The old line back to free market ideology still intact

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1. I happened to watch a segment on CNBC with the St. Louis Fed President James Bullard. As a traditional inflation hawk, he caused a lot of commotion by coming out and warning about the risks of deflation in the near future. In the TV segment, he made the argument that the Fed’s “extended period” language might actually prove counterproductive. Although he said the most likely scenario is a modest recovery, he mentioned that an external shock — like the Euro debt crisis for example — might serve to push inflation expectations lower and cause inflation. The conservative, pro-business host of the program asked Bullard if he thought that the confusion and uncertainty over recent government legislation such as health care reform is serving to depress business confidence. Without expressing outright approval, Bullard offered his support for the host’s contention.

   All throughout the conversation with the regional Fed president, there was plenty use of the words “inflation expectations”, “shocks”, “business uncertainty”, etc., but not once was the word “demand” uttered. There was talk about unemployment, but only in the context of price stability — to the Fed president, the problem with high unemployment is not in the human suffering or lost real output, but rather in the fact that it keeps “inflation expectations” too low for his liking!

   A common retort I hear from fiscal conservatives is that government stimulus is an illusory “free lunch” proposal — i.e. there is no such thing as a magic cure. Economists subtly argue this when they use terms such as “inflation expectations” and “shocks”, terms which emphasize their belief that recessions and unemployment are “real” phenomena and not demand-driven. But here on the business channel we have a regional Fed president and a panel of hosts and reporters seriously considering whether or not the Fed should change the language in their FOMC minutes! Who cares?!?! These same conservatives who chide fiscal stimulus as “too easy” are suggesting that a change in the wording of a Fed press release might avert deflation! How fantastical is that?!?

2. Thank you for the graduate level education in what has been going on in the halls of high finance over the course of the past 10 years, bringing about the collapse of western civilization as we know it, but having it’s roots, no doubt, in the likes of Alexander Hamilton, The Federalist. It’s astounding that less than 60 years after the end of the civil war, and the consolidation of power in the US Government, that the world slid into a global depression, and here we are 70 years after the war to end all wars having slid into a second global depression.

   If I understand the article’s conclusion correctly, then the sovereign debt of the US is insignificant compared to the consequences without increased federal spending. Even so, there’s a tipping point at which public sector spending crowds out private spending. And, to whom does the benefit of all of this spending accrue? I would prefer to teach a man to fish so that he might have to provide for himself and his family, than to dole out unemployment benefits. Has the pendulum swung so far in preserving the financial institutions which caused the collapse, along with the complicity of the federal government, that equilibrium with the private sector cannot be re-attained?

   The important thing, I think, is to reduce federal spending and reduce taxes to return the American economy back to the private sector. Aside from the Fed and Treasury’s unfailing errancy and inability to acknowledge the failure of their collective world view, our federal government is still operating in a vacuum of denial. They figure as long as they can print and spend, the barbarian hordes will be kept at bay. The defense of the dollars they count on to fund their own retirement is their only motivation, which makes peculiar bedfellows of politicians and financiers. In the meantime, state governments are struggling to balance their budgets. with 11 states meeting the definition of bankrupt, and federal deficit spending continues it’s upward trajectory. This imbalance and lack of parity between Washington and the rest of the country could very well lead to a second American Revolution. The economy can not be centrally managed, this has been proven time and again. The longer the delay in returning the economy to the people, by cutting spending and taxes, i.e. shrink the federal government by any means necessary, the longer it will be before a recovery begins, and the more severe will be the consequences.

3. Dear Bill,

   please take good care of your health so you would live longer, we, the sane citizens of this world, still need your guidance and hope you would see the transformation of ECONOMIC Studies in your life time . . .

   Cheers
   Anas

4. Bill,
   when are we going to see some commentary from you in regard to economic policy in the current election debate. Major parties are both keen to talk about paying the debt down as soon as possible. No doubt Libs are much worse than Labour when it comes to stimulus and propping up the aggregate demand. When it comes to the only progressive party “Greens” I’m not convinced that even they really comprehend the MMT fully and the folly and myths of government debt, and least not publicly.

5. “Associate Professor Steve Keen (an academic ranking which is below full professor in the Australian system) – clearly doesn’t understand what Modern Monetary Theory is about”

   Bill, what is it about? Where is the theory actually written down? I’ve read Mosler’s “Soft Currency Economics” which contains some fundamental flaws, which I have pointed out here: http://moslereconomics.com/2010/07/26/the-political-genius-of-supply-side-economics/ (comment 16 onwards) .

   I asked you whether there is a definitive text or set of texts, in a comment on a recent post, but received no reply.

6. Bill,
   Do you have the link to the Playboy article (or do you keep the magazines; for reference to the articles of course)? 🙂

7. Paul Andrews,

   Understanding Modern Money – by Randall Wray is a good place to start. It’s a very simple book that anyone can understand. Well maybe not a neo-liberal, but most people shouldn’t have any trouble.

   Most of what Wray’s book outlines is just common sense wehich unfortunately has never been the strong suite of neo-liberals.

   Cheers.

8. Paul Andrews,

   I believe some of the confusion arises because of different to MMT scholars theory of value you are using. So in your metrics government spending leading to additional employment may not create additional value if everything is “marked to market”. But this is not the point. We can always define such a metrics and exclude for example the implicit value of work provided by the Police officers who are employed by the State.

   Yes we can always hire thugs on the free market to provide enforcement of our ideas. But this is rather the Zimbabwian model.

   Haven’t said that I agree that under certain circumstances (in a degenerated command economy for example – I am sort-of familiar with that system) little of additional common-sense value is added when people are hired just for the sake of hiring.

9. Adam,

   I am not referring to “mark to market”. Warren Mosler says in “Soft Currency Economics”:

   “When people and physical capital are employed productively, government spending that shifts those resources to alternative use forces a trade-off. For example, if thousands of young men and women were conscripted into the armed forces the country would receive the benefit of a stronger military force. However, if the new soldiers had been home builders, the nation may suffer a shortage of new homes. This trade-off may reduce the general welfare of the nation if Americans place a greater value on new homes than additional military protection. If, however, the new military manpower comes not from home builders but from individuals who were unemployed, there is no trade-off. The real cost of conscripting home builders for military service is high; the real cost of employing the unemployed is negligible.”

   My comment explains that there is a trade-off. It doesn’t matter how you value the resources consumed versus the resources produced, there is a trade-off. I’m not talking about dollar values as such. Subjectively we may disagree about the relative “value” of the costs and benefits, (e.g. in this case the benefit of having a stronger miltary versus the cost of supplying soldiers with resources both to do their job and to reward them for doing their job), but to deny there is a trade-off is a big mistake. And this is in the introduction of a supposedly seminal MMT work.

   I will take a look at Wray’s book.

10. Bill,

    You may wish to consider giving Reagan era budget director David Stockman a blast from the blog:

    http://www.nytimes.com/2010/08/01/opinion/01stockman.html?pagewanted=1&sq=david%20stockman&st=cse&scp=1

11. Bill,
    Even if Neill above was correct (which I know he’s not), so long as everyone has a job (public or private) then we would live in a more civilised world.

    As I understand it Neil’s reference to ‘needing to balance the budget’ is illogical. The government sector deficit balances the private sector surplus!

    I echo Anas Alil’s words above. Make sure you get plenty of rest, as some us really care about you.

    Kind Regards
    Charlie

12. Paul Andrews,

    I 100% agree that there is always a trade-off and only the simplified, introductory version of MMT presented on some blogs may contain statements creating an illusion that these trade-offs do not exist. Whenever I see “all things equal” an alarm bell rings in my head.

    To me the key issue not discussed widely enough is the trade-off between increasing our current consumption of non-reneweable resources and leaving them for the future use or leaving them to allow the global ecosystem to function properly. Another aspect which is virtually missing tn the current discussion is the trade-off between increasing the quality of life in the Western countries by accepting cheap cargo from the developing countries and allowing for dismantling of the productive capacities combined with losing our skills. This is again a kind of intertemporal trade-off as in my opinion the West will pay a price for that.

    On the other hand the Chinese and the others have every right to enjoy the same level of consumption we have.

    The issue of price stability in the context of exchange rate gyrations may need to be addressed as well. But having to chose between 20% unemployment for 10 years and 20% CPI inflation for one year I would chose the cost-push inflation. Another trade-off.

    Having said that I don’t see where these issues may invalidate MMT. This is just a monetary theory and I am asking questions which clearly transcende the limits of the monetary economics. However I would argue that clear understanding of the functioning of the financial system and the knowledge of the policy tools avaliable to the societies and governments is a precondition of addressing the problems I mentioned and these (private debt deflation) highlighted by Steve Keen as well.

    This is what MMT should be about.

13. Paul:

    Trade-offs exist in a zero-sum game. I would (in fact do) argue that both neo-liberals and conservatives describe the economy as a zero-sum game when it suits their interests. I don’t disagree that there are elements of our economic activity (environmental damage, resource scarcity, etc.), where a zero-sum context makes sense. But it is a mistake to characterize the entire economy as such.

    The point Mosler was trying to make is that when employing the unemployed, the economic trade-offs don’t exist – the economy is as a whole better, you get more than what is input.

    Yes, the work has to be meaningful, although just generating demand for someone else to fulfill is meaningful to the economy (so bankers CAN sleep at night knowing they are helping their fellow human beings) – but overall, work should generate something of material value.

    The fact that someone has a cost of employment is not a trade-off if the value of the work exceeds that cost. Just because that value cannot be privately monetized doesn’t mean that value doesn’t exist.

14. Since the name of the Mother of Calamities and her beloved pupil has come up, I thought you might find this webcomic amusing: Ayn Rand’s Adventures In Wonderland: http://wonkette.com/415825/thats-objectivist-ayn-rand-in-the-21st-century

15. Terrific post as always Bill.

    I’m sure you are well aware that Steve Keen is not the only economist to have misrepresented MMT as saying there is no limit to deficit spending. Paul Krugman did the same thing in his recent online debate with Jamie Galbraith here and here.

    I think MMT makes very clear that deficit spending for a fiat-currency issuing government is limited by real resource and political constraints. Whenever deficit spending falls inside resource limits, the constraint is political. For academic economists to “misinterpret” this aspect of the theory – especially “Nobel Prize” winners – stretches credulity.

    I recently discussed the exchange between Krugman and Galbraith here. I hope the shameless self-promotion can be forgiven. The post may clarify the limits to deficit spending for some who are relatively new to MMT.

16. “The government sector deficit balances the private sector surplus!”

    I don’t think this is correct.

    What about the following case?

    I go and dig a tonne of gold out of my back yard, and sell it to Westpac, and “deposit the funds” in an account there (in other words, let them keep the gold on the promise that they will give me up to $46 million when needed):

    Westpac: Assets: Tonne of gold; Liabilities: $46 million to Paul

    Paul: Assets: $46 million; Liabilities: $0

    Net private sector surplus: $46 million
    Net public sector deficit: Zero

17. “Just because that value cannot be privately monetized doesn’t mean that value doesn’t exist.”

    Of course – as mentioned above I am talking in terms of underlying costs and benefits, not in dollars. The government provides many services that have value, but which could never be “marked to market”.

    There is no zero-sum game, as the productive elements of society are continually creating products, services and assets of value, from their brainpower and their labour. The assets are used as collateral, generating new loans and hence new funds.

18. Paul

    Gold is no longer a financial asset – it is not a claim on anybody, it is a real asset. The private sector’s financial surplus in your example is still zero. Any bank can purchase a real asset by issuing deposit liabilities to the seller, but no net financial assets can be created this way.

    Hence your example does not disprove the rule that “govt sector deficit balances private sector surplus”.

19. “Gold is no longer a financial asset – it is not a claim on anybody, it is a real asset. The private sector’s financial surplus in your example is still zero.”

    So what the original premise more closely means for you is: “The government sector deficit balances the private sector financial surplus”

    And you are defining financial to mean a claim on somebody.

    So more closely again to the true meaning from your perspective: “The government sector deficit balances the increase in private sector assets that are claims on others, less the increase in private sector liabilities”.

    I don’t think anyone can argue with that statement.

    Where I think MMT goes astray is it takes the original unclarified statement and draws some conclusions about “money”, which is definitely not merely the difference between private sector assets that are claims and others, less private sector liabilities.

    It uses a term “net money”, to mean the above, then claims to draw conclusions about “money” as if it was “net money”.

20. peterc,

    In fact initially Krugman created a model with inflation-linked bonds which can breed like rabbits no matter what and there is no escape. But governments do not use TIPS to offset the deficit spending. They use ordinary bonds.
    “In period 1, the government borrows, issuing indexed bonds (I could make them nominal, but then I’d need to introduce expectations about inflation, and we’ll end up in the same place.)…”
    And here is the problem. Bonds yields do not have to be equal to inflation expectations and inflation expectations do not have to be accurate.
    The second problem is obviously the P(t) = V*M(t) equation which may or rather may not be true.

    Somebody who is more “knowledgeable in scripture” than me should clarify this issue with prof Krugman and he may accept certain provisions of MMT once he starts applying the rational expectations model only to some groups of people. (Bourgeois may have rational expectations. Workers and peasants have usually few)

    However the issue mentioned in the second post is more interesting.
    “Someday the private sector will see enough opportunities to want to invest its savings in plant and equipment, not leave them sitting idle, and the economy will return to more or less full employment without needing deficit spending to keep it there. At that point, money that the government prints won’t just sit there, it will feed inflation, and the government will indeed need to persuade the private sector to make resources available for government use.”

    Again it looks that the quantity of money or quasi-money may matter. I believe that Paul Krugman may have heard a family story about the hyperinflation in Poland as his grandparents left the city called Brest-Litovsk (Brzesc Litewski) in 1922
    SOURCE_http://www.genealogywise.com/profiles/blogs/in-search-of-a-man-selling
    So he must have heard the same stories I heard when I was a kid (about bringing wages in a briefcase). My family lived not far away…

    Based on that I don’t quite understand where he got his rational expectations from but let’s leave this topic for now.

