actually did know the difference? On a grander scale, this is largely what this comes down to, for me, in the grand scheme of things.
@STF
"…The private sector can save without in fact net saving."
Sure, this seems like basic paradox of thrift stuff, but to make mountains out of molehills?
And to carry their argument to an extreme in the opposite direction, they never deal with the
liabilites that come with credit, like they simply float around in the economy and don't hurt anyone. They tend to ignore that by, like, never discussing it.
Liabilities that will negate the savings the private sector is accumulating that they only get to "keep" if monetized by net government spending.
Like Philip Pilkington wrote the other day at NC, paying back loans is like burning money.
I feel insulted if they think we didn't already understand these things.
"I feel insulted if they think we didn't already understand these things."
I think that's the general feeling of the MMT economists. There's not much there that wasn't already understood prior to 2000 as PK'ers had been working through that for decades, and you also had Godley and his followers come in and add still more detail.
I will grant, however, that there has been sloppiness that could lead one not familiar with this past literature to conclude otherwise.
I will also say that I think Waldman's quote is a complete mischaracterization of MMT. Perhaps somebody somewhere said it the way he characterized it in total or perhaps some people said parts of it, but anyone who really understands MMT finds virtually nothing accurate in that quote in terms of a representation of MMT. Again, if not, why do I cringe when I read it?
paul and paulie46 are the same person. Sorry.
Hi Scott,
Yes, in my comment I was being sloppy and using "dollars" in the more restricted sense of the currency and reserve balances supplied by the government.
What distinguishes MMT from other similar schools of thought in the endogenous money tradition, as I understand it, is that MMT recognizes that the kinds of dollars created when commercial banks create demand deposits are not the same kind of thing as the kinds of dollars created when the national government issues physical currency or boosts reserve balances.
Stephanie Kelton has clarified the situation by describing a hierarchy of debt based on general acceptability. I would just like to add to that point by suggesting that it is not just a hierarchy of general acceptability, but a hierarchy of legal obligation. Some dollar-denominated obligations can be met by making a payment with an instrument that is itself an obligation, and for which the payee is thus still in a position to demand further payment from someone. But I would argue that there is a form of payment in our system which completely discharges a dollar-denominated obligation. And this legally final means of payment is something that only the government is permitted to create.
That's why I think there is a serious fallacy in attempts to undermine the MMT picture by arguing that what the government and its central bank do when they create dollars is not fundamentally different than what commercial banks do when they create dollars. A bank demand deposit is a promise, an IOU, and the owner of such a deposit, or of a payment order issued on such a deposit, is legally entitled to demand payment in the form of the government's money. And the government's money is something that is not created by banks. So bank demand deposits are IOUs for something produced by the government, and whose production the bank doesn't control.
Banks can of course create promises fairly freely, and their promises drive the process of currency and reserve production since the Fed typically accommodates the need for additional supplies of these fundamental payment instruments - needs that the promises tend to generate by increasing the aggregate volume of payments.
But that accommodative stance is purely a matter of government choice. If for any reason the Fed decided to end its accommodative stance and turn off the mechanisms that supply ever-increasing amounts of government currency and reserve balances, then banks in the aggregate would quickly find themselves in a position in which they could not expand their balance sheets and create more demand deposits.
But the government can never find itself in a parallel position, because whatever the government's dollars are, they are not legal obligations that entitle their bearers to payment with an instrument whose production the government does not control.
Anyway, that's the way I see it right now :)
If I said to a friend, "My family won't be able to save more unless our income goes up" it would be totally obvious to my friend that even if my family received no more income it would be possible for my son to save more, because my wife and I could increase my son's allowance and he could sock it all away in his piggy bank.
So when MMTers say things similar to "the private sector can't save more unless it receives more income," why does that cause so much confusion, and lead people to think it's an important counter or discovery that one part of the private sector can save more even if the whole private sector doesn't?
@STF,
I agree that JKH hasn't proved that MMT is wrong, but he doesn't think that either. I also agree that MMTers have specified what they mean when using certain terms at some point, but I think it goes a bit beyond sloppiness. Mitchell and Wray routinely omit the 'net' from net savings, so to the uninitiated, it does look like MMTers are saying the private sector can't save without a government deficit. I've seen Ramanan pick them up on this and they have denied they have been 'sloppy'. I think more precision is required or it makes MMT look wrong even though it isn't.
Ben,
"…Mitchell and Wray routinely omit the 'net' from net savings…"
I think it's a stretch to say even that is sloppy.
It's basic paradox of thrift stuff - For one person to save another must dis-save. To take that a step further and say that in order for the economy to save as a whole the government must net-spend is not a great leap and only those with the weakest understanding of the underlying relationships could find confusion in it.
"…to the uninitiated, it does look like MMTers are saying the private sector can't save without a government deficit."
It only looks like MMT'ers are wrong when pedants attack, and those types could make anything look wrong with their convoluted semantic arguments.
This is just more of "opinions of shape of Earth differ" line of argument. Not useful.
Paul,
" in order for the economy to save as a whole the government must net-spend is not a great leap and only those with the weakest understanding of the underlying relationships could find confusion in it."
This gets back to your points about "closed systems" related to your technical background imo.
My opinion is that many more people than we realize dont truly understand the mathematical concept of a "closed system".
iow when you write here: "in order for the economy to save as a whole the government must net-spend"; very few are able to truly understand this from an intuitive, mathematical basis...
they dont get this, for instance, I do not believe Ben Bernanke really understands this as he boasts about the fact that the Fed remits UST interest to the Treasury which results in deficit reduction, no one who truly understands the math behind a closed system would ever boast about this activity...
These are really people who are unqualified to be granted any govt authority related to these operations... this should be exposed imo.
Resp,
@Paul
"It's basic paradox of thrift stuff - For one person to save another must dis-save."
It's not about that. It's about how using inconsistent terminology is confusing. The sectoral balances equation contains 'S' (saving), but (S-I) is also said to be saving, when actually it is net saving.
