For the record, in case you missed it. I posted a link to Neil Wilson explanation of saving at 3spoken, Savings - Explaining the Humpty Dumpty word. MMT economist Scott Fullwiler commented.
STF said...Neil, This is correct. Thank you. Perhaps we can end this ridiculous mountain made out of a molehill now, though my guess is it won't happen given the personalities involved.
Yes, some people get sloppy at times with terminology, particularly in blogposts, working papers, and such. Even in journal articles I've published that have been through several reviews I still find things here and there that I wish I could change.
Well-known Keynesians and Monetarists have been sloppy at times, too, but that doesn't invalidate Keynesianism or Monetarism.
Any reading of MMT would seem to make it obvious what S-I does and doesn't mean, and would seem to make it obvious that it doesn't mean "saving" in the traditional sense as it is defined. We've always said we are using Godley's framework, and it's clear that Godely understood this. Again, there is slopppiness here and there, but there is in every literature out there.
Saving being driven by investment spending is a well-covered topic in Post Keynesianism, some of it by Wray, Minsky, and some by endogenous money/circuitistes. This all pre-dates MMT/neo-Chartalism. One of my research papers in grad school went over this literature. MMT takes all this as given--there is no need to reinvent the wheel and there has been nothing in the recent discussions in this issue that strikes any of us as adding anything of economic significance to this literature. I'm glad many that didn't have much grounding in this literautre found the discussions useful, though.
Net saving builds on this by adding an indicator of Minskyan fragility. It is obviously not the same as saving. Domestic pvt sectors want to net save; this is borne out by data from many, many countries. And they can only do it via govt deficits or current account surpluses.
Yes, we can break down the pvt sector's net saving into household and firms (and financial sector); the data I send out quarterly to MMTers and friends includes this breakdown. I discussed this in my wp at Levy in December 2010 in Figure 2. Rob Parenteau and Yves Smith did a post a few years ago (??) on this, too.
The breakdown of the pvt sector is interesting to some degree because we see that the household sector is the traditional "hedge" financial unit in the economy until 1998 and then again after 2008. The firm sector moves between hedge and speculative/Ponzi (these are Minsky's well-known terms). But cyclically the two are very highly correlated, so the notion that firms can spend and reduce net saving in order to increase net saving of the household sector--while theoretically true and true in an accounting sense--doesn't hold up well empirically. Across business cycles (i.e., trend as opposed to cycles), firm net saving can and has fallen while household net saving increased (and a modest govt deficit). However, this leaves us with Minsky's dictum that stability is destabilizing (i.e., pvt sector led expansions in the cyclical or trend sense will end up creating fragility via debt accumulation, which is what happens when the household net saving is driven by firm net dissaving), and his prediction that this would be the result was largely correct in my view. To end, let me again suggest that this whole discussion makes a mountain out of a molehill. There are many instances that are critics have been sloppy, as well. Indeed, one of them repeatedly argues that quantitative easing doesn't create "money," (http://pragcap.com/milton-friedman-misunderstood-quantitative-easing) when it certainly does if one defines money as the monetary base or deposits (which most everyone does, in fact, including the official statistics of "the money supply"). Does that mean these critics don't understand QE? Does it invalidate their entire understanding of the monetary system? No. It means there was some sloppiness. Nothing more. Who cares? Not me. Scott Fullwiler4 March 2012 19:57STF said...BT [* see below] is correct, too. "Net loss" was clearly intended to mean "net loss of financial assets," not "net loss" in another sense. It happens.
Similarly, there is no "Neochartalist claim" that there would be no pvt saving without a govt deficit. A govt deficit adds to pvt saving, but obviously is not the only thing (or even the main thing given investment spending) that does. 98% percent of the Neo-Chartalist literature and Godley are clear that the point is that "without a govt deficit there would be no pvt net saving." It's simply disingenuous to suggest the entirety of the literature suggests anything else.
And even then, it's obvious there can still be household net saving without a govt deficit (though, as I alluded to above, I would argue that encouraging firm dissaving to increase household net saving is not necessarily going to accomplish this).4 March 2012 20:36STF said...In other words, OBVIOUSLY there can be an increase in financial assets without govt deficits if the former "net" to zero in that case, otherwise there would be nothing to "net" in the first place. Similarly, there can OBVIOUSLY be saving without govt deficits or a current account surplus, but not NET saving.4 March 2012 20:42
* [referred to above]
BT (London) said...This thread is confused.