    So the problem which I can see is when the investors / savers discover that real interest rates are below zero they may try to dump the assets denominated in that currency thus pushing down the exchange rate even more. Does it depend on the quantity of financial assets denominated in that currency? I think so. Then the process of running away from the currency accelerates on its own. The interesting question is why the fiscal policy of imposing a land tax helped to halt inflation in Poland in 1923. Aristocrats and rich people didn’t contribute much to the aggregate demand. I believe the transmission channel was actually the exchange rate of the foreign currencies. Rich people were immediately changing Polish Marks into whatever hard currency they get. This was depressing the exchange rate and feeding back into the prices of imported goods.

    What I remember from the hyperinflation period in 1989 was that people receiving wages who wanted to save were going straight to money exchanges with PLZ (old Zlote) to get either DEM or USD. Any “serious” transactions like buying an apartment were performed in USD. So the local currency was not performing and the rate of saving in PLZ was pretty much zero. Almost like in Zimbabwe…

    Did the aggregate demand exceed the productive capacities? Of course. But this is also the point Paul Krugman is trying to make. If we have a stock of financial assets equal to 10000% of the GDP the system may easily lose its dynamic stability.

    I have no time to research this. One day I may dig out the old Polish statistics from 1921-23 or 1988-91 and analyse them. For now let’s not discard what our old neighbour Krugman said, he may have a point…

    One more thing. I disagree with branding people who do not understand or don’t 100% agree with the MMT. They may not have bad intentions and this may be unfair. I have no bad intentions and I accept that I may be an ignorant as I had only one semester of Marxist / neoclassical Economics 101 at the Uni. But arguments ad hominem won’t convince anyone…

21. Further to the above regarding “The government sector deficit balances the private sector surplus”.

    Here is an example of it being used to draw a misleading conclusion: (from http://www.creditwritedowns.com/2010/05/mmt-economics-101-on-federal-budget-deficits.html )

    “When the government sector runs a deficit, the non-government sector runs a surplus of equivalent size. Draw your own conclusions about what this means in an era of government fiscal austerity.”

    No conclusion can be drawn, because of the limited underlying definition of surplus. If the government ran a surplus, the private sector could well have a very healthy surplus in terms of real assets.

22. Adam (ak): Krugman (like Keen) claimed that MMT says deficit spending can never be a problem. MMT does not say this. Krugman’s (and Keen’s) characterisation of the theory is a misrepresentation. I do think it strains credulity that they could fail to realise this. If they did fail to realise it, it could only be because they didn’t actually take time to check the viewpoint that they were misrepresenting. Krugman, in particular, is at the top of his profession, so to me innocent misinterpretation seems unlikely. In either case, both Krugman and Keen have created a strawman, which is usually done in a dishonest attempt to discredit a point of view. Whether they would agree with MMT, correctly interpreted, is a separate issue, and not the point of my comment.

23. peterc,

    In my opinion even very smart people simply don’t like getting to the bottom of these issues because this would invalidate the theory they invested so much into. But this is not dishonesty. This may be a kind of intellectual failure. We are all humans. I am probably the last person who should lecture about that because my personal style is to pour acid first and then to watch what happens. I do it often and then I regret it later. So please believe me personal attacks will not help anybody. Engaging in discussions whenever possible and pinning down opponents with strong arguments will do the trick I believe.

24. I see the fear first, understanding later if ever is back in fashion.

    http://www.telegraph.co.uk/comment/columnists/charlesmoore/7921664/A-timely-recounting-of-the-Weimar-disaster-that-aided-Hitlers-rise-to-power.html

25. Paul Andrews, August 2, 23:02.

    Your comment # 17 on Warren Mosler’s blog assumes full employment. If there is full employment then diverting a worker from one task to another involves a trade-off. If the worker is unemployed there is no trade-off in terms of that worker’s labour. Warren Mosler assumes there is not full employment hence there is no trade-off.

26. Sorry Paul Andrews,
    I can’t give you a textbook understanding of MMT but FWIW this is my intuitive understanding and so what follows could well be a misrepresentation. I would appreciate any feedback about where I have misunderstood MMT from the more knowledgeable posters.
    Basically whatever you dig out of your backyard, be it gold or potatoes, can only obtain monetary value if someone is willing to exchange that produce for a financial asset. Unless you are in a ‘beads for Manhattan’ situation that financial asset only has value through taxes or interest and ultimately private interest arrangements need taxing to avoid currency annihilation. Runaway inflation or deflation under such an arrangement can mean all bets are off with the exchange value of your financial or real assets.
    You need someone who can pay you in the currency that you get taxed on to buy the goods and services that are others need to sell to you to pay their taxes. So why sell to foreigners if the only financial assets you want are to save the value of your productivity through paying taxes? It is only possible if they are happy to pay you in the financial asset that you are taxed on.
    Admittedly currency pegs, currency trading and monetary union arrangements obscure and complicate this basic international transaction. However it is worth bearing in mind that the only ways your government and the private sector can both be in surplus in any monetary form is if foreign governments and/ or foreign private sectors want your money, goods or services.
    In other words your gold, potatoes, whatever has to be exchanged to have monetary value in the currency that is most efficient and realisable to either where, who and what you are. Most of us have ties in that regard, which, to some extent, make monetary considerations irrelevant.
    Yes it is possible to export and earn an income if your county’s private and government sector are not spending enough of your financial asset at home for you to market your product at home. To do so your country has to produce either financial assets that foreign nationals want to save or invest in or be producing real services and goods that they want to the point that they are willing to fund both the private and public sectors of your economy through buying your government’s currency.
    Of course this breaks down when the productivity of a national economy becomes wildly out sync with the monetary value of currency. Inflation occurs when the productive value of an economy cannot be realised because the flow of monetary value (not its quantity) out strips the economy’s capacity for the production of real goods and services. But the converse is also true. The productive capacity of an economy cannot be realised when flow of monetary value in an economy is not sufficient to pay for the full value of real goods and services in the economy and deflation is triggered.
    Adam (Ak)
    My brief taste of neoliberal influence on academia in Australia during the 80’s in my non- economic social science degree put me off doing any postgraduate study, until recently. I can only admire both Stephen Keen and Bill Mitchell to have come through the discipline of economics and still have the capacity to refute the nonsense. That said I understand Prof Mitchell’s frustration with Prof Keen’s public account of MMT which ignores the fundamental point that deficits are limited by the productive capacity of an economy.

27. “No conclusion can be drawn, because of the limited underlying definition of surplus. If the government ran a surplus, the private sector could well have a very healthy surplus in terms of real assets.”

    Ah ha, a conclusion can be drawn – in such a situation you would have a deflationary scenario – a “very healthy surplus of real assets” with a reduction in net private financial assets. Less net financial assets representing a “healthy” (let’s assume that to mean larger in size relative to some earlier period) net real production.

    Straight-forward is not equivalent to limited.

28. Let me qualify that last conclusion with the possibility of a private credit expansion, which would delay any deflationary episode.

    And this assumes net zero effects from the external sector.

29. Great post, thanks!

30. Keith Newman,

    “Your comment # 17 on Warren Mosler’s blog assumes full employment.”

    This is not correct. Here is the comment, which assumes a level of unemployment:

    —————-

    Warren,

    In “Soft Currency Economics”, you state:

    “When people and physical capital are employed productively, government spending that shifts those resources to alternative use forces a trade-off. For example, if thousands of young men and women were conscripted into the armed forces the country would receive the benefit of a stronger military force. However, if the new soldiers had been home builders, the nation may suffer a shortage of new homes. This trade-off may reduce the general welfare of the nation if Americans place a greater value on new homes than additional military protection. If, however, the new military manpower comes not from home builders but from individuals who were unemployed, there is no trade-off. The real cost of conscripting home builders for military service is high; the real cost of employing the unemployed is negligible.”

    There is a trade-off. Assume the unemployed person is receiving unemployment benefits B. Assume the wage for a military position is W. Let the difference the two be D. D = W – B. This represents the extra purchasing power of the person after he joins the military. The person now has access to more resources than before, through the additional purchasing power D, which leaves less resources for everyone else.

    There is a second trade-off, which is the cost of employment of the person – insurance, equipment, uniforms etc. These need to be supplied from the resources of the nation, leaving less for the people.

    There is third trade-off. While the person is serving in the military, he has no incentive, or even opportunity, to do his own work. He has no opportunity to exhibit entrepeneurship. He has no opportunity to start a small business that will create resources. Therefore the resources of the nation are diminished further.

    These are the trade-offs that should be considered when employing someone in a government position. Sometimes it will be worth it and other times not. But let’s not pretend there is no trade-off.

31. Adam,

    Are you the AK that comments on Steve’s blog?

    Thanks very much for putting together a summary of your understanding of what MMT is. I will have a closer look later and comment further.

32. pebird,

    “Ah ha, a conclusion can be drawn – in such a situation you would have a deflationary scenario – a “very healthy surplus of real assets” with a reduction in net private financial assets. Less net financial assets representing a “healthy” (let’s assume that to mean larger in size relative to some earlier period) net real production.”

    “Let me qualify that last conclusion with the possibility of a private credit expansion, which would delay any deflationary episode.”

    In other words no conclusion can be drawn purely on the basis of there being a government sector surplus.

33. Further to this: “In other words no conclusion can be drawn purely on the basis of there being a government sector surplus.”

    Not only is one not able to draw a conclusion as to whether there will be inflation or deflation, one is also not able to draw a conclusion as to whether there will be a surplus of real assets.

    A government deficit can coexist with a surplus in real private sector assets.

    A government deficit can coexist with a deficit in real private sector assets.

    A government surplus can coexist with a surplus in real private sector assets.

    A government surplus can coexist with a deficit in real private sector assets.

34. The fact is we have too many people either without work ,with not enough hours of work, or receiving a rate of pay that is insufficient to maintain any reasonable standard of living.

    Rises in productivity have often seen profits increase and yet real wages have not followed suite.

    The other common thread through all this is that government surpluses appear to have forced many people into using up all their savings to maintain a standard of living and then once the savings run out they seek credit to simply exist.

    That’s not greed it’s a necessity in this day and age because those who are a little different or don’t keep up with trends are pretty much cast aside like lepers.

    Hence, many people could care less about real private sector assets because they appear to be in the hands of a few and the majority are probably paying for them.

35. For Paul Andrews, August 4 at 8:30:

    I didn’t express myself clearly. The full employment you are assuming is not full employment of labour but rather full employment of productive capacity. You write:

    “There is a trade-off. Assume the unemployed person is receiving unemployment benefits B. Assume the wage for a military position is W. Let the difference the two be D. D = W – B. This represents the extra purchasing power of the person after he joins the military. The person now has access to more resources than before, through the additional purchasing power D, which leaves less resources for everyone else.”

    My response: The person does indeed have access to more resources than before. But there can only be fewer resources for everyone else if all resources were previously fully employed. If there were idle resources available then the allocation of these resources to the now newly employed worker does not come at the expense of anyone else. No trade-off occurs in this case.

    “There is a second trade-off, which is the cost of employment of the person – insurance, equipment, uniforms etc. These need to be supplied from the resources of the nation, leaving less for the people.”

    My response: Same as above.

    “There is third trade-off. While the person is serving in the military, he has no incentive, or even opportunity, to do his own work. He has no opportunity to exhibit entrepeneurship. He has no opportunity to start a small business that will create resources. Therefore the resources of the nation are diminished further.”

    My response: I agree that excessive military expenditures are a lost opportunity for a country even if it is idle resources that are being deployed. If the person was hired to improve infrastructure or educate other people, etc, his/her work would increase the resources of the country.

36. Alan,

    “The fact is we have too many people either without work ,with not enough hours of work, or receiving a rate of pay that is insufficient to maintain any reasonable standard of living.”

    Agreed. The question is: Why? The answer is not necessarily to be found in the private sector surplus of claims on others.

    “Rises in productivity have often seen profits increase and yet real wages have not followed suite.”

    Agreed again. So why the MMT fixation on aggregate private surplus?

    “The other common thread through all this is that government surpluses appear to have forced many people into using up all their savings to maintain a standard of living and then once the savings run out they seek credit to simply exist.”

    Where is the evidence that government surpluses have forced people into using up all their savings? Who decreed that the standard of living to be maintained includes a large house, two new cars every three years, restaurant meals once or twice a week, huge flat screen TV, designer clothing etc. etc? People want to keep up with the Jones’s, and the availability of private credit has enabled a lifestyle arms race. This is nothing to do with whether the government has a surplus or a deficit, especially in times when private sector credit far exceeds public sector credit.

    “That’s not greed it’s a necessity in this day and age because those who are a little different or don’t keep up with trends are pretty much cast aside like lepers.”

    Bingo! It’s only a necessity for those who feel they must keep up with the Jones’s. Anyone else is “different”. This is a huge driving force in a consumerist society. It can’t go on forever though, because at some stage GDP will not support the debt-service on the total stock of credit. Hopefully our society will be a little more accepting of differences when the credit cycle passes its peak.

    “Hence, many people could care less about real private sector assets because they appear to be in the hands of a few and the majority are probably paying for them.”

    Nearly all the people I know seem to care a great deal about real private sector assets – especially houses and their contents! Unfortunately these people’s love of real private sector assets has blinded them to the real cost – i.e. the cost denominated in future labour hours. To the other people, the debt-free non-materialists, I say congratulations!

37. Keith,

    Thanks for your thoughtful response.

    “The person does indeed have access to more resources than before. But there can only be fewer resources for everyone else if all resources were previously fully employed. If there were idle resources available then the allocation of these resources to the now newly employed worker does not come at the expense of anyone else. No trade-off occurs in this case.”