So the 'S' in S-I can be positive even if the government runs a surplus, but net savings can't be.
I know you already know this, but the point is that for clarity, when the term 'saving' is used, it should be describing the 'S' in the sectoral balances equation, and 'net saving' should be used to describe S-I.
It might seem pedantic, but there is definitely confusion out there and it is allowing opponents of MMT to make it look like MMT is wrong.
@Ben
S is always positive. S is a stock and I don't see how it could ever be negative in the real world.
Further , I've never seen (S-I) called saving, it has always been "net saving" and those saying otherwise are being dishonest.
You're giving these guys way too much credit.
Just being a pedant :-)
Further:
(S-I) = S(n) -S(n-1) where n is the total number of budget cycles over history,so
(S-I) is merely the current years ending total net savings minus the previous years ending total net savings.
It follows that:
I = the previous years ending total net savings. Then:
S(n-1) = I(n-1); Then:
S=I; Always.
It's not about that. It's about how using inconsistent terminology is confusing. The sectoral balances equation contains 'S' (saving), but (S-I) is also said to be saving, when actually it is net saving.
Fair enough. But this isn't just an MMT issue. MMT is stuck like everyone having to speak in a language that was invented by economists for various purposes, and in which terms are not always used in a single consistent way. It is impossible to please everyone with one's semantic choices, when there are inconsistent and ambiguous usages among which to choose.
As I understand it, the term "S" in the sectoral balances equation and national accounts equations is defined as:
S = Y - C - T
So it's supposed to be income received in the period minus spending on both consumption and tax payments. And maybe that's a reasonable definition of "saving" when you are talking mainly about households. But the problem is that when you are not talking about just households, but about the whole private sector - which includes firms - then S is not a very natural or common-sense quantity to look at to measure saving. That's because firms (and households to some extent) spend money on capital goods. This is not money they have saved; it is money they have spent. So if you want to look at a quantity that answers to natural definition of saving, you will want to subtract all of those capital goods expenditures as well.
S isn't a stock as I understand it. That would be savings, while S is gross saving. The way I understand it, S is one of the things that can happen to income during some time period. It's all the income that is not spent on consumption purchases or tax payments.
S could be negative in principle. If the government levied some tax that was so massive that the only way the private sector could pay it after making their essential consumption purchases was to send the government all of their remaining income and draw down their savings, then S would be negative for the period. Assuming I were positive, then S-I would be an even lower negative number.
@Paul
Not trying to give anyone excessive credit, but if numerous people make the same criticism of MMT independently, it is worth taking note. On balance, I think the criticism is fair, although again, it doesn't mean MMT is wrong.
"Further , I've never seen (S-I) called saving, it has always been "net saving" and those saying otherwise are being dishonest."
Here's Bill Mitchell from his Saturday Quiz last week:
"We are told that a country is running a small current account deficit and that the private domestic sector is saving overall. However, until we know the relative magnitudes of these balances, we are unable to conclude the state of the fiscal balance.
The answer is false"
Being pedantic, he should have said the private sector is saving (net of investment) overall.
Don't get me wrong. Bill Mitchell is a bit of a hero of mine. I learned MMT from reading his blog, but the phraseology of the quote above is open to misinterpretation and confusion.
@ Dan
S is both a stock and a flow as I pointed out in a comment a few weeks ago.
Over one period:
S = Y - C - T is a flow, but what we define the period as 235 years instead of one?
If you are saying "savings" as in money agents have in their savings accounts including mutual funds, etc. well, that is one definition of savings but it has no real meaning - it's just a number.
Those "savings" dollars can't be realized unless they are monetized - ie the "savings" and ∑(S-I) must be equal or we would have the equivalent of a bank run.
What confuses all of this I think is the existence of liabilities tied to credit which have been "saved", making it impossible for all the loans in existence to be satified.
@ Ben
"…if numerous people make the same criticism of MMT independently…"
Most of the numerous people independently making the same criticism belong to the same clique.
I understand your position - I just don't sympathize with it.
S = Y - C - T is a flow, but what we define the period as 235 years instead of one?
I don't think it matters Paul. It's still a flow. By definition those terms refer to changes in stocks, not stocks themselves. It doesn't matter over what period of time you are measuring the changes.
@Matt,
I have always made my arguments from a "closed system" point of view. I didn't want to get tangled up in labels, so I would purposely avoid using the MMT word.
No matter, if one tries to make an argument re math he/she is accused of being an MMT'er like that's a bad thing.
So far I haven't found anything in MMT that defies closed systems math, but a lot of the cooments from the "nattering nabobs of negativity" get the accounting right but the math wrong.
In order to solve a problem one has to define it first. They don't seem to know what the problem is.
"In order to solve a problem one has to define it first. They don't seem to know what the problem is."
Right and the tip off is that it quickly becomes an argument about terminology or semantics like we have going on here.
http://en.wikipedia.org/wiki/Semantics
"The word "semantics" itself denotes a range of ideas, from the popular to the highly technical. It is often used in ordinary language to denote a problem of understanding that comes down to word selection or connotation."
Many of those lacking true Mathematical Maturity instead have to use a rules based approach or semantic relationships to be able to navigate these systems.... so words and terminology, definitions, identities, etc.. become the most important thing (to them) as that is how they come to understand anything. Rather than thru mathematical intuition.
Hopefully, once we get these semantics nailed down for them in all of this S & I business, we can all get back to a full frontal assault on the morons we have running things... they seem to not be able to understand these systems either thru mathematical intuition or semantic relationships... Now that is the real problem!
Resp,
@Dan
All I'm saying is the sum of all flows is a stock.
The sum of all deficits is the National Debt. The deficit is a flow - the National Debt is a stock.
I think geerussell said it best, i.e.
I probably missed something substantial because it seemed like that was a lot of words just to say "don't refer to the private sector balance as savings".
JKH is tremendous, however, so what can you do? He makes a good point.