Neil is right and has helpfully pointed out the 'financial view' of S-I. One would hope this would resolve things for people like Ramanan who think that Neil doesn't understand the horizontal credit/debt portion of the money stock.
Yes, horizontal credit can still expand while governments run surpluses and there is a current account deficit. But even though credit is growing, there is still a 'net loss' of credit relative to debt in the horizontal system.
You guys are arguing over the meaning of 'net'. Ramanan thinks 'net loss' means an absolute decline in the stock of credit relative to a previous time point. It doesn't. It means a decline relative to the stock of debt.4 March 2012 13:04
this is so clear and well stated. I love it when Scott comes out and talks. He's so lucid and well spoken.
ReplyDeleteMMR seems to be more of a tragedy within the MMT history as each day goes by. What a shame imho. I'd welcome them all back into the fold in a heartbeat. They're all such great guys.
Tom, thank you for cherry picking and doing these in-case-you-missed-it posts - it is very helpful!
ReplyDeleteI still really don't understand why Cullen et al can't get behind Warren's very reasonable proposals.
ReplyDeleteAs ever forks are damaging and difficult to sustain.
But then if you really, really believe that unemployment is good for you (and that's fundamentally the difference here) it will be difficult to back a system that says it is not.
Neil, I think you hit on it. These people DO think that unemployment has virtue. They've stated it numerous times. You're not going to change them of this view. MMR is not fact or science. It's dogma.
ReplyDeleteRamanan is particularly amusing. He's convinced he's on to something.
ReplyDeleteAnon,
ReplyDeleteI think Ramanan's main concern is the external balance. To perhaps over simplify, Ram makes the point that "it cant go on forever".
He gets a lot of back up on this via Wynne Godley.
Granted it is hard to refute an open ended statement like "it cant go on forever", but I think it would be interesting to know when Godley came up with his concerns about the external deficits. If it was 20 years ago, and you looked at this spreadsheet back at that time:
http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt
This thing just popped $5T.
I wonder what Godley would have said if 20 years ago, when he came up with concerns about the external deficits, if you were clairvoyant and told him that 20 years from then the US external deficits would total over $5T, he probably would have said: "NO WAY!".... but yet here we are, and the US worker keeps suffering for it as these zombies just cant get enough USD balances.
Resp,
I seems to me that government debt is actually a main cause here. It makes it more difficult for the system to rebalnce itself more. It provides a way for currencies to be undervalued and overvalued (yuan/ dollar). A fiat/credit money system has an inbuilt rebalancing mechanism, but it doesn't work so well if every penny spent in deficit is accompanied by bond issuance - this just makes the imbalances even worse. I agree that over time we want a situation in which countries like China are consuming more and we're producing more again. US govt debt is pushing that situation further into the future as the Chinese CB keeps plowing its dollars back into bonds and holding down its own currency.
ReplyDeleteAnon,
ReplyDeleteI think what you are describing is a Mercantilist/Neo-Mercantilist global system.
These systems rely on Free Floating currencies and FOREX. Which I think is the point you are getting to here.
imo All these systems do is arb real labor differentials across borders.. BIG F-ing DEAL! Who cant do that?
Similar to what Private Equity firms do deomestically: BIG DEAL, who cant borrow and buy two firms and throw now surplus people out of their jobs? All you need to be is a psychopath and it is very easy.
Resp,
Matt,
ReplyDeleteGood point on the 20years. I've noted before that of the 7 unsustainable data series Godley published on in late 1990s, the only ones that haven't turned around yet are those related to the external balance. Those happen to be the ones MMTers would disagree with him on at least partly (though we don't hold the extreme position that some attribute to us).
I'm not sure what you're trying to say. Can you elaborate?
ReplyDeletethe comment above was directed at Matt, btw. STF: what do you mean by "at least partly" ?
ReplyDeleteTom Hickey, Randall Wray has posted an article on NEP regarding the recent critiques of MMT by John Carney and the MMR people. Worth linking to.
ReplyDeleteI'm a bit unclear on what Scott Fullwiler means by "net saving". I guess this means saving of government liabilities (govt bonds, cash, reserves) and does not include investment (horizontal saving)?
