Peter Dorman — What Donald Trump Is Telling Us about Popular Understanding of Debt and Assets

I see Trump’s suggestion that the US haircut holders of treasury debt through a different lens than most observers. Almost every year, I walk into an introductory economics class in the fall and try to disabuse students of the notion that debt and credit assets like bonds are two unrelated things. They are shocked to discover that the savings bonds many have stashed away are pieces of the “national debt”, and that eliminating this debt would mean draining the world of all such bonds—that America’s collective public debt is (apart from foreign holdings, which is another story) America’s collective private wealth. Yes, the unequal ownership of that wealth is scandalous, but that’s about how much inequality we have, not how much wealth.…

Econospeak
What Donald Trump Is Telling Us about Popular Understanding of Debt and Assets
Peter Dorman | Professor of Political Economy, The Evergreen State College

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

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.

Winterspeak.com
Krugman out of paradigm
Winterspeak

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

John T. Harvey — Four Reasons You Should Consider Washington's Deficit As Your Surplus

I could hear Meet the Press on in the background at my house on Sunday and the reporters were discussing various means of reducing the budget deficit. I didn’t bother to sit down and listen, however, because I knew that none of it made any sense. All were based on the same false premise: federal government deficits represent a burden on the private sector.

They do not.

Forbes
Four Reasons You Should Consider Washington's Deficit As Your Surplus
John T. Harvey | Professor of Economics at Texas Christian University

Kimberly Amadeo — Who Owns the U.S. National Debt?

Summarizes Treasury Bulletin, Monthly Treasury Statement, Table 6. Schedule D-Investments of Federal Government Accounts in Federal Securities, August 30, 2013. Forget what she has to say about QE though.

About.com
Who Owns the U.S. National Debt?
Kimberly Amadeo

Andrea Terzi — The problem with Quantitative Easing…

The problem with Quantitative Easing… was illustrated today by Raghuram Rajan, the Reserve Bank of India governor, along these lines....

The people who saved before the crisis, he said, were largely saving for their retirements. After the crisis they find themselves needing to save more, a problem that is compounded if the central bank pushes down real interest rates and reduces their income further.

In other words, low interest rates have a contractionary effect.

Money And The Real Economy
The problem with Quantitative Easing…
Andrea Terzi | Professor of Economics at Franklin College Switzerland (FCS), and a Research Associate at the Levy Economics Institute of Bard College, NY. He also lectures on Monetary Economics at Catholic University in Milan, Italy.

Peter Cooper — What Everyone Should Know About Budget Deficits and Public Debt

Peter's back with a vengeance. Very nice simple explanation that just about anyone should be able to understand. Model elevator speech.

Hetecnomist

What Everyone Should Know About Budget Deficits and Public Debt

Peter Cooper

Scott Fullwiler — Drop It: You Can Call for Helicopter Money but Drop the Call for “Coordination”

Scott's latest from NEP. Scott has not been blogging much lately although he occasionally comments are various places. So don't miss this one.

New Economic Perspectives
Drop It: You Can Call for Helicopter Money but Drop the Call for “Coordination”
Scott Fullwiler | James A. Leach Chair in Banking and Monetary Economics and is an Associate Professor of Economics at Wartburg College

Auburn Parks — How many people even know what our 'National Debt' actually is?

I wonder just how many people know about what our national debt actually is. The term 'national debt' gets thrown around so often and I have yet to hear anyone talk about US Treasury securities in any interview or discussion on TV, Radio, or any mainstream media websites about the so-called debt. People just assume that because I have debt I know what the national debt is because the national Govt is just like me and my household or the business down the street. Well guess what, the Federal Govt is nothing like a household or business. And the 'national debt' is nothing more than the total number of US treasury bonds in existence. So the next time you hear somebody talk about the 'debt being too high' or 'we need to reduce or national debt'.....we must ask ourselves, just why do we really want there to be less US Treasury bonds in existence.

Is it better public policy to have a smaller amount of risk-free financial assets available to the non-Govt?

I am not saying there could never be a situation where the above statement should be answered with a yes.....I am just saying that any time anyone wants to stop issuing Treasury bonds dollar for dollar with the amount of deficit spending, I am game. If only, to put all this 'national debt' silliness to rest once and for all. But is this something that we progressives should advocate for en masse......to shrink the debt by just supporting the repeal of the statute that requires treasury to issue bonds for deficit spending. Its not like the Fed bank would ever 'bounce a Treasury check' although its more accurately described as the Fed would never refuse to use its computer to credit a SS recipient's or Govt contractor's bank account.

