Dirk Ehnts — Keynes on Savings and Investment

Geoff Tily in his paper on Keynes (pdf) has this quote (from the Collected Writings):

S = I at all rates of investment. Y either definable as C+S or as C+I. S and I were opposite facets of the same phenomenon they did not need a rate of interest to bring them into equilibrium for they were at all times and in all conditions in equilibrium. (CW XXVII, pp 388–9)

This is very enlightening. The “General Theory” also contained the issue of savings and investment, but the quote above nails it. There is no “supply” and “demand” for capital, hence savings and investment do not need anything to move so that there can be equilibrium.

From my point of view, this is one of the strongest rejections of neoclassical macroeconomics and it stands until this day. In a monetary economy, there is no “savings good” that needs to be produced before it can be “invested”. I = S “at all times” – there cannot be a disequilibrium between saving and investment....

In the income equals expenditure model based on accounting, saving and investment are residuals that must always equal each other by identity in a double entry system when consumption is subtracted from each side. If they don't equal each other, check the accounting for a mistake. Income must be equal to expenditure by identity in double entry, since they are opposite entries in recording transactions and must always balance as confirmation that the accounting is correct.

econoblog 101
Keynes on Savings and Investment
Dirk Ehnts | Lecturer at Bard College Berlin

Nick Edmonds — Ledger Accounting for the Monetary Circuit

Some of the basics for double-entry book-keeping are as follows:

1. We can generate any number of ledgers for different items or stages in a process. Note that a ledger does not necessarily relate to something that we might think of as a balance sheet item. Purchases and sales have ledgers as well, even though these are purely income items. We may decide to be more or less aggregated with our ledgers, depending on what we want to record. For example, we might have a single purchase ledger or we might have a number for different types of purchase.

2. A debit is any of: an increase in the value of an asset, a decrease in the amount of a liability, or an item of expenditure. A credit is any of: a decrease in the value of an asset, an increase in the amount of a liability, or an item of income.

3. Each time we put a credit in one ledger, we must put an equal debit in another ledger.

Some of these ledgers may look familiar. In particular, the ledger for a deposit account is essentially the same as the depositor's bank statement. The statement dates will not typically coincide with the dates at which the bank is drawing up its own accounts but, apart from that, they record the same entries and balances.

The most interesting thing I think about this exercise is that we are seeing what bank money actually is. In other words, this process is not simply a record of money movements - it is the actual money movements themselves. If the non-bank agents maintain their accounts with the same bank, then nothing else is going on, beyond what we see here. (If they have accounts with different banks, then each bank (and maybe the central bank) will need to make entries and there will also be wire confirmations, but the essence of the money movement is still just the entries in the ledgers.)

Another thing worth noting is that the transactions have a specific date, but no time. Although there is an increasing use of real time gross settlement, it is not an essential feature of the way ledger money works. This means that there is no fact of the matter as to in what order payments occur during the day.

Reflections on Monetary Economics
Ledger Accounting for the Monetary Circuit
Nick Edmonds

When a bank creates a deposit by making a loan it is making a promise to credit other accounts at the depositor's discretion. In this way the depositor's asset is moved to another account, and if the account is in another bank, then the band's deposit liability is transferred to the recipient's bank for crediting to the recipient's account. This involves the original depositor's bank to credit the reserve account of the recipient's bank, thereby drawing down its own reserve account, an asset account. This leaves the loan outstanding as an asset of the original borrower's bank. 

Nothing changed other than ledger entires but money was moved from account to account. Some of that was bank money in deposit accounts and some, in the case of interbank transfer, was government money (reserves) in the payments system. The only physical exchange perhaps involved checks, but increasingly banking is done electronically, all by keystrokes. Unless cash is withdrawn in the process or paper checks exchanged, the procedure is notional rather than actual and notational instead of physical.

Paul Meli — Sectoral Balances within the Domestic Non-Government

There are many important laws that determine the behavior of various systems within the Universe but as far as economics is concerned, none is more important than the concept of a closed system.


