UE Rate->FF Rate”>

63 Responses

  1. “please photoshop our sign”. :o)

    No no, its the sectoral balance equation (I’ll copy a Bill Mitchell post below):

    There are three sectoral balances derived – the Budget Deficit (G – T), the Current Account balance (X – M) and the private domestic balance (S – I).

    These balances are usually expressed as a per cent of GDP but we just keep them in $ values here:

    (S – I) = (G – T) + (X – M)

    The sectoral balances equation says that total private savings (S) minus private investment (I) has to equal the public deficit (spending, G minus taxes, T) plus net exports (exports (X) minus imports (M)), where net exports represent the net savings of non-residents.

    1. I believe it should be Net Imports = (M – X) which represent the net savings of non-residents.

      Also, I guess private investment (I) is subtracted from private domestic savings (S) in order to isolate the component of private savings which represents government IOUs, i.e. net financial wealth. The (I) is really spending, but spending on capital stock, which is not consumption spending.

      Please somebody let me know if I have this wrong or left something out.

      1. Scott,
        I attended the counter conference this past week, and talked to both Warren and Prof Mitchell about this equation on breaks. Got the idea from the geek holding up the other end of the sign in picture.

        To me it seems easy to measure the (G-T) from the Daily Treasury Statements that are published with 24 hr delay; and I think it is census dept that publishes the Trade Balance data less timely than the DTS with about a month delay and from here (I assume?) you can get the (X-M); but I was discouraged to hear both of them say (independently) that the (I-S) could not be measured or read easily or at all from govt data reports.

        In your paper here you say “If the private sector is net borrowing, then its balance will be negative; if it is net saving, then its balance will be positive.” You go on to state :”(3) Private Sector Surplus or Net Saving = Government Deficit + Current Account Balance”… you make “Private Sector Surplus” synonymous with “net saving”>>>Isnt this figure just “Bank Credit” as reported in the Feds H.8 report?

        In other words, for the “Govt Sector Surplus/Deficit” we know this by how much Treasury Securities the Treasury issues as they cannot run an overdraft. So we could go and total up the differences from the 2 sides (Deposits vs Withdrawals) of the Treasury Statement and know that is what the “Govt Sector Surplus/Defict would be, or just see how much net issuance of Treasry Secuties were made, they are the same thing.

        Wouldnt this work for the private sector in a similar fashion? that is we can find out what I-S (private sector surplus/deficit) is by just looking at how much new bank credit was created/eliminated in the Feds H.8 report.

        If you could follow I-S and get X-M from the Trade Data, then the Govt could know what to do with G-T to act counter-cyclically in a timely fashion via bottoms-up Tax rebates like the GOP came up with ($650 checks) when they thought they had to in 2nd qtr CY2008. Would be pretty simple policy set-up but it looks to me like it would require that one would have to know thru measurement what I-S was.


      2. don’t forget that the CA balance is more than exports and imports; i.e. more than (X – M) or (M – X), depending on view

        i.e. includes net investment income as well

  2. It says govt deficits add to ‘dollar savings’ of the domestic and/or foreign sectors

    govt deficit= non govt savings of dollar financial assets where non govt = domestic plus foreign sectors

  3. Thanks to all & the answers are more or less what I expected. Correct me if I am wrong, but the way I usually state it is that the federal budget deficit is equal to net domestic houshold savings plus business savings plus non-resident foreign sector savings as reflected in the trade deficit. How am I doing?

  4. Matt,

    The identity I-S + G-T + X-M = 0 is not about financial flows, which makes it difficult to measure:

    G = Government *consumption of output*, not government spending
    T = Government taxes *net* of subsidies (e.g. net of social security payments and other transfers)
    I = net investment, not net dissaving. I.e. a household living off of credit cards is dissaving but not investing.
    S = is *defined* as the residual, as there is no meaningful interpretation for S in the FoF or Fed data. You would need to somehow measure income received net of expenditures, but exclude expenditures on financial assets or the payment of interest, and exclude income received from the sale of financial assets or the payment of interest on financial assets.

    The identity that I believe you are trying to measure refers to financial flows, but there is a wrinkle as your change in assets is not only due to more net borrowing, but also to the accrual of interest. It’s hard to extract this from FoF data, so the best is to just look at changes in balance sheet (e.g. levels). but in that case, it is no longer true that this corresponds to anything real (e.g. to real investment or real expenditures), and so the effect on aggregate demand becomes less straightforward. NIPA tries to measure the “real” side to get something meaningful for aggregate demand and investment, but at the price of screwing up the intuitive notions of “savings”. Or you, use the intuitive notion of savings but lose the intuitive notion of investment.