Of course the next thing that people are going to say is........
INFLATION!!!!!!!!AAAAAHHHHHHHHH!!!!!!!!

Daily Kos — Money and Public Purpose
How many people even know what our 'National Debt' actually is?
Auburn Parks

Winterspeak — Do not make a vice out of virtue

I think it is fair to consider savers to be collateral damage, since they harm they are suffering is incidental to the intentions of Government officials and regulators alike. Ultimately, only higher deficits, and more fiscal transfer, will sate their savings desire and begin to generate aggregate demand again.

Winterspeak
Do not make a vice out of virtue

JKH — Briefly Revisiting S = I + (S – I)

Drilling down deeper into S = I.

I suggest commenting over at MR in order to keep comments together. JKH is very generous in responding to comments and questions there.

Comments here OK, too, for those who may wish.

Monetary Realism
Briefly Revisiting S = I + (S – I)
JKH

Stephan Ewald — Cash Is King

So there’s this convoluted debate between Steve Waldman and Paul Krugman about the nature of base money. Izabella Kaminska from FT Alphaville wrote today a nice summary. Waldman and Krugman label their various arguments as wonkish. I would refer to this debate as a very helpful exercise to completely obscure the subject: what is the nature of base money?

GIGO
Cash Is King
Stephan Ewald

Stephanie Kelton on why the US doesn't borrow to spend

Excerpt from Stephanie Kelton
"Can Taxes and Bonds Finance Government Spending?" (1998)
(h/t y in the comments)

Federal Reserves notes (and reserves) are booked as liabilities on the Fed's balance sheet and these liabilities are extinguished/discharged when they are offered in payment to the State. It must be recognised that when currency or reserves return to the State, the liabilities of the State are reduced and high-powered money is destroyed. 

The destruction of these promises is no different from the private destruction of a promise once it has been fulfilled. In other words, when an individual takes out a loan, she issues a promise to a bank. Once she 'makes good' on that promise (i.e. repays the loan), she may 'destroy' that loan debt (liability) by eliminating it from her balance sheet. 

Thus, while bank money (M1) is destroyed when demand deposits are used to pay taxes, the government's money, HPM, is destroyed as the funds are placed into the Treasury's account at the Fed. Viewed this way, it can be convincingly argued that the money collected from taxation and bond sales cannot possibly finance the government's spending. This is because in order to 'get its hands on' the proceeds from taxation and bond sales, the government must destroy the money it has collected. Clearly, government spending cannot be financed by money that is destroyed when received in payment to the State! [This may be intended meaning of Warren Mosler's metaphor that tax dollars are destroyed when the tax liability has been removed from the record, rather than being used to fund future spending as most assume — th.]

How, if not by using the money received in payment of taxes and bond sales, does the government finance its spending? Notice that the government writes checks on an account that does not comprise part of the money supply or HPM but that as it does, the funds become part of the money supply (M1 if deposited into checking accounts, M2 if savings accounts, etc.) and part of HPM. It is therefore apparent that while the payment of taxes destroys an equivalent amount of money (M1 immediately and HPM as the proceeds go into the Treasury's account at the Fed), spending from this account creates an equivalent amount of new money - both bank money and HPM. Modern governments, then, finance all of their spending through the direct creation of new (high-powered) money.

Once again, the difference between monetary and fiscal

If for example your daughter was very sick and needed an expensive surgery that the $50,000 would cover this exacerbates things by another major factor in favor of the check -from the stand point of your own personal welfare.

If we have another Katrina like event where would assistance be more beneficial if we need $100 billion dollars to fully deal with the crisis? Would it be better to have the Fed buy $100 billion in T-bills or send it to the state the disaster occurred at giving the money to the fire department and the Red Cross.

Read it at Diary of a Republican Hater
MM vs. Krugman vs. MMT: Political and Definitional Debate?

by Mike Sax

A fiscal transfer injects net financial assets into domestic private sector. The Fed is not empowered to make fiscal transfers.

Purchase and sale of tsys by the Fed alters the composition and term of non-government net financial assets without affecting the amount.

