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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Wednesday, April 17, 2013
Winterspeak — "Ample theoretical reasons to worry about debt..." [R-R]
Clonal, thanks for the link (Off topic, but real quick): The comments by benjaminhemric pretty much get it right. And the title of that post seems to be trying to lure in readers, when there is only a little disagreement there on how much emphasis Jacobs put on government. And again, benjaminhemric sets it all straight in the comments. Back to R-R: I should mention, I found similar problems (on data use) with macro stuff on long term development by Acemoglu, Johnson and Robinson. They have some great work, but twist their data to support their conclusion that geography was not of primary importance in long term development differences. I always meant to dust it off and get it out there, but I knew the mainstream would just ignore it so haven't.
"Government deficits are what gives the private sector money to invest."
That is not correct. Government deficits add nominal savings to private sector. But investment creates its own savings and savings are not used to invest. Private sector can just save nominally and pay taxes with money obtained from government deficits. I is not using government's money to invest.
The point being that both consumption and investment are spending and saving is not-spending. If non-govt desires to not-spend, then both consumption and investment decline to the degree that govt doesn't provide the desired amount of saving as $NFA. That's MMT in a nutshell.
Interest on growing debt outpacing growth of GDP? No problem, since the govt sets the rate through its cb.
Of course, this degree of policy space is only available to currency sovereigns.
Kristjan, if you are using the money in your bank account to fund investment spending, then most of your spending depends on the government's emission of US government liabilities to the private sector. Your bank account is a negotiable liability of the bank, and it is a liability for US government-issued liabilities. Almost every time you issue a draft on that account to pay someone - whether you use a check or electronic payment - unless the payee happens to bank at the same bank, then the payee's bank requires payment from your bank, and the obligation is settled with the USG liabilities your bank holds in its reserve account.
Also, the account holders of these bank accounts routinely demand cash in exchange for some portion of their balances, and the cash is also obviously issued by the government.
If banks were in the practice of issuing "liabilities" to their depositors - i.e. demand deposit accounts - that were not redeemable into government cash on demand and could not be used to make payments to anyone other than depositors at the same bank, then these account balances would be in far less demand than they are. They would just be another kind of bitcoin.
On RR: Clearly the government doesn't need to compete in private sector credit markets for limited quantities of funds. If it chooses to do so, that is another matter.
If there are unemployed real resources that the private sector is not employing, it follows that there are useful economic activities that the the government could be carrying out without crowding out private sector activity.
"Kristjan, if you are using the money in your bank account to fund investment spending, then most of your spending depends on the government's emission of US government liabilities to the private sector. Your bank account is a negotiable liability of the bank, and it is a liability for US government-issued liabilities. Almost every time you issue a draft on that account to pay someone - whether you use a check or electronic payment - unless the payee happens to bank at the same bank, then the payee's bank requires payment from your bank, and the obligation is settled with the USG liabilities your bank holds in its reserve account."
That's a different issue, payment settlement. If payments don't settle then we have no longer monetary system functioning. I guess you could say that money obtained from government deficits is invested by people as a figure of speech.
money4nothingchicks4free, the question was whether investors use government money to invest, and my claim is "yes". Even if you are drawing on your bank account to carry out your investment expenditures, your bank account balance is the bank's liability for the government's liability, and is your way of accessing government's money.
If you invest in your business by buying a machine from Company A for $50,000, then the end result is that you have the machine, while your bank's liability to you is reduced by $50,000, and Company A's bank has an increased its liability to Company A by $50,000. But this can only happen in general because your bank and Company A's bank are able to settle with each other via government-issued liabilities.
All money comes from the government, even bank money, if we're talking about state money.
It's state money banks are creating and the liabilities are backed by the government at the root.
Most investment risk is borne by government…the lender of last resort.
The argument these days is whether banks should be allowed to create state money going forward…especially for what amounts to gambling.
Most monetary reform discussion is based on cutting investment banks loose from the federal tit. See full-reserve banking, Bill Still, Ellen Brown, positive money, etc.
Like I said Dan, payment settlement is a different issue. There is nothing technically that is constraining private sector making investments right now if say animal spirits would change for some odd reason. You cannot claim that government deficit money is needed so people can invest. It is needed for aggregate demand because private sector desires to net save (nominal). best
Art Shipman really nailed Miltie using "errors" to make political points - this was regarding inflation and money supply - I don't have the links immediately, but you can get them from Art at New Arthurian Economics. I did play a minor role in the discussions when he posted it a while ago.
Here's the link:
ReplyDelete"Ample theoretical reasons to worry about debt...”
Clint Ballinger: On good urbanism, sane economics, & problems in the social sciences
Clint,
ReplyDeleteAlso What Jane Jacobs Got Wrong About Urban Economies
Clonal, thanks for the link (Off topic, but real quick): The comments by benjaminhemric pretty much get it right. And the title of that post seems to be trying to lure in readers, when there is only a little disagreement there on how much emphasis Jacobs put on government. And again, benjaminhemric sets it all straight in the comments.