    That’s the real/financial dichotomy, in that savings is really a purely financial construction, and has no “real” counterpart, but investment for purposes of increasing output is a purely “real” construct, and cannot be measured by adding up net borrowing. This makes S = I and its children identities problematic.

    1. Good points RSJ.

      In fact, the relationship between I and S is not unidirectional. Production firms can increase inventories by using undistributed income and issuing paper so one has investment of one period increasing without change in loans. (Undistributed profits is like saving)

      Matt – so thats the reason you cannot just take the change in loans data prove the identity. Basil Moore says that its (actually just about everything) a bit like saying that even though tides are caused by the Moon, you can’t measure/predict tides so well. Plus the reason it is stressed that investment creates saving is to show that the causality is not just saving leading to investment but the opposite as well and that a shortage in saving doesn’t prevent investment from happening.

      So Matt – dont feel discouraged – if it were that simple, better neoclassicals such as Tobin would have figured this long ago.

      1. Ramanan,

        Basil Moore writes something similar in “Shaking the invisible hand : complexity, endogenous money and exogenous interest rates”. But for the life of me I cannot understand what he is saying.

        I’ll have a read of the article you linked. Hopefully it clears things up.

      2. Yeah I think Shaking the Invisible hand is a collection of some of his articles. And the section you are talking of is the same as in the book I linked.

        He is talking of the S=I identity and the puzzles related to the identity. Its a shocking identity and he explains how these two numbers turn out to be equal and the non-volitional nature of saving.

        Btw, Horizontalists and Verticalists costs $450 in the US, £771 in UK and around €1250 in the Euro zone. Amazon sells it through “these sellers”, not directly since its out of print.

      3. Oh okay, well that’s the version I have read. I can understand the main idea, which you stated, but only at a superficial level. When the break comes up I’ll have a read.

        I really want a copy of Horizontalists and Verticalists. It’s on my list of books that I HAVE to read and study. There’s a library copy at one of the universities in my city, but it is in such poor condition.Here’s hoping that perhaps with the recent interest in economics and Post Keynesianism that they’ll be a reprint in paper back.

        Btw for those interested, this is the dicussion of Chartalism over at mises.org:


        The title is obviously a complete misunderstanding of Chartalism. But one of the posters (Current) has a critique of applying sectoral balances to real variables. (Or as I understand). Unfortunately, I don’t have the economic knowledge to understand his point at the moment.

      4. RSJ & Ramanan,
        Thanks for the feedback, that is alot for me to chew on for now, Ram I will check out the Moore book. For RSJ: I accept your point about G, T, I & S, but what about the X-M…is that correctly measured by the Trade Balance data reported by Census Dept ?

        PS (That geek holding up the other end of the sign is me!)

      5. Oh … good to have seen a picture … are you a geek really or is that a self imposed constraint? btw, I first read geek as “Greek”

      6. X-M can be obtained from the census data, but again it can lead to non-intuitive conclusions.

        Namely, the definition of “final” output has to be adjusted so that output becomes “final” when it leaves the border, even if you are exporting or importing an intermediate input into some other product.

        The reason why you subtract M is that it has already been counted. I.e. total sales are G + C + I + X. But if some of those sales were of imported goods, then you need to subtract those away to get total sales of domestically produced goods.

        But what if those imported goods were not final output but intermediate components? Then you get into some vagueness as you need to determine, when the customer buys something that has foreign inputs, how “much” of the final product was produced locally, and how much was imported. This is done by price, but one consequence of this is that domestic production can seem artificially high or artificially low depending on the terms of trade. So for example, suppose something is made and assembled in China, but designed in the U.S. The chinese get 5$ for making it, and the U.S. customer pays 50$ for the product.

        Then, on the one hand, we “produced” 45$ locally — by designing the product.

        But on the other hand, that 45$ could be viewed as just an aberration because of the terms of trade. We should have paid 30$ instead of 5$, so that domestic production was only 20$, not 45$. As a result total production can fall if prices change but the exact same work is done by the domestic economy, which is not supposed to happen with measures of production.

      7. RSJ,
        Are your points about the utility of the equation that Ive read here (and am thinking about) more or less a “real vs nominal” type of issue?
        from your above: “so the best is to just look at changes in balance sheet (e.g. levels). but in that case, it is no longer true that this corresponds to anything real (e.g. to real investment or real expenditures), and so the effect on aggregate demand becomes less straightforward.”

        I think I often get more out of the nominal data.

        some humor: a blast from the past I came across while looking in to this, excerpt: “The policies of low taxes and spending restraint have produced a clear and measurable record of success,” Bush told reporters last month when the White House unveiled it’s mid-session budget review. “You can’t argue with what I’m telling you. These are the facts.”