My particular pet peeve is that people like Steve Waldmann, and JKH to a lesser extent, pay such respect to the monetarists. Here's SRW two days ago:
I’m going to end this with a bit from the always wise Nick Rowe
Is it just me, or is Nick Rowe a complete waste of time as far as his economic contributions? I hate to be so negative, but having the Fed target nominal GDP is complete nonsense as far as I'm concerned. JKH and company are making a mountain out of an MMT molehill, while giving a free pass to complete nonsense from the monetarists. And the MMR folks had a post citing Krugman as someone who gets it as demonstrated in a Krugman column citing the authority of IS-LM and the liquidity trap. Those MMR folks are 95% MMT in viewpoint and couldn't care less about the IS-LM nonsense, so the dispute with MMT is mostly about personalities, IMO. That's okay -- some of the MMT folks are pompous, but it's a side show.
Apologies to Nick Rowe, Scott Sumner, Paul Krugman et al if they actually have some good points that I'm missing. I could be missing something...
NGDP targeting is nonsense. What is worse, a recent poll in FT showed a lot of financial types rooting for it as the next policy by the FED.
People does not get how the system works, frustrating!
What is worse, the notion that is better to 'target nominal GDP' by somewhat printing money (which is not possible anyway) by CB's to governments running deficits. They are full of it with the ideology that 'markets can allocate money better than governments always' so pass a lot of free money to banking system so they can allocate it.
Unfortunately I see all this discussion about MMR ending exactly at the same point in the future: "look how important is the banking system creating private (non-)savings and allocating resources".
So yes please, free money for bankers, more debt for everybody else and let's see how well is allocated building housing bubbles so we can have 'growth'! Ridiculous.
Anon
The one thing I took from that poll IIRC MMT was third, take that back 2 years would lay a substantional sum it would have been in "other" and not even noticed.
All I'm saying is the sum of all flows is a stock.
No, the sum of all flows is zero :)
Every payment that is made is a drain for somebody's stocks and an exactly equal injection into somebody else's stocks. So the net result for the economy as a whole is zero.
But our total stocks don't sum to zero. We have real positive wealth in the aggregate.
I like Nick Rowe's blog a lot. He poses really good questions and thought experiments that are just fun to think about, and the average quality of the comments is very high. I'd guess he is a very good teacher.
But I agree with you about market monetarism in general. I think they are just wrong about the fundamental causal mechanisms at play - especially the "hot potato' effect - and as a result vastly overestimate the actual and potential role of the Fed in the real economy.
@Dan
"No, the sum of all flows is zero :)…"
Unless you are talking about the government/non-government combined across one balance sheet this is not true.
For the non-government the accumulation of budget deficits/surpluses is a stock and is equal to the National Debt. It is the net total NFA's in the non-government. (NFA's left after all private debt is satisfied).
The sum of all deficits/surpluses is obviously not zero, and they are flows, so I'm not getting your point.
Dan,
I think you should have also received credit from JKH for a sincere attempt to understand MMR. Your efforts to engage them in a respectful manner has been much appreciated by me, and I'm sure others, too.
Dan K-- Interesting that you like Nick Rowe's blog. I'm glad to hear that, and I'll try to keep an open mind.
Here's MMR spokesperson Michael Sankowski on NGDPAggressive NGDP Targeting gets us Recession levels of Unemployment!:
"This recent note by Jan Hatzuis about NGDP targeting shows just how bad monetary policy is at getting unemployment down...
I don’t know why people think 6% unemployment is a good target. It’s a horrible level of unemployment that only looks good from the perspective of the aftermath of a gigantic global crisis.
We need fiscal stimulus, not more bank lending."
NGDP targeting by the Fed is just not serious, and the MMR people know this. I wish they would clarify this, and stop praising Nick Rowe and company. They really don't want to go down the monetarist path and should make that clear.
MMR is a constructive evolution of MMT. I really believe that S=I+(S-I) is significant (net private saving (flow) = net investment + fiscal deficit + trade surplus). But it's built on top of MMT. Market Monetarism is crap, yet the MMR folks are seemingly afraid to say this. Plus one for MMT in being willing to call out such nonsense...
Paul said:
"For the non-government the accumulation of budget deficits/surpluses is a stock and is equal to the National Debt. It is the net total NFA's in the non-government. (NFA's left after all private debt is satisfied)."
Sounds right on the money to me. It is the accumulation of savings in the non government sector.
Thank you very much Geoff
Retraction
This…
It follows that:
I = the previous years ending total net savings. Then:
S(n-1) = I(n-1); Then:
S=I; Always.
posted on March 20, 2012 5:04 PM
…was written by an idiot.
Agree Detroit Dan. Such a huge fuss about whether it is confusing to loosely use the term "saving" to refer to S-I instead of S.
Meanwhile, gross malpractice goes unchallenged and is encouraged.
As a side, is anyone even sure that JKH is a male?
Excellent, this works really good. Share more such information.
MCX Tips
Stock Tips India
In other words JKH is saying on 20 pages what MMT-ers (Wray, STF) have already repeatedly said and clarified: accumulation of NFAs is S-I, while economics defines "saving" as S. Accumulation of NFAs is what a layman would call "saving", hence the verbal shortcut used by MMT, saying that "S-I" is "private saving", which simply means accumulation of NFAs. While some readers may get confused, no MMT-er was ever confused, so there is little to get excited about. Still, JKH gives some useful explanations of how S and I interplay in the real economy, but nothing MMT-ers didn't know.
MarioLa,
But there are plenty of MMTers who don't know the proper definition of saving. I personally debated with many of them during the recent dust up. That's why JKH has gone to such lengths to lay out the basics--because, for whatever reason, the basics do not seem to be well understood.
So what you say doesn't really ring true to me.
from SNA:
"Net saving is net disposable income less final consumption expenditure."
So what is saving?
Vimothy
The mmt economists know the difference. I'm not responsible for everything mmt supporters say anymore than any other school of thought is responsible for it's followers. I don't blame Krugman just because some people that like Krugman might incorrectly interpret himm
Scott,
I agree with you and I think that's a fair point.