    There is some truth in this. However resources are not homogeneous, so there is still a trade-off. Assume the total resources available are R. Of these, some are idle and would be wasted if not needed by anyone. Call these Ri. Others are not idle, call these Ra. So R = Ri + Ra. The newly employed person will consume some of Ri and some of Ra – call this consumption Ca and Ci. I agree that the consumption of Ri is not a direct negative for the economy (although there may be indirect negative effects). However, the rest of the economy now has access to Ra – Ca, whereas previously it had access to Ra.

    “I agree that excessive military expenditures are a lost opportunity for a country even if it is idle resources that are being deployed. If the person was hired to improve infrastructure or educate other people, etc, his/her work would increase the resources of the country.”

    Yes, if the person is doing something that benefits the country, and those benefits exceed Ca + the debt service costs on the government borrowing, I agree. However I believe this becomes hard to achieve when the objective is purely to stimulate. It also becomes harder to achieve as the debt service costs increase. The objective should be to benefit the country through productive endeavours rather than to stimulate for stimulation’s sake.

38. @paul andrews

    “Where is the evidence that government surpluses have forced people into using up all their savings?”

    Now it is you who is confusing the difference between real and financial assets 🙂

    “People’s Savings” are financial assets, namely a claim on someone else rather than a real asset like a tonne of gold. And, as you agreed in an earlier post on this very thread, it is obvious and uncontestable that if the government runs a surplus, that must be at the expense of private sector financial assets. They are two names for the same thing!

    A financial asset is always a claim on someone else, and is consequently an exactly equal liability for someone else. That is what a ‘financial asset’ is, as opposed to a real asset.

    Therefore, the sum total value of all the financial assets in the world is, always has been, and always will be, zero.

    Anyone can create a financial asset, as long as they create the corresponding liability at the same time – it’s called writing an IOU. Banks do it when they issue loans, companies do it when they issue bonds. You can do it when you didn’t bring enough cash to a poker table.

    Governments do it when they print money (or create bank reserves, same thing). Or, for that matter, when they issue debt, which is why the whole ‘printing money will be inflationary so we must borrow it instead’ line is so silly. A dollar bill is just one dollar loaned to the government at no interest.

    The MMT insight is that, since the total value of financial assets is always zero, if the private sector wants to accumulate them (have a net non-zero amount), the government must, as a simple question of logic, be the ones with the corresponding liability. There aren’t any other players at the table! (If you consider more than one country then flows between countries make things a bit more complicated, but overall change nothing.)

    Consider a game of monopoly, because it really is just that simple. All the money tucked under the player’s sides of the table – “private net financial assets” – had to come out of the currency issuer – “government deficits”. For money to go back into the bank – “government surpluses” – it has to come from what the players have – “run down in private net savings”.

    So yes, it is precisely the case that government surpluses forced the private sector to run down their savings – where by savings we mean (and always did mean) ‘net financial assets’, which seems pretty uncontroversial. Why, what did you think “running down people’s savings” meant?

39. Paul Andrews,

    Yes I’m the same “ak”

    I believe the real advantage of MMT is that it has been shown that the current system can be hacked and the real “debt service costs on the government borrowing” can be set to a very low value if not zero. So the society only needs to worry about the real trade-offs not imaginary ones and is effectively inoculated against debt-deflation. This is one of the points Steve Keen disagrees with the MMT I believe.

    The trade-off is obviously the denial of delivery of further free lunches to some rentiers and possibly some moderate erosion in the real value of their assets. This would hurt!

    Personally I would put more emphasis not on just stimulating the demand and increasing overconsumption but on stimulating scientific and technological progress to actually reduce the consumption of non-reneweable resources.

    But without the MMT and only confined to the reactive quasi-free-market system and we will never address any future problems in time – we will keep doing what we’ve been doing for the last several hundred years, behaving as if there was no environment around us.

    There is still a risk that the government will abuse the tools made available by MMT. But this is a political risk – human societies are no longer constrained by dubious database record processing rules claimed as “objective constraints” by the neoconservatives.

40. begruntled,

    Using your definition of people’s savings, people’s savings are people’s claims on others.

    By contrast, “Total claims on others” includes firms’ claims on people, as well as people’s savings.

    Therefore people’s savings (using your definition) can diminish or increase even though total claims on others nets to zero, and independently of the government’s deficit or surplus.

    “The MMT insight is that, since the total value of financial assets is always zero, if the private sector wants to accumulate them (have a net non-zero amount), the government must, as a simple question of logic, be the ones with the corresponding liability. There aren’t any other players at the table! (If you consider more than one country then flows between countries make things a bit more complicated, but overall change nothing.)”

    The private sector wants to accumulate real assets. There is therefore no additional insight provided by MMT in this regard.

41. Hi AK,

    If MMT’s core premises can not be shown to be solid then it tells us nothing. Worse, it may be leading people into dangerous misconceptions.

    Regarding the environment, measures to negate impacts on the environment need to be judged according to real costs and real benefits. Whether this is done by the government sector or not is probably less important than that it be done. If the objective is to obtain a net real benefit, and the means can be demonstrated to enough people to be likely to be effective, then I agree, it should be done. The big problem is that the costs are borne by individual governments, whereas the benefit is to the whole world, so the cost/benefit analysis doesn’t work for any one country. Therefore some way must be found to persuade many countries to agree on measures and implement them simultaneously. I don’t think the cause is helped by associating it in any way with MMT.

42. Paul, private sector does not accumulate real assets. It produces real assets and consumes them, then produces more and consumes more. This process of getting more is driven primarily by productivity gains. There is no economic reason whatsoever to accumulate real assets.

    Private sector also tends to save. It can only save in something which is external to private sector because any other transaction within private sector is just an asset swap. So this external thing is government liabilities which private sector can not generate. This is the definition of saving.

    You can save in real estate, private sector can not. You can save in gold, private sector can not. You can build a house or dig up some gold and consider it your personal savings but it is just a production (GDP) of real estate or gold which is supposed to be consumed. But GDP is a flow. It can not be saved. It is not saving.

43. “o R = Ri + Ra. The newly employed person will consume some of Ri and some of Ra – call this consumption Ca and Ci. I agree that the consumption of Ri is not a direct negative for the economy (although there may be indirect negative effects). However, the rest of the economy now has access to Ra – Ca, whereas previously it had access to Ra.”

    You seem to have forgotten That Ra will consume some of Ri as well, and that an amount of Ca was happening anyway. Plus of course that an increase in Ca or Ci will cause a multiplier effect in Ra.

44. “You seem to have forgotten That Ra will consume some of Ri as well, and that an amount of Ca was happening anyway. Plus of course that an increase in Ca or Ci will cause a multiplier effect in Ra.”

    Ra and Ri are mutually exclusive by definition. If the resource was idle before the event, it is Ri. If it was not idle before the event it is Ra.

    You are correct that an amount of Ca was happening anyway, because of unemployment benefits. Call the initial Ca: Ca1, and the additional Ca due to the wages being greater than the unemployment benefits: Ca2. So Ca = Ca1 + Ca2. The rest of the economy now has access to Ra – Ca2, whereas previously it had access to Ra.

    An increase in Ci will not cause a multipler effect in Ra, as by definition the resources used to satisfy Ci come out of Ri.

    Ca will cause Ra after the event to be less than Ra before the event. At the time of the event, there is no multiplier. After the event, the private sector may take steps to increase Ra due to the additional demand, but this will not tend to be greater than the reduction caused by the event, and will entail further real costs. Therefore any multiplier effect may in fact be a further drain on real resources.

45. Paul Andrews: A few quick and dirty observations. Where is the evidence that government surpluses have forced people into using up all their savings? Pebird’s conclusion is not “no conclusion” unless you think credit bubbles are infinitely sustainable. Maybe next time will be different. 🙂 Just as lines and shortages hide inflation in a command economy, easy credit can hide or postpone deflation in a market economy, but if the cause, the surplus is not removed, the effect is inevitable. Check out https://billmitchell.org/blog/?p=4157 and https://billmitchell.org/blog/?p=5345 mentioning the negative effects of the Clinton surpluses, and lots of others on Australian surpluses.

    Most of the problems you bring up seem to me to concern more any type of Keynesian or nonclassical macro – economics, rather than MMT in particular. I think you should realize that anti-full employment views have the burden of proof. They are frankly, crazy, and assume that there is a nonlinear quantum chaotic fractal buzzword effect that makes doing nothing more profitable than doing something. As Keynes said:

    “The Conservative belief that there is some law of nature which prevents men from being employed, that it is ‘rash’ to employ men, and that it is financially ‘sound’ to maintain a tenth of the population in idleness for an indefinite period, is crazily improbable – the sort of thing which no man could believe who had not had his head fuddled with nonsense for years and years. The objections which are raised are mostly not the objections of experience or of practical men. They are based on highly abstract theories – venerable, academic inventions, half misunderstood by those who are applying them today, and based on assumptions which are contrary to the facts…Our main task, therefore, will be to confirm the reader’s instinct that what seems sensible is sensible, and what seems nonsense is nonsense.”

    Bingo! It’s only a necessity for those who feel they must keep up with the Jones’s. Anyone else is “different”.
    You misunderstand Alan, and I daresay, reality. The difference between the old US or global full employment economy and the new unequal and irrational one, means that you either keep up with the Joneses, or you are out of a job, and soon out on the street. That’s what “different” means now, as Alan said: “cast aside like lepers”.

    this [increasing the resources of the country] becomes hard to achieve when the objective is purely to stimulate.
    Empirically, this is not true. The New Deal worked, got employment into single digits. WWII, spending directed toward the military, probably the least effective stimulus, as the product is simply destroyed, got the USA completely out of the Depression. Worry about full employment, let the budget take care of itself, and see the economy grow was the universal postwar experience, with no worse inflation than the subsequent, low growth, monetarist, inflation fighting era.

    debt service costs on the government borrowing, Answer to government debt worries: then don’t “borrow” (governments issuing bonds for bucks is not real borrowing, just exchanging one type of debt for another.)

    The third trade-off: I hope you pardon me for saying so, but get real. Yes, necessity is the mother of invention, but god bless the child that’s got his own.

46. “Paul, private sector does not accumulate real assets. It produces real assets and consumes them, then produces more and consumes more. This process of getting more is driven primarily by productivity gains. There is no economic reason whatsoever to accumulate real assets.”

    How then would you explain private sector accumulation of houses, offices, factories, intellectual property, machinery, stock, etc.?
    The sum of these has been increasing for hundreds of years. This year’s creation allows for more creation next year. Net real production of these assets far exceeds net real consumption/depreciation.

    “Private sector also tends to save. It can only save in something which is external to private sector because any other transaction within private sector is just an asset swap. So this external thing is government liabilities which private sector can not generate. This is the definition of saving.”

    Your definition of savings includes all claims on others, including firms’ claims on individuals. It does not include individuals’ ownership of firms through shareholdings. It does not include real assets. Using that definition, your statement may be correct. MMT proponents need to make that definition absolutely clear when making statements like the one you have made.

    What is important in increasing the prosperity of an economy is the increase in real assets, not the increase in savings as you have defined them. This can and does increase independently of the government surplus or deficit.

    “You can save in real estate, private sector can not. You can save in gold, private sector can not. You can build a house or dig up some gold and consider it your personal savings but it is just a production (GDP) of real estate or gold which is supposed to be consumed. But GDP is a flow. It can not be saved. It is not saving.”

    You are implying here that the private sector does not include individuals like myself. But using that definition the sum of claims on others in the private sector does not net to zero. You need to choose one definition or the other.

    GDP includes capital investment, which creates real assets in year X that can then be used in production in year X + 1. Over time, in a propserous economy, the sum of real assets increases, even though some assets depreciate over time.

47. Paul:

    Re: “The government sector deficit balances the private sector financial surplus”

    Private sector financial surplus, as taken from the GDP identity, means holding cash or Government bonds *only*. Any other kinds of mutual claims inside the private sector, due to aggregation, cancel out. E.g., commercial bonds as opposed to T-bonds are not part of such surplus obviously.

    I thought you realized that, but after reading your exchange I am not so sure.

48. Paul, yes, production of assets is increasing as well as consumption of these same assets. Or what is your actual point here?

    Your problem feels like one those problems where people try to challenge MMT but choose instead to go in circles and to make self-obvious statements implying very deep meaning in them. Yes, GDP includes investments. Yes, investments create real assets. Yes, real assets can be used in production. Yes, in prosperous economy real assets increase (though we can discuss it). Yes, real assets depreciate over time. But what precisely is your point?

49. Paul Andrews,

    “The big problem is that the costs are borne by individual governments, whereas the benefit is to the whole world, so the cost/benefit analysis doesn’t work for any one country. Therefore some way must be found to persuade many countries to agree on measures and implement them simultaneously. I don’t think the cause is helped by associating it in any way with MMT.”

    These are 2 separate issues:
    1. global coordination of limiting using resources / limiting CO2 emissions (where I may share your views) and
    2. development of new technologies.

    I was clearly referring to the second issue – financing of the R&D work. In this case real resources are spent and crowding-out effect may occur however I would argue that only states can take responsibility for a long-term investment in new technologies. Securing public financing is an issue if MMT is rejected.

    I disagree with the usual cost/benefit analysis because it implies a static market picture. I can show that early investment in for example electric cars will give the country which is capable of diverting resources early to win the competition later and at the same time may slow down the ratio of using the non-renewable resources even if the other countries initially do not adopt new technologies. The key thing is the change in relative prices in time.