        But congressional Democrats and budget hawks say there’s really little to cheer about, noting that Congress will have to vote again this fall to raise the federal debt limit because of on-going annual budget deficits. “In total, the nation’s debt has already climbed by more than $3 trillion under President Bush — much of it borrowed from foreign nations like China and Japan,” said Senate Budget Committee Chairman Kent Conrad (D., N.D.). “I don’t hear anyone in the administration crowing about that statistic.”

        Oh how another 12 months would change everything!


      8. Matt, the problem I have with the nominal vs real distinction is establishing the coefficient of inflation. I believe that it is highly subjective, on one hand, and has been manipulated historically, on the other.

        Those who are especially concerned about inflation make a big deal of this, like the Austrian school, but I find it difficult to apply in practice with any precision. They also have room to question and deny what the nominal figures imply, like Y=C+I+G+NX and its articulations, by claiming that they don’t represent the real. You just can’t argue with these people using numbers.

        It’s kind of like trying to call bubbles before they pop. As result, those who make a big deal of this distinction tend to see hyperinflation behind every price rise, while government that have a vested in interest in low COLA’s do their best to minimize the coefficient.

      9. Tom, You are much more articulate, (btw great comments over at mises.org!) but Im personally coming to the consclusion that the whole concept of “Inflation” in a FFNC system is well basically BS.

        I was sitting there in the Conference last Weds at GWU and the panel was trying their best to acknowledge the possibility of inflation and making sure the audience knew that MMTers stood ready to watch out for it. I thought this ironic when all 6 of the panelists sat at the front table and each had a notebook computer in front of them, most had a PDA/cell phone type of gizmo, I know that just the computing power sitting right there at the table consisted of probably more compuitng power than existed in the entire University in 1985. And I thought that for a few thousand dollars you could replace all 6 of the panelists equipment today and the IT budget at GWU was probably in the millions (nominal!) in the 1980’s.

        My observations over the last 20-25 years of awareness has led me to believe that functionally all price instabilty/inflation over these years has come solely from what I call the 2 “P’s”, ie Property and Petroleum, and the downstream effects of both of these items. Property ran up due to unbridled/under-regulated leveraging of property by the banks that has finally led to their own destruction. And in Petroleum an unbridled monopolist in OPEC that our govt refuses to address thru use of the fiscal channel to jump start alternative fuels for a petroleum substitute/choice (I cannot prove it of course but imo they (opec) are behind this offshore debacle in the Gulf, and the Toyota issues). I am convinced that if we could get policies that put both of these 2 P’s back under effective control, the problem would quickly become huge DEflation and we would have to quickly implement an ELR program so that the historic productivity gains that the information revolution is reaping would not lead to social chaos, and the continued depression of real wages that has occured since this revolution started in earnest about 25 years ago.

        IMO the economics profession (not necessarily MMTers but certainly “austrians”) does not have a full enough appreciation for how much the “information revolution” is a historic deflationary force that I see no end to at least for the next few decades, in fact it is still accelerating.


      10. I agree, Matt. The proportionality is out of whack considering innovation, and the real issues are being masked a debate that involves much ado about nothing over “inflation” and, even worse, “inflationary expectation.” Of course, the not so hidden agenda is kissing the bond markets butt.

        Secondly, and more possibly much significant in the long run of the 21st century, is innovation involving automation. What is still being overlooked is the onset of automation and robotics that is going to revolutionize productivity in this century and its onset is also going to change the labor factor of production drastically. The world will not only need a JG but also a completely new concept of work. The Protestant ethic on which Max Weber posited that modern capitalism based is about to go out the window.

      11. Matt Franko, interesting observation about the two “P’s” (property and petroleum). Michael Hudson has made a similar point:

        What has really been fueling the rise in property prices in this country has been the fact that real estate has been untaxed. What the tax collector relinquishes is now free to be capitalized into debt service on higher loans to bid up real estate prices. In 1930 about 75% of state and local finances came from the property tax. Last year it was down to 16%, so that’s from 3/4ths down to 1/6. Cities have shifted the property tax onto wages and salaries – income and sales taxes that increase the price of business. Taxes used to fall on property and hence were progressive, but now have turned regressive. The result is that “tax deflation” now reinforces debt deflation. This threatens to aggravate the depression we’re entering.

