Tuesday, August 25, 2015

Winterspeak — Krugman out of paradigm

Warren Mosler versus Paul Krugman. in which Mosler wins.
A lifetime ago, Krugman wrote that mathematical models were useful because they took implicit, inconsistent assumptions and make them both explicit and consistent. This was an aid to clear thinking.
His current thinking on monetary operations has a number of implicit assumptions, which is why he believes a fiat state has the same constraints and responsibilities as a household, and why his thinking fundamentally comes from the "sound finance" school of thought and not the "functional finance" school of thought proposed by Abba Lerner back in 1951.
Warren defines nongovernment net financial assets in aggregate:
Mosler: …  the US public debt, for example, is nothing more than the dollars [as tax credits] spent by the govt that haven’t yet been used to pay taxes. Those dollars constitute the net financial dollar assets of the global economy (net nominal savings), as actual cash, or dollar balances in bank accounts at the Federal Reserve Bank called reserve accounts and securities accounts. Functionally, it is not wrong to call these dollars the ‘monetary base’.
Currency as tax credits are liabilities held by nongovernment as financial assets. In aggregate, these assets are net of nongovernment creation of the unit of account through lending (loans create deposits). Borrowing and lending in nongovernment in a unit of account must net to zero as an accounting identity. Any net financial assets can only come from the currency issuer as a liability of the issuer that is correspondingly the asset of currency users. 

This is why payment of taxes with tax credits cancels the liability of the currency issuer and "destroys" that amount of the unit of account, that is, reduces the "monetary base" in Mosler terms, which includes government securities, as the total amount of liabilities of the currency issuer held by currency users in aggregate in the currency zone.

Krugman out of paradigm

1 comment:

Ralph Musgrave said...

That difference in opinion between Mosler and Krugman (or at least one of the differences between them) can be resolved by taking into account the fact that the state performs two quite different types of borrowing. First, it borrows to fund infrastructure and other assets. The logical TERM for relevant bonds there is "very long". Plus the rate of interest, ideally, needs to be whatever the average rate over the life of the asset will be, which of course is difficult to estimate.

The SECOND function consists of issuing money and borrowing some of that back so as to control aggregate demand (a point which Mosler quite rightly keeps making). The term of those bonds needs to be SHORT: reason is that private sector confidence can change quickly, which means the state will tend to issue and sell those bonds quickly.

I'm putting a post on my own blog in this subject shortly, possibly today.