An economics, investment, trading and policy blog with a focus on Modern Monetary Theory (MMT). We seek the truth, avoid the mainstream and are virulently anti-neoliberalism.
This can clearly be seen over the period from 1997q1 to 2008q2 when the government budget deficit failed to offset the current account deficit in 38 of the 42 quarters and household net worth increased by 110% while corporate profits rose by 140%. Clearly, the private sector did not experience a “net loss” over this period even though the budget deficit failed to offset the current account leakage.
While the point about not being vague about terms like "net loss" is admirable, this is not a particularly good argument for illustrating the point. Corporations and their profits are only one part of the private sector. Corporations could conceivably be growing their profits even if the sector as a whole was losing income.
Accounting tells us what this means - the financial wealth must have declined, and real wealth must have risen (my guess: real estate). What is the big deal again?
"in 38 of the 42 quarters and household net worth increased by 110% while corporate profits rose by 140%."
Strawman. Household net worth could (and does) go up on paper because the homeowner thinks (wishes) the house he paid $150,000 for is now "worth" $300,000. How much does that increase his savings? Not a penny until he sells the house and the transaction reduces someone else's net (gotta throw that in there for the pedants) savings. Seems like corporations report profits when their income exceeds their outgo. You know, like they have "more dollars" at the end.
A few years ago my house was worth $100,000 more than it is now. Did I lose a $100,000 in savings or do I have $100,000 more in savings because it's still worth $100,000 more than I paid for it?
Until the proponents of this "theory" can prove their hypothesis through rigorous mathematical logic rather than picking through data generated by others they are just creating more fog. (IMHO).
This wouldn't bother me so much if they weren't simultaneously dogging MMT.
Once again, it needs to be emphasized that one cannot derive substantive quantitative and causal conclusions about which transactions are or are not the backbone of some larger pool of transactions, or about which activities and operations do or do not "drive" the economy, simply by examining identities and accounting logic.
We know that S = I + G – T + X – M.
Does this tell us that I (private sector investment) is the backbone of S? Does it tell us that G (government spending) is the backbone of S? Does it tell us that X is the backbone of S? No, it tells us none of these things.
In an economy with a very small government sector and very low exports, I might very well dwarf G and X and be driving the creation and distribution of real wealth. In a state capitalist economy with a very large government, and small export markets and private investment, G might very well dwarf I and and X and be driving the creation of real wealth. Both of these scenarios are possible. Both are consistent with Godley's equation and both are consistent with MMT. Which types of expenditures are driving the growth of national savings and the creation of real wealth is the result of public choices, and cannot be derived from identities and accounting. The MMT framework is consistent with any size government.
But to get the MMT framework you need to combine the sectoral balances framework with the model of the government (or some agent within the government) as the agent responsible for any net increase in the total stock of money. This latter idea doesn't come from the sectoral balances framework alone. That framework only looks at the flows of payments in and out of the various sectors. Those payments all sum to zero. But it doesn't show how the net stock of money increases over time. The latter is not explained by bank credit, because bank credit creates an asset and a liability at the same time. It is only explained by the fact that the government is a monopoly producer of money. This tends to be obscured by a quasi-fictional national accounting system that treats currency and reserves as "liabilities" of the central bank, so that all the balance sheets sum to zero. But a few moments thought should convince anyone that is a bogus picture. It's a leftover accounting convention from gold standard days that no longer connects to reality.
Just to follow up on a point made in the previous comment:
Imagine an economy in which the government is responsible for 75% of all capital development. That is, to keep things simple, suppose in this imaginary economy that the government owns and operates 75% of firms, and as a result does 75% of the purchasing of capital equipment, 75$ of the inventory building, etc. Suppose that the economy is isolated from the rest of the world and does not do any importing or exporting.
So in that economy, we still have
S = I + G – T + X – M.
which in this case reduces to:
S = I + G - T
Suppose the actual quantities instantiating the above equation are:
I am not an economist but this whole argument is going nowhere, as best I can tell. The private sector was in deficit for most of that period. And then in 2007/8 the whole credit thing came tumbling down. All that wealth was and is now gone and we are in the great recession with millions unemployed and foreclosures all around. So your wealth went up on the house and stock you owned, and maybe the boat you bought on the third mortgage. And now it is gone.
Now we have had three years of trillion dollar deficits ( not enough but a beginning) and there is some improvement in wealth, like stocks. Does anyone seriously believe that all those private sector deficits were ok? Sounds like a "loss" to me.
If the federal govt and the regulators had done what they should have and stopped the fraudulent credit expansion, the crash would not have been so severe. But then who says we have wise administrators and presidents and such? The sectors were telling us what was happening and we were simply blind to it. And yeah, that includes Greenspan.