      12. I should add that that property taxes are collected by state (and local) governments that, like Greece, don’t control their own currency. In the US context, Michael Hudson is highlighting a failure in state tax policy, not federal (though Uncle Sam could pick up the slack by taxing unrealized capital gains on property via the income tax). Here’s a more recent article by Hudson:

        The link between financial and fiscal crisis – and hence the need for a symbiotic fiscal-financial reform – is just as clear in Europe. The Greek government has pre-sold its tax revenues from roads and other infrastructure to Wall Street, leaving less future revenue to pay its public debt. To cap matters, paying income tax is almost voluntary for wealthy Greeks. Tax evasion is hardly necessary in the post-Soviet states, where property is hardly taxed at all. (The flat tax falls almost entirely on labor.)

        Throughout the world, scaling back the 20th century’s legacy of progressive taxation and untaxing real estate and finance has led to a public debt crisis. Property income hitherto paid to governments is now paid to the banks

  5. Matt,

    re: “nominal” versus “real”, I was actually making the distinction between “financial” and “real”, in the sense that increased spending on financial assets (or increased dissaving) does not necessarily translate into increased investment or increased aggregate demand. This is not a value judgement as to whether financial balance sheet models are better or worse than NIPA models. Both approaches are important. I actually think that this discrepancy is a deep result and something that people paper over.

    re: inflation — there were many times when we had inflation that was not because of oil. In terms of land — there is the chicken and egg problem as to whether the inflation was causing the land prices to rise or the other way around. I think that recent history of wage arbitrage has given people a skewed view of inflation, and they are in for a rude awakening if this view becomes entrenched. But that is concern for another day, not now. For example, after WW2, we experienced periods of 20% inflation that was not due to either oil or land, for example. The inflation spike of 1980 cannot be blamed on the oil shock or land prices — the whole world experienced the oil shock, but some economies (such as Germany and Japan) had falling inflation from 1974 whereas the U.S. had rising inflation.

    Mises.org is a bit too religious for my tastes.

      1. Ramanan, no I’m saying that the level of dissaving is not the same as the level of investment. It’s possible to dissave more without investing more. For example, people typically borrow to purchase assets or durable goods. So an increase in the price of assets — say housing — can result in more dissaving that is not matched 1-1 by an increase in investment. I think it will lead to some more investment, but not dollar for dollar. So from the financial balance sheet view, it possible for an increase in investment to lead to an increase in asset prices, but not an increase in goods consumed. I.e. the increase could end up being purely inflationary, and you have no way to tell whether it is “real” or just asset price inflation.

        On the other hand, if you had a model of actual production, you would know when more goods were produced, but then you wouldn’t be able to say that your investment was the same as dissaving or an increase in financial liabilities, and you wouldn’t be able to use sectoral balance sheet approaches to model your investment.

        In both cases, you need to anchor the balance sheet dynamics with some “real” model of production in order to determine whether the income flows are real or inflationary. And inflation is exactly what we know so little about. Here by “inflation”, I don’t mean CPI per se, but asset prices as well as consumer prices and producer prices.

        I think for this reason, people who favor the balance sheet dynamics tend to discount inflation as it screws up the reliability of their models. So there is a temptation to pretend inflation is something extremely simple — e.g. oil prices — in order to give their models more relevance. Alternately, they pretend that no increase in incomes is inflationary up to some magic point (“full capacity”), so that their models are accurate dollar for dollar until this magic point. The problem is that capacity utilization is a measure applicable only to manufacturing — i.e. to a tiny slice of the economy. Medical services, and all services, do not have a measure of capacity utilization. Moreover, asset prices can rise even while consumer prices are falling, etc.

      2. This was Current’s angle of objection in the thread at Mises.org. that MDM and I mentioned above. He also points out that this introduces an element of uncertainty into the equation.

        Oh, wow, it turns out that we can print our way to heavenly bliss!

        While I take this to be a valid objection, similar to the general one in economics about data, I chose not to get into it for two reasons. First, i was just there to clarify some apparent misunderstanding about the MMT position, and secondly, I m not an expert in this field, and I would not want to misrepresent the MMT position since I don’t know what it is exactly. Would someone care to address this?

      3. RSJ,

        You may be implicitly assuming the causality from saving to investment whereas in the PK/Circuitist lit, its the opposite and bi-directional as well. This may be of interest to you:

        Weaving Cloth From Graziani’s Thread http://www.wynnegodley.com/pdfs/GodleyOnGraziani.pdf

        Its a short write-up. These things have been handled with loving detail in other places. In Godley’s approach, there are three kinds of matrices – balance sheet, transactions flow and revaluation. The last one includes things such as capital gains. House purchases have not been considered by Godley but his colleagues such as Gennaro Zezza have attempted that. Prices change because of markups, wages etc and great details have been taken to shift between real and nominal. No assumptions such as no price change happen till full employment is reached are made.