ReplyDeleteHere's a quote from Neil Wilson on this subject:
"In the National Accounts 'Net Saving' has a particular meaning, and refers to Gross Saving less the depreciation of fixed capital. This is not the same as the 'net saving' referred to in MMT, and it may be where some of the confusion creeps in."
I think the simplest description is as follows:
private sector saving = net investment + fiscal deficit + trade surplus
How is "net savings" defined in this context?
Thanks. I appreciate all the efforts here to get this straightened out!
Anon,
ReplyDeleteIt doesnt matter if it sits in USTs if the interest rates are zero, so perhaps the issue is not "bond issuance" per se.
I think you are on to it wrt your mention of the floating FOREX. The mercantilists need this arrangement to foment a continuous "race to the bottom" as each jusrisdiction takes turns experiencing a devaluation as they ratchet down on the real terms of labor in their countries, back and forth. The mercantilists just jump back and forth arbing these real terms of trade/labor.... bad news.
No one can ever "cash in" on real productivity increases and start early retirements and more time off as TPTB always find another nation who is willing to "work for less". And so on and so on.
It's a real moron policy if you think about it ie we never are able to experience real productivity gains.
Resp,
So what would you say would be a non-moron policy wrt the above.
ReplyDeleteThe MMT economists have made clear that an external deficit will go on as long as other countries desire to save in the currency of that country. Then the balance will begin to shift as the change in fx rate makes imports more expensive and exports less expensive for that currency zone.
ReplyDeleteThe world is in the process of rebalancing now as globalization proceeds. There was a similar rebalancing after WWII. I was traveling widely at the time, and the USD was king. Everything was very inexpensive everywhere. Now it is the opposite in most of those places.
But these trends can last a long time. The US and West "should" be running CADs while the emerging nations play catch up. It's beneficial for the world socially, politically and economically.
The developed nations should also be using the economic policy space that a non-convertible floating rate currency affords to soften the shock to employment domestically, as MMT advises.
Detroit Dan, the way I understand it, net saving is just S-I.
ReplyDeleteThere is also the concept of "saving" that is associated with just the term "S" in the national accounting equations and Godley's equation.
In those equations, S is what you get when you subtract consumption and tax payments from income:
S = Y - C - T.
So S defined that way thus includes capital investment expenditures such as expenditures on building inventory, for buying machines, expanding factories and warehouses, hiring workers, etc. These are the things included under "I" in the usual equations.
So MMT and others look at S-I, to focus on a concept of national saving that explicitly does not include expenditures on production, and consists only in financial income that is set aside and not spent on anything - it represents a net addition to the private sector's stock of financial assets.
They call S "gross saving" and S-I "net saving".
Matt, the constraint on economics is politics. Historically, when workers get shafted enough, they rise up and say enough. We are starting to see that now, and all regimes are becoming more authoritarian in response. That just exacerbates the situation. We have been following this trend here in the posts for some time, and thing are heating up.
ReplyDeleteAnon: "So what would you say would be a non-moron policy wrt the above."
ReplyDeleteAs WArren has said, imports are benefits and exports are costs, so a trade deficit is OK at full employment. A country like the US with economic policy space due to the existing monetary regime can use the sectoral balance approach and functional finance, along with an MMT JG, to achieve FE & PS while enjoying the benefits of imports. This is actually a benefit for the exporting countries, too, as they ramp up their economies in the face of practically non-existent domestic demand due to low incomes and high domestic saving desire. Everyone wins.
“the notion that firms can spend and reduce net saving in order to increase net saving of the household sector--while theoretically true and true in an accounting sense--doesn't hold up well empirically. Across business cycles (i.e., trend as opposed to cycles), firm net saving can and has fallen while household net saving increased (and a modest govt deficit).”
ReplyDeleteCan somebody elaborate a bit on the intended meaning here?
Thx.
As I understand it in outline:
ReplyDeleteS = Y - C
I = Y - C
so
S = I
S = is household sector income not consumed in the period, i.e., the residual after consumption expenditure.
I = is firm expenditure on goods not produced for consumption in the period, plus unplanned inventory.
so
S is the accounting record of financial saving by the household sector in financial instruments
and
I is the accounting record of production not consumed, or saving wrt bricks, brawn, and brains, plus inventory held over.
