Macroeconomists do not understand debt
Big thanks and welcome to Andy Harless, who appears in the comments of a recent post on savings putting the orthodox macroeconomist position in plain English. Once again -- you all be the judge of what makes sense to you. First, Andy:
According to Andy, households are flush with cash and are just not spending because the Government isn't threatening their savings enough. Thus our high unemployment. The data, and common sense, suggests that households are up to their eyeballs in debt, and are not spending because they don't have enough money.
You can see the twisted logic by which orthodox macro believes that the more money you borrow, the less money you need. Those of us with experience in reality might hold a more nuanced view. Again -- make up your own mind.
Mosler recently had a piece that tracks the non-Fed sector's fiscal position clearly from the late 90s to today.
The crisis occurred because people (mostly in Asia) earned too much income and didn't spend enough. The crisis wouldn't have happened if they had chosen not to earn that income, and it wouldn't have happened if they had chosen to spend more. The financial and housing sectors over-expanded because Y-C was too high in the rest of the economy. You can't blame them for the minus sign, but you can blame them for choosing the values of Y and C. I say again, saving caused the crisis.This is the old "savings glut" idea put in plain english. To buy it, you need to believe that a Chinese man, who made a VCR and sold it for Yankee dollars, and then put those dollars under his mattress and lived off rice and gruel, is responsible for Angelo Mozilo giving a $1M loan to an unemployed gardener, and then having that loan rated AAA by Moodys and sold via Lloyd Blankfein. Maybe the Chinese factory worker went to college with Geithner and therefore has an inside track to Wall Street?
According to Andy, households are flush with cash and are just not spending because the Government isn't threatening their savings enough. Thus our high unemployment. The data, and common sense, suggests that households are up to their eyeballs in debt, and are not spending because they don't have enough money.
You can see the twisted logic by which orthodox macro believes that the more money you borrow, the less money you need. Those of us with experience in reality might hold a more nuanced view. Again -- make up your own mind.
Mosler recently had a piece that tracks the non-Fed sector's fiscal position clearly from the late 90s to today.
posted by winterspeak at
10:14 AM
97 Comments:
1. According to Chairman Greenspan, it was the "global savings glut" that led to the large CAD, arguing that if those Asian savers had increased consumption in their own countries instead, especially China, then the US would not have had it growing current account surplus. What has that got to do with Americans going into debt to buy housing and vehicles they could not afford based on income and running debt on their credit cards? We can argue about causes of the GFC led by housing in the US, but I don't see Asian savers as one of the direct causes.
2. US savings have been falling since the mid-80's. What American savers? Household debt has been rising since the mid-80's too, and ballooned in the last decade. Americans have maintained lifestyle through increasing indebtedness. The only savers are the top of the town, and the rise in wealth inequality is the record of the accumulation of savings at the top. If there are "bad" savers, it is the wealthiest of Americans. BTW, a great of deal of these savings accrue from economic rent.
3. Finally catching up on the SRW debate, it seems that the moral issue is over rent-seeking, which is non-productive and parasitical, versus productive investment. It seems to me that a lot of SRW's moral outrage is over economic rent rather than "saving."
Andy H. makes this argument implicitly when he says:
"Morally speaking, it seems perfectly reasonable to me that one might reformulate Say's Law as a moral obligation: supply has a duty to create its own demand. In other words, if you're lucky enough to have income, you have an obligation to use that income in such a way as to produce income for others."
@3:33
This is quite in keeping with Keynes's project of eliminating the rentiers, and accords with Michael Hudson's recommendation to tax away economic rent in order to disincentivize rent-seeking and incentivize productive investment > productivity > income > demand > productive investment, in a virtuous circle to replace the vicious circle of debt and rent.
I would agree with SRW about tsy issuance to a degree, but would look at it differently. Since tsy issuance is operationally unnecessary, it is a subsidy that is inefficient and should be eliminated on that purely economic basis. This has to do particularly with the $-4-$ deficit offset, which goes to the top of the town. I have no problem with (retail) E and EE/E bonds, but most small savers prefer CD's anyway.
The other aspects at which SRW takes offense are embedded in moral hazard, which I also find indefensible in a free market system. If one wants retail banking guaranteed, then let government provide a GIRO bank for the purpose. I would personally prefer to see a combination of GIRO banking for deposits and transfers and keeping Fannie/Freddie in government hands for lending at the retail banking level.
There is no justification for guaranteeing commercial and investment banking or any other aspect of the financial sector in a free market system. While comercial and investment banking should be regulated (and I would include shadow banking also), there should be full private responsibility for risk-taking.
In short, i think that the diatribe about savers is a rant that would be better directed at rent-seeking behavior, as well as malfeasance.
The “global savings glut” was always an argument that had zero logical integrity. It’s for people like Greenspan, who thinks that banks lend reserves, and still can’t quite grasp the full sweep of double entry book keeping.
Current account imbalances are a separate matter – you can at least debate that point from a starting position of some analytical reality.
It’s an easy argument – rabid credit generation in the US, much of it in the form of MEW (mortgage equity extraction) facilitated consumption that spilled over into the current account deficit. China helped with mercantilist currency manipulation and low wages. Who’s to blame? Everybody, as usual. Blaming the saver in this case is blaming the currency manipulator, but that’s only one side. At the end of the day, it’s a US choice to buy foreign products. Besides, some people think the CA deficit is a wonderful thing.
Internal imbalances are another species. It’s a form of rented income redistribution. Blaming the savers simply means you favour unrented income redistribution, which would obviate the need for credit and saving in the first place.
But this idea of blaming savers because they don’t use their income themselves to build cement plants etc. is very kooky. Like most ideas of its ilk, it basically targets the elimination of the banking system, without being upfront about it. Taken literally, it says that direct equity in the enterprise, at most, without any other form of finance, is the only acceptable form of saving. It’s seems silly, as a practical matter.
In this debt terrorist political climate, we can't afford such a large CAD. Sorry Asian savers.
Tom: What, in your opinion, are the top 3 rent seeking industries in the US today? How would you say rents are spread across the three?
JKH: I'm not sure Steve is targeting the banking system. His grasp is considerably broader--he was criminalizing a passive act. Practical really doesn't come into it. Anyway, I didn't even touch the practicality of Steve's notion. His argument was pursued on a moral dimension, and I limited my rebuttal to that.
I went and read the previous piece that Harless commented on. He seems to agree that there was insufficient fiscal policy (low dissaving rate by govt) so one would presume he understands MMT to a limited extent as this is implicitly advocating for higher deficit spending.
The biggest flaw in his logic is he seems to believe all the unemployment is voluntary. Rarely is there ever such a thing.
Winterspeak,
After hearing so much about this orthodox macroeconomist, I’m certainly looking forward to meet him! He’s probably not about more because he tried to solve a dynamic optimisation problem to find the most efficient method of solving dynamic optimisation problems, and fell into an infinite regression, or something.
Did you ever hear the recording of Huerta de Soto’s lecture on FRB at the LSE? You might enjoy it. It’s quite germane. At the very least, you have to admire the man’s effort. He makes a lecture on banking and credit sound like commentary to La Liga (in a good way).
John Ross had this recently as well: http://ablog.typepad.com/keytrendsinglobalisation/2011/01/new-deterioration-in-the-us-savings-rate.html
JKH,
Puzzled that you describe saving/s and CAD stories about the GFC as a “separate matter”? Isn’t there a logical equivalence in that if NX < 0 then S – I < 0? Why is saying that one sector (US, in this case) saved too little different from saying the other sector (China) saved too much?
To dumb this down a little,
vimothy says, "Why is saying that one sector (US, in this case) saved too little different from saying the other sector (China) saved too much?"
I say, Saying that some other country is responsible for our economic problems is a form of shirking responsibility.
JKH says, "Who’s to blame? Everybody, as usual."
I say, I blame policy. I always blame policy. It doesn't even matter which economic problem you want to talk about. I blame policy.
Winterspeak says, "Macroeconomists do not understand debt."
I say, Few do.
Art
vimothy,
Global saving equals global investment. Neither could be described over the past decade or longer as demonstrating an unusual glut condition as a proportion of global GDP. The percentage has been reasonably stable at around 22 per cent.
The “glut” interpretation that is ascribed to the “global” situation can only pertain logically to current account surpluses – their size, distribution, concentration, etc.
So the idea that there is a glut in China may have legs, for example. The idea there is a global glut doesn’t.
Winterspeak,
Criminalizing a passive act may be immoral, but it is even more impractical and deeply contradictory, given that the medium of exchange in which income is paid is itself a medium of saving.
JKH,
Have you read the speech? I’m not sure where you and Bernanke disagree—he’s trying to explain the US CAD in terms of saving flows because he believes that “trade-related factors cannot explain either the magnitude of the U.S. current account imbalance or its recent sharp rise. Rather, the U.S. trade balance is the tail of the dog”. This seems at least reasonable. It’s certainly not an unusual focus for analysis in the context of global imbalances.