    The Chinese (not spending constrained for obvious reasons) are investing now. The Americans seem to be fiscally constrained because they do not listen to Warren Mosler and they do not spend enough on the research in 2010. The private sector will only react to the pricing signal when it hits the future markets because this is the free market economy and it can only process prices driven by rational expectations. But now oil futures are cheap so making electric car is rather pointless…

    “The next five years will see rapid advances in advanced battery technology, as dozens of manufacturers position themselves to meet the anticipated demands of newly electrified vehicles being launched by nearly every major global automotive company. Despite the support of the federal government, U.S. battery companies have struggled to gain market share while the Asian market for vehicle batteries has taken off. Asian manufacturers, which have traditionally dominated the global market for lithium ion (Li-ion) batteries in various electronics categories, will continue to lead in both Li-ion production and consumption as the global market for electrified vehicles grows rapidly over the next several years, according to a recent report from Pike Research.
    “The Obama administration is making a concerted effort to prevent the failure of the U.S. auto industry, and that will bolster development of the U.S. battery industry through 2012,” says senior analyst John Gartner. “But political shifts and market realities could remove that safety net.”

    SOURCE_http://www.pikeresearch.com/newsroom/asian-manufacturers-will-lead-the-8-billion-market-for-electric-vehicle-batteries

    It is exactly the development of new technologies what may stop the race to the edge of the cliff and prevent wars to get better access to the oil. If this is coordinated globally – everyone will win. So this may have an impact of the first issue as well.

50. Some Guy:

    “A few quick and dirty observations. Where is the evidence that government surpluses have forced people into using up all their savings? Pebird’s conclusion is not “no conclusion” unless you think credit bubbles are infinitely sustainable. Maybe next time will be different. 🙂 Just as lines and shortages hide inflation in a command economy, easy credit can hide or postpone deflation in a market economy, but if the cause, the surplus is not removed, the effect is inevitable. Check out https://billmitchell.org/blog/?p=4157 and https://billmitchell.org/blog/?p=5345 mentioning the negative effects of the Clinton surpluses, and lots of others on Australian surpluses.”

    Credit bubbles are not sustainable. Easy credit can hide or postpone deflation. I agree with you there. The cause is not the surplus – credit can and does expand without a government surplus. The cause is a positive feedback loop – more credit inflates asset prices. Rising prices encourages people to “invest” with more credit. The profit motive causes relaxation in lending standards by financial institutions. There is a great book that describes this if you are interested: “The Origin of Financial Crises” (Cooper 2008).

    “Most of the problems you bring up seem to me to concern more any type of Keynesian or nonclassical macro – economics, rather than MMT in particular.”

    Fair enough. They remain problems with MMT also.

    “I think you should realize that anti-full employment views have the burden of proof. They are frankly, crazy, and assume that there is a nonlinear quantum chaotic fractal buzzword effect that makes doing nothing more profitable than doing something”

    I have not argued against full employment. I have argued against unproductive employment. I think that close to full productive employment can be achieved by the private sector, with an efficient and productive public sector to support it. If you think that is crazy please let me know why.

    “You misunderstand Alan, and I daresay, reality. The difference between the old US or global full employment economy and the new unequal and irrational one, means that you either keep up with the Joneses, or you are out of a job, and soon out on the street. That’s what “different” means now, as Alan said: “cast aside like lepers”.”

    Apologies to Alan if I have misunderstood him. What I meant is that standards of living are very high and people buy things on credit that they can’t afford. People that don’t buy things on credit that they can’t afford (e.g. large houses and goods to fill them with) are better off in my opinion but are the minority and are treated as “different”. Alan was referring to people maintaining a standard of living using credit. To me the average standard of living of today is far higher than that of years ago, and is unsustainable, and people should not try to maintain that standard.

    “The New Deal worked, got employment into single digits. WWII, spending directed toward the military, probably the least effective stimulus, as the product is simply destroyed, got the USA completely out of the Depression. Worry about full employment, let the budget take care of itself, and see the economy grow was the universal postwar experience, with no worse inflation than the subsequent, low growth, monetarist, inflation fighting era.”

    Whether the New Deal worked is a subject of much debate. The New Deal created Fannie and Freddie, so the consequences are still playing out. In my opinion the massive credit bubble created in the twenties was finally destroyed by WWII, allowing the start of a new credit expansion.

    “debt service costs on the government borrowing, Answer to government debt worries: then don’t “borrow” (governments issuing bonds for bucks is not real borrowing, just exchanging one type of debt for another.)”

    Without the real assets created by the private sector, the government would not be able to achieve anything. How else to gain access to those assets, other than through borrowing or taxation?

    “The third trade-off: I hope you pardon me for saying so, but get real. Yes, necessity is the mother of invention, but god bless the child that’s got his own.”

    Think about all the things we have today that we did not have 100 years ago, and consider how many of these things were created by the inventive capacities of the private sector.

51. Adam,

    When I refer to a cost/benefit analysis I am talking about real underlying costs and benefits, not prices of those costs and benefits.

    I think that governments should enforce constraints to protect the environment. Development of technology will be performed by private sector once the constraints are in place because there will be profits to be made.

    I dare say we will not agree on that.

52. Paul Andrews,

    I actually fully agree with the need to impose the constraints but I may not be convinced that the private sector alone has the capacity to develop the technology and that the current intellectual property model encourages commercialisation not patent hoarding.
    REFERENCE_http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aw5EZ9BzrgtU
    All really big R&D projects (for example nuclear research and space programs) were run by the state institutions only outsourcing individual tasks to the private sector. When the actual technology was already available the private sector could efficiently commercialise it.

    The scale of the tasks facing us is enormous if we want to live in a sustainable world in 50 years time. Startups may help but this is not enough.

53. Sergei,

    “Paul, yes, production of assets is increasing as well as consumption of these same assets. Or what is your actual point here? ”

    My point is that production of these assets exceeds consumption, meaning that real assets grow over time. This was in response to your claim that the “private sector does not accumulate real assets”.

    I note that you have not responded regarding the inconsistency in your definition of private sector.

54. VJK,

    “Private sector financial surplus, as taken from the GDP identity, means holding cash or Government bonds *only*. Any other kinds of mutual claims inside the private sector, due to aggregation, cancel out. E.g., commercial bonds as opposed to T-bonds are not part of such surplus obviously. I thought you realized that, but after reading your exchange I am not so sure.”

    What part of the exchange makes you think I don’t agree with that? So long as “financial” is defined as “claims on others” for the purposes of the statement, I agree with the statement. If I’ve implied something else somewhere in what I’ve written please let me know.

55. Paul Andrews,

    Let me encourage you to read a few more Bill’s posts then maybe find invaluable JKH’s comments or visit other professional sites like the Levy institute rather than go after individual commentators and then deliver a technical-KO claiming the total victory over MMT based on your professional experience as an economist over non-professionals.

    The key issue to me (a software engineer not economist) is the overall stability and benefits of the system based on tracking the gap in the aggregate demand and filling it by government spending rather than tracking inflation indices with a hard constraint on the public debt/GDP ratio (55% in Poland).

    I am not a MMT convert and I still haven’t finished learning.

    Now to the key point you were making:

    “Assume the total resources available are R. Of these, some are idle and would be wasted if not needed by anyone. Call these Ri. Others are not idle, call these Ra. So R = Ri + Ra. The newly employed person will consume some of Ri and some of Ra – call this consumption Ca and Ci. I agree that the consumption of Ri is not a direct negative for the economy (although there may be indirect negative effects). However, the rest of the economy now has access to Ra – Ca, whereas previously it had access to Ra.”

    “Ra and Ri are mutually exclusive by definition. If the resource was idle before the event, it is Ri. If it was not idle before the event it is Ra.
    You are correct that an amount of Ca was happening anyway, because of unemployment benefits. Call the initial Ca: Ca1, and the additional Ca due to the wages being greater than the unemployment benefits: Ca2. So Ca = Ca1 + Ca2. The rest of the economy now has access to Ra – Ca2, whereas previously it had access to Ra.
    An increase in Ci will not cause a multipler effect in Ra, as by definition the resources used to satisfy Ci come out of Ri.
    Ca will cause Ra after the event to be less than Ra before the event. At the time of the event, there is no multiplier. After the event, the private sector may take steps to increase Ra due to the additional demand, but this will not tend to be greater than the reduction caused by the event, and will entail further real costs. Therefore any multiplier effect may in fact be a further drain on real resources.’

    I don’t understand “by definition”. By definition of what? Assuming constant prices (what is generally true during a recession) the “resources” correspond to income/spending. You are implying here “by definition” that the spending multiplier is lower than 1 (additional people employed will subtract from the pool of the resources/income available for the rest rather than add to it) what has been empirically shown to be false. Of course you may claim that resources/income are technically not the same and again we may go into the details.

    But this is what I understand from the original Bill’s post:
    REFERENCE_https://billmitchell.org/blog/?p=6949

56. Adam,

    “by definition”

    At the outset, I defined R to be real resources, Ri to be idle real resources and Ra to be non-idle real resources. These aren’t commonly used terms, just ones I defined to illustrate the point. This is what I mean by “by definition”. By “real resources” I mean actual physical and mental resources such as iron, coal, gold, muscle-power, brain-power etc.

57. Adam,

    I’m not interested in whether people are economists or not.

    I think if we read something we think is incorrect, then a positive step each of us can take is to describe why we think it is incorrect.

    The positive effects are:

    If I myself am incorrect, I may be able to find out from others, and increase my understanding.

    Reciprocally, if others are incorrect, I may be able to help them see why, and increase their understanding.

    In many cases neither occurs, because a point is reached where dogma takes over on either side, or people just stop reading and responding. However it is still worth pursuing for the times when new insights can be achieved.

    It doesn’t matter whether the other party is an economist or an MMTer, because in the cut and thrust of public opinion, everyone counts, and people who comment on these types of blogs have more influence than the average person (albeit still very limited influence).

    We are very lucky that we have this technology that allows us to discuss in this way. I find it much more productive than verbal debates, because of the textual record and the thinking time allowed.

    We are also fortunate that blog owners such as Bill allow comments to be freely made even when they do not agree with the opinion of the blog owner. So thanks to Bill and others like him. And by the way the moderation on these comments is excellent whoever does that.

    I think that many of us find the pursuit of knowledge and understanding exhilarating. There is only so much understanding one can achieve through one’s own research and reflections. This medium of debate is an important adjunct to that research and reflection.

58. Paul:

    “So long as “financial” is defined as “claims on others” for the purposes of the statement, I agree with the statement.”

    Who else, in addition to the government, do you include in “others” ? If “others” == “government only”, do you disagree with the statement ?

59. “An increase in Ci will not cause a multipler effect in Ra, as by definition the resources used to satisfy Ci come out of Ri.”

    Looks like you just proved that its not worth anybody working. Much better to be idle. The evidence around us suggests otherwise. Which means there’s a flaw in your model.

60. Hi VJK,

    For convenience, the original statement you made was: “Private sector financial surplus, as taken from the GDP identity, means holding cash or Government bonds *only*. Any other kinds of mutual claims inside the private sector, due to aggregation, cancel out. E.g., commercial bonds as opposed to T-bonds are not part of such surplus obviously.”

    I then said I agreed with the statement so long as “financial” == “claims on others”. So the full version of the statement with with I agree is:

    “Total net claims on others held by the private sector, means the private sector holdings of cash or Government bonds *only*. Any other kinds of mutual claims inside the private sector, due to aggregation, cancel out. E.g., commercial bonds as opposed to T-bonds are not part of such surplus obviously.”

    Hope that clarifies it.

61. Paul, private sector grows in line with its production and consumption. And what I said it that real assets are not accumulated. They are produced for consumption which is the opposite of saving. Whereas financial saving is tendency, and is in general a left-over from not-spending.

    It is a pointless discussion until you clearly outline your claim fully.

62. Neil,

    “Looks like you just proved that its not worth anybody working”

    If the employee adds to Ra (through productive work) more than Ca – B + I + T + Ea then it is definitely worth them working.

    (Note: Ra and Ca refer to real resources that may not be able to be quantified in dollar terms. Ra can include intangibles such as knowledge improved through education).

    (B = previous unemployment benefit, I is total interest on additional government debt over the term of the debt, T is the taxation burden that needs to be carried by all workers and Ea is the cost in non-idle real resources to employ the person – e.g. office space, equipment).

63. Sergei,

    On Wednesday, August 4, 2010 at 18:07, you stated:

    “private sector does not accumulate real assets”

    You then stated in support of the above that the private sector does not include individuals.

    This definition of private sector is most unusual, and if you apply this definition to other statements made by MMT, such as “the total net claims on others held by the private sector = the government sector deficit”, then the statements are not true.

    In any case, even leaving out individuals, private firms accumulate real assets such as land, equipment, intellectual property and more. Some of these depreciate over time but a profitable firm will increase their ownership of these over time – i.e. a net accumulation.

    My claims have been laid out in my previous comments. To summarize, what I have tried to demonstrate is that some of the claims that MMT makes are true only within very limited definitions of the terms used. These claims are then used to justify proposed policies by restating them as if the terms used referred to broader concepts.

    For instance:

    “The private sector surplus is equal to the government sector deficit”

    is used to justify a continuing or increased deficit. It is persuasive – how can anyone deny that a private sector surplus is good?

    But if we restate in context, with the terms defined fully, the statement becomes:

    “The total net increase in claims on others held by the private sector is equal to the government sector deficit”

    If people understand this, they will understand that the call for increased deficits is not necessarily justified unless real assets are increased, because increased claims on others is not an end in itself.

    MMT proponents who come to understand this cannot then in good conscience use the original unclarified statement to argue for increased deficits. They can argue on other grounds, but not, in good conscience, these.

64. “If the employee adds to Ra (through productive work) more than Ca – B + I + T + Ea then it is definitely worth them working.”

    So that contradicts your first statement that it is not worth putting the unemployed to work.

    Plus it is at odds with the classic Keynes hole filling statement.

    It looks like you are operating at a single point in time and are not taking into account the temporal effects of eliminating the opportunity cost.