G - T is saving in net financial assets due to vertical disbursements (expenditure and transfers)
X - M is saving in net financial assets from external operations
Financial saving resulting from horizontal transactions nets to zero.
Hi JKH
ReplyDeleteThe point was that ...
1. within a business cycle, household and firm net saving are highly correlated.
2. across business cycles (trend), they can diverge, and did so particularly in the first few decades of the post WWII era. But this secular reduction in firm net saving was right in line with Minsky's base model of building financial fragility, in our view.
Hope that helps.
Tom, S is only supposed to be equal to I in the one-sector model, right? In the full three sector picture, S can and usually will be greater than I.
ReplyDeletethx, Scott
ReplyDeleteI was misreading the full sentence structure
Wait a sec...
ReplyDeleteSimilarly, there is no "Neochartalist claim" that there would be no pvt saving without a govt deficit. A govt deficit adds to pvt saving, but obviously is not the only thing (or even the main thing given investment spending) that does. 98% percent of the Neo-Chartalist literature and Godley are clear that the point is that "without a govt deficit there would be no pvt net saving."
Scott understands the correct meaning of saving.
This is not surprising, since Scott is a smart guy, and defining saving, as some have sought to in the MMT blogosphere, as identical to net saving, is not at all coherent.
But it does seem 180 degrees from what everyone else has claimed.
So are we all now in agreement that saving is income less consumption, and not income less consumption and investment?
See Neil Wilson's comment at Winterspeak's
ReplyDeleteS = I
and
(Sd + Sg) = (Id + Ig)
and
(Sd + Sg + Sx) = (Id + Ig + Ix)
rearranging gives:
(Sd - Id) = (Ig - Sg)
which is the same as
(S - I ) = (G - T)
similarly with the three sector
(Sd - Id) + (Sg - Ig) + (Sx - Ix) = 0
which is the same as
(S - I) + (T - G) + (M - X) = 0
"…But it does seem 180 degrees from what everyone else has claimed."
ReplyDeleteSome people on the internet have poorly developed comprehension skills. I won't mention names.
99% of the posts I've read show that MMT folks agree 100% with SF's definition above and always have.
The argument has been over certain posters claiming we are saying something else - when we're not.
More aggravating than when people interchange annoy with irritate.
Tom,
ReplyDeleteI'm familiar with the identities.
I don't think we need to see them again.
The argument at Winterspeak's blog was between people who claimed that saving is income less total expenditure (e.g. Winterspeak), and hence private saving is zero without government deficits, and those who claimed that this was not correct.
As I said there, you cannot define saving as "net saving" and write the SFB identity in the conventional way, because it doesn't make the least bit of sense.
P.S.
ReplyDeleteThere's a chopped version of the relevant sentence at Credit Writedowns, perhaps potentially confusing.
I don't know whether his corresponding explanation is the right one. Maybe its fine. Haven't spent time there. Just for your info.
Actually, I'm not sure about the derivations you give. But that's probably a side issue, for now.
ReplyDeletevimothy, the derivations were for Dan K who said that S = I is one sector. Neil shows how it covers the whole economy when broken out. I should have quote him to establish the link between comments.
ReplyDeleteJkH: P.S.
ReplyDeleteThere's a chopped version of the relevant sentence at Credit Writedowns, perhaps potentially confusing.
I don't know whether his corresponding explanation is the right one. Maybe its fine. Haven't spent time there. Just for your info.
Scott?
Tom,
ReplyDeleteThanks.
In that case, it might be worth being a bit more careful.
S = I by identity for the whole economy considered as a single sector IFF that economy is closed.
If the economy is open, then,
S = I + net acquisition of foreign assets
Where "S" is defined as national saving (private + public saving), and I is defined as aggregate investment (private + public).
In the Winterspeak thread Warren Mosler said…
ReplyDelete"In a one sector model: In real terms S always = I and there is no part of S that is not I.
In nominal terms S always = I and there is no part of S that is not I.
And expanding to more sectors doesn't alter the 'totals.'"
This is because (I - S) in the sectoral balances equation is a measure of the change in savings over the budget cycle or "net change in financial assets".
The net change in one (S) is equal to the net change in the other (I) because I is always equal to S at any snapshot in time.