What we were originally discussing at Asymptosis was not the fact that "MMT is wrong", or some such, but whether MMT makes the right tactical choices in how it presents the concept of macro saving and how it tries to transmit its understanding of that concept to its followers and the uninitiated.
Unfortunately, in the debates that followed, none of the non-professional MMT enthusiasts that participated were able to engage with this point, because they couldn't seem to understand the premise, which is that there is a difference between saving and saving net of investment.
To me this suggests that there is something of substance in the original argument, viz, the issue of how saving and saving net of investment is presented. It seems that there must be, since so many are confused.
"…That's why JKH has gone to such lengths to lay out the basics…"
…because clearly the basics require a several-thousand-word dissertation.
Probably take him a million words to describe entropy.
"a million words to describe entropy."
That's the way they roll, not that there is anything wrong with that... (as long as they do eventually get there)
Resp,
Vimothy,
Being so strong on semantics MMR should differentiate "MMT economists" from "MMT enthusiasts". I bet some enthusiasts confuse S-I and S, so what? Hey, they may even be confused about more basic things! It means MMT is wrong! Please name one MMT economist who is confused about it. And Bill Mitchell it isn't, he knows full well when he is talking about S-I and S. I think having a month-long debate about an ambiguous statement somewhere on the internet does earn one a "loon" badge?
The fact some MMT enthusiasts are confused about X or Y says nothing about the validity of MMT, as MMR tried to portray it.
This S<>S-I "discovery" may be useful for laymen interested in MMT and MMR but it tells us nothing about the validity of MMT.
If an enthusiast of evolution is confused about some details of heredity, how exactly does of it "prove Darwinism wrong"? That would be a ridiculous statement, I hope MMR-ers get that, but sometimes I doubt it.
MarioLa,
Sure. So, another thing for people to consider, which places more responsibility on the lower ranks of MMT, is this:
Non-professional MMT enthusiasts might try to be more circumspect about the positions they claim for MMT, since outsiders will not find it easy to parse their statements for the true positions of professional MMTers and the original errors of non-professional MMT enthusiasts.
I started out in this debate thinking that for sure there could be no chance that economists could really be in disagreement over the definition of saving, but after having been contradicted as to the position of MMT by all participating MMTers (until Scott’s contribution), began to suspect otherwise.
If, for example, Austrians were to tell me that "Austrians believe X", where X is some proposition that seems inconsistent with the basic tenets of Austrian economics, I would discount their views.
But eventually, if enough Austrians tell me that Austrians believe X, if I ask repeatedly and am told clearly and unambiguously by a large and varied sample of Austrians that Austrians believe X, I'm going to update my priors. What else can I do?
Which brings us back to the subject of the original conversation:
Does MMT make tactical or presentational errors in the way it presents the concepts of saving and saving net of investment to the public?
If the public and MMT enthusiasts are confused but professional MMTers are not, then this suggests to me that there might be something that could be done to improve matters, by either party to the conversation.
By improving matters in this fashion, everyone could be made better off--a Pareto improvement, in econo-speak. Nothing of substance is changed about the theory of MMT, but people's understanding of that theory and it's implications for economic policy is raised up a level.
Hey, y''all, simmer down. John Carney has it right that a lot of smart people don't get MMT, and that includes academic economists and finance professionals. This is not surprising since it is a new take, and it's going to take some time to clarify the ideas, get the terminology straight, and debate key issues. This is a good thing, and it is the next step. It was bound to happen as soon as MMT began to be more widely recognized and talked about.
There are two things to keep in mind. First, knowledge expands through debate of issues. clarification of terminology, and examination of assumptions. So far there has not been much of this going on wrt MMT because not many took notice of it. Now that MMT is getting exposure, thanks to be people like John, these things are naturally coming up. It is a good thing and to be welcomed.
Secondly. as John points out when a lot of smart people are interested in what you are saying, but not really getting it right as far as you are concerned, you should take it as a signal that you need to clarify things, no matter how clear you may think you have made it already. Generally speaking, when people don't get something, they are understanding it from another perspective, and the challenge is to get others to see your point of veiw through your lens. They may not agree with it after they understand it, but there is no real debate if they don't get it in the first place.
Thirdly, it is necessary to separate issues and explore them independently, making sure that each issue is clear before drawing conclusions about their relationships to each other. Don't rush to judgment and risk throwing the baby out with the bathwater.
None of these matters is exclusive to the MMT debate. It's just how the dialectic that advances knowledge works. There should be no disagreement over formal language or empirical data. these are areas where widely accepted and well-defined criteria already exist. So there is a way to resolve such issues through investigation and clarification.
There is also the area of subjective norms and values. While rational arguments can be given for holding these, ultimately there are no absolute criteria available, so there may be no resolution forthcoming through debate.
Between these two areas is a large grey area characterized by confusion, ambiguity, cognitive-affective biases, and so forth. Here is where a lot of work generally needs to be done, and this is actually largely what contemporary philosophical methodology focuses on. A lot of so-called problems are misunderstandings that careful analysis reveals not to be problems at all but pseudo-problems that clarification resolves.
So let's view this as an opportunity to improve understanding of macroeconomics, the underlying monetary economics, and the relation of these to policy formulation. The goal is not to prove this or that school of thought correct, but rather to advance knowledge in a way that will improve individual lives in society. We are working together on this, and we are all in this together, for better or for worse. Let's each do our best to make it for better. Trust the process.
BTW, as an educator, I have often experienced the situation where I explain a point to someone many times and when they finally get it, they say, "Oh, is that what you mean. Why didn't you say so in the first place?" :)
vimothy,
If you want to get MMT you need to read the MMT economists, not bloggers who may get things wrong, as CR did on JG. Wray was explicit about that. It applies everywhere. If you want to learn General Relativity start with a textbook, not blogs. If you start with blogs don't complain that GR is "wrong" because someone was confused about it on a blog. This seems really basic.