        Coming back to your point, changes in asset prices appear in the revaluation matrix and something like S=I still holds. Also, the consumption function is dependent on income as well as accumulated wealth. Any capital gain adds to accumulated wealth rather than income. No attempt is made to explain the parameter “propensity to consume out of wealth” just taken as some number.

        Again, the causality in these models is investment leads to saving than the opposite, though in their unpublished work, they have the usual causality as well.

        Some of what I have written may be tangential but you may find what you are looking for with Wynne Godley’s approach.

        A foxy hedgehog: Wynne Godley and macroeconomic modelling

        These are not models which can be used directly by econometricians because the number of paramters explode as you add more complications but still extremely pleasing.

      4. Ramanan,

        I read the paper on Graziani, and I think it’s a good illustration of the issues I was talking about.

        IF you assume that there is a fixed, exogenous markup, and a fixed, exogenous productivity factor, and a fixed, exogenous wage rate, then indeed tracking money flows is all you need to do to track “real” flows. With a markup of 10%, a productivity factor of 2 goods/hour and a wage rate of $10/hour, then you know that spending $100 will buy you 18 goods. In that case, yes, you can predict prices, etc. The number of goods produced is a linear function of the amount of money spent. That is a simple, linear, constant production model.

        If you are assuming that productivity, wages, markups, and interest rates are exogenous and determined by non-economic forces, then indeed you are reducing economic activity to accountancy and keeping track of money flows.

        But most people do not think that these factors are exogenous, and the business of economics is to try to understand what drives them. Certainly these factors change with the business cycle, so there is evidence that they respond to changing economic conditions. If you just assume all of that away, then you are assuming away all the difficult problems, and reducing economics to tracking money flows. In that case, yes, accounting models is what you should use. That may be helpful in some cases, but it’s not particularly enlightening, IMO.

      5. It seems to me that MMT is both descriptive of operational reality and explanatory as an economic theory. One has to get the description correct to develop an adequate explanation.

        As RSJ points out, accounting is descriptive. In normal accounting, for example, the numbers on balance sheets and income statement can be traced through ledgers to transactions recorded in journals. This is how data is derived and displayed quantitatively. This is the observational/empirical aspect.

        But management doesn’t leave it there. It uses these data displays to hypothesis concerning future operations. The data are not constant, so questions arise involving correlations, patterns, and ultimately if explanation is successful, causality. That is the theoretical aspect.

        Traders use a similar procedure in figuring out how to make their moves in markets. Technical traders pay very little attention to fundamentals, for the most part, because that’s already old news that has already been discounted. Traders are only concerned with the dynamic between bulls and bears, the forces of buying and selling that move prices.

        This is what happens in business and finance. Doing economics is similar but dealing on a larger scale, using more complex data. But the object is still to figure out what happened and why, and what this bodes for the future by making projections. This involves both description and hypothecation.

        Some see MMT as lost in the notional, ignoring the real, but I think that is a misreading of what’s going on. But it is a criticism that needs to be met.

      6. RSJ,

        Yes of course markups change all the time, and these PKEists themselves know that.

        These Keynesian authors actually rebuild dynamic macroeconomic models using this approach. The approach taken is to treat some variables as exogenous and then see what happens if you change them. These models are demand-led, have all sectors interacting and by dynamic I really mean dynamic – most economists use a short run Keynesian multiplier for example. In Godley’s approach, the stock and flow interact with one another and I do not see other kind of models where they do so – important in my view. (I am a great fan, so you see me mentioning Godley’s work frequently). Actually they are very solid – for example, virtually every model treats government debt and deficit as exogenous, when they are not. Virtually every model falls into the money multiplier and central bank setting the money supply story. Most of economics theory assumes a constant supply of money. Pigou made that mistake. Most models assume saving lead to investment.

        So instead of endogenising some of the exogenous variables, the trick in this approach is to ask what happens if I change a variable and study the path from one state to the new state. Slightly indirect but useful in my view.

        As far as “strategic analysis” is concerned, I think this one really was a good forecast. Of course, the authors know that short term forecasting is a bit silly.

        THE UNITED STATES AND HER CREDITORS: CAN THE SYMBIOSIS LAST? http://www.levyinstitute.org/pubs/sa_sep_05.pdf

      7. people who say MMT is lost in nominal are the same people who don’t see 10% unemployment as a huge problem.

        MMT is scrupulous about real vs nominal and how the two interact with one other. standard macro starts with assumption that nominal does not matter (only real) and then scratch their heads when nominal has HUGE real world impacts.

        it’s like those guys have never taken out a (nominal) mortgage

      8. Zanon said:

        “MMT is scrupulous about real vs nominal and how the two interact with one other.”