Confusing?
It's confusing because I in the expression (I - S) is "marked" or referenced to it's value at the beginning of a budget cycle.
The sectoral balances relationship thus measures the change in Savings over the following budget cycle, resulting in a "net change in savings" marking the value of S at the end of the budget cycle.
In reality I and S are ALWAYS equal at ALL times when measured at the same point in time, surplus'/deficits or not.
∆S or (I - S) is a measure of the change in either I or S when measured in reference to their values at the beginning of a budget cycle.
In this example I and S are stocks equal to the total accumulation of each over the budget history.
(S - I) is not the change in S.
ReplyDeleteS is generally defined to be a flow variable. It measures the change in the stock of savings over a given period due to unconsumed income.
(S - I) is therefore the change in what MMTers call "net savings". It measures the change in "net financial assets" or "NFA" over a given period.
Thanks Dan K!
ReplyDeleteSo net savings, as used here, does seem to be equivalent to net saving of financial assets, where financial assets are those created by fiscal deficits.
Just trying to get my terms straight. Thanks again...
"(S - I) is not the change in S. "
ReplyDeleteYes, it is. It is the increase/decrease in financial assets accrued from the government balance in combination with the external balance.
I don't know what chain of logic you can use to make the argument that it isn't, but I'm waiting.
It is a result from the sectoral balances relationship and it is expressed as a flow (incremental S).
It is derived from the relationships:
Y + I + C + G + (X - M)
Y = C + S +T
What is the definition of S in the second of these two equations?
What is the definition of I in the first of these two equations?
It follows that they are the same I and S found in the SB equation that is derived from them.
What part of algebra don't you get?
Paulie,
ReplyDeleteThe change in S is the change in S.
The change in (S - I) is the change in (S - I).
(S - I) is the change in savings due to net acquisition of financial assets.
"S", the total change in savings, is the sum of, "I", investment (the change in the capital stock) and "(S - I)", net acquisition of financial assets (the change in the stock of NFA).
vimothy
ReplyDelete"The change in S is the change in S. "
True.
The change in (S - I) is the change in (S - I).
True.
(S - I) is the change in savings due to net acquisition of financial assets.
True.
""S", the total change in savings, is the sum of, "I", investment (the change in the capital stock) and "(S - I)", net acquisition of financial assets (the change in the stock of NFA)."
Let me try to sort this out in piece by piece…
""S", the total change in savings…"
True.
Mathematically, the total change in savings is equal to the the difference between total savings (a stock) at (t=now) and savings at inception (t=0) which was zero. In the beginning there was no savings. So the stock of savings = S.
…the confusion comes from the fact that in the equations I listed above all of the terms imply a budget cycle of one year, which is normal, so the values appear to be incremental, which they are over t=1. They are also incremental over t=235 or any number in between. S is both a stock and a flow.
A budget cycle can be defined as any period of time one wants and the relationship remains the same. t can be 1day, 1 week, 1 year 235 years or any number in between. So in the above case S is both a flow and a stock, depending on what time period it is observed over.
So the sum total stock of savings S accumulated over t=n periods is also S. Confusing but…that's the way it is.
"…is the sum of, "I", investment (the change in the capital stock)…"
True.
Same for "I". In the beginning it was zero, now it is "I". "I" is also a stock (a stock that changes in 1 to 1 relationship with S) and a flow.
"… and "(S - I)", net acquisition of financial assets (the change in the stock of NFA)."
True. For one period t or for all periods t=n.
So I see where we disagree. We don't. We are speaking different languages.
Paulie,
ReplyDeleteExcellent!
Much of the time, people use "S" and "I" to refer specifically to the flows (or the time derivatives of the stocks of savings and capital in a continuous time setting).
But as you note, the flow identity implies the same relationship with respect to the stock variables also holds--obviously, since the flow identity is just the total time derivative of an equivalent stock identity.
I am SO glad Paulie and Vimothy got that cleared up. :)
ReplyDeleteJKH and Tom
ReplyDeleteEd's interpretation is not the same I was after, but I'd have to look more carefully to agree/disagree.
JKH,
ReplyDeleteBTW, since I saw a bit of discussion on the CP thread from a while back (aka, the big cluster bleep).