MarioLa,
I've been reading the academic output of MMT economists for some years.
As I've tried to explain, the issue was not whether "MMT is wrong", which, with respect, is a statement that is inane on its face and seems meaningless in any deeper sense (what could it possibly mean? I confess to having no idea), but whether MMT presents a particular concept in a way that is easy to understand, or whether it presents it in a way that is likely to confuse.
You seem to agree that MMT enthusiasts are confused about the issue, which suggests that something could be done to further their understanding, or at any rate, that the issue might warrant further thought.
Why not do something like…
…one group defines savings and net savings and total savings, etc. and another group defines the same terms from their perspective and then compare to see where/if they differ and why? And then have the discussion.
Nah, that would be too simple.
"…MMT enthusiasts are confused about the issue…"
:as opposed to MMR enthusiasts who have it down cold.
Seems like some of you already had this discussion over at Nick Rowe's blog. How did that turn out?
Vimothy.
I think enthusiasts of every school can be confused about S, it doesn't invalidate any school of thought. The def of "saving" in economics is simply inane. It contains accumulation of NFAs (S-I) and real investment goods (I), like new houses. Imagine blowing a million dollar on a house and telling your wife "honey, I just saved a million dollars!". So if you are talking to a layman you call S-I "saving", because this is how they understand saving. The difference with MMT is that it is the only school that tries to explain this stuff. I think Bill Mitchell has a blog post on this, which would invalidate your critique - it is not MMT's fault that ppl didn't read it. Some may get confused anyway, who knows. Still, this "confusion" pales with the confusion stirred by MMR that "MMT is wrong at its foundation" when it isn't. People got seriously confused and excited over at the MMR site. So, maliciously (mis)quoting you, "MMR enthusiasts are confused about the issue, which suggests that something could be done to further their understanding, or at any rate, that the issue might warrant further thought."
I appreciate your efforts to calm down both sides though. Still, some things cannot be left unsaid.
MarioLa,
It's certainly true that enthusiasts from all schools can become confused, and I agree without qualification that this does not invalidate the schools themselves.
I suppose the hope from the perspective of a wanting to inhabit a relatively unpolluted intellectual environment must be that wiser and calmer heads prevail and prevent the discourse from deteriorating too much.
But that's a very general point. There is a specific point being made here. Since there really is, as far as I can see, quite a bit of confusion, it seems like the MMT/R community has two choices:
1, It can conclude that it doesn't really matter, and move on.
2, It can conclude that it does matter and reflect some more on the issue.
I think that "2" is better option than "1". It seems like saving is quite a key concept to MMT, and one that is likely to be foregrounded in policy analysis. If the way that saving is presented seems wrong to people then they might discard the whole analysis on that basis alone. so this might turn out to be important, and, in the long run, something that strengthens MMT.
I dunno though, obviously, I could be wrong.
Why economists conceive of saving in the way that they do is a different and somewhat subtle question. We could discuss it in more depth if you like.
I'm not really a party to either MMT or MMR, though. I find that both groups contain people whose thought and writings I find valuable. I'm afraid that I don't really have much of an opinion about the split, other than there seems to be more acrimony on all sides than is necessary. But people care about these things, that's why they get so enthusiastic about them in the first place--so there's a sense in which this reflects a kind of strength or vitality within the Chartalist school.
"It is not the monopoly suppliers of all media of exchange that one might call "dollars".
Should they be called dollars if they are not, in fact, dollars?
If I write "IOU S. Fullwiler $10" on a piece of paper and hand it to you I haven't given you ten dollars. So why pretend that a dollar's worth of bank credit is the same thing as a dollar? It's not.
Bank credit is a claim on a quantity of dollars, not those dollars themselves.
Govt deposit insurance doesn't magically turn bank credit into dollars, it simply guarantees that if your bank folds (when it makes more IOUs for dollars than it can afford) the govt will step in and compensate you for having been conned into believing that you owned dollars, when all you really owned was bank credit.
Given that most people don't understand how the banking sector works, it could be argued that FDIC is really just a form of compensation for people who have been defrauded.
I'm just a layman (a bright one I hope) and I get MMT and if smart people can't - people much smarter than I - I don't get it.
I assume they're incapable of lateral thinking and thinking outside of their own paradigm.
Incapable of thinking in an alternative form of logic as there are many different varieties of logic available - perhaps those with a background in philosophy can attest to that?
If I have $10000 dollars worth of 'savings' in a bank account, do I really have dollar savings at all? What I actually have is a claim on dollars - i.e. an IOU given to me by a bank.
I don't actually own $10000 dollars, I own a claim on $10000 dollars, or $10000 dollar's worth of bank credit. In reality my dollars were 'invested' in the bank when I opened my account - i.e. when I lent my money to the bank - and now all I own is a bank IOU, whilst the bank now (temporarily) owns what used to be my dollars.
When I withdraw money from my account I am essentially calling in my investment, or calling in my loan to the bank.
If I have $10000 dollars worth of 'savings' in a bank account, do I really have dollar savings at all? What I actually have is a claim on dollars - i.e. an IOU given to me by a bank.
I don't actually own $10000 dollars, I own a claim on $10000 dollars, or $10000 dollar's worth of bank credit. In reality my dollars were 'invested' in the bank when I opened my account - i.e. when I lent my money to the bank - and now all I own is a bank IOU, whilst the bank now (temporarily) owns what used to be my dollars.
When I withdraw money from my account I am essentially calling in my investment, or calling in my loan to the bank.
Senexx, the reason that smart who are well educated in the subject people can't get it while other smart people pick it quickly is that the approach is unfamiliar to them, and it can even seem to somewhat contradictory in their eyes. To people used to standard economic modeling and their assumptions and use of terms, a different approach can even seem naive. It's often takes some doing to get people to "think different." But we have already seen some of these people revising their views, albeit gradually.