While trying to explain this change in saving-investment flows, Bernanke develops the idea of a “global savings glut”, and here he means that desired savings have increased, i.e. that the supply schedule has shifted. He’s not referring to the actual value of savings in equilibrium, which, as you note, was quite stable. Imagine supply and demand curves in [S, r*] space; if demand for savings is inelastic, a rightwards shift in the supply curve will lower the real interest rate with no increase to actual (equilibrium) savings. So if desired savings had increased and desired investment had increased, then actual savings would have increased. However, if there was no change to desired investment, then we would expect to see interest rates fall and actual savings stay the same.
JKH,
Have you read the speech? I’m not sure where you and Bernanke disagree—he’s trying to explain the US CAD in terms of saving flows because he believes that “trade-related factors cannot explain either the magnitude of the U.S. current account imbalance or its recent sharp rise. Rather, the U.S. trade balance is the tail of the dog”. This seems at least reasonable. It’s certainly not an unusual focus for analysis in the context of global imbalances.
While trying to explain this change in saving-investment flows, Bernanke develops the idea of a “global savings glut”, and here he means that desired savings have increased, i.e. that the supply schedule has shifted. He’s not referring to the actual value of savings in equilibrium, which, as you note, was quite stable. Imagine supply and demand curves in [S, r*] space; if demand for savings is inelastic, a rightwards shift in the supply curve will lower the real interest rate with no increase to actual (equilibrium) savings. So if desired savings had increased and desired investment had increased, then actual savings would have increased. However, if there was no change to desired investment, then we would expect to see interest rates fall and actual savings stay the same.
Just testing to see if I can get a comment through. Can't tell if the fault is with my browser settings, but apologies winterspeak if you get duplicate comments from me.
Okay. Give this another go...
JKH,
Have you read the speech? I’m not sure where you and Bernanke disagree—he’s trying to explain the US CAD in terms of saving flows because he believes that “trade-related factors cannot explain either the magnitude of the U.S. current account imbalance or its recent sharp rise. Rather, the U.S. trade balance is the tail of the dog”. This seems at least reasonable. It’s certainly not an unusual focus for analysis in the context of global imbalances.
While trying to explain this change in saving-investment flows, Bernanke develops the idea of a “global savings glut”, and here he means that desired savings have increased, i.e. that the supply schedule has shifted. He’s not referring to the actual value of savings in equilibrium, which, as you note, was quite stable. Imagine supply and demand curves in [S, r*] space; if demand for savings is inelastic, a rightwards shift in the supply curve will lower the real interest rate with no increase to actual (equilibrium) savings. So if desired savings had increased and desired investment had increased, then actual savings would have increased. However, if there was no change to desired investment, then we would expect to see interest rates fall and actual savings stay the same.
vimothy,
I’ve read all the global savings glut speeches, and find them limp.
More convincing to me:
- U.S. Wal Mart customers borrow domestically to the hilt (loans create deposits)
- Buy junk made by China, who pays its workers zilch and pegs its currency to price stuff attractively
- U.S. pays China with dollars; China buys treasuries
- U.S. makes nothing for export so there is a CA deficit
That’s actually the order in which stuff happens.
a) What’s global about that transaction? It looks bilateral to me.
b) Do you actually think rates would have been higher without that borrowing? Because there’d be no Chinese surplus without it, and the glutters think it’s the glut (surplus) that has made rates low.
Winterspeak: "Tom: What, in your opinion, are the top 3 rent seeking industries in the US today? How would you say rents are spread across the three?"
I am going on what I have heard from Michael Hudson. I haven't make a study of this and don't have any specific figures. According to Hudson, the largest portion of economic rent historically is land rent and this remains so today. He seems to place the burden of economic rent in the US at present on FIRE, which would imply that the sequence is 1) land rent, 2) financial rent and 3) monopoly rent. But I haven't seem any of his figures, so that is a guess.
I don't know though. It seems to me that the multinationals are racking up a whole lot of monopoly rent, and a lot of that is sequestered in tax shelters outside the US, so the figures are unknown, even to tax authorities.
Mosler holds that petroleum pricing is a Saudi monopoly since they control marginal production. US oil companies profit heavily from this pricing. Exxon (formerly Standard Oil of NJ) is still the giant in the US even after the break up of Standard Oil. Chevron (formerly Standard Oil of CA) is right behind.
Lots of parasites out there without targeting "savers."
Tom: I'm sorry, I don't understand your response. It seems that you would say the top three rentiers are:
1) people who own land (about 60% of the US population I believe)
2) Finance, Insurance, Real Estate (in equal measure??)
3) Multinationals. Like GM and Ford I presume.
4) Saudi (because it has oil)
5) Other US oil companies
Is that right?
1. Just about everyone who owns land profits from economic rent when land value goes up due to circumstances to which they did not contribute through productive investment, like construction and structural improvement. Most of improvements that result in land value rising come from government (transportation, schools, rural electrification, water provision, etc.). Population expansion to outlying areas is usually made possible or greatly facilitated by public roads and other public improvements. According to Hudson, historically this land rent accounts for most wealth accumulation in addition to the original privatizing of the commons.
For example, savvy developers know that they they make the bulk of their money through land rent, not markup on construction. I saw that in CA where land value could double literally overnight as developers bid it up at the margin. I looked at at a lot a friend of mine was planning to develop. He had seen an advertised price on it that day. When it called the next morning after making his decision to purchase, it had doubled. He declined to make an offer but over the next couple of years that lot price had doubled twice over.
2. I said that I was not up on the breakdown in the figures on FIRE, but this is what I've gleaned.
Land rent is predominant.
As far as finance goes, finance is about intermediation and facilitating the operation of the real economy through investment, intermediating transactions, etc. Finance is a public utility, in particular owing to its special relationship with government. Gains not related to its primary functions, like prop trading and financial innovation that is not socially or economically contributory, are counted as economic rent. That's a lot of the current financial sector gain, as I am given to understand. (For example, a sales (consumption) tax is OK, but a financial transactions (rent) tax is not.
I assume that insurance is third. I don't know the numbers on insurance, or exactly how Hudson distinguishes rent from productive contribution, but he does include it specifically under rent.
3. Multinationals like Ford and GM profit from global labor arbitrage, tax advantages, government subsidies, etc. They are also price setters, not price takers. Moreover, much the profit has come from their finance companies rather than production. Their business model was to raise the price of vehicles as much as possible by providing low terms and treating vehicles as houses, collecting the maximum monthly they could extract.
4. According to Mosler, the Saudis are running a classic monopoly and control price.
5. US oil companies profit from the price setting. They are not price takers.
Here is a short video clip of Michael Hudson on economic rent and taxation.
Speaking of understanding debt, here is an interesting introduction to the work of Frederick Soddy and environmental economics. It relates to economic rent, too.
The Financial Crisis Is the Environmental Crisis
JKH,
Okay, but still, I don’t think it’s quite fair to say that the savings glutters are logically inconsistent. Logical inconsistency is not something academic economists generally have a problem with, in my experience. It’s all the other stuff (alas).
Don’t see where your story contradicts the savings glut explanation. (BTW—it’s not the glut, it’s the change to desired glut). Are you implying that the US consumer drove rates down by borrowing rather than borrowed because rates were low? That seems slightly incomprehensible to me, as an economics student, but I’m not even sure how you would tell those two states apart. I do remember that it was damn easy to get 0% balance transfers on your credit card though! Good times.
Since you mentioned that loans create deposits, while I’m here, there’s a question I’d like to ask about Loanable Funds. Do Chartalists recognise that LF is a model of the market for foregone real resource consumption? It’s not the same as the market for an infinitely elastic supply of credit. Loans create deposits (on aggregate), but capital formation requires a flow of real (saved/unconsumed) resources over time. So what ties the flow of nominal saving (or even everyone’s favourite, net nominal saving) to real saving flows and their magnitudes? And if you understand what I mean by that, how does any of this (for example),
bilbo.economicoutlook.net/blog/?p=5419
Make sense?
Lloyd Blankenfein alone managed to save 53 million dollars in 2007.
I don't see how you can argue that there isn't a savings glut.
"Global saving equals global investment. Neither could be described over the past decade or longer as demonstrating an unusual glut condition as a proportion of global GDP. The percentage has been reasonably stable at around 22 per cent."
I haven't met Mr. Global, so I can't talk about how much Mr. Global has saved, or what he intends to do with his deferred consumption, or why he isn't shopping enough or hiring enough.
But I can say the sum total of economic actors' savings is not the sum total of global investment.
However the sum total of economic actor's investments *is* the sum total of global investment.
Savings demands do not net out in the same way that savings nets out on a consolidated balance sheet basis.
In an economy with two actors, the economy-wide savings demand is the sum of their individual savings demands.
Therefore total savings almost always exceeds total investment.
When you have a large excess of one over the other, that requires faster than sustainable global debt growth, which is equivalent to the notion of a global savings glut.
"Do Chartalists recognise that LF is a model of the market for foregone real resource consumption? It’s not the same as the market for an infinitely elastic supply of credit."
That's a good point. And the problem is that no such market exists. In order to have such a market, you would need to screen the participants -- prevent them from putting in a bid unless they had committed to deferring consumption equal to the amount of the bid. Similarly you would need to prevent sellers from putting in an offer unless they had agreed to invest the proceeds of the offer. I.e. screen out all secondary market transactions, and prevent anyone from rolling over the proceeds of a sale into the purchase of another asset. Only in that case could you argue that the market-clearing rates equilibrate the loanable funds market as defined.
