Brian Romanchuk — Net Financial Assets And Equity

An old debate about "Net Financial Assets," a term used in by Modern Monetary Theory (MMT) was reopened by Steve Roth at Asymptosis.in the article "Where MMT Gets Its Accounting Wrong -- And Right." This generated a lot of comments, and a response by Steve Randy Waldman at interfluidity ("Translating Net Financial Assets"). This also generated discussion at Mike Norman Economics. I largely agree with Steve Waldman's view, but I just want to offer what I think is a more introductory version of what I understand to be the underlying issue. That is, does it make sense to "net out" equity?

All you really need to know in a few paragraphs.

In my view, the take away lies in the flows rather than the stocks. Is there is difference between an increase in nongovernment net financial assets in aggregate owing to deficit spending and an equal amount of increase in the stock of financial claims on equity. Look to the flows involved.

Government spending and transfers, as well as interest payments, increase the purchasing power of nongovernment in the currency zone. The difference between central government revenue and expenditure is the fiscal balance, whether in balance, in surplus, or in deficit. In the case of a deficit, the amount exceeding revenue is matched by issuance of government bonds. The flow is from spending to government securities, but indirectly.

The spending itself doesn't go toward purchase of the securities directly, since few recipients of the spending use it to purchase government securities. In fact, the securities are purchased from the existing money stock. This implies that deficit spending flows through the economy where its effect is multiplied by velocity, being spent many time before being taxed away or saved longer term.

Nothing of the sort occurs in an increase in the value of net equity. The marginal price changes in markets, which is reflected as fictitious gains (and losses) in portfolios. Book value does not change correspondingly. Actual gains and losses are not booked until realized.

In the aftermath of the recent crisis, the Fed conducted policy intended to drive asset values higher than they would be otherwise in order to increase spending through the "wealth effect." Didn't happen.

On the other hand, substantial government deficits did have a positive outcome in stimulating demand and accommodating deleveraging with the flow being multiplied.

Bond Economics
Net Financial Assets And Equity
Brian Romanchuk

Brian Romanchuk — MMT And Net Financial Assets

Here we go again on net financial assets held by nongovernment in aggregate (currency issuer liability-currency user asset) and the role the concept plays in the MMT model based on government finance, nongovernment finance, and national accounting.

Brian cites Steve Roth's post and comments on the issues raised in terms of MMT.

Ramanan is up with a post on Steve's post here, too.

Bond Economics
MMT And Net Financial Assets
Brian Romanchuk

Econ Journal Watch Volume 12, Issue 2, May 2015

Econ Journal Watch
Volume 12, Issue 2, May 2015

In this issue (.pdf):

Evolution, moral sentiments, and the welfare state: Many now maintain that multilevel selection created a sympathetic species with yearnings for social solidarity. Several evolutionary authors on the political left suggest that collectivist politics is an appropriate way to meet that yearning. Harrison Searles agrees on evolution and human nature, but faults them for neglecting Hayek’s charge of atavism: The modern polity and the ancestral band are worlds apart, rendering collectivist politics inappropriate and misguided. David Sloan Wilson, Robert Kadar, and Steve Roth respond, suggesting that new evolutionary paradigms promise to transcend old ideological categories.

More articles but this looks most interesting to me.

ht Tyler Cowen at Marginal Revolution

Steve Roth — Modeling the Wealth, Income, and “Saving” Effects of Redistribution: More is Better?

I’m rather taken with this spending + surplus = income dynamic approach to modeling. (But I would be, wouldn’t I?) I’d be delighted to see how others might analyze and display results using various parameters, and how they might adjust, improve, or dismantle the model. In particular: are there obvious, gaping flaws here?

Whaddya think? 

I take issue with is the statement about "redistribution." 

"Some percentage of the rich person’s wealth is transferred to the poorer people every year (by the ebil gubmint man)."

There is no inherent connection between taxing and spending for a currency sovereign, nor should their be. Expenditure is not funded by taxation. There is nothing preventing transfers without offsetting taxes.

Increasing spending power at the bottom increases aggregate demand and flow. Decreasing the stock of wealth at the top decreases the political and economic power of the wealthy without affecting flow in the economy.

Following the principles of functional finance, I would use taxation, first, to control incipient inflation and secondly, to discourage negative behavior such as rent-seeking.

