As I noted yesterday, last evening I accepted an invitation to speak on a panel…
Stock-flow consistent macro models
Many readers keep calling for my views on Austrian economics. Apparently when pushing what we might call the Modern Monetary Theory (MMT) view they get hit with a barrage of Austrian school criticism along the lines that statism is dread and that by privatising everything you will improve the human condition. My first thought when I get E-mails like this is to wonder where my readers hang out in their spare time! I wasn’t aware that the Austrian school was anything more than a cobbled together bunch about as large as the modern monetary school (laughing). Anyway, I am taking the request seriously and as a start I present some background – some modern monetary armaments. We are going to war.
The Austrians claim that they predicted the crisis etc is nothing more than recognition that their major hypothesis is that anytime the government is involved in the economy eventually things turn sour. So eventually, given that economic activity cycles, you are going to be correct. However, their understanding of the way the fiat monetary system operates is non-existent. More on the another time.
For now, this blog introduces what is called stock-flow consistent macroeconomic accounting structures. It is based on a paper I wrote last year with James Juniper called There is no financial crisis so deep that cannot be dealt with by public spending.
It is at the pointy end of my blogs and won’t appeal to all. But if you really want to start understanding the quality of modern monetary theory then stock-flow accounting is a good place to start.
What this framework allows you to understand is why the prevailing orthodoxy in macroeconomics has failed. The framework shows you that the mainstream belief that markets self-equilibrate at levels that are remotely socially acceptable is erroneous. Markets do not self-regulate in ways that avoid major financial upheavals and these crises have profound impacts on the real economy.
In particular, the body of literature that is built upon the belief that fiscal policy should only be a passive support to an inflation targeting monetary policy is shown to be highly damaging to the long-term growth prospects of modern monetary economies.
The current crisis confirms that the only way that the non-government sector can save is for the government sector to run continual budget deficits. The stock-flow framework allows you to understand why this fiscal conduct is non-inflationary and, if managed properly, exerts downwards pressure on nominal interest rates and underpins full employment.
To understand how the modern monetary economy operates we need to take a step back into national accounting. First, a modern monetary system has three essential features:
- A floating exchange rate, which frees monetary policy from the need to defend foreign exchange reserves).
- A sovereign government which has a monopoly over the provision its own, fiat currency.
- Under a fiat currency system, the monetary unit defined by the government has no intrinsic worth. It cannot be legally converted by government, for example, into gold as it was under the gold standard. The viability of the fiat currency is ensured by the fact that it is the only unit which is acceptable for payment of taxes and other financial demands of the government.
Within a modern monetary economy, as a matter of national accounting, the sovereign government deficit (surplus) equals the non-government surplus (deficit). The failure to recognise this relationship is the major oversight of neo-liberal (and Austrian) analysis.
In aggregate, there can be no net savings of financial assets of the non-government sector without cumulative government deficit spending. The sovereign government via net spending (deficits) is the only entity that can provide the non-government sector with net financial assets (net savings) and thereby simultaneously accommodate any net desire to save and hence eliminate unemployment.
Additionally, and contrary to neo-liberal (and Austrian) rhetoric, the systematic pursuit of government budget surpluses is necessarily manifested as systematic declines in private sector savings.
The decreasing levels of net private savings which are manifest in the public surpluses increasingly leverage the private sector. The deteriorating debt to income ratios which result will eventually see the system succumb to ongoing demand-draining fiscal drag through a slow-down in real activity. So you have to trace the private indebtedness back to the conduct of the government sector.
The analogy neo-liberals (and Austrians) draw between private household budgets and the government budget is false. Households, the users of the currency, must finance their spending prior to the fact. However, government, as the issuer of the currency, must spend first (credit private bank accounts) before it can subsequently tax (debit private accounts). Government spending is the source of the funds the private sector requires to pay its taxes and to net save and is not inherently revenue constrained.
With that in mind, modern monetary theorists develop a theory of unemployment based on the conduct of fiscal policy (compare that the Austrians who emphasise excessive real wages). In a fiat monetary system, unemployment occurs when net government spending is too low. As a matter of accounting, for aggregate output to be sold, total spending must equal total income. Involuntary unemployment is idle labour unable to find a buyer at the current money wage.