"So what ties the flow of nominal saving (or even everyone’s favourite, net nominal saving) to real saving flows and their magnitudes? "
Nothing -- you can have savings gluts.
Vimothy
“it’s not the glut, it’s the change to desired glut”
That’s better. But those economists who believe it should say what they mean, as in a “savings demand glut”.
Still, the only actual “saving glut” that makes sense to me is in the sense of the paradox of thrift. But what the global glut’ers believe in has nothing to do with the paradox of thrift. They were talking about this stuff when the economy was roaring.
“Are you implying that the US consumer drove rates down by borrowing rather than borrowed because rates were low?”
No. The Fed drives rates, essentially, as always. US consumers borrowed because rates were low.
The glut’ers believe “the glut” (whatever it is) drove rates lower. And they associate “the glut” inextricably with the US current account deficit – that’s clear from all of their speeches. If that’s the case, it would mean they’d have to believe the absence of a CA deficit would have indicated no glut. But the deficit originates with domestic borrowing (or in some cases saving) as the source of funds – that’s how the banking works. And if they believe the glut drove rates lower, and if the deficit is funded domestically first (which it is), that would have to mean they’d believe rates would have been higher in the absence of that borrowing. That’s what their serpentine logic (not mine) suggests.
"I haven't met Mr. Global"
He sends his condolences, and refers you to The Good Book of Elementary Accounting Identities.
JKH,
Could you have him call Bill Mitchell as soon as possible for a refresher course, please? He seems to think that the government cannot save.
The piece that I linked to above is really, really bad. Mitchell has a chair at an Aussie university?
vimothy,
"He seems to think that the government cannot save."
I have a problem with that particular interpretation as well (i.e. that government cannot save).
JKH,
It’s an astonishing piece of writing, in many ways. It’s not short—there are over four thousand words in it (I counted)—but once you get beyond the phrase “all output and spending flows are expressed in real terms in this sort of analysis” (almost?) all of it is badly wrong and misguided. Mitchell simply doesn’t understand what the hell Mankiw is going on about. That’s seems crazy, because this is a text designed for disinterested 19 year old undergrads and what he’s going on about about is covered in lecture 2, intermediate macro. But I can think of no other explanation and consequently don’t think I can take Mitchell very seriously as a critic of mainstream econ.
RSJ,
I’m not sure whether you understand the distinction I’m making.
It is impossible for real saving to exceed real investment in the same way that it is impossible for roast chicken to just appear from nowhere and fly and into the mouths of hungry orphans, or in the same way that it’s impossible for real investment to exceed real investment. The real flow of saving in the economy IS the real flow of investment.
Yes, Vimothy, I see the point you are making.
But the criticism of loanable funds is that, while real savings must equal real investment, there is no loanable funds market to equilibrate the two.
At any point in time, the demand curve for investment, whatever it's shape, is not the sole source of demand in the loanable funds market -- the sole source of "asks". And the supply curve of those wishing to defer consumption, whatever its shape, is not the sole source of supply of loanable funds, that is, of bids. Someone selling an asset they already have is not a borrower, and yet they contribute to demand for loanable funds. Someone buying an asset on credit is not a saver, and yet they contribute to the supply.
Therefore the point where supply and demand meet in the loanable funds market is not necessarily the point where aggregate demand for investment meets the aggregate supply of savings. Bill Black just pointed out that the average hold time for stocks is 22 seconds. I think it's fair to say that those desiring to invest and those desiring to defer consumption have almost no influence on asset prices in the capital markets.
In the above, by "loanable funds market", I should have said "capital market". The point being that you can *define* the loanable funds market as some place where *only* savers can put in bids and only investors can put in asks, but that actual capital markets, in which rates are set, do not operate this way.
And one consequence of that, if you agree with me so far, is that there is no voluntary process by which those desiring to defer consumption of real resources agree on an interest rate with those desiring to invest real resources. The process is involuntary, in that borrowers can seize real resources without coming to an agreement with savers. The agreement is with lenders in general, not savers specifically.
There are a set of equivalent assumptions:
1) All lenders are savers
2) The income of each individual, deflated by CPI, is unchanged as a result lending or borrowing.
3) Balance sheet expansion (deflated by CPI) on the part of one individual, must be funded by a deferral of consumption on the part of the lender.
4) The nominal price of real assets cannot move apart from the consumer price index
5) Loanable funds equilibrates those desiring to defer consumption of real resources with those desiring to invest real resources.
6) The transfer of real resources from savers to lenders is done via voluntary exchange in the capital markets.
If any one of these is false, then they are all false. Balance sheets can expand, in one period, by an amount greater than GDP, so that it cannot be the case that this lending came at the expense of consumption.
You need all of these assumptions. Without them, you would conclude that in an economy with financial markets, borrowers as a group can seize real resources from savers without their permission, and you would lose your efficiency results.
JKH,
But those economists who believe it should say what they mean, as in a “savings demand glut”.
In that case it would be “savings supply glut”. An increase in demand (curve shifts right) should raise the equilibrium interest rate, not lower it.
It’s true that the savings glut trope has little to do with the paradox of thrift. But if you try to understand this solely in those terms you might miss out on some or all of the real dynamic at work here. Be careful about spending so much time around nominalists—wrestle ye not with monsters and all that.
“The Fed drives rates, essentially, as always.”
How does the Fed lower the real price of saving in your model—can you expand?
RSJ,
Okay, sorry—I thought you were claiming that real saving could exceed real investment on aggregate.
At any point in time, the demand curve for investment, whatever it's shape, is not the sole source of demand in the loanable funds market -- the sole source of "asks".
Don’t understand what you mean. What other use is there for output?
“And the supply curve of those wishing to defer consumption, whatever its shape, is not the sole source of supply of loanable funds, that is, of bids.”
Don’t understand this either. What other source of output is there?
Vimothy,
Now, *I* don't understand your point.
Who is talking about output? We're talking about credit markets that buy and sell securities, not output.
Are you arguing that because the economy must decide how much consumption to produce and how much capital goods to produce, that, as a matter of panglossian necessity, capital markets must be the place where this is determined by individuals' supply and demand curves?
The onus would be on you to show that this occurs, rather than assuming it occurs. All you really know is that capital markets are places where people buy and sell paper assets.
If A can buy a security on credit, then he is a buyer, and hence contributing to the quoted price in the credit markets, yet A is not a saver. A is only a saver if his income exceeds his consumption, and the act of borrowing does not increase A's income (although it can allow the income of others in the economy to increase), nor does it decrease his consumption.
If B can sell a security they already have, then B is a market participant and is also influencing interest rates, yet B is not an investor.
Neither A nor B are deferring consumption of real output, or increasing the capital stock. Yet they influence the market price of assets. And I would argue that their preferences dominate the market price of assets (e.g. the 22 second hold period).
Suppose on Monday, a real saver, X, buys a security from B. The interest rates will be the intersection of the investor's supply curve with B's demand curve. The proceeds of B's sale are deposited in a brokerage account tied to a bank.
On Tuesday, A borrows from the bank and buys a security from a real investor, Y.
Now what will be interest rates on those two days?
Why would the interest rates be the same as if X had transacted with Y?
If they are not the same, then how can you argue that loanable funds (demand from investors intersecting the supply of savers) is the mechanism by which the economy allocates real resources towards consumption vs. investment?
JKH,
The issue is that when I save, my net-worth goes up by exactly that amount. In a private ownership economy, the total amount of savings is equal to the total increase in net-worth of households. This is the cumulative amount of consumption that has been deferred.
It need not equal the total amount of investment.
What you are doing is anthropomorphizing -- "Mr. Global", when the economy consists of multiple households. It's an aggregation error.
Now you can argue that when aggregate savings exceeds national investment, that there is a savings glut.
In Bernanke's paper, he was looking at asset accumulation, noting that it was excessive, and commenting on a savings glut.
Given the huge amounts saved by Blankenfein, Rubin, and others, it's difficult to argue against the concept of a savings glut.
The problem being that "the economy" doesn't have a way of telling whether too much consumption has been deferred or not. Savings is not "real" -- only investment is real. Just by looking at the real economy, you cannot tell whether $100 of consumption has been deferred, or $1000 of consumption has been deferred. To do that, you need to look at asset prices.
Vimothy,
Now, *I* don't understand your point.
Who is talking about output? We're talking about credit markets that buy and sell securities, not output.
Are you arguing that because the economy must decide how much consumption to produce and how much capital goods to produce, that, as a matter of panglossian necessity, capital markets must be the place where this is determined by individuals' supply and demand curves?
The onus would be on you to show that this occurs, rather than assuming it occurs. All you really know is that capital markets are places where people buy and sell paper assets.
If A can buy a security on credit, then he is a buyer, and hence contributing to the quoted price in the credit markets, yet A is not a saver. A is only a saver if his income exceeds his consumption, and the act of borrowing does not increase A's income (although it can allow the income of others in the economy to increase), nor does it decrease his consumption.
If B can sell a security they already have, then B is a market participant and is also influencing interest rates, yet B is not an investor.
Neither A nor B are deferring consumption of real output, or increasing the capital stock. Yet they influence the market price of assets. And I would argue that their preferences dominate the market price of assets (e.g. the 22 second hold period).