        How is it in case of savings desire? Is savings desire nominal or real?

      9. When MMT say “savings desire” they mean “more net financial asset” desire which is pure nominal.

        that’s why it can be met with purely nominal numbers in spreadsheet response.

        if people want to actually move real consumption into the future, MMT say get real asset because financial asset is nominal and therefore not correct vehicle for iron clad real consumptions.

      10. That doesn’t make sense Zanon.

        If I want to save $1, it’s because I can buy a loaf of bread with it. If the price of bread goes to $10, do I still want to save $1? No, I want to save $10.

        Unless I’m misunderstanding the term “savings desire” it seems to me that it’s real, not nominal.

      11. Repeat thought experiment but imagine you have $500,000 mortgage and real estate is no longer going up at 10%/year.

        The way MMT use “savings desire” it means nominal. There is also real desire to carry real consumption forward (which is what you mention in your bread example and MMT has response to that as well) but your question was about specific MMT term.

        This is what I mean by distinguishing real and nominal scrupulously

      12. Current’s critique is good and deserves a response.

        For instance,

        The financial balance equation quoted by post Keynesians can be written:

        Nominal Private Savings – Nominal Investment = Nominal Government Deficit + Nominal Current Accounts Balance

        Now, it seems the you guys cancel nominal private savings against nominal investment and create a figure for “net savings”. What significance does this difference between two nominal flows have? None whatsoever as far as I can see.

        It isn’t the case that if government deficit is reduced then real private sector savings must reduce. The equation doesn’t tell us anything about real magnitudes.

      13. Xy, I agree that Current’s critique needs to met.

        On this specific issue it strikes me that we are dealing with the fact that income after taxes that is not consumed can allocated either to saving or investment (capital spending). Savings are funds not committed to either consumer spending or capital investment, hence, do not contribute to demand and do not affect present supply. Therefore, there will be a gap between potential supply (full capacity utilization over the period) and demand (that portion of Y that is spent over the period).

        This is “notional” in that it is derived, but it is “real” in that it has actual implications for the economy and society. Eh?

      14. Tom:

        I agree with that narrative–demand for liquid assets does not contribute to total income or employment, and this can be a problem. This is a very Keynesian problem. However, I don’t think that’s quite what current is getting at. The question, I think, is what is the real value of the flow of saving on the left hand of Warren’s tea party protest sign and how is this determined. The real value of savings is its purchasing power.

      15. Actually, maybe it can be made to be even simpler: what is the real value of money and how is this determined?

        Understanding monetary operations doesn’t necessarily help with this.

      16. Xy, determining the “real value of money” is the knotty problem if money is not tied to an anchor having intrinsic value in exchange instead of notional value like a paper note, which as such only has numismatic value as something real.

        This, of course, involves the question of establishing a coefficient of inflation to determine nominal relative to real. This coefficient is notional rather than real. It is pretty obvious that inflation indexes are rather subjective.

        So it can be argued that one never really gets to the real unless money is tied directly to something real, either as a commodity or through convertibility.

        That’s the way I understand it anyway, but I am a layperson in this.

      17. Xy, my understanding is that MMT gets around the “real value of money” question by incorporating it into a nebulous category called “savings desire.” Savings desire is the amount of nominal money that the private sector wants to hold for whatever reason.

        These reasons include saving for retirement, saving for a rainy day, having liquidity to prepare for spending, or having liquidity to take advantage of any investment opportunities which may arise. It is measured in nominal dollars, but of course the amount of nominal dollars the private sector wishes to save will depend upon a whole host of factors including the perceived “real” value of the dollar.

        If the real interest rate is perceived as negative (i.e. the real value of money is falling at a rate which exceeds the nominal interest rate), this should (ceteris paribus) dampen the desire to save in nominal dollars. High real interest rates should increase the desire to save in nominal dollars.

        This has an effect on the real economy because if the savings desire of the private sector increases, aggregate demand drops (once again, ceteris paribus) and vice versa.

        Note that the US is currently in a situation where the real interest rate is either negative or very close to it, but savings desire is still very strong. This is because of 1) the amount of perceived wealth that was wiped out by the collapse of the housing bubble and the decline in the stock market; and 2) the perception that the economy is bad that investments (capital investments or private lending to people to make investments) are not attractive. Lending in particular is not happening because borrowers look uncreditworthy. This is something almost all economic commentators get wrong, by the way. The reason banks aren’t lending is not that they’re capital/reserve constrained. It’s that they don’t see very many borrowers who they think will pay them back.