Seems to me we were counting our chicken, er cows, long before they were real.
it needs to be emphasized that one cannot derive substantive quantitative and causal conclusions about which transactions are or are not the backbone of some larger pool of transactions, or about which activities and operations do or do not "drive" the economy, simply by examining identities and accounting logic.
Is surely true, and words that MMTers would do well to remember.
JKH's identity is supposed to represent a stylized fact: most saving is in fact "driven" by I (in a non-causal sense). There are basic economic reasons why that is the case, but it's not important for the argument in general, which can be verified by something as simple as checking publically available data.
JKH's identity is supposed to represent a stylized fact: most saving is in fact "driven" by I (in a non-causal sense). There are basic economic reasons why that is the case, but it's not important for the argument in general, which can be verified by something as simple as checking publically available data.
It's basic to Post Keynesianism and MMT that investment drives saving rather than saving funding investment. What's the issue here?
What MMT claims is that net saving necessarily involves net financial assets (vertical money), since saving of credit money (horizontal money) nets to zero.
I see you left my duplicate comments up to humiliate me further. ;-)
The issue is that saving is equal to investment and net saving; it is not simply equal to net saving.
The argument that has been raging started with an observation that MMTers sometimes make it seem like the private sector cannot save without government deficts.
However, many MMTers then claimed that actually, the private sector cannot save without government deficits.
This is clearly nonsense. See, e.g., Scott Fullwiler:
Similarly, there can OBVIOUSLY be saving without govt deficits or a current account surplus, but not NET saving
26 comments:
This can clearly be seen over the period from 1997q1 to 2008q2 when the government budget deficit failed to offset the current account deficit in 38 of the 42 quarters and household net worth increased by 110% while corporate profits rose by 140%. Clearly, the private sector did not experience a “net loss” over this period even though the budget deficit failed to offset the current account leakage.
While the point about not being vague about terms like "net loss" is admirable, this is not a particularly good argument for illustrating the point. Corporations and their profits are only one part of the private sector. Corporations could conceivably be growing their profits even if the sector as a whole was losing income.
Accounting tells us what this means - the financial wealth must have declined, and real wealth must have risen (my guess: real estate). What is the big deal again?
"in 38 of the 42 quarters and household net worth increased by 110% while corporate profits rose by 140%."
Strawman. Household net worth could (and does) go up on paper because the homeowner thinks (wishes) the house he paid $150,000 for is now "worth" $300,000. How much does that increase his savings? Not a penny until he sells the house and the transaction reduces someone else's net (gotta throw that in there for the pedants) savings. Seems like corporations report profits when their income exceeds their outgo. You know, like they have "more dollars" at the end.
A few years ago my house was worth $100,000 more than it is now. Did I lose a $100,000 in savings or do I have $100,000 more in savings because it's still worth $100,000 more than I paid for it?
Until the proponents of this "theory" can prove their hypothesis through rigorous mathematical logic rather than picking through data generated by others they are just creating more fog. (IMHO).
This wouldn't bother me so much if they weren't simultaneously dogging MMT.
I love how threatened you all are by MMR. Then again, if JKH were constantly saying I was wrong I'd feel threatened also.
Once again, it needs to be emphasized that one cannot derive substantive quantitative and causal conclusions about which transactions are or are not the backbone of some larger pool of transactions, or about which activities and operations do or do not "drive" the economy, simply by examining identities and accounting logic.
We know that S = I + G – T + X – M.
Does this tell us that I (private sector investment) is the backbone of S? Does it tell us that G (government spending) is the backbone of S? Does it tell us that X is the backbone of S? No, it tells us none of these things.
In an economy with a very small government sector and very low exports, I might very well dwarf G and X and be driving the creation and distribution of real wealth. In a state capitalist economy with a very large government, and small export markets and private investment, G might very well dwarf I and and X and be driving the creation of real wealth. Both of these scenarios are possible. Both are consistent with Godley's equation and both are consistent with MMT. Which types of expenditures are driving the growth of national savings and the creation of real wealth is the result of public choices, and cannot be derived from identities and accounting. The MMT framework is consistent with any size government.
But to get the MMT framework you need to combine the sectoral balances framework with the model of the government (or some agent within the government) as the agent responsible for any net increase in the total stock of money. This latter idea doesn't come from the sectoral balances framework alone. That framework only looks at the flows of payments in and out of the various sectors. Those payments all sum to zero. But it doesn't show how the net stock of money increases over time. The latter is not explained by bank credit, because bank credit creates an asset and a liability at the same time. It is only explained by the fact that the government is a monopoly producer of money. This tends to be obscured by a quasi-fictional national accounting system that treats currency and reserves as "liabilities" of the central bank, so that all the balance sheets sum to zero. But a few moments thought should convince anyone that is a bogus picture. It's a leftover accounting convention from gold standard days that no longer connects to reality.