Suppose on Monday, a real saver, X, buys a security from B. The interest rates will be the intersection of the investor's supply curve with B's demand curve. The proceeds of B's sale are deposited in a brokerage account tied to a bank.
On Tuesday, A borrows from the bank and buys a security from a real investor, Y.
Now what will be interest rates on those two days?
Why would the interest rates be the same as if X had transacted with Y?
If they are not the same, then how can you argue that loanable funds (demand from investors intersecting the supply of savers) is the mechanism by which the economy allocates real resources towards consumption vs. investment?
vimothy,
“In that case it would be “savings supply glut””
I was actually channelling Nick Rowe, thinking loosely about the demand for savings as in the sense of the demand for money, a stock.
God help me.
:)
RSJ,
Saving = investment
(global macro accounting identity at the level of flows)
Marked to market saving NOT = book value investment
(macro or micro accounting relationship at the level of stocks)
Saving = deferred consumption
(behavioural proposition, sometimes applicable at the micro level, but useless in macro)
Bernanke and Greenspan both conjecture about the dynamics of the flow of saving and investment (# 1 above), and its effect on interest rates, when they refer to the “global savings glut”.
# 2 has to do with things like bubbles, which is primarily not what they're referring to in the context of the "global savings glut"
JKH,
RSJ is confusing real and nominal values, which is why he is violating the identity you give above.
Nominal saving must equal nominal investment both at the micro and macro level. Similarly, by definition, real saving must equal real investment. In this sense RSJ is mistaken.
However, nominal saving does not have to equal real investment (i.e. real saving).
Paper wealth can increase with nominal income even though it does not represent a real increase to the economy’s productive capacity. I.e. if there is no real saving. In this sense, given the proper application of basic macroeconomics and being consistent with accepted definitions, RSJ is correct.
It seems to me that both you and RSJ are trying to reverse engineer economic theory from your experience of working in the financial sector. Obviously I don’t know either of you well enough to offer advice, but if I did I advise caution in relying too heavily on Neo Chartalists. Both of your views are compatible, if you apply correct
theory consistently.
At least, that’s my perspective, from my position as a lowly and inconsequential economics student (doubtless “brainwashed” by mainstream econ).
" if you apply correct theory consistently."
Of course, that is the point in contention. What is the criterion of "correct."
As Kuhn observes, scientific theories are neither true nor false. Theories are explanatory and predictive. As explanations they either save the appearances, or fail to. This is shown by testing hypotheses as predictions by testing them empirically and examining the theory for internal consistency.
Theories are called into question when hypotheses generated from them are disconfirmed, either by being shown to be inconsistent with the algo or falsified by empirical testing. Generally speaking this does not overturn the theory itself. It means that something has to be corrected in its structure. When there is sufficient structural breakdown, then a new theory is called for and a revolution in that science eventually takes place.
The way to attack theories is by attacking specific hypotheses showing that assumptions are untenable or predictions false.
So I am not quite sure what you mean by correct theory here.
Tom, you need to read the rest of the discussion I've been having with RSJ and JKH.
Vimothy, I have read it and I don't see that you have established that your version of the correct theory is indeed correct, or that that either of them is mistaken.
I admit that I am no arbiter of this, since this is not my field.
However, that is beside the point I am raising.
Your statement about "correct theory" has problems independently of anything said previously. What is the criterion of "correct theory" in your view and how is the criterion justified? This relates to the philosophy (foundations) of economics, not doing economics within a particular paradigm.
Tom,
Correct theory relates to the "savings glut" hypothesis, the Loanable Funds model and real saving and investment. Re-read the thread and think, grasshopper.
In general, I'm afraid that you probably need to actually study this subject to understand it. Goofing about on blogs is no substitute (alas).
vimothy,
“I advise caution in relying too heavily on Neo Chartalists”
That’s not bad advice. At the same time, I wouldn’t ignore them. There are enough errors in mainstream interpretation of monetary operations to listen to them for that alone.
I do have a problem with some of the stylistic features of MMT – e.g. its tendency to trivialize certain financial operations to a “for dummies” level of presentation (e.g. the financial effect of taxation), its insistence on denying that saving is a legitimate accounting item in the case of government, and so on. I also think that MMT analytics are deliberately crafted in the direction of favourable outcomes for MMT preferred ideological tendency. E.g. You can describe X’s liability as Y’s asset, or Y’s asset as X’s liability. NFA depends on the first.
A great deal of what MMT says can be reduced to what are essentially variations on the fallacy of composition as it pertains to micro/macro observations. I find that quite useful.
I also think that scepticism in general for mainstream ideology is constructive at this stage.
Vimothy,
You own a mine that produces a surplus of 1 ton of iron. Then, something happens -- a new technique is discovered, or a richer vein is discovered -- and your mine starts to produce a surplus of 2 tons of iron.
Clearly your net-worth has gone up.
Clearly the production characteristics of the economy have changed.
And yet no investment occurred.
You are implicitly assuming that assets continue to have the same characteristics across periods unless investment occurs.
I don't think I am confusing real or nominal here, I am pointing out that the income generated by the existing capital stock can change across periods without any investment.
That can happen in *both* real and nominal terms.
The reality is that the big fluctuations are in paper terms. But the principle itself holds in both cases.
Now suppose that prior to this, I was selling all of my iron for consumption goods each period. After this, as I have twice as much Iron per period, I decide to sell half of the mine to another investor in exchange for some prime beach-front property.
Before I had an income stream of 1 ton of iron per period, and now I have the same income stream plus some land.
I have saved in real terms.
The investor who bought the mine merely exchanged an income stream of 1 ton of iron for some land. He did not dissave in real terms.
Therefore the total savings in the economy went up as measured in terms of the sum of all individuals savings, but there was no economy-wide investment. There was also no economy-wide savings.
This has nothing to do with real versus nominal.
Now in the above example, instead of having the mine become more productive, just assume that everyone believes it will be more productive. The same set of transactions can occur. The same excess savings will occur.
It's just a basic result of consolidating balance sheets.
That is the second fallacy -- believing that there is a "Mr. Global" that is choosing to save or consume, or arguing that because "Mr. Global's" consolidated income statement didn't show too much savings, that the sum total of economic actors did not save too much.
There can easily be excess savings by all individuals, even in real terms, without excess savings when you consolidate balance sheets.
That’s not bad advice. At the same time, I wouldn’t ignore them. There are enough errors in mainstream interpretation of monetary operations to listen to them for that alone.
Precisely so. Their understanding of monetary operations is (relative to many) very good, and I certainly recognise this. In fact I believe I’ve read every paper Scott Fullwiler and Marc Lavoie (not MMT per se but related) have ever published on monetary operations and think that they are generally excellent. But the problem, and it is substantial, is not their understanding of operations—it is their inability to master basic macroeconomic theory. Nominalism is a very old fallacy in economics, and these guys have fallen for it hook, line and sinker. They are like a textbook case of how not to go about developing a coherent macroeconomic model of the economy. Furthermore, the blog comment echo chambers they play host to on the internet are filled with people to whom MMT appeals because it speaks directly to their prejudices / better nature and who are unable to critically evaluate what they read. They think that the government not being financially constrained in terms of its operational ability to issue currency without limit means that the government can determine real income, which is totally insane. That’s why the mainstream ignores them. They’re cranks. I’m sure this seems harsh, but I can find no other words for it.
I’ve actually experimented with taking this criticism to Billy Blog, and it’s quite clear that most of the commenters there haven’t got the faintest clue what I’m talking about. I could be writing it in Chinese and it would be neither more nor less comprehensible to them.
“I find that quite useful.”
It is very useful. But again, I would urge caution. The fallacy of composition only pertains directly to nominal income. Its effect on real variables must be established by a coherent macroeconomic model of human behaviour and the Neo Chartalists are nowhere near that. From what I’ve read, they don’t even know what “real” means in economic theory.
When you mentioned Nick Rowe upthread, you actually reminded me of your very interesting debates with him on the money multiplier and the role of reserves. When you hear experts pronounce—as experts—on subjects you understand well, and get them ass-backwards, you tend to discount the rest of the stuff as well. Now, I know very little about anything as rarefied as monetary operations, but I do know intermediate macro—and the Neo Chartalists totally butcher it. I mean, they don’t understand it at all. I find it quite shocking. Almost unbelievable really.
“Nominalism is a very old fallacy in economics, and these guys have fallen for it hook, line and sinker... The fallacy of composition only pertains directly to nominal income. Its effect on real variables must be established by a coherent macroeconomic model of human behaviour and the Neo Chartalists are nowhere near that. From what I’ve read, they don’t even know what “real” means in economic theory.”
I find that interesting. As a curious tourist, I am uncomfortable with what I see as the edifice for the measurement of real magnitudes in economics – other than what applies to actual physical items. I am sceptical that there is a continuous, coherent mapping from this edifice into nominal space.
“When you hear experts pronounce—as experts—on subjects you understand well, and get them ass-backwards, you tend to discount the rest of the stuff as well.”
Probably true. But you may view what you believe you understand yourself as the indispensable kernel of a world view. It may not be implied misunderstanding by association as much as implied misunderstanding by necessary dependence. BTW, an example of the opposite is Nick Rowe’s fascinating ventures into the analysis of barter economies, which in my case should not intersect with that kernel. Still, his analysis tends to exhaust me before I can understand what he’s getting at.