65. Paul Andrews,

    I am sorry if I go too far…

    Are we talking about stocks (value) or flows (income?) I am guessing you are referring to stocks.

    How would you define the “total interest on additional government debt over the term of the debt” if “Ra and Ca refer to real resources that may not be able to be quantified in dollar terms” Surely interests are charged on debt not on “value”… but anyway this is just a minor problem.

    Is the equivalent of the value of interests sent back in time? So the real value is depleted by the interests charged in the future. How can I send something from “now” to “yesterday”? What will happen to that value which is subtracted?

    This does not mean that there will be no redistribution of real resources in the future where bond holders will receive a free lunch. But we can’t talk about sending the real value back in time… Please remember you have defined Ra and Ca as real values.

    (well I sort-of know where this way of thinking comes from – accounting, valuation, compounding interests, etc.)

    OK let’s assume “all things equal” and that we have mastered the art of sending cargo back in time.

    The second issue is even more interesting as this is a common mistake made by the 99% of the economists.

    How can you calculate the value of x(t0) by integrating y(t) for t=t0 to t=t1 where t0<t1 ? You want to know the value of a parameter "now" but it depends of the value of another parameter in the future. Worse, that parameter y(t) may actually be a function of x(t) and some random noise. Certainly our future interest rates may depend on the current deficit spending and the level of spare productive capacities.

    x(t0) is the value of additional "resources" The integral I am referring to is the (real) value of "total interest on additional government debt"

    We must know the future… or rather we have to assume something like "rational expectations about the inflation" otherwise the equation doesn't make sense. But… what about the noise …

    We not only can send cargo back in time but also we must know the future.

    We are GODS… no sorry we are just neoclassical economists.

66. Paul, private sector is a subset of economy. Economy can be split along any lines but general approach is to split it into private sector and public sector. Private sector is normally further decomposed into domestic and external. Domestic can be still further split into households and corporate. And so on. So where did I say or assume that private sector does not include individuals?

    My next point was that private sector produces real assets not to accumulate them but to consume. Consumption (amortizing or immediate) is the purpose behind any production. Nobody produces for the sake of having. The fact that the stock of real assets grows does not mean anything. Consumption grows as well as the size of private sector. Moreover the claim that real assets accumulate does not include services which stand behind advanced economies. Services are produced but in no way can be accumulated or using your terminology saved.

    Saving is by definition “for the sake of having” or “just in case” and have a goal of improving safety margin of saving agent. When we had barter financial systems people saved in wheat, corn etc. But in modern monetary systems people save in terms of money. Modern money is a nominal asset and claim. You can have your savings on deposit in a bank but on macro level all private sector claims on itself net to zero. The only way private sector can save is to use claims external to private sector. This is government money and government debt.

    So “The private sector surplus is equal to the government sector deficit”. That is fact which starts even with decomposition of economy into several parts. It is not used to justify anything. It is an accounting fact which always happens regardless of whether you like it or not. What MMT says is that if government, domestic sector and external sector all try to save at the same time then somebody will have to give up. And normally it is government who gives up. What MMT further says is that economic cooperation is better than opposition since the surplus-deficit equality will be forced onto the economy but in a worse economic state. So MMT tries to distinguish between good government deficits and bad government deficits and argues for government to be proactive and not reactive.

67. Paul:

    “Hope that clarifies it.”

    It does.

    Thanks.

68. Very interesting discussion guys. I definitely feel smarter for having followed it this far.

    Paul, thanks for your input here. Its this type of interaction between the “curious non believers” and the “billophiles” which makes this comment section the best on the web for my time. As a non economist who loves thinking about these economic issues this, MMT, is really the only paradigm that strips it down and tries to answer these very important questions. So many things seem to be simply assumed away with all the other paradigms and math is used as some sort of brain scrambler to discourage the uninitiated from even beginning to question.

    I actually have more of a point than just glad handing you all here so let me comment to Paul on something; I have seen you use the term “real” value a lot, or real cost. Its used by many people so really this is a question to the board in general I think, but what IS the real cost or value of anything?

    I have my own sense of real vs nominal but I usually refrain from using it in economic discussions because I cant quantify it and if it cant be quantified, what use is it in our modern monetized economy? It seems to me the only value we should ever discuss is nominal since that is our notation of worth in THIS world. There may be worlds where real can be distinguished but it aint this one. Whatever someone will pay for it is what something is worth. Real costs, as I think you mean by the term, are different for everyone so we should carefully bring them into economics discussions.

    Now it is helpful to distinguish if cash has been payed or if extensive credit was used, since this can determine if full payment is actually ever made but to the seller he cares not if cash or credit was used, unless HE issued the credit himself. I think I actually lament this condition of our economic life. I say I think because I may be wrong about the consequences of this that I see. Those consequences are; Third parties which actually encourage and profit from the issuance of extensive credit. They do take the responsibility of extracting the debt payments and make sure the seller simply gets paid up front but this really removes the seller from caring about the ability of the buyer to pay, thats some banks problem. Trouble is a banks problem is a lot of peoples problem. And when multiple banks are involved it becomes all of societies problem.

69. I meant to add to my previous post;

    Paul, I do think you might be falling for the fallacy of composition in some of your reasoning. You talk about private savers as individuals but MMT talks about the private sector saving as a whole and there can be no doubt that the sector as a whole saves the amount, to the penny, that the public sector dis-saves. The govt saving money is nonsensical. It never saves money. It can spend or not spend but when it doesnt spend there is not more for later. Even when the accounting says surplus on their balance sheets that is not more money to spend later. As Greenspan said, the govt can guarantee any amount of payment, it cant guarantee what you can buy with it. How can Greenspan be so right about this yet so wrong about so much else?

70. Neil,

    “So that contradicts your first statement that it is not worth putting the unemployed to work.”

    I didn’t make such a statement.

    “Plus it is at odds with the classic Keynes hole filling statement.”

    If you mean the idea that the unemployed should be put to work digging holes and filling them again, then yes it is at odds with that idea.

71. Sergei,

    “So where did I say or assume that private sector does not include individuals?”

    Here: “You can save in real estate, private sector can not. You can save in gold, private sector can not.”

72. Greg,

    “I have my own sense of real vs nominal but I usually refrain from using it in economic discussions because I cant quantify it and if it cant be quantified”

    By real assets I mean actual things that people, firms and governments find value in. It starts with water, food, then shelter. At the other extreme it includes iphone apps and other luxuries. It includes brain power, muscle power, knowledge, systems and other “things in the world” that people can make use of to sustain themselves and the state, and to develop and create more things.

    If those things cannot be created, sustained and increased then any talk of private sector surplus is meaningless.

    As for quantification, everyone has their own subjective relative values for real assets. There is no such thing as an objective value of a real asset. The market can determine a price for each asset, by finding the person, firm or government that places the most subjective value on the asset and allowing them to obtain it in exchange for things that others value more highly. This is the closest thing we have to an objective value determinant for real assets, and works well for many purposes.

    Other real assets cannot be priced or quantified. For instance those things that benefit a country, such as the system of capitalist democracy itself, cannot be quantified. Each person has their own subjective value for this, and because there is no market, these subjective values cannot be crystallized into a single market price.

    When an individual person is forming an opinion as to whether a particular unemployed person should be employed to perform a particular job for a particular wage entailing a particular increase in government debt, they need to use their subjective judgements to weigh up the effects on all real assets. Because some of these things have prices the individual can also come close to objectively quantifying them. However the other things cannot be objectively quantified. The individual should not leave out the real assets that cannot be quantified purely because they cannot be quantified. The individual needs to make a subjective judgement taking in all of the information available to him or her – quantitative and qualitative.

    When a society, through their government, is forming an opinion as to whether to employ a type of person to perform a type of job for a range of wages, the individuals that form that society need to weigh up the same effects on real assets, whether they can be objectively quantified or not.

    I am not asking that everyone agree with me on whether a particular person be employed in a particular government job. I am saying that I think it makes sense for everyone who forms an opinion on the matter to consider the impact on real assets, not on the impact on total net claims held on others by the private sector.

73. Greg,

    “You talk about private savers as individuals but MMT talks about the private sector saving as a whole and there can be no doubt that the sector as a whole saves the amount, to the penny, that the public sector dis-saves”

    I agree that the private sector saves the amount to the penny that the public sector dissaves, if “saves” is defined as net increases in private sector claims on others.

    This definition of “saves” excludes the increase or decrease in the value of firms, and any other net accumulation or depreciation of real assets.

    Take shares for instance, any increase the value of those shares is not included in your definition. If a company invents a new method of energy creation that saves the planet and increases the value of its shares one-hundred-fold, and increases the wealth of its shareholders, the definition of saving you are using does not capture that.

74. Dear Paul and others

    I haven’t had time to comment yet on this discussion but the statement “the private sector saves the amount to the penny that the public sector dissaves” (which runs through this thread of discussion) is incorrect. The correct statement is that the non-government surplus is to the penny equal to the government deficit. The private sector is only a part of the non-government sector.

    That misunderstanding alters some of the conclusions you have been making and has limited the overall discussion and if I get time I will reflect on that.

    best wishes
    bill

75. Paul, you are making a typical fallacy of composition mistake which Greg also mentioned. Yes, you personally can save in gold, real estate, stocks, deposits and etc but private sector can not. You personal saving is an asset swap on macro level.

    Bill, I honestly do not understand why you push for new terminology with “non-government”. I believe that definitions “private – public”, “domestic – external” are common sense and well accepted and understood. Please clarify

76. Paul, the definition of savings in the national accounts is income not spend. This is precisely the reason why your purchase of gold, real estate etc does not qualify as savings. Because it is income that you spend. Then, if you dig up some gold from your backyard that is production. Production that is not sold increases inventories. Increase of inventories is investment. You should not invent a bicycle and try to confuse everybody. A difference between government sector and public sector can be a valid question to ask but everything above is a well established processes which have nothing to do with MMT 🙂

77. Sergei,

    The definition used in the national accounts is not the one that people generally mean.

    e.g. from Bill’s post:

    “So never mind the real damage caused to people’s life savings”

    In this context, savings would include investments such as share funds.

    My point is that a statement is made by MMT, and is correct, if a particular definition of savings is used. However that statement is not correct when communicated to people who have a different definition in mind.

    I am not saying that any particular definition of savings is the “correct” one.

78. Sergei,

    My apologies, I misunderstood that you were drawing a distinction between an individual as a part of the private sector and the private sector as a whole.

    So your argument is that there is a fallacy of composition.

    There is no fallacy of composition because the non-government sector does accumulate, in aggregate, real assets. This is apparent simply by looking around at all of the real assets currently in possession of the private sector. Buildings, machinery, technology etc. These were not there at the inception of the private sector, hence they have been accumulated by the private sector.

    The “claims on others” is merely part of the accounting for ownership of those real assets, as well as ownership of the future labour of others. The net creditors have a claim on a share of the real assets. The net debtors have some control of real assets that they will need to relinquish to creditors in the future unless they provide sufficient productive capacity to the creditors.

    One of the sad things about any part of the government deficit that is ultimately unproductive is that is plays further into the hands of the net creditors by giving them a greater share of the ownership of future labour of all taxpayers. I’m sure bankers love MMT because it lets them sell more of what they sell the best – debt. When they get worried they won’t be able to collect, they will stop loving MMT.

79. Isn’t ‘non-government’ a wider term than private + external. Doesn’t it include all entities that have to ‘balance the books’ and therefore include Quangos and the like.

80. Just to elaborate on: “The net creditors have a claim on a share of the real assets. The net debtors have some control of real assets that they will need to relinquish to creditors in the future unless they provide sufficient productive capacity to the creditors.”

    This process is distorted by the growth in total net debt relative to real assets, because of the price inflation that this causes for real assets. Hence those who borrowed in the last 40 years to buy real estate, did not need to provide as much productive capacity to creditors as they would have had to in an environment with no growth in total net debt relative to real assets. Those who did so recently, or those who do over the next few years are in danger of having to provide more productive capacity to creditors than they expect, as total net debt relative to real assets is likely to contract. By total net debt I mean the total net debt of all debtors, including the government. There is a natural limit to total net debt relative to real assets due to the burden of interest payments that must be funded by the productive capacity of real assets. This is another factor to take into account when deciding whether you agree with increasing the deficit for any other reason than productivity improvements. It’s not great to be a net debtor in a deflationary environment.

81. Paul,

    But Bill doesn’t advocate public borrowing while the so-called markets dictate long-term bonds yield. Only if this is the case the redistribution of the real income is significant for example for 5% and debt=100% of GDP 5% of it has to be redistributed assuming a stationary state – zero inflation and zero growth in the debt level.

    The natural interest rate is zero in MMT as they want to leave excess liquidity on the interbank market what also implies low long-term bond rates if inflation expectations are low (as the near end of the yield curve is pinned close to zero).

    Maybe my post was written in an unfriendly way but I was actually trying to show that point – we should not make any assumptions in regards to the future real costs of servicing the the public debt (I mean the income redistribution rate) unless we embrace the MMT fully – in that case these costs can be residual.

    Or we always have an option of selling no bonds (what has been proposed by Bill). In that case interest rates will be normally close to zero or to whatever the overningt deposit rate at the central bank is.

    In the MMT world the central bank must hold a lot of debt securities anyway so what’s the point of selling them ? (maybe except for inflation-indexed saving bonds with zero yield for genuine individual savers).

    I still need to learn how inflation hedging can be performed if there is no bonds. There will always be some inflation… New instruments may need to be provided.