Just to follow up on a point made in the previous comment:
Imagine an economy in which the government is responsible for 75% of all capital development. That is, to keep things simple, suppose in this imaginary economy that the government owns and operates 75% of firms, and as a result does 75% of the purchasing of capital equipment, 75$ of the inventory building, etc. Suppose that the economy is isolated from the rest of the world and does not do any importing or exporting.
So in that economy, we still have
S = I + G – T + X – M.
which in this case reduces to:
S = I + G - T
Suppose the actual quantities instantiating the above equation are:
$7 Trillion = $2 Trillion + $6 Trillion - $1 Trillion.
In this economy, JKH's equation is still true, because it is a logical tautology:
S = I + (S-I)
and the actual quantities are
$7 Trillion = $2 Trillion + ($7 Trillion - $2 Trillion).
But is I the backbone of S in this economy? Clearly not. G is the backbone of S in the imagined economy.
So you just created a fake world to prove your point? Uh, why waste your time?
Here's a good equation for you Dan:
MMT = Socialism + (Socialism - Capitalism)
All this is to deny Minsky.
The issue is best dealt with by looking at the central model in Steve Keen's work.
Aggregate Supply = Aggregate Demand + Change in Debt
(Bear in mind it is a model, not pure mathematics).
What it says is that the causal driver of the supply expansion is the private bank's desire to expand debt as much as they can get away with.
And that level of debt generates dynamic instability and ponzi schemes in the economy and leads straight to the Minsky Moment we've just had.
Focussing on 'I' as the driver is classic supply side. This is neo-classical economics with a side order of monetary operations.
"Build it and they will come" is a Walrasian fantasy in a credit economy.
I am not an economist but this whole argument is going nowhere, as best I can tell. The private sector was in deficit for most of that period. And then in 2007/8 the whole credit thing came tumbling down. All that wealth was and is now gone and we are in the great recession with millions unemployed and foreclosures all around. So your wealth went up on the house and stock you owned, and maybe the boat you bought on the third mortgage. And now it is gone.
Now we have had three years of trillion dollar deficits ( not enough but a beginning) and there is some improvement in wealth, like stocks. Does anyone seriously believe that all those private sector deficits were ok? Sounds like a "loss" to me.
If the federal govt and the regulators had done what they should have and stopped the fraudulent credit expansion, the crash would not have been so severe. But then who says we have wise administrators and presidents and such? The sectors were telling us what was happening and we were simply blind to it. And yeah, that includes Greenspan.
Seems to me we were counting our chicken, er cows, long before they were real.
I've put that model the wrong way around.
AD = AS + change in debt
Bear in mind that it is circular in includes spending on assets.
Not surprising, as when you take a loan, you're making a bet.
If you let the bank sell that loan to another, it's just like a bookie getting his vig.
Dan,
By definition, G is consumption and not investment.
Dan,
A further comment.
This,
it needs to be emphasized that one cannot derive substantive quantitative and causal conclusions about which transactions are or are not the backbone of some larger pool of transactions, or about which activities and operations do or do not "drive" the economy, simply by examining identities and accounting logic.
Is surely true, and words that MMTers would do well to remember.
JKH's identity is supposed to represent a stylized fact: most saving is in fact "driven" by I (in a non-causal sense). There are basic economic reasons why that is the case, but it's not important for the argument in general, which can be verified by something as simple as checking publically available data.
Tom,
Sorry, browser issues--please duplicate comments.
Aargh--please delete duplicate comments.
Okay, that's enough of that--this website has me beat.
@Vimothy,
By definition, G is consumption not investment. Haven't seen this before. Can you expound?
JKH's identity is supposed to represent a stylized fact: most saving is in fact "driven" by I (in a non-causal sense). There are basic economic reasons why that is the case, but it's not important for the argument in general, which can be verified by something as simple as checking publically available data.
It's basic to Post Keynesianism and MMT that investment drives saving rather than saving funding investment. What's the issue here?
What MMT claims is that net saving necessarily involves net financial assets (vertical money), since saving of credit money (horizontal money) nets to zero.
Tom,
I see you left my duplicate comments up to humiliate me further. ;-)
The issue is that saving is equal to investment and net saving; it is not simply equal to net saving.
The argument that has been raging started with an observation that MMTers sometimes make it seem like the private sector cannot save without government deficts.
However, many MMTers then claimed that actually, the private sector cannot save without government deficits.
This is clearly nonsense. See, e.g., Scott Fullwiler:
Similarly, there can OBVIOUSLY be saving without govt deficits or a current account surplus, but not NET saving
Which is correct.
Sorry, vim, I thought I had done that. Anyway, done now.
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