    1. I was just over at Mises.org trying to clarify a post there about Lynn Paramrore’s Nine Myths piece in The Huffington Post. I was interacting with someone called Current and the discussion was very informed. I suggested he come by and present his objections since I don’t have the depth to be sure that I am representing the Neo-Chartalist position accurately in relation to the Austrian critique. MDM posted a link to this above if anyone wants to take a look and comment on what Current says in the spirit of debate. I proposed a an Austrian/MMT debate, and Joehbed agreed it would a good idea to get some of the heavy hitters from both sides together.

      BTW, Nick Rowe just posted an invitation to MMT’ers over at his place for a debate on the shape of the Long Run Phillips Curve.


      Nick wrote: “I think that Modern Monetary Theorists want “orthodox” macroeconomists to engage them more. I’m not sure that I’m really orthodox, but anyway; I sympathise with their desire, and this is an attempt to meet it.”

      RSJ has already posted quite a bit, and Panayotis has joined in too. Anyone else?

  6. matt franko: (hyper) inflationary episodes abroad were not by 2 ps, and therefor i do not think 2p argument will get far with non-mmt’er

    tom hickey: it is excellent that protestant work ethic will not be needed for future prosperity becas (most ironic) protestant-pc culture has destroyed work ethic!

    pls tell chinese all that hard work they do is useless. they should just wait fir robots like us.

    nick rowe is waste of time and space

    1. Zanon: pls tell chinese all that hard work they do is useless. they should just wait fir robots like us.

      I said in the long run. But robotics is already happening, and automation has already taken its tool on traditional institutions, like the family farm, which is no longer economically viable. I have seen people cry over this, when they had to leave the land and get a job pushing stocks or something in the city.

      After a while, there aren’t going to be enough jobs to go around in developed economies, which will include most of the world in this century, unless we go back to the rich having a load of servants maybe. I’d rather see a JG that makes public improvements. But in the long run, the economic concept of work as one’s necessary contribution for compensation is going to change, too. This presupposes that humanity stays on the same track and doesn’t screw up in a major way, which is admittedly a huge presupposition.

      nick rowe is waste of time and space

      If MMT’ers don’t get out more, the word won’t get out either. We can’t just talk to each other, no matter how good it makes us feel to find agreement, and expect to increase the reach of MMT. I take this as a genuine offer, quite unlike others in the mainstream who have refused to debate with MMT’ers when approached.

      1. Tom hickey:

        my comment re nick Rowe is informed by experience. If he strikes you as being genuine it is because you have not spent enough time there. Also, Rowe is lghtweight both as blogger and academic

        as fir your robotic salvation, I told you to sav it for Chinese. Mayb nick Rowe can tell them for you

    1. Agreed, Mr. Hickey conducted his cutting out expedition on the Mises board in a most seamanlike manner (Master and Commander was on cable this afternoon). :o)

      1. I reread the mises thread, you did very good Tom Hickey.

        Current was actually interesting to read, as opposed to the typical Austrian MORONs who think every time a fly scratches its bottom it is sending the world down the road to serfdom.

        If non-metallist austrians (a shy bunch i never heards of) like endogenous money system and agree that funding savings desire supports AD and does not cause inflation, then what is left as point of different? They don’t like interest rate risk and uncertainty? MMTs don’t like either say just set at zero and turn off light. They think that deep falls in AD, employment, and GDP are OK because things will “bounce right back quicker and stronger than ever, cure is worse than disease” etc. etc.? High burden of proof there and ultimately political decision.

      2. Zanon, Current advocates free banking, which, as I understand it, eliminates the central bank and lender of last resort. Banking institutions are treated in the same way as other commercial entities; there are no special laws or regulations applying to the financial sector.

        Current also advocates 100% reserve banking, and that is a requirement that would have to be imposed, so I’m not sure how they square this imposition with non-regulation. Maybe this is an exception to the rule.

        Since money is entirely endogenous under free banking, and banks are limited by the requirement to hold full reserves, then the vertical-horizontal distinction as MMT deals with it is eliminated. This would mean that government fiscal policy becomes entirely dependent on private money creation, and the Treasury competes directly for funds with/in the private sector, since there would be no sovereign currency issued.

        Free banking is an entirely different system than the one in place, both in the US and world, so I don’t see it becoming a practical reality. Should it come to pass, the MMT analysis would no longer apply, since an entirely different set of rules would be in place, with no role at all for government other than as another entity in the endogenous system.