I’d like to see somebody somewhere do a massively impressive post on the nature of what the meaning of “real” is in economics.
“And yet no investment occurred.”
The idea that inventory is investment, by design or by default, is essential to a coherent world view of saving and investment.
The difference between investment and consumption is always defined by duration.
Mr. Global is a clearing house for investment, positive saving, and negative saving. Mr. Global always clears successfully, micro and macro.
Vimothy: where does mmt say govt can determine real income? In some circumstances it may be able to increase it, but I have never seen them claim govt can determine it
“where does mmt say govt can determine real income?”
Everywhere. Here, for example:
bilbo.economicoutlook.net/blog/?p=12022
What can one say about such an analysis? It is hopelessly confused.
Of course, it is not formulated as clearly as “govt can determine real income”, because Neo Chartalists don’t understand what “real income” means.
JKH,
I don't see the relevance of your comments. Yes, markets clear, etc. So what?
Vimothy: I can't take Billy blog. So I guess I'll just assert that I haven't seen anyone clearer about the real/nominal distinction than MMT.
Of course if you have an excerpt or digestible link I'm open to changing mind
RSJ,
You are pretty close. If you just pay more attention to what “real saving” and “real investment” actually means, this will make sense. I suspect that because you’ve figured all of this out yourself—which is a significant achievement and one that certainly exceeds whatever achievements I can realistically call my own—you’ve had to innovate, and so when I write “real saving”, you read something else, and it doesn’t make sense in terms of your idiosyncratic model.
I’ll respond to you point-by-point.
You own a mine that produces a surplus of 1 ton of iron. Then, something happens -- a new technique is discovered, or a richer vein is discovered -- and your mine starts to produce a surplus of 2 tons of iron.
Real investment has occurred and real savings has increased, because the productive capacity of the economy is greater.
Clearly your net-worth has gone up.
This is a good example of where you’re going wrong. What do you mean by “your net-worth has gone up”? You’ve haven’t given sufficient preconditions for that statement to be unconditionally true. Real net worth has increased. We’ve already said that above, so it must be the case. Conditional on meaning “real net worth”, your “net worth” has gone up. Nominal net worth may or may not have increased, but we cannot know this solely on the information you’ve given.
Clearly the production characteristics of the economy have changed.
Correct.
And yet no investment occurred.
No. This violates logical consistency. Where did this new technology which contributes to the real productive capacity of the economy come from? Straight out of Zeus’ head? Real investment must have occurred (the consequence of real saving—perhaps unrecognised until now), because the real capacity of the economy has increased.
You are implicitly assuming that assets continue to have the same characteristics across periods unless investment occurs.
I’m not assuming that.
Imagine the most technologically advanced civilization possible, a Kurtzweil wet dream. What is the real value of their capital stock? Compared to real Earth wealth, it is incomprehensibly large. Orders of magnitude greater—we don’t need to give it a number. Then, one day, the Europeans turn up, and everyone dies of the plague. So what is their real wealth now?
I don't think I am confusing real or nominal here
I’m afraid you are, and a little bit more besides.
I am pointing out that the income generated by the existing capital stock can change across periods without any investment.
You’re still not being careful. What do you mean by “income” and what do you mean by “investment”?
If real income (real output) increased, then there must have been real investment. That’s what those terms mean.
[Cont., for good measure...]
That can happen in *both* real and nominal terms.
It cannot happen in either. But nominal income can increase without any increase in real investment.
Now suppose that prior to this, I was selling all of my iron for consumption goods each period. After this, as I have twice as much Iron per period, I decide to sell half of the mine to another investor in exchange for some prime beach-front property.
Okay, so call the initial arrangement t_1 and the current t_2. In t_1 there was real saving and investment. In t_2 there has been no real investment or real saving.
Before I had an income stream of 1 ton of iron per period, and now I have the same income stream plus some land.
I have saved in real terms.
All real activity—saving and investment—occurred in t_1.
The investor who bought the mine merely exchanged an income stream of 1 ton of iron for some land. He did not dissave in real terms.
Aaargh! Think about what you’ve just written. You’re taking what you know about paper flows and cutting pasting it onto a model of real activity. Real saving does not imply a parallel real dissaving that nets to zero. The only way “real dissaving” makes sense is in terms of the depreciation or outright destruction of the economy’s productive capacity (real productive assets). Your entire population dying of the plague, your cities being bombed, your industrial centres sliding into the sea—that’s real dissaving.
Therefore the total savings in the economy went up as measured in terms of the sum of all individuals savings, but there was no economy-wide investment. There was also no economy-wide savings.
I cannot tell if you are correct unless you need to reformulate that proposition in terms of reals and nominals.
This has nothing to do with real versus nominal.
Oh, but it does.
Now in the above example, instead of having the mine become more productive, just assume that everyone believes it will be more productive. The same set of transactions can occur. The same excess savings will occur.
There is no real increase in productive capacity, so there is no real saving or investment. There may or may not be an increase in nominal saving and investment.
That is the second fallacy -- believing that there is a "Mr. Global" that is choosing to save or consume, or arguing that because "Mr. Global's" consolidated income statement didn't show too much savings, that the sum total of economic actors did not save too much.
There can easily be excess savings by all individuals, even in real terms, without excess savings when you consolidate balance sheets.
It looks like you’re making some new claims here. There can be “excess savings” in terms of supply and demand schedules and pegging the price above its equilibrium value. But the actual real saving that really actually occurs in equilibrium must always equal real investment.
JKH,
Actually, I think I will try to take some of your advice—or at least what I take to be your implied advice. MMT and/or the paradox of thrift more generally provides a significant gotcha moment (did for me, anyway), because it is careful about properly accounting for nominal flows of funds. This is not something that is emphasised in economics at the level at which most people approach it. Consequently, it is quite exciting—the model is consistent, and I understand it. I understand it in a deep way—the way it fits together, the way it works, the way force will ripple out through its structure. Where else is this so accessible? If nominal analysis was the same as real (economic) analysis, MMT would be a real lightning bolt. As it happens, economics is primarily interested in nominal income flows only insofar as they pertain to real outcomes. But a lot of people don’t understand that, and so the value of the MMT capital asset has been somewhat inflated. It is only a nominal lightening bolt (alack).
I am sceptical that there is a continuous, coherent mapping from this edifice into nominal space.
Your instincts serve you well. Hold on to this scepticism.
My browser does is really struggling here. What is the f@$%ing problem, you heap of junk!
Winterspeak,
Thanks for having me. I’m afraid I’ve rather derailed your thread.
I haven't seen anyone clearer about the real/nominal distinction than MMT.
Dude, get out more. I don’t believe that it’s possible to be more wrong about the real/nominal distinction.
Of course if you have an excerpt or digestible link I'm open to changing mind
It isn’t obvious from all that I’ve written so far?
There’s too much verbiage to quote in full. You will either have to read it yourself or piece together my criticism from what I’ve wrote here (which shouldn’t be hard). But for example, Bill is asking what determines real income:
So what drives output? What determines national income?
And what does determine output? Bill thinks its govt spending. You need to read his example to properly appreciate the depth of his miscomprehension. He states, “The government issues the currency in this two-person economy and the non-government offers labour (productive resources) in return for payments. Some product is created. We open a spreadsheet that records all transactions.” Then he states that, “The government announces a tax of 100 dollars. The non-government person asks: “Where will I get the 100 dollars from to pay this tax?” The government says: “I will spend $100 on private sector activity which will provide the currency necessary to pay the taxes”. The relevant spreadsheet entries are made recording these transactions.”
In other words, without govt spending, which provides currency, there can be no income to pay taxes. This is bollocks on stilts. It’s bollocks on stilts because Bill believes that currency is income. And real income is not currency, though it can be measured in terms of currency; it is the sum of real output flows, consumed or invested.
He continues,
The column – budget balance in period 1 records a zero. The government runs a balanced budget (for example, spends 100 dollars and taxes 100 dollars). The private sector receives 100 and pays it back in taxes so has a zero balance at the end of the period. The private accumulation of fiat currency (savings) is thus zero in that period and the private budget is also balanced – they spend all they get and do not save.
The private accumulation of fiat currency is savings—all the errors are on display right there! For a economist, this is shameful.
Do I need to go on? I can probably do the whole post, if you like.
Okay, you win. We'll do this piecemeal.
Winterspeak,
Thanks for having me. I’m afraid I’ve rather derailed your thread.
I haven't seen anyone clearer about the real/nominal distinction than MMT.
Dude, get out more. I don’t believe that it’s possible to be more wrong about the real/nominal distinction.
Of course if you have an excerpt or digestible link I'm open to changing mind
It isn’t obvious from all that I’ve written so far?
There’s too much verbiage to quote in full. You will either have to read it yourself or piece together my criticism from what I’ve wrote here (which shouldn’t be hard). But for example, Bill is asking what determines real income:
So what drives output? What determines national income?