    Now the key point. I haven’t seen much discussion about the impact of persistently low interest rates on the other parameters of the economy. Let’s imagine that we got out of the recession with debt = 1000% of GDP – this means that the central bank must be very careful and cannot increase real (nominal – inflation) interest rates much and has to moderate the long end of the yield curve otherwise we are in the trap described by Paul Krugman. But the usual instrument of the monetary policy becomes useless then. If the private sector has so much debt instruments there is a constant threat of dumping the assets (affecting exchange rates) if inflation develops. So the government has to be very careful and intervene very early with fiscal policy (taxes) if there is a risk of inflation caused by credit expansion leading to breaching the productive capacities of the economy.

    But if there is no additional incentive on saving (real interest rate close to zero) the private sector may not increase the ratio of savings to GDP at all. These people who have a surplus will have to invest instead to get a decent return. There is no point in saving in financial instruments. We have to acknowledge that the rate of saving doesn’t have to be constant but may be a function of expected gains.

    But this may be what we wanted to achieve anyway – there will be no gap in aggregate demand provided that there is no debt deleveraging. Bubbles have to be suppressed by the efficient fiscal (taxation) policy as such a system may be quite sensitive to inflationary threats.

    So this is how I would see the proposed alternative “bias point” for the economy when MMT is implemented. Very little income redistribution and banking lending constrained by risk assessment of debtors rather than fluctuating interest rates. Financial sector doing what it is supposed to do – lubricating the productive economy rather than growing like a cancer and feeding asset bubbles.

    Does it make sense or is my analogy with electric circuits going too far? Please be careful as I may be wrong here…

82. Paul

    You said regarding savings

    “Take shares for instance, any increase the value of those shares is not included in your definition. If a company invents a new method of energy creation that saves the planet and increases the value of its shares one-hundred-fold, and increases the wealth of its shareholders, the definition of saving you are using does not capture that”

    It SHOULDNT take share value into consideration! That can change day by day, heck minute by minute. Once you sell the shares and keep the cash it adds to your savings, and subtracts from someone elses savings because they spent to purchase your stock. This is not to say that these increases in value arent positive or capable of encouraging growth. One can often use these assets as collateral for further borrowing and investment but you certainly wouldnt expect there to be a universal agreement by various sources of lending as to the value of your shares of stock that you wanted to put up. There would be a spectrum of valuation likely. Some banker would not think that stock is worth as much as a another maybe because he doesnt know enough about the company. The share value of a stock is determined by too many extrinsic and variable factors.

    What if that stock you are using as collateral is an energy company stock and a month later that company you referenced invents the new method of energy creation causing the stock you own to plummet in value? The guy who valued your shares at 100 and loaned you money is going to be pissed when the shares end up being worth 25. While the guy who valued them at 30 will not be burned as much.

83. Greg,

    There is no should or shouldn’t to a definition or concept. One concept of saving includes shares, another doesn’t. Both concepts are valid. My point is that those who use a potentially ambiguous term should make it clear which definition they mean before using it to persuade someone to a particular conclusion.

84. Adam,

    What Bill advocates, he advocates because of conclusions he has drawn from a chain of logic that we call MMT.

    I believe that the a priori assumptions are invalid and the subsequent chain of logic is also unsound, in part because the terms used are not applied consistently.

    Your comment discusses notions that only make sense if you believe the a priori assumptions and the chain of logic are sound, so I can’t really add anything further to what you have said.

85. August 4, 15:32

    ”However resources are not homogeneous, so there is still a trade-off.”

    This may well be the case but then there is full employment of those resources regionally and/or in a profession, etc, something I had assumed was not the case. In any event in most developed economies there are plenty of idle resources. Witness the high unemployment of labour, low industrial capacity utilisation rates and low inflation rates. So any trade-off under those conditions is minimal.

    ”Yes, if the person is doing something that benefits the country, and those benefits exceed Ca + the debt service costs on the government borrowing, I agree. However I believe this becomes hard to achieve when the objective is purely to stimulate. It also becomes harder to achieve as the debt service costs increase. The objective should be to benefit the country through productive endeavours rather than to stimulate for stimulation’s sake.”

    Not sure how you define productive endeavours and why that is such a concern. There are plenty of things people can do that are productive: educating themselves or others, assisting the sick and aged, infrastructure repair or building, environmental improvement, beautification of cities, etc, etc. It’s not like there’s a shortage of things that need doing.

    I’m not sure what your point is with respect to debt service costs unless you are assuming the costs are borne by an entity that is not the currency issuer.

86. Sorry, my previous comment should have read: For Paul Andrews, August 4 at 15:32

87. Paul,

    “I believe that the a priori assumptions are invalid and the subsequent chain of logic is also unsound, in part because the terms used are not applied consistently.”

    This is interesting. Could you list these invalid assumptions and inconsistencies you found?

    (Note. I’ll be back on Sunday evening and I’d love to continue this thread)

    Adam

88. Adam,

    I’ve been listing the logical inconsistencies and defending my interpretation above.

    One of the main a priori assumptions is that the validity of a currency is solely due to demand for it from the private sector in order to pay taxes.

    This I disagree with. The private sector is required to use the currency due to legal tender laws. The system evolved to where it is today by starting with the BofE gold standard, on top of which evolved credit money. The BofE system spread across the Western world, with temporary lulls from time to time. The gold standard was then removed, leaving solely the credit money system. There was no need for a government deficit for money to come into being.

    From a purely theoretical standpoint, and as an academic exercise only – even if you had to start a pure-credit system from scratch, the (brand new) central bank could “bootstrap” the system by buying real assets from the private sector (and issuing HPM to do so), or by lending to the private sector using private assets as collateral (again, creating HPM to do so). This HPM would be backed by real assets so the central bank would be in the black from the start so long as the government provided it with some real assets (e.g. land) as an equity buffer. The initial value of the currency would be set by the amount of HPM created to pay for the assets.

89. Kevin,

    “In any event in most developed economies there are plenty of idle resources.”

    Agreed.

    “So any trade-off under those conditions is minimal”

    I am glad you agree that there is a trade-off. This was my initial point. I don’t think it is possible to dismiss the trade-off as minimal, or conversely assume that the trade-off is prohibitive, without first investigating and forming an opinion on the effect on real assets in detail for each potential new job creation scheme. (Actually I think these would be better called “Public asset production scheme”, because that should be the objective).

    “Not sure how you define productive endeavours and why that is such a concern. There are plenty of things people can do that are productive: educating themselves or others, assisting the sick and aged, infrastructure repair or building, environmental improvement, beautification of cities, etc, etc. It’s not like there’s a shortage of things that need doing.”

    I think we each have our own subjective views on what is productive. For instance, I think that education is extremely important. (I also happen to think it cannot be left purely to the private sector). However it is not just a matter of adding teachers to improve education – education could be improved in many ways without doing that. As one example, I believe economics should be taught much more widely and in more depth, with exposure to all the main and alternative viewpoints, not just neo-classical, not just Keynes. Assisting the sick and aged is also important for improvements in a real asset – our morality and decency as a community. A moral, decent community will be more happy, and therefore in my opinion more productive generally.

    None of those things can be done simply by throwing people into work. The objective has to be improvement of real assets – physical, mental, psychological, spiritual. The objective cannot simply be creation of jobs as stimulus.

    These things cannot be judged by the numbers alone, so not everything can be left to the market. The market is good at things that can be easily quantified, and where actions have early consequences. The market won’t be interested in doing things now that will make life better a hundred years from now.

    However the market is brilliant at things that can be priced, and where actions have early consequences (i.e. where the profit can be smelled some way not too far down the track). Fortunately a lot of things can be priced, and all we need to do is let people freely be productive and be rewarded, while providing a fair environment with protection of property, for those things to grow.

    Government is, in my opinion, better suited to doing those things whose value cannot be quantified with a price. A good government will recognize that what profits society as a whole is conversion of labour into real (but non-priceable) assets. That government will have a good idea of the real assets it wishes to grow, and of how to grow them by spending the minimum quantifiable resources possible (e.g. labour).

    A bad government will waste labour and other resources by ignoring those factors and putting people to work just for the sake of putting them to work.

90. “I’m not sure what your point is with respect to debt service costs unless you are assuming the costs are borne by an entity that is not the currency issuer.”

    The cost of net government debt is borne by the government.

    In the Central Banking system, deposits come into being when any entity makes a decision to trade future credit for current credit, where the future credit is a higher amount than the current credit. This applies to the government as well as to private individuals and the private sector as a whole. The difference between the total future credit committed, and the current credit obtained, is the total interest burden.

    So the “currency issuer” is actually anyone who decides it’s a good idea to borrow. They add a kind of value by promising future production. That “value” is represented in the system by the increase in total net debt.

    The only case where the new borrower does not bear the cost (except in cases of underwater defaults) is when the central bank buys government debt, because any interest on government debt owned by the central bank is remitted back to the government. In this sense the government has an unfair advantage over the private sector (although the private sector gets its own back through “too big to fail”, bail outs, and sale of securities at above face value to the central bank). However, even in this case the government does bear the burden of eventually paying down the principal.

91. While I have this in mind: people should be wary of comments such as “the interest rate on government bonds is low, therefore it is OK to keep increasing borrowings”. I heard Joseph Stiglitz on the radio last night saying something like this.

    What this ignores is the potential for deflation. Future deflation may mean that the real interest rate is much higher than the nominal rate. It won’t be possible to simply “issue currency” to avoid deflation, because as described above, productive activities must be found in order to make the debt creation, and hence currency creation, worthwhile. This takes time (if it is even possible), and if the motivation is wrong, will not be done properly, causing a decline in real assets over time.

92. Some replies:

    Credit bubbles are not sustainable. Easy credit can hide or postpone deflation. I agree with you there. The cause is not the surplus – credit can and does expand without a government surplus. Yes to the latter, but that is irrelevant to what I, pebird etc concluded, and you are denying or are inconsistent or unclear about. The conclusion was the surpluses are highly deflationary, and very easily lead to deflation-postponing unsustainable credit bubbles. We were not saying that all credit bubbles arise that way.

    To me the average standard of living of today is far higher than that of years ago, and is unsustainable, and people should not try to maintain that standard. Well, especially modulo technological advancements in consumer goods, the advancement in the median American’s standard of living is pathetic over that of thirty years ago, compared to the advance from thirty years ago to thirty years before that. Look at the real wage. All of the wealth of the increased productivity has gone to the upper income brackets. What gains there have been have to be balanced against losses – more wealth only comes with less leisure. Two incomes barely support what one did. Under a more full employment economy, run more according to what MMT would advise, there were more and more attractive choices. Now, its either keep up with the Joneses (but not too much, or get trapped in debt peonage) or don’t – and probably land in one of the lower brackets, constantly under attack from the upper. In any case, why is it unsustainable? This is a real, not a nominal, financial question. The only financial part is the way the US current account deficit gets us real goods for dollars.

    Without the real assets created by the private sector, the government would not be able to achieve anything. Either absurdly false or trivially true. Denies the very possibility of a command economy. Governments can and do create real assets. Private sector involvement can be minimal, or nonexistent. Of course they do have to pay actual people for their work on government projects, but I don’t think this trivial truth is what you meant. And there is prison labor.

    How else to gain access to those assets, other than through borrowing or taxation?
    By paying for them with newly created money without “borrowing”. By “printing money”. Which is what the government does. The government does not “borrow” money from anyone. The unnecessary activity of issuing and/or buying back bonds is not borrowing, but exchanging one kind of government debt for another. There is a demand for government IOUs called “dollars” because government has the unilateral ability to demand them back from you, and even take and convert your real assets if you don’t have government IOUs. This question indicates a very basic misunderstanding of government finance and MMT.

    Whether the New Deal worked is a subject of much debate.The debate is between empiricists and ideologists. Nobody in 1936 doubted. Look at the election returns. The New Deal created Fannie and Freddie which worked very well until mortgage securitization. Criticizing anything so long after, after drastic changes is amazing. It is visiting the sins of the grandsons on the long dead grandparents.

    The costs of unemployment, direct and indirect, are obviously so enormous that the rational thing for anyone who has not studied the highly irrational and otherworldly anti-empirical nonsense that passes for mainstream economics is to dismiss the trade-offs as negligible. Of course, MMT, or Keynes for that matter, proposed targetted and rational stimulus. Of course the job guarantee program would do useful work and try to maximize public asset creation – but a job must be a right, not a government whim.

    As someone who has lived off their small business, the idea that people with jobs have “no opportunity to exhibit entrepeneurship”, and that their non-entrepreneurship is a serious loss to the economy, and that this has anything to do with the “inventive capacities of the private sector” is comical. Although I do entertain the hope of convincing Warren Mosler to give up his multimillionaire job to me, so he can exhibit his prowess as a penniless entrepreneur. Yeah, lots of people have said getting fired was the best thing that ever happened to them. Lots more haven’t, because it wasn’t. Sometimes they or their loved ones died soon after.

    That modern money demand is driven by taxes (and legal tender laws are irrelevant – they don’t even exist in Scotland iirc) is not an apriori assumption, but something which has been subjected to study. When you are learning a new subject, you have to give it a chance, and not repudiate everything immediately. You might like to look at Alfred Mitchell-Innes’ two wonderful articles on money written in 1913 and the book Wray edited on them for historical understanding. Credit and state money is ancient. The gold standard is both a new-fangled and discarded invention.

    There was no need for a government deficit for money to come into being.

    Of course there was, no matter what one used as money. Otherwise it would all be sitting in government vaults or as sums in government computers, or as flammable notched sticks in a building. This isn’t an assumption, but a tautology applicable to all forms of credit. No creditor can have credits if the debtor does not have a debt from running a deficit = issuing credits.

    In your theoretical academic exercise, why would anyone accept the HPM for real assets in the first place?

93. Paul: So the “currency issuer” is actually anyone who decides it’s a good idea to borrow.

    Nobody actually disputes that. And that is how banking system operates and the whole private sector in general (e.g. shares, bonds). But there should be a lending desire for this to operate. However government can issue laws and enforce them and therefore does not have to wait until somehow appears who wishes to lend.