From Wikipedia:

”In non-relativistic classical mechanics, a closed system is a physical system which doesn’t exchange any matter with its surroundings, and isn’t subject to any force whose source is external to the system. A closed system in the classical mechanics sense would be considered an isolated system in thermodynamics.”

What does this mean in the context of a monetary economy? What could properties of a physical system have in common with a system based largely on the relationships between stocks and the flows between them? It turns out that some math systems behave according to the same rules that constrain elemental physical particles, i.e. the concept of the conservation of matter holds mathematically for the “conservation” of currency units within the system.

If we define the closed system as the universe of state-backed US dollar assets and liabilities, including state-issued bonds held by the public, it means that the net dollar assets existing in the economic system cannot change over some period of time t without an add or subtract from a source external to the system.

New Economic Perspectives
Sectoral Balances within the Domestic Non-Government
Paul Meli

Santelli: "Every baby born in the U.S. inherits $50,000 in debt"

What an ignorant statement!

Santelli never ceases to surprise. I hope CNBC is getting their money's worth insofar as ratings go from this guy, because they certainly aren't getting any useful information or insight for their audience.

Santelli started his morning rant by making the idiotic statement that we often hear that every child born in the USA comes into the world with a debt of $50,000. That's according to the debt clock, he says. First of all, what's with this debt clock anyway? Does anyone realize that 500 years ago the world went to double entry accounting? That means the way we account for things is as follows: for every debit their is a credit, for every liability there is an asset and for every debtor there is a creditor. So the debt clock is also an asset/savings clock.

Asset Clock! (h/t Matt Franko)

---Mike Norman Economics---USD Net SAVINGS Clock

This is an inarguable accounting FACT (unless you're Santelli, I guess). Once you understand this then every time someone mentions the debt clock they are obligated to state that whatever's on the debt clock ($15.2 trillion), is balanced by an equal amount of assets. This is not opinion or conjecture or wishful thinking. It's a fact.

So let's look at the debt (assets). What is it? What is it comprised of and more importantly, whose debt is it?

The debt is the debt of the government. How do we know this? Because the debt mongers themselves tell us. Not a day goes by without some guy like Santelli or Pete Peterson or David Walker or some other member of the Debt Doomsday crowd admonishing us that the government has to cut its debt. They point to it. They actually say, "Look...look at the $15.2 trillion of debt that we have." The number they are pointing to each and every time happens to be the amount of U.S. Treasury securities outstanding. By the way, as long as we're talking about Treasuries, what are they, exactly? Asnwer: Treasuries are nothing more than dollars with a term and a coupon. The government printed up those $15.2 trillion dollars (in excess of taxes collected) over the past 234 years and paid them to people for goods and services or transfer payments. The dollars now sit in Treasuries because they earn some interest.

I've just answered my second question: Who holds the debt? People hold the debt. People were paid that money when the government spent it. (The government also owns some of its own debt. That's like my right pocket owing money to my left.) The point is, people OWN those dollars. It's not a debt to them, it's an ASSET!

You don't think so? Tell ya what...go into a bank and ask for a loan. The banker will probably ask you to to fill out an application where you will need to list your liabilities and your assets. If you own Treasuries I'm sure you will be putting that down under the "asset" column.

And what about Santelli? What does he think? I wonder if he even owns any Treasuries. If he does, does he consider that a debt? A burden? Hey Rick, if those Treasuries are a burden to you I'd be HAPPY to take them off your hands! And while I'm at it, I'd be happy to take Warren Buffet's $40 bln burden of Treasuries off his hands along with Apple Inc's $100 bln burden. In fact, to show you what a nice guy I am, I will take the whole, $15.2 trillion off everyone's hands right now.

You see, the $15.2 trillion debt of the government is an asset to the non-government. It represents a portion of the financial assets denominted in US dollars that we own. That's right...it's not what we owe, it's what we OWN! It's part of our wealth.

That baby that Santelli talked about at the beginning of his rant is not born with a $50,000 debt, but rather, with a $50,000 asset. Maybe not directly owned in the form of a Treasury, but owned indirectly in terms of his or her share of national national wealth. Telling young people to "vote against that" as Santelli did, is pure stupidity. But, hey, what did you expect from him?