Thursday, August 23, 2012

Matias Verengo on the Cambridge capital controversy

Matias Verengo explains the Cambridge capital controversy.

Naked Keynesianism
Nick Rowe on Reswitching and the Capital Debates
Matias Verengo | Associate Professor, University of Utah


MMT related question said...

Does the government ever borrow privately-issued money?


Tom Hickey said...

Not in aggregate, since tsy issuance = deficit spending (money creation). The same amount of dollars the govt creates through deficit spending are saved as the tsy offset, so that non govt net financial assets in aggregate increase along with money creation.

MMT Q said...

what do you mean by 'not in aggregate'?

I was wondering whether the government actually borrows privately issued money at any point in time. Does it ever borrow bank credit?

Tom Hickey said...

Do people and institutions pay for tsy purchases with deposit accounts? Of course.

MMT Q said...

People can buy tsys with deposit accounts but the government doesn't borrow bank deposits (bank credit), does it? The treasury gets paid for tsys with a credit to its account at the Fed, though not necessarily straight away.

Say an investor buys a government bond. His bank debits his deposit account and credits the Treasury's tax and loan account. That account is a liability of the bank (bank credit). Either that account is then debited within the day, or if it is held for longer term the bank pays interest. Then at some point the Treasury calls in the account, the bank debits the account, the Fed debits the banks reserve account and credits the Treasury's account at the Fed. Then the Treasuy spends.

Is this incorrect?
Longer term tax and loan accounts pay interest to the treasury. At some point the Treasury calls in those accounts, the bank debits the account, the Fed debits the bank's reserve account and credits the treasury's account at the Fed. Then the treasury spends.

Tom Hickey said...

The Tsy gets reserves to cover deficit expenditure by issuing tys. The Fed auctions the tsys to the primary dealers. The primary dealers are the market makers and they vend the tsys into non-govt. So the Fed is paid for the auctioned tsys by the PD's, and the tys that the PDs then sell are paid out of buyers' deposit accounts.

It is meaningless to ask whether the tys are bought with bank money. Once the money is in non-govt, there is no way to distinguish govt-created money from bank-generated money, since these are just entries in the unit of account.

What is relevant is whether in aggregate the amount injected is equal to or greater than the amt saved in tsys. If so, then in aggregate no bank-generated money is involved.