94. Sergei,

    “Nobody actually disputes that. And that is how banking system operates and the whole private sector in general (e.g. shares, bonds).”

    Great – this is good common ground.

    “But there should be a lending desire for this to operate”

    As long as there are private assets, and trust between people, there will be a desire to lend the assets out. Currencies will naturally evolve in cases where governments do not enforce an overarching legal tender currency.

    In the case where the government does enforce a legal tender, again in the theoretical case of a brand new economy, creation of a central bank with power to create and lend HPM against private asset collateral could supply the seed lending.

95. Some Guy,

    “The conclusion was the surpluses are highly deflationary, and very easily lead to deflation-postponing unsustainable credit bubbles. We were not saying that all credit bubbles arise that way.”

    OK – my position, to be clear, is that a government surplus or deficit represents an increase in the total net debt of all sectors. i.e. line up all of the net debtors and total up all of their net debt. If this increase is not matched by an increase in real assets through the production paid for with the debt, then it is inflationary.

    To elaborate, if the government has a surplus, the private sector holds the net debt, and in my opinion will in general, but not always, be better at putting that net debt to work to increase real assets, and therefore an inflationary scenario is less likely. However that does not preclude the possibility that the private sector will waste the access to capital, leading to inflation. One possible case is if the government lent to people to fuel an excessive real estate boom (by excessive I mean one that improved quality of houses far and away above what is needed to achieve maximum productivity of occupants).

    Conversely, if the government has a deficit, they hold the net debt. Because of the difficulties that occur on the government side when channeling funds to productive activities, I believe there is a greater chance that the total net debt created will exceed the real assets created, and therefore inflation is more likely.

    Over and above all this, what has had a much greater impact on inflation in my opinion for the last 30 or 40 years has been relaxation of lending standards in the private sector.

    “Denies the very possibility of a command economy. ”

    A command economy appropriates the assets of the private sector through force. I agree that this is another alternative to borrowing and taxes.

    “By paying for them with newly created money without “borrowing”. By “printing money”.” (In response to how else is the government to obtain access to private assets)

    This is the MMT position, yes, but the position is based on incorrect a priori assumptions, and a chain of reasoning that does not use terms consistently. For instance, any activity that exchanges one form of debt for another, in exchange for regular payments of a fraction of the original amount, fits the concept of “borrowing” at “interest” perfectly. You call it “printing money” which is misleading, because it leaves out the payment of what MMT people call a subsidy to the private sector. (Most people call this interest).

    “Of course, MMT, or Keynes for that matter, proposed targetted and rational stimulus.”

    To propose targetted and rational spending is to admit that there are trade-offs. I don’t have a problem with that. I was commenting on a particular comment that Warren made in the introduction of his seminal paper, that there is not a trade-off.

    “Of course there was, no matter what one used as money. Otherwise it would all be sitting in government vaults or as sums in government computers, or as flammable notched sticks in a building. This isn’t an assumption, but a tautology applicable to all forms of credit. No creditor can have credits if the debtor does not have a debt from running a deficit = issuing credits.”

    Why does not having a government deficit imply that money would be sitting in government vaults or those other places? If a government started from scratch with no assets, it would not have any deficit, or any surplus, or any vaults.

    “In your theoretical academic exercise, why would anyone accept the HPM for real assets in the first place?”

    If the HPM is denominated in the only legal tender currency in the country, borrowing from the central bank to get HPM would be the only way to transact business other than barter. Private entities would clamour to be the first to borrow, using their assets as collateral, to get first use of the new currency.

    I will look at Alfred Mitchell-Innes’ articles. I agree that credit money and state money go back a long way. I was referring to the central banking model itself, a particular system for managing credit money, which began with the Bank of England and has evolved since, during a long period of (mostly) growing prosperity.

96. Paul:

    If the productive capacity of an economy is running at 70% and an increase of spending increases that utilization to 80%, without any increase in real assets, is that inflationary?

    I don’t think there is a simple answer to that question – I want to point out that I think you are implicitly assuming an economy at or close to full capacity (such as “during a long period of (mostly) growing prosperity.”) At or near full capacity (which implies a low unemployment rate), your analysis makes sense.

    Your make the point “If this increase is not matched by an increase in real assets through the production paid for with the debt, then it is inflationary.”

    Consider that prior investments in productive output expected a certain return – which has an implicit assumption on capacity utilization. If the economy’s capacity utilization exceeds that assumption, then those prior investments will more likely meet or exceed their targets, conversely if utilization is below that assumption, those investments will have poorer performance. These effects on return have to be taken into account when making assertions about the relationship between spending and inflation.

    This creates an interesting situation with regard to capital holding different maturities of investment (private portfolio composition). Those that have idle capital (having substantially realized their gains/losses) will have different interests from those who have longer net positions. Those still waiting to realize their returns tend to favor an increase in capacity utilization, while those with realized positions view excess capacity as over-investment that should be eliminated as soon as possible. Why invest in an economy with excess capacity? And help your competitors realize their “bad” bets?

97. For Paul Andrews, Aug 7, 12:38:

    Indeed I do agree that when resources are fully employed there is a tradeoff and since the world is not homogenous, as you note, there could well be places where idle resources and fully employed resources exist side by side. In that case there will be a tradeoff depending on the extent of the fully employed resources. However I think it is safe to say that the tradeoffs are minimal in most developed countries under current circumstances and will remain so untill all resources are nearly fully employed. I say ”nearly” because of the lack of homogeneity you point out.

    I agree that it is better for governments to put people to work doing constructive things. I suspect I have a greater appetite for government provided services than you do but that is another matter.

    With respect to your post at 12:54 and ”The cost of net government debt is borne by the government.” etc:

    My response: It seems to me this is where the issue of vertical and horizontal money comes in. When the issuer of the currency spends it creates financial assets in the economy and when it taxes it eliminates them. This is very different from what happens for the horizontal users of the currency. This has considerable ramifications. Bill and other MMTers discuss monetary operations at great length in various posts and I leave it to you to read them.

    And thanks for the report of the Stiglitz statement.

98. pebird,

    I agree that a lot depends on the degree of idleness, as well as the degree of heterogeneity. From my perspective, depletion of non-decaying, finite resources such as oil is a significant cost to weigh up against the utilisation of idle labour resources.

    “Consider that prior investments in productive output expected a certain return – which has an implicit assumption on capacity utilization. If the economy’s capacity utilization exceeds that assumption, then those prior investments will more likely meet or exceed their targets…”

    These kinds of statements need to be researched through nonlinear dynamic modelling in my opinion, as there are many interrelated variables. In general an increase in total net debt not matched by an increase in real assets will be inflationary, but how that exhibits itself over time will be highly sensitive to initial conditions, and to the highly variable behaviour of market participants.

    I think heterogeneity plays a bigger role than most people think. For example “Why invest in an economy with excess capacity?” is not really a question most entrepreneurs would ask, because entrepreneurs are looking to create things for which there is no existing capacity, regardless of what capacity already exists for making other things.

99. Keith,

    “However I think it is safe to say that the tradeoffs are minimal in most developed countries under current circumstances”

    I don’t think it is safe to say that without doing the research in each case, but it’s a good point to leave this thread, one to agree to disagree on. However I’ll just give a little background on why I think the trade-offs are signficant.

    Some of our most valuable resources are finite and non-decaying, which means they are never “idle” in the sense that unemployed labour is idle. For example, oil.

    On the other side of the equation, productive activities are not necessarily easy to find. For example, in a new society, at one extreme the first teacher would be super-productive, at the other extreme if everyone was employed as a teacher, the last x teachers would be counter-productive. Somewhere in the middle lies an optimal number of teachers – any over and above that will be a net drain. You can’t just keep adding teachers.

    Also, most productive activities are not those that can be performed without specialist skills, unlikely to be found amongst the unemployed, meaning that there are further training costs, even if people with the required underlying capabilities can be found.

    So when a government looks to stimulate there is a high chance that resources will be wasted due to the difficulty (time and cost) in actually trying to find productive activities that the unemployed can perform. The temptation therefore is to be less thorough than one ought.

    If a private entity creates a business that wastes resources, it won’t last long, and the waste will be temporary. If the government does the same thing, the activity tends to stick around because it’s a difficult political exercise to curtail it. The failure rate of private enterprises is high – around 90% failure is the ratio that venture capital firms expect. If the failure rate (in terms of production of real assets) in government activities is anywhere near that (and why wouldn’t it be?), then there is an obvious, significant problem. So attention needs to be given to cutting government waste because there is no natural mechanism to do so, as there is for the private sector.

    “When the issuer of the currency spends it creates financial assets in the economy and when it taxes it eliminates them”

    There is a definitional problem here. In our system, the issuer of the currency is actually anyone who decides to borrow. This was discussed above and I was told that this was agreed within MMT. Under that definition, currency is eliminated when debt principal is paid down (including the government paying down debt [not correct MMT parlance but hopefully translatable] with tax revenue).

    Re: vertical money, as far as I can see the definition is unclear. Definition 1 seems to be that vertical money is money credited to bank accounts by the treasury but not yet drained through the sale of government bonds. Definition 2 seems to be that vertical money is the claims on the government sector by the private sector + central bank, and therefore includes government bonds held by the private sector + central bank (as well as undrained reserves).

    If we go with definition 1, that money is negligible and transient, because the government is required under the central banking model to drain these funds through the sale of government bonds to the private sector (which may then end up at the central bankbut not usually).

    If we go with definition 2, then the differences in the effect of vertical money versus horizontal money are difficult to fathom. The only difference that I can see is that the net debt of the government (vertical money) is likely to be invested in less productive pursuits than the total net debt of private sector debtors (horizontal money). Actually that might be wrong (thinks: real estate investors).

    If you have a clearer picture of the concept of vertical money I am happy to stand corrected.

100. ON WASTE AND THE PUBLIC VS. PRIVATE SECTOR

     Some have commented that the private sector produces less waste and it has a tendency to eliminate it by the attrition of private firms something missing in the public sector.Here are some points regarding this issue.

     1. The main point regarding sustainable waste is the market power/community authority that firms/institutions have and not the private vs. public sector allocation.
     2. At any point of time/space, wasteful private firms exist even if eventually they disappear and they consist of a much larger share in the economy than public wasteful institutions.
     3. The public sector waste is concentrated in institutions “captured” by private interests that exercize authority purchasing excessive private goods/services that are overpriced with transfer pricing. Notice that even neoclassical Public Choice Theory admitts this point! In a sense they convert social cost into their private gain, based on priviledge immune from the solidarity force among community members that accounts for representation control that reduces waste. This is equivalent but with different dynamics to the administrative control practiced by private firms induced by competition among shelfish interests.
     4. Public sector waste resulting from misallocation among public institutions is “internalized” and not shared with community members. This can be reduced by democratic accountabilty that controls authority and non-shared waste.
     5. Notice that democratic accountability enhances sharing of common purpose/rights/attributes by engaging not only the vote process but pre-voting debate that attempts to achieve community consensus of what consists common purpose that is then confirmed by vote. Democracy is not a state of the majority rule contolling the monority opinion bur building consencus accountability that achieves sharing among members which by definition limits waste.
     6. Notice that there are additional differences in feedback dynamics and optimization methods (I have mentioned this before although I have yet to post the comment that explains it!) when considering behavior within the private and public sectors that mainstream theory is hidding under the table or fails to acknowledge!

101. Paul,

     Money is not just debt instruments regardless of the history of the monetary system. In the current system money are tokens of exchange, just numbers. As long as the currency remains the legal tender it is irrelevant where it comes from. They can either be injected by the government or created by the banking sector.

     The system can obviously fail – like in the Weinmar Republic in 1919-1923 or Zimbabwe.

     As a software engineer I can use my analytical experience and describe the monetary system as a decentralised hierarchy of balance sheets storing these numbers. A small number of physical tokens remains in circulation as well but these are still accounted for on the balance sheets. Legal and accounting rules define operations which can be performed on the records (numbers). Legal rules also determine how these numbers relate to the real goods and services.

     This knowledge is enough. We don’t need any more information to describe the system.

     Please do not concentrate on the ontology of money. This is the thing i believe one of our friends got wrong. He thinks in terms of a magic substance called money created as an offset to debt which cannot be destroyed on balance sheets. But we have to think in operational terms or we may not progress much further than Mt Kosciuszko. Our theory must start from the accounting not philosophy.

     Now the second issue. I agree that “official” theory of value which links the use value to the so-called exchange value is plainly incorrect. But what is your value theory? Do you agree with Marx that the value of goods is determined by the amount of labour?

     REFERENCE_http://www.isreview.org/issues/49/capital.shtml

     But this theory has its own limitations. What about the intrinsic value of the natural resources? What if it is multidimensional?

     So my ultimate question is how you define the value of “resources” you are referring to.

     Can you define a metric space based on your measurement of value?

     REFERENCE_http://en.wikipedia.org/wiki/Metric_space

     Personally I think that what you have presented so far doesn’t disprove any relevant elements of MMT. MMT is just a monetary theory showing how the decentralised monetary database system operates within the framework of modern state institutions. It does not come with its own value theory. We have a responsibility to BYO.

     It is also our responsibility to use the existing financial system to achieve individual and social goals – and do not kill ourselves by destroying the environment.

102. You call it [trading bonds for dollars] “printing money”which is misleading, because it leaves out the payment of what MMT people call a subsidy to the private sector. (Most people call this interest). No, that is not what MMTers call printing money. Bill does not like the term, but let us use it. Printing money means running a printing press and getting dollar bills out of it. Then the government uses them to buy stuff. This spending is the real money printing/creation. The bonds etc are a sideshow, which are not necessary, forget about them. The basic idea is that the normal state of a government is to issue more dollar bills than it destroys by taxation. The difference is the deficit. No bonds need be sold. No borrowing or interest of any sort. Let’s say the US converts to Islam and makes it illegal.