My comments were a bit garbled here and there and that obviously contributed to the acrimony that resulted. I think Phil put the points the way I would make them at the MMR site, and largely how I put them in this comment at Neil's. Here's Phil's exposition:
Scott Fullwiler clarifies the points made by Kelton and answers CP’s criticisms. Here are some of Fullwiler’s comments:
(their order has been rearranged for clarity)
“The post is about a simple accounting identity that should be–but isn’t usually–standard or given in any discussion of government deficits. It is not about causation, and Stephanie didn’t suggest otherwise.”
“This post is about changes to the financial position of the pvt sector, which would seem to obviously have positive/negative effects. You actually don’t dispute that point. You dispute what S is, but beyond that you appear to agree.”
“S-I is the appropriate measure of the sector’s income relative to spending, or the change to its financial position. What it is is “net saving” for the sector.”
“S-I is about the financial position, not the ability to produce real goods and services. Nobody ever said you should look at the sector balances alone, only to understand financial positions–and even then it’s not eveything.”
“S includes investment spending. S-I doesn’t. If you want to call investment spending “saving,” then go ahead. As I said, Y-C-T (which = S) is only subtracting spending by households, not by businesses. So, while it is called “saving,” I don’t consider that a measure of “saving.”
What WE (MMT’ers) are after is a measure of the change to the financial position of the private sector, spending relative to income. That is S-I, not S.”
“S-I refers to total spending out of income for the sector as a whole… If S>I, then the sector’s income was greater than its spending. If S<I, then its income was less than its spending.
If S-I S, that is not necessarily bad, or a “deterioration” as the author called it.”
SF: “It means the private sector is spending more than it’s income.”
JKH
ReplyDelete(last one) to clarify, I wasn't trying to redefine the traditional measure of saving. I was trying to point out that S as measured still included spending, and needed to be adjusted if one wanted a measure of changes to financial positions of sectors. Again, that wasn't made all that clear at times.
In other words, as at Neil's site, S and S-I have their separate places in doing analysis. S is (mostly) the accounting record of investment, as Warren likes to put it, and S-I is the change to the financial position (net) of the pvt sector, which can be disaggregated further as desired.
Phil here:
ReplyDeleteSorry Scott, I tried to post the entirety of your comments in a legible fashion but the computer (or website) wouldn't let me. For some reason it kept cutting the post off after the last paragraph that you quoted. There were interesting comments by you and CP after that but the computer just didn't want to know.
Thanks, Phil. No worries--you did great. I'm sure somehow the website problems will be blamed on me at some point anyway. :)
ReplyDeletePhil and all,
ReplyDeleteThere is word limit on posts. If you have trouble posting a long post, just break it up into sections and label them as continuations. Happens to me frequently. I get a message, though, that the limit has been exceeded. Don't know why that didn't happen if that was the reason for the trouble.
Blogger is a bit quirky, it seems. I have trouble posting on other Blogger site using Chrome, even through both are Google products. I can post there using another browser. Strange.
Scott,
ReplyDeleteThanks.
“Ed's interpretation is not the same I was after, but I'd have to look more carefully to agree/disagree.”
That was precisely my interpretation, and approach.
BTW, it occurred to me after I asked the first question here, that the reason I asked was that I’d picked up only the partial sentence from Ed’s quote, and was confused as a result. It also occurred to me that it would be a miracle if his interpretation turned out to be correct using that partial quote, but like you I didn’t actually investigate it. Be interesting to determine that. He’s pretty smart, so I should figure out how he did that.
Thanks for clarification on the CP thread. That one wasn’t my own primary interest, but has been an object of re-attention, I realize. The big cluster bleep to which you refer is one component in one massive shit storm we’ve had in the last little while. I’ve never seen anything quite like it.
Call’s for a bit of calm reflection, I think, at least for a period, which I’m attempting to undertake. There has been quite a misinterpretation of the intended context and meaning for “the equation”, IMO, which I’ll probably try and put out at some point, but this day is not the day to do so. In fact, the meaning is in the record, but not everybody has followed the record, perhaps understandably. I’m reflecting on Mosler’s question about “purpose” in that context. I’m generally a purposeful person, and I think this case was no exception.
JKH,
ReplyDeleteCalm reflection isn't a problem that you have--thanks for the advice, though; whether or not intended as such, it's appropriate.
