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.
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Monday, October 1, 2012
Matheus Grasselli — 2012 UMKC Keen model with government (video)
Matheus Grasselli, Professor of Mathematics at McMaster University, presents an extension of the Keen model of financial instability to include government spending which is able to compare the austerity approach to that of running deficits during a recession.
"So how does this gel with what you were saying earlier about the government borrowing everything from the Fed?"
I said the money taxed or borrowed by the Treasury comes from prior spending or lending by the Treasury, or lending or purchases of assets by the Fed.
"If it wanted to stop taxing and borrowing and just print money it could do so, of course. But why would it choose to? What would it gain?"
The point is that government spending at present is "printing money". This is because money is destroyed by taxes and borrowing and created by government spending. Government deficit spending adds new net financial assets in the form of bonds and reserves. As such deficit spending creates non-government savings.
The usual way people think of it is that savings are borrowed by banks and lent out to borrowers, including the government. The actual process is that govt deficit spending creates non-govt savings, as do bank loans. The usual way of thinking about it is the wrong way round.
You said:
"Right, pretty weird. So if businesses earn x+p, but households only earn x, where does the extra p come from? Perhaps it comes from savings? But note that, over time, savings are increasing, not decreasing, as they would if they were constantly being dipped into to meet this short fall in the amount needed to purchase all business output. Perhaps it comes from the government? But note that the government can only borrow from the private sector or tax, which means that it can't add to x.
So where does the extra p come from?"
The answer is that it comes from government deficit spending and increases in private debt. That's why the savings are increasing over time.
"The answer is that two ping-pong balls go into pail one, and then the same two ping-pong balls go back into pail two."
That doesn't make any sense.
"Where do the funds come from to purchase all of the output made by firms? They come from the sale of the output. That is the meaning of the identity, well known to MMTers, "aggregate expenditure equals aggregate income."
The identity is "ex-post" as pointed out by Steve Keen.
"In fact, there isn't even two pails. There's only one pail: households. That's why, when businesses make a profit, money isn't "leaking out of the economy." Households sell their labour in factor markets and buy output in product markets, but they also... own all of the businesses. All wealth in the economy is ultimately owned by people, the same people, in an aggregate sense, who buy all of the output and earn all of the the income the sale of that output generates. Income = expenditure."
When income is saved, this leads to a reduction in demand, unless the amount taken out through saving can be reintroduced by someone going into debt or by government deficit spending.
The problem is that the creditors will try to buy politicians, and force the lower classes to pay the price for government borrowing.
They know the left-winger's game and have no intention of playing along.
Once they buy a bond, they want a real return. They don't want (a) a nominal return erased by inflation, or (b) a real return erased by taxation.
They want a real return, with the real cost of borrowing placed on the shoulders of the lower classes (the "debtors").
That's what they're doing now. They look at the expanding government debt and think "I don't want to be taxed to pay for that", and "I don't want inflation to erase that".
And so they buy politicians that will make the working and middle class pay.
The problem is that the creditors will try to buy politicians, and force the lower classes to pay the price for government borrowing.
They know the left-winger's game and have no intention of playing along.
Once they buy a bond, they want a real return. They don't want (a) a nominal return erased by inflation, or (b) a real return erased by taxation.
They want a real return, with the real cost of borrowing placed on the shoulders of the lower classes (the "debtors").
That's what they're doing now. They look at the expanding government debt and think "I don't want to be taxed to pay for that", and "I don't want inflation to erase that".
And so they buy politicians that will make the working and middle class pay.
Classic rent-seeking behavior. It's about the real rate of interest.
I need to get myself one of those basins of attraction.
ReplyDelete"So how does this gel with what you were saying earlier about the government borrowing everything from the Fed?"
ReplyDeleteI said the money taxed or borrowed by the Treasury comes from prior spending or lending by the Treasury, or lending or purchases of assets by the Fed.
"If it wanted to stop taxing and borrowing and just print money it could do so, of course. But why would it choose to? What would it gain?"
The point is that government spending at present is "printing money". This is because money is destroyed by taxes and borrowing and created by government spending.
Government deficit spending adds new net financial assets in the form of bonds and reserves. As such deficit spending creates non-government savings.
The usual way people think of it is that savings are borrowed by banks and lent out to borrowers, including the government. The actual process is that govt deficit spending creates non-govt savings, as do bank loans. The usual way of thinking about it is the wrong way round.
You said:
"Right, pretty weird. So if businesses earn x+p, but households only earn x, where does the extra p come from? Perhaps it comes from savings? But note that, over time, savings are increasing, not decreasing, as they would if they were constantly being dipped into to meet this short fall in the amount needed to purchase all business output. Perhaps it comes from the government? But note that the government can only borrow from the private sector or tax, which means that it can't add to x.
So where does the extra p come from?"
The answer is that it comes from government deficit spending and increases in private debt. That's why the savings are increasing over time.
"The answer is that two ping-pong balls go into pail one, and then the same two ping-pong balls go back into pail two."
That doesn't make any sense.
"Where do the funds come from to purchase all of the output made by firms? They come from the sale of the output. That is the meaning of the identity, well known to MMTers, "aggregate expenditure equals aggregate income."
The identity is "ex-post" as pointed out by Steve Keen.
"In fact, there isn't even two pails. There's only one pail: households. That's why, when businesses make a profit, money isn't "leaking out of the economy." Households sell their labour in factor markets and buy output in product markets, but they also... own all of the businesses. All wealth in the economy is ultimately owned by people, the same people, in an aggregate sense, who buy all of the output and earn all of the the income the sale of that output generates. Income = expenditure."
When income is saved, this leads to a reduction in demand, unless the amount taken out through saving can be reintroduced by someone going into debt or by government deficit spending.
The problem is that the creditors will try to buy politicians, and force the lower classes to pay the price for government borrowing.
ReplyDeleteThey know the left-winger's game and have no intention of playing along.
Once they buy a bond, they want a real return. They don't want (a) a nominal return erased by inflation, or (b) a real return erased by taxation.
They want a real return, with the real cost of borrowing placed on the shoulders of the lower classes (the "debtors").
That's what they're doing now. They look at the expanding government debt and think "I don't want to be taxed to pay for that", and "I don't want inflation to erase that".
And so they buy politicians that will make the working and middle class pay.
The problem is that the creditors will try to buy politicians, and force the lower classes to pay the price for government borrowing.
ReplyDeleteThey know the left-winger's game and have no intention of playing along.
Once they buy a bond, they want a real return. They don't want (a) a nominal return erased by inflation, or (b) a real return erased by taxation.
They want a real return, with the real cost of borrowing placed on the shoulders of the lower classes (the "debtors").
That's what they're doing now. They look at the expanding government debt and think "I don't want to be taxed to pay for that", and "I don't want inflation to erase that".
And so they buy politicians that will make the working and middle class pay.
Classic rent-seeking behavior. It's about the real rate of interest.