And what does determine output? Bill thinks its govt spending. You need to read his example to properly appreciate the depth of his miscomprehension. He states, “The government issues the currency in this two-person economy and the non-government offers labour (productive resources) in return for payments. Some product is created. We open a spreadsheet that records all transactions.” Then he states that, “The government announces a tax of 100 dollars. The non-government person asks: “Where will I get the 100 dollars from to pay this tax?” The government says: “I will spend $100 on private sector activity which will provide the currency necessary to pay the taxes”. The relevant spreadsheet entries are made recording these transactions.”
In other words, without govt spending, which provides currency, there can be no income to pay taxes. This is bollocks on stilts. It’s bollocks on stilts because Bill believes that currency is income. And real income is not currency, though it can be measured in terms of currency; it is the sum of real output flows, consumed or invested.
He continues,
The column – budget balance in period 1 records a zero. The government runs a balanced budget (for example, spends 100 dollars and taxes 100 dollars). The private sector receives 100 and pays it back in taxes so has a zero balance at the end of the period. The private accumulation of fiat currency (savings) is thus zero in that period and the private budget is also balanced – they spend all they get and do not save.
The private accumulation of fiat currency is savings—all the errors are on display right there! For a economist, this is shameful.
Do I need to go on? I can probably do the whole post, if you like.
Hmm, let me try a different tack, so that perhaps we can come to some agreement.
Assume a closed private ownership economy, forget about inventories. We always have: savings = change in net-worth.
The issue is how the change in net-worth is recognized on the balance sheet.
According to NIA, we have
Investment - consumption of fixed capital = change in book value of capital stock = wage income + capital income - consumption - (G-T)
or
change in the book value of the capital stock + (G-T) = income - consumption = savings = change in net-worth.
So according to NIA -- aggregate savings are the result of changes to the book value of the capital stock + deficit spending, and this is the only rationale for recognizing changes in net-worth.
However, individual households are trying to transmit consumption across time.
In order to do this, they care about changes in the re-sale value of their assets when they plan to take delivery of the consumption goods, and they also care about the return, or interest payments made, of the deployed capital stock.
If the existing capital stock becomes more or less productive, so that the interest rate changes, then NIA savings will not change, but household savings as measured by consumption deferral will change.
If the resale value of the existing capital stock changes, then NIA savings will not change, but household deferral of consumption will change.
So savings, as measured by households who are attempting to defer consumption, need not be the same as changes to the book value of the capital stock.
For some reason, you are characterizing changes to the productive characteristics of the existing deployed capital stock as "nominal savings" while characterizing an increase or decrease in book value as "real" savings.
I think this is an unorthodox use of the term. In both cases, the quantities are "real", in that they are deflated by the price level and so are invariant with respect to changes in the unit of account.
Nevertheless, the two quantities need not be the same.
If there is an asset bubble, you can argue that household net-worth is going up because of paper effects. And that's the story of the day.
But if the existing capital stock becomes more productive, then still the sum of household savings will go up independently of national savings.
For some reason, you are characterizing changes to the productive characteristics of the existing deployed capital stock as "nominal savings" while characterizing an increase or decrease in book value as "real" savings.
That really isn’t what I’m doing. I explained this at some length above. Positive changes to the productive capacity of the existing real capital stock represent real saving and real investment. This proposition must be true given standard economic definitions of those terms.
Winterspeak,
[Cont.]
Bill has all of the accounting right, and none of the economics. But in macroeconomic terms, what does accounting refer to if not the real economy? Consequently, Bill has none of the accounting right either.
vimothy: Something went crazy with the comments. I hope you were able to post what you wanted.
I'm not sure where the real/nominal confusion is in your discussion with RSJ. An economy can increase real assets (and have nominal assets stay the same), or it can increase nominal assets (and have real stay the same). For example, if I make a chair, I've created a real asset, but there has been no nominal change on any balance sheet. Over the short term, this chair is an investment, because it's available next period. Over the long term, this chair is consumption, because it will eventually crumble to dust.
Similarly, a Government can credit a deposit account, and lo and behold you have an increase in nominal assets, but no change in real assets.
What's confusing?
Either way, I'm not going to defend Bill as I don't read him and haven't for months. I don't understand your critique of him though -- if (in a period) the Govt spends 100 and taxes 100, then the private sector has no change in net financial assets in that period. What's the problem?
Vimothy,
That really isn’t what I’m doing. I explained this at some length above. Positive changes to the productive capacity of the existing real capital stock represent real saving and real investment.
Well, NIA does not measure "positive changes to the productive capacity of the capital stock".
NIA measures changes in book value.
That's it.
If today you invest in $100 of equipment, then your book value goes up by $100.
But whether that equipment will earn a return of 3% or 20% is not captured by NIA, nor can it be. In one period, it can earn a return of 3%, and in the next period, it can earn a return of 20%, and the swing from lower levels of productivity to higher levels of productivity will not be measured by looking at how much real investment has occurred.
Such a swing will be reflected, at least ideally, in changes to the market value of household savings.
But not in national savings.
Comments are still freaking out.
Winterspeak,
Something went crazy with the comments. I hope you were able to post what you wanted.
I was. You can delete my long comment addressed to you at 9:53 PM—it’s duplicated, and slightly extended, in the series of shorter comments below it.
I'm not sure where the real/nominal confusion is in your discussion with RSJ.
I think the confusion is where I talk about reals and RSJ thinks I mean nominal stocks and flows, adjusted for inflation.
See, e.g., this comment:
In both cases, the quantities are "real", in that they are deflated by the price level and so are invariant with respect to changes in the unit of account.
I must really suck at this communication lark, eh! Changes in book value are an attempt to account for real changes, and may or may not represent real changes, but they are not the real changes themselves. Map does not equal territory.
[Cont.]
A Government can credit a deposit account, and lo and behold you have an increase in nominal assets, but no change in real assets.
Right, and according to Neo Chartalists (I refuse to use the phrase “modern monetary theory” to describe what you guys do—it is beyond pompous), your income has increased by the amount of new money the govt just created. That’s the whole point of Bill’s post. But if there was no other activity, your income has not increased. Your nominal income has increased, which is totally different. That your nominal income has increased is trivially true. If you understand rudimentary financial accounting, it’s obviously unnecessary to say that net govt spending increases aggregate nominal income and nominal “net financial assets” or savings. That’s just a tautology and this is a base analysis—pure solipsism, in fact, but masquerading as economics.
Your nominal income here is just a flow of the financial assets the govt created. Your real income is the flow of real goods and services that you produced for consumption and investment. If you didn’t produce any, your real income is nothing—nada, zip, zilch, fsck all, regardless of how much new or net new (whatever) money the govt created.
if (in a period) the Govt spends 100 and taxes 100, then the private sector has no change in net financial assets in that period. What's the problem?
The problem is that what you’ve just said is completely circular and as is tells us absolutely nothing about the real world. Think about it. Why the fsck do you care how much “net financial assets” has changed? It can only be because there have been real changes in the real economy. What are those real changes? You don’t know because you’re not looking at them. You’re not looking at them because you think that merely accounting for financial flows is enough. Well, it is not. Not if you want to do economics, anyway.
"NIA measures changes in book value.
That's it.
If today you invest in $100 of equipment, then your book value goes up by $100.
But whether that equipment will earn a return of 3% or 20% is not captured by NIA, nor can it be. In one period, it can earn a return of 3%, and in the next period, it can earn a return of 20%, and the swing from lower levels of productivity to higher levels of productivity will not be measured by looking at how much real investment has occurred.
Such a swing will be reflected, at least ideally, in changes to the market value of household savings.
But not in national savings."
That's refreshingly clear, and I agree with it.
"Similarly, a Government can credit a deposit account, and lo and behold you have an increase in nominal assets, but no change in real assets."
That's symptomatic of the "real algebra" problem with economics.
That deposit has a nominal value and a real value.
It may result from the government purchasing real assets or real goods and services. There's real value either way.
Or it may result from the government (CB) purchasing financial assets (e.g. OMO;QE). There's still a nominal value and a real value to the deposit.
"Real" is a mess.
I'd like to see Harless do a post on this, the way he did for investment and saving.
a problem
RSJ, JKH,
I think I can explain it now. When I write (for example) “real income”, I don’t just mean what is the value of the money you received in return for supply of factor services, adjusted for inflation. I mean the real goods and service flows that were produced and consumed or invested in that period. Because the real world is not like the world of economic models, where everything is homogenous and perfectly divisible, real output does not come with a number already assigned that we can use to make direct comparison across output flows and so determine relative implications for our real consumption and investment desires (or if it does, only the Flying Spaghetti Monster knows it). We need a measure. So we take market value for aggregate output, and now everything has the same units, and we adjust for inflation to control for changes in the price level across time. That gives us a measure of real income—it might be a good measure and it might be a bad measure (debateable, certainly)—but it is only ever a measure. Real income is the real output that has actually been produced and consumed or invested.
Consider a very simply economy. Every period it produces and consumes ten apples. Each apple is a dollar each. What is its real aggregate income? It isn’t $10. It is ten apples—the real output it really produced. What is its aggregate real consumption? It isn't $10 either. It is also ten apples. $10 is a measure of its real income. What if you factor in changes in the price level over time? It doesn’t matter; if all it ever produces is ten apples, its real income will only ever be ten apples. If all it ever consumes is ten apples, its real consumption will only ever be ten apples.
vimothy,
That's fine.