Winterspeak — The Myth of High Powered Money

Does the government fiscal deficit flow to savings or equity? Winterspeak says equity and denotes this as NFA (e).

There is already a spirited debate raging in the comments.

Read it at Winterspeak.com
The Myth of High Powered Money
by Winterspeak

Mike Sankowski — S = I + (S – I) : The Most Important Equation in Economics

This is an absolutely must-read if you haven't been following the comments on Steve Roth's post, How Accounting “Constrains” Economics, at Asymptosis, to which I had pointed to earlier.

JKH illuminates the saving-investment controversy and resolves it clearly with basic algebra using transformations familiar to anyone who reads Bill Mitchell's blog. Definitely elegant.

Mike gives the essentials if you don't have time to read the original historic discussion. However, I recommend reading the whole thing at Steve's after reading Mike's summary.

Read it at Modern Monetary Realism
S = I + (S – I) : The Most Important Equation in Economics
by Mike Sankowski

I am not sure it deserves the title, "the most important equation in economics," since it is derived from Y = C + I + G + (X-M).

UPDATE:

Mike responds to my questioning the relative importance of the macro identities:

 It’s the most important (sorry Tom H!) because this is where sovereign nations control the money in the system. It’s the most important because this is where Godley’s Theorem about the necessity of Deficit Spending hits domestic citizens.

Based on that reasoning, I agree.

Excellent comments there. JKH is participating.

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)

Rogue Economist — Net Financial Assets

The rogue economist provides a long and detailed exposition of the meaning of "net financial assets" based on my previous comments there.

"Net financial assets" is a key MMT concept, so it is definitely a worthwhile read. I'm bookmarking it, too, in order to refer others to it. It meets a lot of objections and corrects erroneous ideas now being bandied about.

Read the post at Rogue Economist Rants, What is net financial asset

Here is my comment there:

Thanks for providing a detailed explanation of net financial assets.

I must clarity that the term "net financial assets" is not my term. It is a key term of Modern Monetary Theory (MMT).

MMT emphasizes the distinction between vertical, "outside," or exogenous money creation by the government as currency issuer, and horizontal, "inside," or endogenous money creation by bank lending.

When banks lend, loans create deposits, which are withdrawn and spent into the economy. Loans are booked as bank assets and deposits as bank liabilities. The net is zero. No net financial assets are created when banks lend. What is created, however, is an interest obligation that exceeds the value of the loan, which must be repaid in addition to the principle.

Conversely, when government deficit spends it creates financial assets in the private sector. These financial assets have no liability in the private sector, so they are non-government net financial assets. The net financial assets injected by government come with no interest payable by the recipient.

This is the basis of the vertical-horizontal distinction that MMT draws, and it is why the government as household analogy is erroneous. Households, firms, and states in the US are currency users, while the federal government is the currency issuer. Missing this distinction is the reason for a lot of junk economics.

A government that is the monopoly provider of a non-convertible floating rate currency is not operationally constrained because it funds itself with currency issuance. Such a government does not tax to fund itself and it does not borrow to finance itself. A currency issuer does not need to get money elsewhere. It issues it.

Taxes withdraw net financial assets previously injected by deficit expenditure. Governments withdraw some of the NFA through taxation for two reasons. First, taxes create a need for the government's money, which Warren Mosler calls a tax credit. This gives value to otherwise worthless pieces of paper. Secondly, governments withdraw NFA from non-government to regulate inflation.

Government does not usually withdraw the total net financial assets it injects. Historically, the US government has generally run a deficit. Only once was the national debt paid down.

The residual of deficit spending is the "national debt." It should be obvious from the above that the "national debt" is actually savings of NFA held by non-government, accruing interest that is also created by currency issuance and adds NFA. All the brouhaha is complaining about growing national wealth in the hands of non-government. Does that complaining make sense?

IN the MMT macro view and policy recommendations based on it, fiscal policy — injection and withdrawal of non-government NFA — is used to adjust nominal aggregate demand to nominal aggregate supply at full employment with a view toward achieving full employment and price stability. In this regard, MMT holds that fiscal policy based on "functional finance" is superior to monetary policy, since it can be adjusted to changing non-government desire to save in order to ensure that the balances of the sectors — government, domestic private, and external — sum to zero at full employment.