In the absence of government spending, unemployment arises when the private sector, in aggregate, desires to spend less of the monetary unit of account than it earns.
Nominal (or real) wage cuts per se do not clear the labour market, unless they somehow eliminate the private sector desire to net save and increase spending. Thus, unemployment occurs when net government spending is too low to accommodate the need to pay taxes and the desire to net save. This is a fundamental mistake that neo-liberals (and Austrians make).
For example, if you read the classic Austrians, such as Murray Rothbard, you will get this sort of claim in his Power and Market (pages 204-205):
Unemployment is caused by unions or government keeping wage rates above the free-market level.
And this gem from America’s Great Depression (pages 43-44):
Generally, wage rates can only be kept above full-employment rates through coercion by governments, unions, or both. Occasionally, however, the wage rates are maintained by voluntary choice (although the choice is usually ignorant of the consequences) or by coercion supplemented by voluntary choice. It may happen, for example, that either business firms or the workers themselves may become persuaded that maintaining wage rates artificially high is their bounden duty. Such persuasion has actually been at the root of much of the unemployment of our time, and this was particularly true in the 1929 depression.
In a fiat monetary system where the government has currency sovereignty this analysis couldn’t possibly be true. More on this will appear in another blog.
All of the modern monetary propositions can be understood within a flow of funds framework which renders the underlying accounting between flows and stocks consistent. Mainstream economic models do not have stock-flow consistency and therefore fail to understand how the spending relations tie in with the wealth and other stock relations.
Definitions
To understand the difference between a stock and a flow think of a bath-tub. The water in the bath is a stock – it is measured at a point in time. The water that comes into the bath (via the taps) and/or out of the bath (via the sink) are flows and you measure them as a rate of water flow per unit of time. So many litres per minute.
If the inflows are stronger than the outflows the water level in the bath will rise and vice-versa. In other words, flows add to and subtract from stocks.
In economics, this distinction is very important and most students fail to really understand it. I think that is because mainstream macroeconomics then doesn’t go onto to use the distinction properly, especially in the area of fiscal relations.
So the level of bank reserves is a stock – measured at some point each day. Government spending and taxation, consumer spending, saving, investment, exports, imports, etc are all flows of dollars per unit of time. Government spending adds to bank reserves and taxation reduces (drains) the stock of reserves.
Clearly, a theory of the economy that doesn’t recognise the intrinsic relations between the flows and stocks is missing the boat. Given that modern monetary theory is ground out of the operational accounting of the monetary system, its stock-flow consistency is impeccable and unique (a major strength).
A Flow of funds view of modern monetary macroeconomics
A Flow-of-funds approach to the analysis of monetary transactions highlights both the importance of the distinction between and vertical and horizontal transactions and the fundamental accounting nature of the budget constraint identity.
It shows categorically that the Government Budget Constraint (GBC) is an ex post accounting identity rather than an ex ante financial constraint. You will recall that mainstream macroeconomics (and the Austrians) all believe the GBC somehow represents a financial constraint on government prior to it spending.
It doesn’t and cannot in a fiat monetary system unless the government adopts, voluntarily, a framework that replicates the operations of the ex ante GBC. In doing so it reduces its fiscal authority and bows to the pressure of those who oppose government intervention at a sufficient level to generate full employment.
A Flow-of-funds approach also shows that if the sovereign government runs cumulative surpluses which destroy net financial assets then the non-government must accumulate deficits in the form of increasing indebtedness which are unsustainable.
The distinction between vertical and horizontal transactions can be clearly demonstrated by examining the current transactions matrix for a simplified economy.
The last row of the current transactions matrix affords a crucial insight into the nature of (vertical) transactions between the government and non-government sectors.
These transactions must be clearly distinguished from their (horizontal) counterparts: those between banks, households, and firms. The basis for this distinction is that only vertical transactions give rise to net financial assets or increases in real wealth, whereas horizontal transactions net out to zero.
While transaction accounts (or T-accounts) are helpful for distinguishing between such things as high powered money and other forms of money, and for explaining why it makes theoretical sense to consolidate the central banking and treasury functions of government, they are not very helpful when it comes to establishing the difference between vertical and horizontal transactions.
However, this difference can easily be justified by examining a current transactions matrix for the economy, which depicts flows of goods and services and flows of monetary payments between institutions (households, banks, firms, and the government sector).