     From a purely theoretical standpoint, and as an academic exercise only – even if you had to start a pure-credit system from scratch, the (brand new) central bank could “bootstrap” the system by buying real assets from the private sector (and issuing HPM to do so), or by lending to the private sector using private assets as collateral (again, creating HPM to do so). This HPM would be backed by real assets so the central bank would be in the black from the start so long as the government provided it with some real assets (e.g. land) as an equity buffer. The initial value of the currency would be set by the amount of HPM created to pay for the assets.

     In your academic exercise, you seem to have a currency backed by convertibility into government land, OK. (a) you say the govt (the treasury and the central bank combined) uses its HPM to buy real assets from the private sector. That’s the deficit right there. A fiscal, monetary deficit – the government spent more HPM than it took in (apparently zero) (b) you say the private sector could borrow HPM; that is the govt spending HPM to put this HPM loan to the private sector on its balance sheet. Again, there’s the deficit. (And unless it is a negative interest rate loan – wish I could get one – where is the private sector going to get the HPM to pay it back?)

     What you are trying to do is impossible. What sectoral balances, deficit = private savings, things adding up to zero, etc are based on is: that if I give you one whatsit, my balance sheet’s whatsits decreases by one, yours increases by one and the total number of whatsits is unchanged. Take me =govt, you = private sector; My whatsit deficit = your whatsit savings. If we don’t agree on this, as a mathematician, I am interested in your number system!

     If you don’t get the basic identities that MMT and other forms of macroeconomics use, you aren’t defining things the standard way that MMT and other forms of macroeconomics use.

103. AK

     “Money is not just debt instruments regardless of the history of the monetary system”

     Agreed. I didn’t mean to claim an overarching definition of money, there are many different definitions.

     What I meant was that under the central banking system, purchasing power resides in the total net debt of all net debtors. If the increase in “total net debt of all debtors” exceeds production of real assets desired for purchase in any given time period, inflation is generally the result (although there may be lags). For the purpose of the discussion, and in the context of the central banking model only, my idea of “issuance of currency” is equivalent to “creation of purchasing power”.

     Physical tokens are a liability of the central bank to the holder. (Again I refer only to the current central banking model). These are interchangeable by private banks for HPM reserves. The central bank is required to ensure its assets exceed its liabilities, so each physical token and each unit of HPM has a corresponding asset on the central bank balance sheet.

     I believe that value cannot be objectively determined. We can come close in some cases, but not in others.

     Each individual has a subjective value that he or she places on each thing in the world. These subjective values usually don’t have numbers, but the individual has preferences for one thing over another. I agree with the Austrian theory of marginal utility here (but I don’t agree with Austrian theory on many other points).

     Some real assets individuals can obtain for money, whereas other real assets cannot be obtained for money.

     When the individual desires a thing that can be obtained for money, and he or she decides to obtain that thing, he or she subjectively values the thing more highly than the money with which he or she is parting.

     The market is the sum of many such individual subjective decisions, and we get close to an objective money value of real assets through the market. This bears the hallmarks of an objective value, for most intents and purposes, even if it is not truly objective.

     The class of real assets that cannot be obtained for money do not have anything close to objective values, as there is no market to provide the approximation. However, they still have subjective value to individuals, and sometimes this subjective value is high to the vast majority of individuals. Individuals still have subjective preferences for one of these real assets over another (e.g. more public education vs. lower taxes). It is a mistake to ignore these real assets because they cannot be priced.

     In addition, aquisition of or creation of real assets that cannot be obtained for money can and does have an effect on the production of real assets that can be obtained for money down the track. e.g. better public education today, resulting in greater knowledge and understanding within the population, may result in higher GDP fifteen years from now.

     In summary, any government attempt to create “value” – i.e. subjective value in a high proportion of all individuals, needs to take into account quantifiable (priceable) costs and qualititative (unpriceable) costs in terms of usage of real assets, and quantifiable and qualitiative benefits in terms of creation of real assets. Any government decision is made by a set of individuals, each with their own subjective values. These people have a responsibility to make an effort to determine the broad subjective values of the population, rather than merely using their own, although often this is not practical, and this is part of the problem with the spending of taxpayer funds.

     Market pricing is a rough approximation of an objective value for some things, and I believe the best that is available. It has another huge benefit, and that is that it represents the free actions of a free society. Everyone plays their part in determining the price of things. Because an objective value does not exist, all methods of valuation are approximations. For example the labour theory of value is a much less accurate approximation.

     “Personally I think that what you have presented so far doesn’t disprove any relevant elements of MMT”.

     To demonstrate this you need to refute the arguments already given earlier in the thread.

     “MMT is just a monetary theory showing how the decentralised monetary database system operates within the framework of modern state institutions.”

     It actually shows how the system would work if one of the key rules of central banking did not apply. This is akin to showing how chess would work if the checkmate rule did not apply.

     “It does not come with its own value theory”

     It implies that an increase in the private sector net claims on others is a good thing, and hence valuable, in and of itself. This is not the case.

104. Some Guy,

     “Printing money means running a printing press and getting dollar bills out of it”

     The central bank does this when private banks request bank notes. Banks can swap HPM reserves for bank notes, and back, at will. Any bank notes returned to the central bank in excess of those required, are credited to the bank’s HPM reserve balance, and stored as “inactive” notes. These can be released again to save printing costs.

     This means that all active bank notes have corresponding assets on the central bank balance sheet. The government and the central bank are constrained by central banking laws from simply printing dollar bills without the corresponding accounting adjustments, as they are prevented by law from releasing inactive notes.

     So in and of itself, printing physical bank notes is not a way out of government deficit problems, unless the law were to be broken by the central bank.

     I can understand why Bill does not like the term “printing money”, because it very rarely is used to mean actual physical printing, and it is often used to mean different things (e.g. central bank purchasing of government bonds, or simply government issuance of bonds, or government spending from its central bank account which is later drained by issuance of bonds).

     If you do not agree with the above, then anything we have to say to one another will probably not make sense.

     Of course, the government could change the laws and the above would not apply. I am referring to things as they are under the current laws.

     “What you are trying to do is impossible. What sectoral balances, deficit = private savings, things adding up to zero, etc are based on is: that if I give you one whatsit, my balance sheet’s whatsits decreases by one, yours increases by one and the total number of whatsits is unchanged. Take me =govt, you = private sector; My whatsit deficit = your whatsit savings. If we don’t agree on this, as a mathematician, I am interested in your number system!”

     I’ve said before that I agree with this if savings is defined as the increase in net claims on others held by the private sector.

     Keynes himself defined saving as:

     “the excess of income over expenditure on consumption”

     He then defined consumption as:

     “Consumption is, therefore, any purchase/sale that is not between entrepreneurs”

     so Keynes himself did not include consumption of part of the private sector – “entrepreneurs” – in his definition of saving.

     Therefore the statement you have made is not correct when using Keynes’ own definition of saving. Proponents of MMT should make their definition clear whenever they make statements like to one you have made.

105. Dear Paul,

     “if the increase in “total net debt of all debtors” exceeds production of real assets desired for purchase in any given time period, inflation is generally the result (although there may be lags)”

     This may not be correct I believe. The price levels on individual markets depend on how many tokens are to be used for purchasing goods and services available (what you call assets) in any given time period.

     This is not the same as the increase in monetary stock (“total net debt of all debtors”).

     Further, the tokens (money) do not have to be practically backed by debt obligations. This is the key point.

     Private money is created when loans are extended so the money (as assets) has to be balanced by the liabilities (and further by existing assets of the private sector or a predicted future income stream). This process of M1 creation may lead to an injection of M0 to the system.
     REFERENCE_http://wwwm.htwk-leipzig.de/~m6bast/rvlmoney/UH-MonCreat.pdf

     But the government debt is not real debt.

     1. From the private sector point of view one asset (a bond) can only be exchanged into another asset (money). It is irrelevant where this money comes from – taxes, rolling over the debt or new money creation. Private sector has to repay its debt by selling goods and services in order to get money from someone else.

     2. At least short term government debt is included in “broad money”.
     REFERENCE_http://www.ecb.int/stats/money/aggregates/aggr/html/hist.en.html

     3. If a significant amount of the public debt is held by the Central Bank this is equivalent of having the same amount of money not backed by debt in the system (on the private sector’s balance sheet). So instead of having assets in the form of debt instrument it is currency what appears there.

     This currency is not offset by the debt held by the private sector. The rule has already been violated even if the CB cannot legally purchase debt instruments from the Treasury directly.

     Money is nominally offset by the debt hidden on the balance sheet of the CB but practically is not offset by anything.

     The Central Bank is a part of the Government Sector. Despite repeated denials the Fed is actually “printing” already, possibly to manipulate the yield curve. Some people may still stubbornly believe in the money multiplier effect.

     “(Reuters) – The Federal Reserve on Tuesday took a small but significant step to counter a weakening U.S. economic recovery, saying it would use cash from maturing mortgage bonds it holds to buy more government debt.”
     …

     ” Treasury debt prices rose sharply, with the yield on benchmark 10-year notes slipping to 2.77 percent, near 15-month lows”
     …

     “Under the new regime, the Fed will keep its holdings of domestic securities steady at around $2.054 trillion, primarily by buying government securities ranging from two to ten years in maturity.

     Investors were still trying determine just how much mortgage- and housing agency-backed debt held by the Fed would be maturing each year, with estimates hovering between $100 billion and $150 billion.

     While not insignificant, the amount was not generally seen as large enough to have a substantial simulative impact on the economy.”
     …

     “That policy is not without drawbacks. It could expose the Fed to charges that it is printing money to help fund the government’s large budget deficit — something Fed officials have repeatedly vowed not to do.”

     REFERENCE_http://www.reuters.com/article/idUSTRE6753HW20100810

106. Adam,

     I can’t assess most of your statements because the definitions of the terms you use are not clear. You need to define “tokens”. In one part you define tokens as money, but then you need to define money. What does “nominally offset” versus “practically offset” mean? You seem to be using the word currency inconsistently.

     Re: bonds held by the Central Bank: it is not practically possible for the Central Bank to take more than a small portion on to its balance sheet, so there are limitations to this form of currency creation, even if you do not accept that the Government’s debt to the Central Bank is real.

     The reason is that every bond added expands the asset and liability side of the CB’s balance sheet equally (because there is no net income stream from the bond), and therefore reduces the capital of the CB (as a percentage of assets) and brings it closer to technical insolvency. If the CB were to become technically insolvent, the Government would need to restore the capital, and the only way to do this is to donate tax revenue to the CB, or to sell more bonds to the private sector.

     Of course, currently in the US the CB pays interest on HPM reserves – this decreases further the extent to which CB purchase of government bonds can be performed.

     You could argue that such a situation (technical insolvency of the CB) could bring the CB era to an end and I don’t discount that possibility, but while the CB rules are in force, the need for the CB to remain solvent limits the amount of currency which can be created by the CB purchasing government bonds.

107. Paul,

     Technical insolvency of the CB is irrelevant and this is the whole point.

     Please read the following document carefully, the second part is neoclassical to the extreme but in the first part the author spills the beans.

     “As pointed out by Ed McKelvey (2008), the size of a
     central bank’s existing stock of assets says little about
     its capacity to increase its assets in a hurry. Consider
     the case of the Fed. Normally, increased holdings of
     assets (typically US Treasury securities), are funded by
     increasing the stock of base money. Technically, this
     means that the increase in Fed assets is financed by borrowing,
     that is, through higher Fed leverage. Since the
     borrowing is through the issuance of non-interest-bearing,
     non-redeemable debt instruments (base money),
     there is, in principle, no limit to the amount of monetary
     borrowing the Fed can engage in, and therefore
     also no limit to the domestic currency value of the
     assets it can hold on its balance sheet. The Fed’s
     $900bn balance sheet can therefore, should the need
     arise, be doubled or increased tenfold overnight, should
     there be a compelling financial stability or economic
     stability case for it.”

     “…of the two common concepts of
     insolvency – equitable insolvency
     (that is, failure to pay obligations as
     they fall due) and balance sheet
     insolvency (the condition that
     liabilities exceed assets) – equitable
     insolvency is the relevant one.”

     REFERENCE_http://www.cepr.org/pubs/PolicyInsights/PolicyInsight24.pdf

     Indeed, it holds over 2 trillion now… The total Federal debt is USD8.7tn and total public debt is USD14.3tn

     Is this insignificant?

     REFERENCE_http://www.treasurydirect.gov/govt/reports/pd/account/2010/2010_june.pdf

     Also you have forgotten about the coupon rate of the bonds what affects the capital of the CB but this is rather marginal in this context.

     Please be aware that I am a guy who doesn’t trust anybody and I have spent a significant amount of time recently cross-checking the claims made by Bill. So good luck if you find a hole, I haven’t found one…

108. The key words are “in principle”.

     His comments on leverage echo my point that direct holdings of Government Bonds decreases CB equity as a percentage of CB assets.

     In practice, at present the Fed is paying interest (3%) on base money. Ed’s comments predate this policy. If there was no limit in practice to the size of the CB balance sheet, there would have been no need to start paying interest on base money.

     In practice, increased leverage in the CB reduces confidence in the CB system. All of the powerful interests (i.e. net creditors) want the CB system to survive, for obvious reasons.

     Don’t forget, Ed is a banker. Bankers sell credit for a living. MMT helps them do their job, by helping perpetuate the myth that the credit is free.

109. Note also how Ed’s comments, when working for Goldman Sachs, helped prepare the ground for the Fed purchasing dodgy Fannie and Freddie MBS from the banks. This was essentially a bank bailout by taxpayers, without congressional approval, because if the Fed’s balance sheet is impaired as a result, the government will need to recapitalise the Fed. In the meantime the banks got face value in base money, now safely invested at 3%.