That's real income for a barter economy.
Or it's aggregate real income for a monetary economy.
But real income in a monetary economy can't be distributed without nominal measurements - wages, interest, dividends, etc.
And nominal measurements are themselves differentiable into equivalent real measurements, based on some inflation index.
The problem is, how far into a discussion of economic policy can you go without reference to income distribution?
So the idea of real income gets conflated between aggregate real, as in barter, or distributed real, as in monetary.
JKH,
That deposit has a nominal value and a real value.
Yes, but its real value is not its nominal value, adjusted for inflation, that’s only a measure of its real value. And it’s effectively a (hopefully informed) guess, because we cannot observe its real value directly to measure it. It’s like in OLS. You don’t observe population parameters, but you can produce estimators that will measure them, with differing characteristics (e.g. BLUE).
The actual real value of the deposit qua deposit is its actual real contribution to the economy’s production technology and because it is objective knowable only within the confines of a logically consistent economic model. In the real world, only the Flying Spaghetti Monster knows the true real value of anything.
"Real" is a mess.
Jesus, you two are a real pair!
Because you are both so smart, you assume that this is more complicated than it in fact is.
The valuation of “real” is a messs, because “real value” is unknowable, because what’s real is objective and valuation is subjective. “Real value” is conceptual. Real output on the other hand is the real stuff that is produced, consumed and invested in the economy. It is not conceptual; it is concrete. It is what actually happened. “Real output was ten apples.” That’s an objective statement about the physical universe. “The value of real output was $10.” That’s a subjective judgement that may or may not be consistent on its own terms.
Or it's aggregate real income for a monetary economy.
It’s this. Individual real income in the ten apple economy depends on the distribution of real output. But that’s something else. I only trying to establish the correct definition of “real income”. Given this definition, aggregate real income is simply the sum of all individual real income flows.
But real income in a monetary economy can't be distributed without nominal measurements - wages, interest, dividends, etc.
And nominal measurements are themselves differentiable into equivalent real measurements, based on some inflation index.
All true.
The problem is, how far into a discussion of economic policy can you go without reference to income distribution?
Not very far—hopefully!
So the idea of real income gets conflated between aggregate real, as in barter, or distributed real, as in monetary.
I’m not sure I follow you here. Aggregate real income in a barter economy has the same meaning as aggregate real income in a monetary economy. The same is true of distributed. How you get there, though, is very different.
Anyway, this has been a very interesting debate, but I'm afraid I really must step away from it and go and do some frickin revision!
Thanks to both RSJ and JKH for their contributions, and especially to our host, winterspeak. This has certainly helped me to arrange my own thinking, of nothing else.
Regards,
v
"In the real world, only the Flying Spaghetti Monster knows the true real value of anything."
That's an interesting theory as a robust counter to MMT.
:)
I'm with you on real output, but the fact is that economics refers to real and nominal values all the time. If real were only ever used in the context of real or physical output, I'd have no problem with it.
thanks also
JKH: When I said "Similarly, a Government can credit a deposit account, and lo and behold you have an increase in nominal assets, but no change in real assets" I was trying to be scrupulously precise. The credit happened in exchange for nothing -- there was no trade of any sort -- just a transfer. This is clearly an increase in nominal assets only.
vimothy: Good lord--I think you and I may be in agreement. Economists often use "real" to mean "inflation adjusted nominal", and I understand why they do that, but it is not what I mean as "real" in this discussion.
And there are two ways that Bill's accounting tautology has meaningful impact on the real world:
1. In a paradox of thrift condition, the economy is losing real output because it has insufficient nominal net financial assets. Here, creating nominal income will generate real income as idle resources start producing again. This is not a tautological result.
2. It also shows that Government debt and deficit funds private sector net financial assets. If Obama's Commission to reduce the deficit were renamed the Commission to reduce private sector savings, people might have a different reaction to it. If the Commission is successful, I expect it to have very real impacts as well.
Both of these flow directly from MMT, but you can't really get either from orthodox Macro today (although Keynes gets you some of 1).
I dunno vimothy--my training was in standard orthodox econ. I think all the classical micro stuff is fine, but MMT makes mincemeat (to use JKH's expression) of macro.
Nobody would produce any apples if there isn't demand for them. Why bother planting the tree? There is no indication that they are required.
The one thing I have seen in MMT that I haven't seen anywhere else is a focus on sales and demand as the driver.
In business sales and potential sales are the primary focus. Investment comes when you can see the sales; when you can see the profit. You have to signal that loud and clear first and foremost to get anything.
If you hold up a pot of cash and tell the entrepreneurs of the country that they can keep it if they manage to increase output by that amount while keeping prices stable then investment will be forthcoming.
No there isn't a model in MMT to describe how that happens - hence my "does an economy quantity expand or price expand" unanswered question. There is no answer in there about how to get the right amount of the right type of widget/haircut/apple.
For me the primary insight from MMT from a sovereign government policy perspective is that you don't need to pre-fund. You can post-fund if required to control nominal/real imbalances.
You can run an initiative, target the nominal injection where you believe it has the best chance of achieving the necessary increase in real output (according to complementary real output theories as required) and then monitor it.
If you get the real expansion, then that's a result. If not then you need to adjust taxation/interest rates to compensate nominally.
MMT is not the universal theory of everything, but it does correctly describe the fundamental operational nature of a fiat system.
In other words there is a valid alternative viewpoint of the existing system that shows that some of the restrictions in place are not intrinsic to the nature of the system. They are instead artefacts of the particular viewpoint adopted.
So rather than requiring "Tax and Spend", you can legitimately use "Spend with description of expected real output expansion and description of Tax that will happen if that doesn't occur". Not as snappy I grant you.
Vimothy,
Joined the discussion late but I feel like adding my two cents.
The one thing is you shouldn't proxy Chartalism to Post Keynesian Economics. There is a lot of work in the latter and since you mention that you from the academia, you will have access to literature to find out. Some consider Chartalism to be a part of PKE but Chartalists may not want to be identified with the gang.
However not that Post Keynesians have themselves described the monetary system in fair bit of detail including intricacies in central banking operations. They have been doing that in the last 30-40 years. Also, stock-flow consistency, sectoral balances are original to Post Keynesianism.
To me the Chartalists' usage of sectoral balances looks like a tailored version. Is. They heard one part of the story from PKEists but not the remaining! Also the description of the government's operations in the monetary operations looks like "sneaking in" a few things such as "we do not borrow" and the insistence of providing overdraft facilities to the government.
I will drop you a comment in your blog on the insistence of overdrafts .. its a bit dirty (and scandalous) to post it here!
Of course its true that governments do not face issues in financing deficits but the no overdraft and debt ceilings are psychological barriers to prevent governments from using fiscal policy. To some extent it is sad, but to some extent, the proposition of the usage of fiscal policy to solve all the problems is implausible.
Here are two critiques:
State Money And The Real World - Or Chartalism And Its Discontents by Louis-Philippe Rochon and Matias Vernengo
&
Money Creation And The State - A Critical Assessment Of Chartalism by Claude Gnos and ouis-Philippe Rochon
The essential Chartalist mistake is that about convertibility. It is true that "the State" doesn't promise to convert currencies but banks do that in the modern era.
Here is how - page 49-50 here. Payment Systems by Bank of England.
The reason I brought that up, (you see my arguing assertively at Bill's blog) is that it shows that money is credit is the superior view. I think the Chartalists implicitly assume non-resident nonconvertibility. It is true that the Chinese won't dump the US Treasuries, but other nations do not have the exorbitant privilege. So what does it mean if the net asset position of UK is minus £200B (illustrative) - it means that UK owes £200B to the rest of the world!
Which of course is related to your question on NFA... yep it is true - knowing the NFA by itself is as meaningless as knowing the weight of the Milky Way. The correct questions are how do stocks and flows feed into one another and monetary and real variables change etc. These questions have been looked into in PKE.
If you have checked my other comments at the other blogs, you may yawn at my references to the external sector here :-). But my reason for commenting stays. Don't proxy it to PKE. The PKEists are themselves very intellectual but do not go for the overkill!
Neil
Excellent comment, especially this;
"MMT is not the universal theory of everything, but it does correctly describe the fundamental operational nature of a fiat system"
Which of course IS the system we are operating under. No matter how much the Austrians and neo liberals hate it, fiat money is here to stay. In fact our gold standard was fiat. Any decision by an authority to peg a currency or not to exchange it for a commodity or not and at what rate is a decision BY FIAT! There is no natural money. There is no money which has been chosen by people as the numeraire of trade. This has always happened in modern societies as a result of a political decision.
In a large way, my reaction to real analyses is so what? What does it mean? How does that analysis change my economic situation and the decisions I make? I make most of my decisions based on price, not real price but price. What portion of my income will I need to attain such and such? How many hours will I have to work to get some thingamajig that I covet? I suspect that most people make the same calculations.
Vimothy, my impression of your problem with MMT can best be expressed by an analogy. I know a guy who is a great guitarist. An outstanding guitarist. Technically he is way better than REMs guitarist but he resents that REM is so popular because they arent great musicians (technically). He can play circles around the REM guy but no one buys his music. People want to hear REMs music no matter how poor the quality of their musicians.
