Steve Roth — MMT confusion

Back to saving, net saving, and net worth.

Eric and Randy show the accounting.

Asymptosis
MMT confusion

Steve Roth

Rodger Mitchell — Mathematical proof that deficits should be increased.

“Deficit” and “debt” fool most people, because these words sound negative. But think about it this way:

A federal “deficit” occurs when the federal government creates and spends more dollars than it receives in taxes. Similarly, when the government runs a surplus, the government takes more dollars out of the economy than it sends into the economy. A government surplus is the economy’s deficit.

The added dollars from federal deficit spending go to one of two places:

1. Into the U.S. economy, where they become Net Savings, or


2. To foreign economies to pay for Net Imports

Thus, the equation: Federal Deficits = Net Private Savings + Net Imports

Banks create dollars by lending, but those are not net dollars. For every dollar created by a bank, a loan obligation also is created –- the new dollars are offset by new obligations, so they net to zero. Only the federal government creates net savings dollars.

Monetary Sovereignty
Mathematical proof that deficits should be increased. Send it to your favorite debt-hawk
Rodger Malcolm Mitchell

Warren Mosler shows why fiscal austerity can't work

There’s a reason the hardcore budget balancer/deficit hawk does not last long under the microscope. Their numbers can’t add up, which leaves them with contradictory statements.

The Center of the Universe
Ryan the next Bachman?
Warren Mosler

Proportion of government "debt" and private debt is key

I want more fiat money in the economy to make up for the reduction of credit use. (That's the whole plan.) But the quantity of fiat money has been reduced (see: M1/NGDP) while our use of the more expensive credit-money has increased. The quantity of fiat money has been reduced because of our assumption that printing money causes inflation. 

Meanwhile, our use of credit has increased -- leading to the bizarre accumulation of debt -- because of our assumption that credit use is good for growth. (See "irony".)

Read it at The New Arthurian Economics
Ouroboros and Irony
by The Arthurian

Exactly.

Scott Fullwiler comments on saving at 3spoken

For the record, in case you missed it. I posted a link to Neil Wilson explanation of saving at 3spoken, Savings - Explaining the Humpty Dumpty word. MMT economist Scott Fullwiler commented.

STF said...Neil,

This is correct. Thank you. Perhaps we can end this ridiculous mountain made out of a molehill now, though my guess is it won't happen given the personalities involved.



Yes, some people get sloppy at times with terminology, particularly in blogposts, working papers, and such. Even in journal articles I've published that have been through several reviews I still find things here and there that I wish I could change. 



Well-known Keynesians and Monetarists have been sloppy at times, too, but that doesn't invalidate Keynesianism or Monetarism. 



Any reading of MMT would seem to make it obvious what S-I does and doesn't mean, and would seem to make it obvious that it doesn't mean "saving" in the traditional sense as it is defined. We've always said we are using Godley's framework, and it's clear that Godely understood this. Again, there is slopppiness here and there, but there is in every literature out there.



Saving being driven by investment spending is a well-covered topic in Post Keynesianism, some of it by Wray, Minsky, and some by endogenous money/circuitistes. This all pre-dates MMT/neo-Chartalism. One of my research papers in grad school went over this literature. MMT takes all this as given--there is no need to reinvent the wheel and there has been nothing in the recent discussions in this issue that strikes any of us as adding anything of economic significance to this literature. I'm glad many that didn't have much grounding in this literautre found the discussions useful, though.



Net saving builds on this by adding an indicator of Minskyan fragility. It is obviously not the same as saving. Domestic pvt sectors want to net save; this is borne out by data from many, many countries. And they can only do it via govt deficits or current account surpluses. 



Yes, we can break down the pvt sector's net saving into household and firms (and financial sector); the data I send out quarterly to MMTers and friends includes this breakdown. I discussed this in my wp at Levy in December 2010 in Figure 2. Rob Parenteau and Yves Smith did a post a few years ago (??) on this, too. 



The breakdown of the pvt sector is interesting to some degree because we see that the household sector is the traditional "hedge" financial unit in the economy until 1998 and then again after 2008. The firm sector moves between hedge and speculative/Ponzi (these are Minsky's well-known terms). But cyclically the two are very highly correlated, so the notion that firms can spend and reduce net saving in order to increase net saving of the household sector--while theoretically true and true in an accounting sense--doesn't hold up well empirically. Across business cycles (i.e., trend as opposed to cycles), firm net saving can and has fallen while household net saving increased (and a modest govt deficit). However, this leaves us with Minsky's dictum that stability is destabilizing (i.e., pvt sector led expansions in the cyclical or trend sense will end up creating fragility via debt accumulation, which is what happens when the household net saving is driven by firm net dissaving), and his prediction that this would be the result was largely correct in my view.

To end, let me again suggest that this whole discussion makes a mountain out of a molehill. There are many instances that are critics have been sloppy, as well. Indeed, one of them repeatedly argues that quantitative easing doesn't create "money," (http://pragcap.com/milton-friedman-misunderstood-quantitative-easing) when it certainly does if one defines money as the monetary base or deposits (which most everyone does, in fact, including the official statistics of "the money supply"). Does that mean these critics don't understand QE? Does it invalidate their entire understanding of the monetary system? No. It means there was some sloppiness. Nothing more. Who cares? Not me.

Scott Fullwiler4 March 2012 19:57STF said...BT [* see below] is correct, too. "Net loss" was clearly intended to mean "net loss of financial assets," not "net loss" in another sense. It happens. 



Similarly, there is no "Neochartalist claim" that there would be no pvt saving without a govt deficit. A govt deficit adds to pvt saving, but obviously is not the only thing (or even the main thing given investment spending) that does. 98% percent of the Neo-Chartalist literature and Godley are clear that the point is that "without a govt deficit there would be no pvt net saving." It's simply disingenuous to suggest the entirety of the literature suggests anything else. 



And even then, it's obvious there can still be household net saving without a govt deficit (though, as I alluded to above, I would argue that encouraging firm dissaving to increase household net saving is not necessarily going to accomplish this).4 March 2012 20:36STF said...In other words, OBVIOUSLY there can be an increase in financial assets without govt deficits if the former "net" to zero in that case, otherwise there would be nothing to "net" in the first place. Similarly, there can OBVIOUSLY be saving without govt deficits or a current account surplus, but not NET saving.4 March 2012 20:42

* [referred to above] 

BT (London) said...This thread is confused.



Neil is right and has helpfully pointed out the 'financial view' of S-I. 

One would hope this would resolve things for people like Ramanan who think that Neil doesn't understand the horizontal credit/debt portion of the money stock.



Yes, horizontal credit can still expand while governments run surpluses and there is a current account deficit. But even though credit is growing, there is still a 'net loss' of credit relative to debt in the horizontal system.



You guys are arguing over the meaning of 'net'. Ramanan thinks 'net loss' means an absolute decline in the stock of credit relative to a previous time point. It doesn't. It means a decline relative to the stock of debt.4 March 2012 13:04