"Trade deficits will go as long as there is willingness on external sector" is a simplistic assumption which ignores future consequences and of manageable will be the situation. If we are trying tob uild a somewhat stable system this issue can't be ignored, otherwise we go full retard and ride the koolaid of Greenspan.
ReplyDeleteAll these printed dollars, when the willingness to accept them drops will trigger inflation. There is no free lunch, it's a matter of when not if. Off course it's not "Hyperinflation OMG! We're all dying!", it's an slow process, but the fact is has real economic impact.
When the population of these countries gets tired of their neo-merchantilist overlords and starts to ask for their share of wealth, usually when you reach the climax of expansion and the situation is not sustainable any more for the overleveraged consumer population trade balances must reverse to balance trade. This is good for labour in the indebted nations, but is not an automatic process as there is a shortage of real capital and know-how, resources etc. to reach previous consumption levels, so this will either trigger inflation or a decrease in economic activity/consumption (or both things, as it's happening right now).
In short: structural issues develop with policies encouraging this for decades, and contrary to financial issues, which are relatively easy to fix, structural issues take time and are more problematic to stability. I don't think encouraging trade deficits is a good policy, because even if "exports are a cost" is true, it does not mean you can run trade deficits forever without real consequences (for both the exporter and the importer).
The discussion between vimothy and myself was nothing more than an extended game of charades.
ReplyDeleteThe man or woman on the street would neither understand nor learn anything from the discussion.
Yet MMTr's are criticized for expressing their ideas in shortcut or "sloppy" form for the masses in the interests of simplicity.
We are thus roundly denounced as "obfuscaters", "intellectually dishonest", "wrong" etc. by the bunch that is going to bring the "truth" to the world, only to generate more fog (nothing personal v, referring to others in particular).
"All these printed dollars, when the willingness to accept them drops will trigger inflation."
ReplyDeleteWhat will happen is that the USD will lose relative value in the fx market and that will mean higher prices for imports, including oil, which can lead to supply side inflation in the US. Conversely, US exports will increase and the trade gap will close.
The US can respond to inflationary pressure by selectively increasing taxes to reduce demand. Moreover, the increased oil price can be mitigated by increasing US production (yes, we will be using oil for some time while reducing the amount), converting to natural gas (not as bridge to environmental sustainability but to reduce the inflationary pressure of rising oil price), and investing much more in alternative energy sources, which is already happening and will increase as oil price rises.
In addition, I dont' see the same problems and challenges in the future that you do, Leverage. The looming problem is global warming and as the consequences become more evident, there is going to be a complete reordering of economics and society in ways that we cannot foresee — or else. Under the berst of circumstances this will involve a combination of total catastrophe and tremendous opportunity. There will be big winners and big losers, and probably some hot wars, too.
This will reorient the global economy from a carbon based economy to other energy sources. Depending on how quickly this is implement and achieve will determine the extent of the catastrophe. Considering a life span of about 80 years, everyone under 30 now will be heavily affected and its going to be more challenging for those who are younger than 30, or not yet born.
Until world leaders and those advising them view the global economy as a closed system and that the major challenge is ecological sustainability, they will continue to drive their countries and the world toward the abyss. This will only get faster as exponential factors ramp up.
The problem is not too much vertical money being created, but rather its distribution and use. Widespread global unemployment, lack of education, health care, etc., show that effective demand is lagging and too little investment is going into what is vital.
Climate science shows that the present course is unsustainable, and this is already becoming obvious. The death and destruction from the recent spate of tornados in the US was not due to "the lack of prayer" as pious leaders here complain on TV, but rather it is due to ignoring and denying the environmental instability that is upon us owing to global warming, due at least in part to controllable human causes.
Governments need to be provisioning more NFA instead of less and designing economic and social policy that directs financial and actual resources where they are most needed and will do the most good most quickly.
The clock is running out on many of these issues due to ignorance, denial, and narrow self-interest. The world can have a much higher standard of living for virtually everyone while also meeting the challenges that face it. In fact, this is a huge opportunity as creative destruction takes place and innovation replaces the obsolete and obsolescent.
MMT shows that affordability is not the issue, but rather availability of real resources now and in the future. World leaders in all fields need to realize this and begin acting on it ASAP in order to minimize what is already baked in due to previous inaction.