One question is whether it is wiser to stick to a standard definition of, say, accounting terms and then to try and define the world as one sees it from within that confinement. Or whether it is wiser to redefine the terms to suit one's intended statement. The prior has the advantage of providing different ideological factions with a common linguistic ground from which to argue, but is a disadvantage for those arguing from outside standard paradigm, as the terms themselves will invariably reflect biases and blind spotsinherent in the paradigm.
It becomes a matter of framing, which itself is amatter of power. And also a matter of the logical impossibility of pinpointing the limitations of a paradigm from within itself (I'm sure Tom knows the correct philosophical term for such a problem).
Although I take it that JKH, Ramanan and others are technically very well versed in accounting (while I have no formal training in either accounting or economics), and it understandibly gives them some pleasure to be able to lecture some MMT ENTHUSIASTS on what the latter consider to be their home turf (accounting), I don't think they always appreciate the complexities and contradictions inherent in the underlying matter. Perhaps that is a problem of being too technically versed?
I came across the 'theory of monetary emissions' or 'quantum economics' the other day. Its main representatives are Schmitt, Cencini and Sergio Rossi and probably others I don't know of. The latter teaches here in Switzerland, btw.. I haven't read much of their stuff yet, but it seems they are closely related to the circuitists of Lavoie's couleur, but with a strong focus on the labour theory of value and apparently some other distinctive differences I haven't yet understood. One thing I immediately found quite helpful though, is their very clear idea of a: the different aggregate states of money (typically referred to as stocks and flows in standard speak), and b: clear distinctions and relations between these forms of money and labour as well as the physical world. Each of these four are treated separately, while MMT would typically only distinguish between 'real' and 'nominal' and, tom me at least, standard economics only distinguished between stocks and flows, as far as I can tell (do correct me, if you fell I'm wrong here).
continued below
continued from above
The essence is, that what JKH portrays as a logically consistent and seemingly complete world of 'income, balance sheets, and flow of funds' statements, is, accrording to the quantum economists, and quite plausible to me, in fact a philosophically impossible amalgamation of physical, temporal and ideal 'things' (using my own terms here). One can, indeed one should, try and put all theses things together somehow, if one wished to gain some kind of insight over the world we inhabit. But I'd posit that the quality of these insights varies and can never be complete in any way and also that there is probably a trade-off between accuracy and any breadth of meaning. A good tactiuc is probably to be versed in as many paradigms as possible.
My visual memory hook is that the financial world always NETS to 0 by simultaneously expanding in opposite directions (say, vertical or horizontal). So, financial world savings (noun) are always 0. One can then slice the world to show a purportedly meaningful 'NET' financial gain somewhere. But this only works if the corresponding NET loss of the mirrored sector is deemed less important or neglible in contrast. For MMT, this happens when vertical transactions take place - government deficits are the lesser evil in comparison with private sector NFA gains - at least in a demand constrained world. NFA being net of sector, not net of investment here, as both sectors can invest.
The physical world, on the other hand, doesn't ever net out. There is no negative stone for every positive stone - except maybe in some physics lab.
And then there are ideas. Ideas are rather ethereal beings, but have the power to transform things (through labour), and thus can give them value (according to quantum economics). This value can then be expressed in the relative terms of finance.
Saving, as defined in the equation S = I + (S-I), is to me an example of the attempt to combine relative and absolute. And I think the focus of MMT on NFA is an attempt to separate those issues. Net - as in net of sector. Financial - as in not real. Assets - as apposed to liabilities and thus, thanks to double entry book keeping, always relative.
Having said all that, what I'd also like to know - now that 3 gazillion pixels have been spilt over the word saving - is how 'investment' is normally defined. We definitely need a new term to tart a flame war over :-).
now that 3 gazillion pixels have been spilt over the word saving - is how 'investment' is normally defined. We definitely need a new term to tart a flame war over :-).
So... do the government have a currency monopoly? :)
Oliver,
"MMT enthusiasts" is my term, so don't hold it against Ramanan or JKH. I wanted to make a distinction between MMTers who are professional economists and MMTers who are not, and that seemed to scan. It's not meant to be pejorative or condescending. I am not a professional economist either and so would qualify for the label "enthusiast" under my taxonomy.
@ Vimothy
I understood that and thought it was a good distinction because it gets to what Scott Fullwiler pointed out. Not trying to use it against Ramanan or JKH. I apologise if it came across that way.
Oliver,
No worries and thanks for clarifying.
Oliver: "One question is whether it is wiser to stick to a standard definition of, say, accounting terms and then to try and define the world as one sees it from within that confinement. Or whether it is wiser to redefine the terms to suit one's intended statement."
MMT economists have criticized other for not sticking with standard accounting terminology and practice, e.g., violating SFC, Accounting terms are defined technically by standard practice, governments for national accounting, and official boards also have jurisdiction, like the FASB in the US. So, no, you can't just make stuff up to suit your position or to clarify explanation.
Part of the present clamor arose when JKH and Ramanan, for instance, perceived that some MMT economists were playing loose with terminology, which Scott has admitted some were in his view, too. This looseness likely was in the interest of popularization and making a point rather than a mistake, but it could and did create some confusion. It is problem that all professionals face in trying to explain complicated points to non-experts. This can make a crucial difference in expert testimony in trials, hearings, and so forth, where understanding nuance can make a huge different, affecting the future of many people.
So this kind of clarifying debate is absolutely necessary going forward if non-experts and even other experts are to get MMT right.
On the other hand, there is sense in making mountains out of molehills, either. If everyone works together calmly and in a civil fashion, then we can cooperate together on advancing knowledge. Problems arise when people either take themselves too seriously or assert ownership over truth.
Unfortunately, priority as a big deal among professionals, and a lot of people are also so invested in their position that they cannot admit to being wrong about anything about it, they go to their graves defending monumental errors, like Alan Greenspan almost certainly will about his role in fomenting the crisis.
"So... do the government have a currency monopoly?"