ReplyDeleteBack to R-R:
I should mention, I found similar problems (on data use) with macro stuff on long term development by Acemoglu, Johnson and Robinson. They have some great work, but twist their data to support their conclusion that geography was not of primary importance in long term development differences.
I always meant to dust it off and get it out there, but I knew the mainstream would just ignore it so haven't.
"Government deficits are what gives the private sector money to invest."
ReplyDeleteThat is not correct. Government deficits add nominal savings to private sector. But investment creates its own savings and savings are not used to invest. Private sector can just save nominally and pay taxes with money obtained from government deficits. I is not using government's money to invest.
@ Kristjan
ReplyDeleteThe point being that both consumption and investment are spending and saving is not-spending. If non-govt desires to not-spend, then both consumption and investment decline to the degree that govt doesn't provide the desired amount of saving as $NFA. That's MMT in a nutshell.
Interest on growing debt outpacing growth of GDP? No problem, since the govt sets the rate through its cb.
Of course, this degree of policy space is only available to currency sovereigns.
" investment creates its own savings "
ReplyDeleteHow about when revenues flow back to the investment greater than the investment (profit, retained earnings)?
What does that create?
The net flow if funds (at least over recent history say the past 50 years) has been towards investment, not towards savings.
So if household saving is increasing it has to be from deficits since we run a continuous trade deficit.
To be clear I'm talking about saving in currency units.
Kristjan, if you are using the money in your bank account to fund investment spending, then most of your spending depends on the government's emission of US government liabilities to the private sector. Your bank account is a negotiable liability of the bank, and it is a liability for US government-issued liabilities. Almost every time you issue a draft on that account to pay someone - whether you use a check or electronic payment - unless the payee happens to bank at the same bank, then the payee's bank requires payment from your bank, and the obligation is settled with the USG liabilities your bank holds in its reserve account.
ReplyDeleteAlso, the account holders of these bank accounts routinely demand cash in exchange for some portion of their balances, and the cash is also obviously issued by the government.
If banks were in the practice of issuing "liabilities" to their depositors - i.e. demand deposit accounts - that were not redeemable into government cash on demand and could not be used to make payments to anyone other than depositors at the same bank, then these account balances would be in far less demand than they are. They would just be another kind of bitcoin.
On RR: Clearly the government doesn't need to compete in private sector credit markets for limited quantities of funds. If it chooses to do so, that is another matter.
ReplyDeleteIf there are unemployed real resources that the private sector is not employing, it follows that there are useful economic activities that the the government could be carrying out without crowding out private sector activity.
"Kristjan, if you are using the money in your bank account to fund investment spending, then most of your spending depends on the government's emission of US government liabilities to the private sector. Your bank account is a negotiable liability of the bank, and it is a liability for US government-issued liabilities. Almost every time you issue a draft on that account to pay someone - whether you use a check or electronic payment - unless the payee happens to bank at the same bank, then the payee's bank requires payment from your bank, and the obligation is settled with the USG liabilities your bank holds in its reserve account."
ReplyDeleteThat's a different issue, payment settlement. If payments don't settle then we have no longer monetary system functioning. I guess you could say that money obtained from government deficits is invested by people as a figure of speech.
" investment creates its own savings "
ReplyDeleteHow about when revenues flow back to the investment greater than the investment (profit, retained earnings)?
What does that create?
The net flow if funds (at least over recent history say the past 50 years) has been towards investment, not towards savings.
So if household saving is increasing it has to be from deficits since we run a continuous trade deficit.
To be clear I'm talking about saving in currency units."
Yes nominal savings desires create a slump. i didn't say anything against all those things that you talk about.
money4nothingchicks4free, the question was whether investors use government money to invest, and my claim is "yes". Even if you are drawing on your bank account to carry out your investment expenditures, your bank account balance is the bank's liability for the government's liability, and is your way of accessing government's money.
ReplyDeleteIf you invest in your business by buying a machine from Company A for $50,000, then the end result is that you have the machine, while your bank's liability to you is reduced by $50,000, and Company A's bank has an increased its liability to Company A by $50,000. But this can only happen in general because your bank and Company A's bank are able to settle with each other via government-issued liabilities.
"I is not using government's money to invest"
ReplyDeleteAll money comes from the government, even bank money, if we're talking about state money.
It's state money banks are creating and the liabilities are backed by the government at the root.
Most investment risk is borne by government…the lender of last resort.
The argument these days is whether banks should be allowed to create state money going forward…especially for what amounts to gambling.
Most monetary reform discussion is based on cutting investment banks loose from the federal tit. See full-reserve banking, Bill Still, Ellen Brown, positive money, etc.
Like I said Dan, payment settlement is a different issue. There is nothing technically that is constraining private sector making investments right now if say animal spirits would change for some odd reason. You cannot claim that government deficit money is needed so people can invest. It is needed for aggregate demand because private sector desires to net save (nominal).
ReplyDeletebest
Clint and Tom,
ReplyDeleteArt Shipman really nailed Miltie using "errors" to make political points - this was regarding inflation and money supply - I don't have the links immediately, but you can get them from Art at New Arthurian Economics. I did play a minor role in the discussions when he posted it a while ago.