MMT answers many questions no matter how "un pure" their economic analysis is and what they may miss (in your view). MMT deals with money, the nature of it, how its created and what our options with it are. You have some classic "pure" view of economics which, unfortunately leaves way too much un answered. Thats my $.02 worth.
I realise that I’m doing a bad Columbo impression here, but I want to clarify “just one other thing”:
Vimothy, my impression of your problem with MMT can best be expressed by an analogy. I know a guy who is a great guitarist. An outstanding guitarist. Technically he is way better than REMs guitarist but he resents that REM is so popular because they arent great musicians (technically). He can play circles around the REM guy but no one buys his music. People want to hear REMs music no matter how poor the quality of their musicians.
Greg,
You are, of course, entitled to form your own opinion of my motives. I’m sure that they are sincerely held and I can respect that. But I haven’t written any of this because I’m looking for attention. I wrote it because I find it interesting, because I enjoy debating these subjects, and because I thought the conversation that developed had some value. I certainly didn’t write it to draw attention to my blog, which I never update, and which is mostly worthless, self-important garbage of no consequence. Please do not read it—I’m not looking for an audience. I wanted to have a conversation, and I did; it was fun, and I am sated. I only link to my blog because I can’t sign in to the comments section any other way (AFAIK—I am a reluctant Luddite, but a Luddite nevertheless).
If you want my advice (and clearly you do not, but here it is anyway) you should buy a copy of a macro text like Mankiw or Blanchard, and get something more modern like Williamson or Andolfatto (the latter is free online, and excellent), and study them in your spare time (not “read”—though you will need to do that as well—but actually study; there is no substitute for study if understanding economic models is your goal). Don’t be intimidated by any of this stuff. It is all easy to understand—it just takes a bit of intellectual effort. Then you will be able to say for yourself whether Bill’s depiction of mainstream theory is correct, and whether governments really can fund their nominal debts in real terms by issuing currency or [insert hand waving here] “operations” (which is patently incoherent in either case), and my putative motives will be irrelevant.
Cheers,
vim
Vim
I did not intend to imply you were looking for attention, simply to point out that you feel your analysis is purer, more real if you will than Mr Mitchells. You seem to think we can...... no..... MUST ignore money in our analyses. I'm extremely skeptical of that view. I'm not saying I cant be convinced but you've presented nothing persuasive.
I've been to Andolfattos blog many times and gotten into discussions with him on more than one occasion and I can assure you I will NOT be buying a copy of anything by Mankiw. He's a complete shill.
My advice.... dont quote Mankiw!
The emphasis on "real" v. "financial" is Austrian, I believe, based in Mises. Austrians claim that MMT doesn't get this distinction, so it is misguided.
I suspect that MMT'ers {and other PK'ers) would say that Minsky appreciated this distinction, and did so in a more sophisticated way than Mises. (Which may be why Mish and Steve Keen get along about debt.)
I would say that it is two theories clashing. But what do I know?
Greg,
Opinion held of work never read is speculation. What you wrote there is just gossip, it’s vulgar—you don’t know the man or his work, and you should have more self-respect.
People have been developing this field for hundreds of years (accumulated desired real saving, debatably realised ;-P). Are you going to pick it all up by osmosis? You won't get the models by hanging around blog comments, mate, and it doesn't matter whose name is on the banner at the top of the page. It could be Paul Samuelson and you'd be no better off (actually, you might if it really was Paul Samuelson). You don’t learn to ride a bike by hearing other people describe the experience; you buy a bike and get on it. Either develop serious brilliance, or study. There is no third option.
If you like, think about the about the following:
“The private accumulation of fiat currency is savings” (BMitchell)
Do you agree? Why?
“Governments can fund their nominal debts in real terms by issuing currency”
Do you agree? Why?
Vim: “The private accumulation of fiat currency is savings” (BMitchell)
In giving an example, Bill says:
"Let us start at a most basic level. In this blog – Deficit spending 101 – Part 1 I discuss the two-person economy. It doesn’t get much simpler than that. You might nominate yourself to be the government and your partner to be the non-government private sector to make it personal.
The government issues the currency in this two-person economy and the non-government offers labour (productive resources) in return for payments. Some product is created. We open a spreadsheet that records all transactions.
The government announces a tax of 100 dollars. The non-government person asks: “Where will I get the 100 dollars from to pay this tax?” The government says: “I will spend $100 on private sector activity which will provide the currency necessary to pay the taxes”. The relevant spreadsheet entries are made recording these transactions.
The column – budget balance in period 1 records a zero. The government runs a balanced budget (for example, spends 100 dollars and taxes 100 dollars). The private sector receives 100 and pays it back in taxes so has a zero balance at the end of the period. The private accumulation of fiat currency (savings) is thus zero in that period and the private budget is also balanced – they spend all they get and do not save...."
[emphasis added]
http://bilbo.economicoutlook.net/blog/?p=12022#more-12022
Vim, “Governments can fund their nominal debts in real terms by issuing currency,” doesn't turn up in a search. Reference?
I wrote it.
"Either develop serious brilliance, or study. There is no third option."
There is. Run a business in the real world doing real investment with your own cash and employing real people.
Then you learn how economics really works in the school of hard knocks.
People have been developing weather models for hundreds of years - and the predictions are still wrong.
You don't learn about the real world in books.
"“Governments can fund their nominal debts in real terms by issuing currency”
Can a government fund its nominal debts in real terms by issuing bonds?
Vim
Ive been to Mankiws site and read his missives throughout the internet. I dont need to read his textbook I know what kind of man he is from the other sources I referenced. I have no use for him. Vulgar describes HIM well as far as I've seen.
Neil: "There is. Run a business in the real world doing real investment with your own cash and employing real people."
Or, one could, like Wynne Godley, work at the cb, or, like Michael Hudson and Warren Mosler, work in the financial sector, or like Keynes and Minsky, be intimately familiar with the financial sector.
The criticism of MMT'ers is that most mainstream economists are not knowledgeable in finance, and this results in false assumptions and deficient models. Thus, the problem that contemporary economics faces lies in integrating finance.
Moreover, as I suggested at the outset of this comment thread, according to Minskians, the disconnect between actual (real) and financial (monetary) shows up as economic rent.
RE: "Say's Law as a moral obligation: supply has a duty to create its own demand. In other words, if you're lucky enough to have income, you have an obligation to use that income in such a way as to produce income for others."
I'd formulate it as fait-accompli:
'Supply has little option in it's own interest other than to create its own demand. In other words, if you're lucky enough to have income, you'd better use that income in such a way as to produce income for others, lest you shalt not be able to sustain it. Even in a World of no income tax.'
RE: "According to Chairman Greenspan, it was the "global savings glut" that led to the large CAD, arguing that if those Asian savers had increased consumption in their own countries instead, especially China, then the US would not have had it growing current account surplus.."
It's not correct to think that the Chinese individuals in general have been saving their money under the mattress. Two things here:
1. Most don't even make the kind of money to save significantly. If you talk to a Real Chinese (even with an IT Engineer with a spouse working), you'll be surprised to know that even with double incomes they are putting off having a child because raising a kid is unaffordable in the cost of living they have vis-a-vis their paltry incomes. Industrial workers are in so much worse condition that recently they were committing suicides to escape life.
2. Those few that do have good incomes haven't exactly stuffed mattresses either. At the exchange rate that Yuan has, the American goods were not value for money, but they bought apartments, at silly prices at that. It will be a mistake to think that they can be now cajoled into buying American products by "saving less". They cannot do that because a huge portion of their future incomes has been already committed to making suffocating mortgage payments.
The real cause of the Economic implosion and stalemate is the same phenomenon on both sides of the Pacific: Too much skew in incomes - people at the higher end of the Corporate hierarchies sucking most of the Corporate Revenue, then seeking Govt doles, bailouts and tax breaks in the name of maintaining employment, while actually protecting their rent extraction/ superman price of 'leadership'!
The secondary bottleneck is the dollar-yuan exchange rate that further expensives American goods to the Chinese - the USD converts to twice as many Yuans as PPP conversion would yield.
"Finance is a public utility, in particular owing to its special relationship with government." (especially with credit creation as a substitute for maintaining low fiscal deficit yet expanding money supply)
**Recognition/acceptance of this is long overdue**
That part of Finance that is essential to productive investment needs to be culled out from the rest, and there should be Public institutions alongside private in that line of business (like USPS existing alongside Fedex & UPS. In fact, USPS is way less important to have than Public Basefinance institutions).
"Gains not related to its primary functions, like prop trading and financial innovation that is not socially or economically contributory, are counted as economic rent." ..... and end up getting Gov protection to save the essential Finance.
"a sales (consumption) tax is OK, but a financial transactions (rent) tax is not." Tragic.
"Their business model was to raise the price of vehicles as much as possible by providing low terms and treating vehicles as houses, collecting the maximum monthly they could extract."
!
And that's exactly the renteering by the Health "Insurance" too.
Raise the prices of healthcare delivery as much as possible, then maximize on the monthly premium, and then maximize the "out of pocket" if you actually show up at the doctor's,...so you pay your premiums but access care only when you simply cannot avoid. No wonder total healthcare spending (insurance premium + Oops) in the US is Twice of most developed nations.
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