Warren Mosler said that his key insight was the government's being the monopoly provider of its currency of issue, which follows from the government being the currency issuer. Anyone who understands the different between a currency issuer as sole supplier and currency users as dependent on that supply should easily be able to understand also how the currency issuer holds a monopoly. Once one understands this, many things follow from it, which Warren elucidated, kicking off what became MMT, to a significant degree through Warren's support.
Every national sovereign is sovereign in its currency. Government can choose to modify or even relinquish use of this sovereign monopoly that comes with national sovereignty, as the countries that joined the EMU did. However, nations can also reassert full currency sovereignty at any time they choose, although this will have consequences.
This is so clear and obvious I can't understand why there is even any question of it. As interpreted by the courts, US Constitution. Article 1, sections 8 & 10, give the federal government currency sovereignty exclusively, with the proviso that states can "make... gold and silver Coin a Tender in Payment of Debts."
In the US chartered banks as public-private partnerships can participate directly in the money creation process through credit extension, but they cannot emit the currency themselves. No printing presses in the basement, the US mint alone strikes coins, and the central bank alone has authority over reserves, i.e., "owns the spreadsheet."
Here's some classic MMR logic:
"Since currency is the medium of exchange and the government does not control the issuance of credit, it is incorrect to claim that the government has a monopoly on the currency or money."
That little gem and others like it can be found here: http://monetaryrealism.com/sample-page/
It's not an obvious error, or Warren's insight would not be as significant as it is. This insight is the game-changer.
What has really illumined it is the situation that emerged in the EMU subsequently, just as the MMT economists have predicted from the outset as the result of relinquishing currency sovereignty. They are also emphasize that a sovereign nation can reassert its currency sovereignty when it is is the national interests, which, btw, US states cannot do.
@ Tom
Yes, Ramanan called me out on that one over at Steve Roth's. I was conflating focus and terminology.
States are the only ones who can provide 'units of accounts' (aka USD, euros, british pound, yen, whatever), as lo9ng as anything else in the pyramid of 'money-things' is a liabili/IOU which in the end is denominated and backed by these unit of accounts is not 'pure money'.
This is key to understand the current monetary system, the 'pureness' of money is not measured by it being an exchange medium (ie. bank notes) or an storage of value (ie. gold) but being the abstract unit used to account for the price of exchanged things.
Coconuts are not money, gold is not money, credit IS NOT 'pure money' because is a liability of unit of accounts issued by governments. Private sector can create money (ie. alternative currencies), but credit is not money as long as it's credit denominated on unit of accounts.
It seems a bit difficult to understand at the beginning but if you think about it you realize why this is so.
Money-things and 'pure money' (base of the inverted pyramid of money-things) are different things. You see this when the pyramid collapses due to falling prices and leverage/rehypothecation collapse (in a deflationary environment).
Goldbugs have a similar theory, only they place (physical) gold at the base. But they are wrong as long as gold is not unit of account.
STF already clarified the position on monopoly:
"Interesting. In the interest of clarity, though, I hope you do not mind if I suggest that one should never say that the govt is the "monopoly supplier of dollars." The govt supplies currency, reserve balances, and Treasuries, which are NFA. It is the monopoly supplier of those things that it produces. It is not the monopoly suppliers of all media of exchange that one might call "dollars"--bank deposits, etc."
It's another issue with common MMT terminology. As Dan Kervick incorrectly said, the government is not the monopoly supplier of dollars. The government is the monopoly supplier of certain forms of the medium of exchange. I don't think MMR is saying MMT has this "wrong". I think they're just adding clarity as they were with the S=I+(S-I) debate.
When banks create credit they don't create dollars, they create an IOU for dollars.
Loans create deposits from nothing and with no government constraint. Are you saying deposits aren't new purchasing power or new dollars because if you are then MMT has bigger problems than I previously thought. Saying that the financial assets "net to zero" is a semantic point. The fact is, the debtor has new real spending power in the form of previously non-existent dollars. Canada, for instance, has an extremely small base when compared to its overall money supply (which is almost all debt). Focusing on the NFA's misses the big picture.
Peter: "Are you saying deposits aren't new purchasing power or new dollars because if you are then MMT has bigger problems than I previously thought."
Of course, that is not what MMT is saying. MMT distinguishes vertical money and horizontal money as part of its operational description. MMT doesn't go deeply into the horizontal description because circuitists have already done that. MMT focuses on the vertical-horizontal distinction and its implications. Vertical v. horizontal implies a hierarchy, for example.
@Peter
"…The fact is, the debtor has new real spending power in the form of previously non-existent dollars…"
The debtor has new real spending power but you seem to be ignoring the debtors real spending loss (liability) as he/she pays back the loan and those dollars disappear from the economy.
The time lag between the borrow-repay cycle creates a false sense of aggregate demand.
Credit is limited by our ability to earn money to service our debt.
In the case of a car loan a $20,000 car ends up costing us over $22,000 in spending over a 60 month period. Just so we can have it "now".
Might be even more difficult if one loses his/her job.
"those dollars disappear from the economy."
The dollars don't disappear. If they did we'd see large declines in M2 and M3. The banking system is like a ponzi scheme. It requires new debt to service ever increasing assets. The problems don't arise from the government not spending enough net financial assets into the economy. The problems arise when asset values decline and cause joblessness and imbalances. It has nothing to do with base money. Just study the Canadian banking system where there is very little base money and no reserve requirements. Canada won't have a problem so long as the asset values being serviced by that debt are stable.
I am kind of surprised that you guys don't seem to understand this.
Peter
When a loan is paid back what do you think happens to the dollars?
I'm kind of surprised that you don't seem to understand this.
If all loans were satisfied (paid in full) how many dollars would remain in the non-government?
The total amount of debt in the system must always increase in order to service the old debt. The debt in a modern banking system must always grow or the system stops working.
If you understood the Canadian banking system you would see that you're wrong. Base money or net financial assets make up a very small portion of the outstanding currency.
Peter
You are ignoring the known laws of arithmetic.