        What I have stated about free banking is what I have gleaned from summaries. I haven’t investigated the details, so I am not sure exactly what Current proposes. He mentions several people with whom he agrees, but I haven’t the interest to pursue that, since I regard this as pie in the sky with virtually no chance of ever being enacted. While I am not sure about their specific proposals either, I think that this is the direction that Ron Paul libertarians want to take by abolishing the Fed and eliminating fractional reserve banking.

        The free banking proposal is contrasted to state banking. See billy blog, 100-percent reserve banking and state banks. Lots of comments, too.

      3. Unsurprising.

        I think free banking is completely moronic for reasons stated elsewhere on this site.

        The 100% reserve requirement is almost certainly misunderstanding of role reserves actually play in system. I am sure he thinks it is some kind of credit control mechanism.

        i also hesitate to call this endogenous system, as now no entity can create net financial assets. sound exogenous to me.

    1. and Nick says:

      “…the statement that should the government run a deficit of X, people will elect to buy X worth of government bonds is pretty much an accounting identity.”

      This is where you really have been badly lead astray by the MMTers. Some of the stuff they say might be right, or might be wrong; it’s an empirical and/or theoretical question. But when you misuse an accounting identity, and mistake it for an empirical or theoretical statement about how the world works, you are just logically wrong.

      1. TBagger:
        “But when you misuse an accounting identity, and mistake it for an empirical or theoretical statement about how the world works, you are just logically wrong.”

        Youre statement here is incoherent. Where is the illogic?

      2. “…the statement that should the government run a deficit of X, people will elect to buy X worth of government bonds is pretty much an accounting identity.”

        I don’t think I’ve ever heard an MMT’er say that . . . me or anyone else . . . at least I would NEVER say it like that myself.

      3. Hey, that is some serious misquoting.

        We were talking about re-interpreting Ricardian equivalence.

        The *assumptions* of that model are that all government deficits are debt financed.

        The *conclusion* of that model is that households will elect to purchase enough government bonds to offset the government spending.

        I.e. I was arguing that Ricardian Equivalence can be interpreted to say that however much the government deficit spends, people will purchase enough government bonds to allow that deficit spending to occur — within the constraints of the model, which says that deficit spending must be financed with bond sales.

        I.e. it is nothing more than an accounting identity, rather than a “proof” that government deficit spending is impotent.

        Politics leads you to interpret it one way or another, not the math of the model.

        And I was using that as an example of how often the results of the models are interpreted politically, whereas the math of the models is much more ambiguous.

        Ricardian equivalence was example #2, and the inflexibility of wages (rather than capital) as a source of unemployment was example 1. You could argue that unemployment is due to capital rigidities just as much as due to wage rigidities — the math doesn’t tell you which, politics does. This was in a context of arguing that when there is more than 1 firm, then regardless of the wage rate, the aggregate labor supply is a function of the aggregate capital supply — i.e. the wage rate is a function of the interest rate, with downard movements in one possible only if there are downward movements in another — and therefore volatility in the capital supply can lead to unemployment, regardless of the wage rate.

        It would be helpful if, when quoting a sentence out of a long (and interesting discussion), MMTb* would put some context into what was being discussed.

    2. Nick,

      Don’t take it to heart. Its like that Matt Dillon line in Singles, his negative energy only makes you stronger. :o)

  7. sad commentary on humans that they would even want to fight against MMT

    and that they get mad at accounting identities.

    reminds me of discussions with a john gelles way back where he loved money but hated taxes. he wanted to have his non convertible dollars be worth something but didn’t want there to be any taxes, and get very upset over what i was saying about both.

  8. Beowulf and Tom: thanks! And, compared to what Brad deLong says about some economists, I got off easy!

    Here’s the big point though:

    There are 2 groups of macroeconomists.

    The first group says: “What do you mean you can’t increase AD? You run out of paper? Ink? You scared of inflation (right now?)? Ha!”

    The second group says: “Monetary policy won’t work, and fiscal policy means increasing the national debt, so we are scared of doing that any more”.

    MMTers are part of the first group. BUT YOU ARE NOT ALONE!

    Scott Sumner, for example, is clearly part of that first group. So are monetarists.

    Recognise differences within that group, sure (and sometimes they are unimportant, even semantic). But also recognise what you have in common.

    1. Thanks for jumping in and broadening the conversation, NIck. We are all in this together. One people, one planet. We need to cooperate, not throw stones at each other. Debate is about finding out both what different people think and also what’s good and bad about different arguments. Democracy is about finding common ground, not the imposition of majority will on minorities.

      We all have something to learn from each other, and we have to remember that no one has the ocean in their bucket. Disagreement is fine as long as it is constructive, and all parties are pursuing truth, not interests and advantage.

Leave a Reply

Your email address will not be published. Required fields are marked *