Asymptosis
Modeling the Wealth, Income, and “Saving” Effects of Redistribution: More is Better?
Steve Roth

Steve Roth adds his take on JKH's post

JKH has magisterial post up on the recent dust-up over Saving as perceived in various sectoral models — one-sector (global, for instance, or government- and trade-balanced domestic private sector); two-sector (government and private including international); the most common MMT construct, the three-sector model (government, domestic private, and international); the rather uncommon four-sector model (government, international, domestic household, and domestic business); or even a seven-billion-plus-sector model, in which each individual (and business, and government) is represented as a sector.

His key point, I think — one I agree with profoundly — is that people need to be very clear on which model they’re assuming when they use the word Saving, or the construct “S.” (People sometimes use those two differently, with different implied sectoral models, sometimes within a single discussion or even a single sentence.) In most cases the different constructs of saving and S that people throw around are absolutely valid within their (implicit) sectoral models. The problem arises when people are talking about different sectoral consolidations within the same discussion, without themselves and/or their interlocutors being (fully) aware of it.

I’ve left a few glancing comments over there, but it’s prompted me to write up some thinking here that’s conceptually related.

Read it at Asymptosis

Thinking About the Fed

by Steve Roth

Crossposted at Angry Bear

Steve reflects cursorily about the nature of the Fed and its relation ship to the federal government, the Treasury specifically, and the private banking system, proposing four different ways of thinking about this, and invites others to specify this more rigorously in terms of current institutional arrangements and operations.

I my view this kind of articulation is needed, since all these views, and probably some more are currently being either advanced or presumed. This is an area of significant contention, and it comes up as soon as I start discussing MMT with many people who are a particular conception of this, usually different from the way MMT frames it. As usual, the framing of the matter is crucial to discussion of related issues.

Steve Roth — When Do Humans Want to Share the Wealth?

Fun to extrapolate from psychology experiments, but I would not want to justify a conclusion based on this. There are a lot of other very good arguments. And this is not a "liberal" position. As Roth observes, Sarah Palin gets it.

Read it at Asymptosis
When Do Humans Want to Share the Wealth?

by Steve Roth

John Carney — Accounting Identity Errors and MMT

Read it at CNBC NetNet
Accounting Identity Errors and MMT

by John Carney | Senior Editor

Look like John is trying to prod some MMT economists to come forward and clarify their position wrt recent challenges emanating from JKH's analysis at Steve Roth's place, which John links to.

Steve Roth — Public v. Private Debt

Read it at Asymptosis
Public vs. Private Debt: The Long View

by Steve Roth

Steve Roth — How Accounting “Constrains” Economics

Read it at Asymptosis
How Accounting “Constrains” Economics

by Steve Roth

Getting into the nitty gritty of the foundations of MMT.

Update on "An MMT Thought Experiment: The Arithmetic and Political Mechanics of Net Financial Assets"

Commenter geerussell alerts us that the conversation on Steve Roth's post has some interesting comments, mostly by JKH. These are a must-read, IMHO, or better, must-study.

Read it at Asymptosis
An MMT Thought Experiment: The Arithmetic and Political Mechanics of Net Financial Assets

by Steve Roth

Steve Roth — An MMT Thought Experiment

I ask not just for clarity, but because (as always), I’m struggling with the relationship between fixed assets and financial assets, between saving and investment.

Read it at Angry Bear
An MMT Thought Experiment: The Arithmetic and Political Mechanics of Net Financial Assets
by Steve Roth
(h/t Kevin Fathi via email)

Steve Keen — MMT Convergence?

Neil Wilson recently posted A Double Entry View on the Keen Circuit Model

at 3spoken.

This elicited some excellent comments, including a couple of extensive contributions by JKH.

Keven Fathi emailed me that Steve Roth just posted at angry Bear that he regards Neil's post as The Most Important Econoblog Post This Year.

Congratulations, Neil, on moving this debate significantly forward.

Steve Roth follows up with Answers — Taking IOR to Zero

Read it at Angry Bear
Answers: Taking IOR to Zero
by Steve Roth

Steve thanks commenters here for their insights.

Steve Roth asks What Happens if IOR Goes to Zero?

Read it at Angry Bear
Question for Market Monetarists and MMTers: What Happens if IOR Goes to Zero?
by Steve Roth

Angry Bear — It's the Private Debt, Stupid

Read it at Angry Bear
It's the Private Debt, Stupid
Posted by Steve Roth
(h/t Kevin Fathi via email)

Go figure.

When really smart people like Ben Bernanke constantly ignore an elegant, simple, even obvious explanation that's been lying on the ground, ready to pick up, for at least 75 years, you gotta figure they've got some incentive -- whether they're conscious of it or not.

Must read.