Everyone (nearly everyone) has a credit limit beyond which they cannot service the loans they have obtained.
If you try to tell me (anyone) that you have unlimited access to credit then well…
We have reached that point.
The question now is what will it take to satisfy that debt if most people can't borrow more money to repay existing loans?
You seem to think magic will do it.
The dollars to repay outstanding debt are not available to those holding the liabilities. They are being held as accumulated wealth by others, a relatively small segment of the population.
There is no way out except NFA creation by the government sector.
I never thought the day would come that "borrowing from Peter to pay Paul" would be considered prudent behavior.
Paul,
That's how a modern banking system works. Loans create deposits and more deposits allow debtors to service current debts. The key point is that the debt has to always grow and the asset values connected to the debt must remain stable.
"…Loans create deposits and more deposits allow debtors to service current debts…"
Loans also create liabilities, which you continue to ignore. For every agent that receives a dollar asset from a loan someone else accrues a dollar liability. No matter how much credit is created this relationship cannot be changed.
To the extent that dollars are hoarded (saved) liabilities cannot be satisfied. When the ratio becomes large enough the system freezes up (like now) and will not un-freeze until the dollars are made available to repay enough of the loans as to free up credit again, either by raising taxes on the wealth-holders or net government spending.
Because these liabilities currently cannot be satisfied, the banking sector must to be propped up by the Fed, otherwise the banking system would be (is) insolvent.
There is nothing complicated about this - it is simple arithmetic combined with the reality that in a closed system net financial assets cannot be created out of nothing, You are making the argument that they can be.
The system you are advocating is the one the Eurozone is operating under. It has taken only 10 years to destabilize. Keep an eye on the system over the next five years or so and see if the ECB doesn't prop the system up with free money.
And please spend some time studying the properties of closed systems or you will never have any real understanding of economic systems.
Economics is an engineering problem.
Matt, HELP!!!
Europe proves me right. Do you understand how the LTRO works? The banks borrow money to buy sovereign debt. As long as there is someone willing to make the loans and the asset base doesn't collapse the system stabilizes. Which is exactly what we've seen in the last 6 months.
Keep watching…
…let's see what happens.
If one can't be convinced by arithmetic maybe events will succeed…
…arithmetic is less painful though.
I forget who it was that said it but I really like the description of the private sector as proposing growth and NFAs ratifying that growth.
A desire to grow is accommodated initially by private credit. Because it requires those stable asset values and ever-expanding debt it is fragile and the growth can be repealed in a flash if one of those two things breaks down.
Ideally, NFAs backfill stability under that growth, bolstering the ability of the private sector to service accumulated private debt. In the event that either asset prices or private credit provision break down, further NFAs can be deployed to cushion the fall.
When they work in tandem we get steady, stable growth. When they pull in different directions we get instability and eventually a bust.
@geerussell
I don't know if this quote from Scott Fulwiller is what you are talking about but it captures the essence:
“... any transaction in a capitalist economy results in changes in the agents’ financial statements; if the hypothesized supply and demand relations are not consistent with the actual changes occurring within the financial statements of the relevant agents, then the hypothesized model is irrelevant...” (Fullwiler, 2007, p. 1006)
If the net cash on financial statements in the aggregate (sum of all non-government financial statements) increases the increase must be accompanied by net government spending to be realized (assuming no external sector surplus).
Obviously because of offsetting liabilities credit cannot provide the financial assets necessary to fulfill this requirement.
You guys are just picking up on this? The MMRists have been describing NFA's as a facilitator for weeks now. That was one of the main points from the recent dust-up. One of the main points of JKH's post was to show that I is the backbone of private sector equity. NFA's are a facilitator. Private credit is a primary driver of I. It took some of you 2 months to figure all of this out?
"It took some of you 2 months to figure all of this out?"
We already knew it. We always have. We have a somewhat different perspective on it than you do apparently.
Some others on the other hand don't even understand arithmetic.
Their level of understanding will be weak to say the least.
It took you 104 comments to find this thread?
Smart ass.
Name calling. Nice. Living up to the MMT reputation.
LVG,
It's not surprising to find a striking resemblance between MMT and a to-MAY-to to-MAH-to rephrasing of MMT, which is mostly what I saw in that dustup. YMMV.
Question.
Where do the dollars that fund retirement plans come from?
Because, in the end if they had to come from credit half the population would be retiring owing more than they had in their retirement fund.
How would that work?
LVG and Geerussel
that's just functional finance (NFA fluctuates as a "rudder" to offset fluctuations in pvt sector), which has been around for 70+ years. Glad someone "discovered" it a few months ago, though. One less person to convert.
Dan Kervick: What distinguishes MMT from other similar schools of thought in the endogenous money tradition, as I understand it, is that MMT recognizes that the kinds of dollars created when commercial banks create demand deposits are not the same kind of thing as the kinds of dollars created when the national government issues physical currency or boosts reserve balances.
That is factually wrong. Even mainstream recognizes the difference and states it openly
"The role of central bank money in payment systems" http://www.bis.org/publ/cpss55.pdf
Contemporary monetary systems are based on the mutually reinforcing roles of central bank money and commercial bank monies. What makes a currency unique in character and distinct from other currencies is that its different forms (central bank money and commercial bank monies) are used interchangeably by the public in making payments, not least because they are convertible at par. Central bank money plays a key role in payment arrangements, as it has proved safe and efficient to have a central reference of value with which all other forms of the currency maintain this par convertibility. This role is long-established and, for the most part, uncontroversial.
Paul: So far I haven't found anything in MMT that defies closed systems math, but a lot of the cooments from the "nattering nabobs of negativity" get the accounting right but the math wrong.
Planet Earth is not a closed system. Apples can grow without government deficits and increase savings. Just like wheat can increase savings. And many other things. Your math works only if you always add "net" to your definition. Otherwise there is no possibility to have global savings or global investments. And that was absolutely correctly pointed by those nabobs.
Post a Comment