The following figure is what we call a current transactions matrix and is a highly simplified stock-flow consistent macroeconomic model. I recommend you print the figure by clicking on it and then using the print out it to follow the discussion. Note the -1 or t-1 just means last period’s value.
Here, consumption spending by households, C, comprises wages after tax, W-Tw, plus a fixed share a, of (lagged) household wealth, Vh.
Household wealth increases both through savings out of income, the latter including (lagged) interest receipts on deposits, ib, and dividends received from banks, Fb, and firms, Fd, inclusive of the capital gain on equities (a component subject to minor degree of simplification).
Firm investment is pDK (the D is the greek delta meaning change in), il is the loan rate of interest, and Tl is the tax rate on firm income. It is further assumed that the government chooses the bill rate of interest, ib, tax parameters and government spending as proportion of total capital.
Likewise, it is assumed that firms distribute a fixed share of after tax profits Fd as dividends, while banks distribute their total profits Fb to households. For simplicity, households are assumed to lend all their savings to firms without borrowing themselves.
The sources and uses of funds can be determined by reading the entries in each of the cells in any given column of the matrix.
For the household sector, the sources of funds include wages, interest on deposits, and distributed dividends from banks and firms. Uses of funds include consumption and payment of taxes on household income.
For firms, sources of funds include revenue from the sale of goods and services to households and government, as well as that component derived from the sale capital goods to other firms. These funds are used for investment, the payment of corporate taxes, the payment of interest on borrowings, and the distribution of dividends.
Banks receive interest on loans and issued bank bills, and use their funds for payment of interest on deposits and the distribution of profits.
By summing across the rows for the flow-of-funds accounts of banks, households and firms, it is apparent that all transactions cancel out with the exception of the interest paid on bank bills by government, the payment of taxes by firms and households, and the receipt of revenue by firms for the sale of goods and services to the government.
However, and very significantly, these components are all vertical transactions between the government and non-government sectors. That is they do not net to zero but create/destroy net financial assets in the non-government sector.
Government surpluses must equal non-government deficits
The bottom row of the Current Transactions Matrix indicates that government savings (surplus) or tax revenue net of government spending and payment of interest on bonds ((T – G – ibt-1Bt-1 – 1) are equal to the non-government sector’s dis-savings (deficit = pDK – Fu – Sh).
This is a crucial accounting identity because it implies that, in periods when governments run continual budget surpluses, although economic growth could well be sustained over the short run, this will only happen if the non-government sector runs an on-going deficit, thus accumulating ever-increasing levels of debt.
Moreover, as surpluses destroy net financial assets, this increase in private sector debt will be matched by a continuous decline in net financial assets or wealth.
To show this, we must interpret the flow-of-funds accounts more closely for each of the sectors in terms of how they interact together. However, before this is attempted it is desirable to incorporating transactions with the rest-of-the-world.
Extending the framework to the Rest of the world accounts
The next table is a simplified transactions table which while simplifying the components of GDP, now includes a column for the rest-of-the-world (ROW) account.
Here, Gross Domestic Product, Y, is equal to Private expenditure, PX, plus government expenditure, G, plus exports, X, minus imports, M. The ROW account reveals that imports minus exports and transfers paid by the external sector, TF, equals the balance of payments deficit.
Every item in the Production (GDP) account is matched by a corresponding negative entry in some other column. Taxes net of transfers are received by the government.
Net property income, taxes and transfers, TF and TP, are paid by the external and private sectors, respectively.
The final row totals reveal that public sector net borrowing, PSNB, equals the private net acquisition of financial assets, NAFA (private savings less investment) minus the balance of payments surplus (or plus the deficit), BP.
From the perspective of a stock-flow consistent approach to macroeconomic modelling outlined above, the fundamental accounting identity states that government savings (surplus) or tax revenue net of government spending and payment of interest on bonds is equal to the non-government sector;s dis-saving.
That is, public sector net borrowing equals the private net acquisition of financial assets (private savings less investment) minus the balance of payments surplus (or plus the deficit). As governments have moved away from deficit spending at levels typical of the post-war period of full-employment, private sector debt levels have escalated.
The reason why this has happened is that causality flows from fiscal policy to the private sector simply because economic influences over the rest-of-the-world account change quite slowly, with income effects dominating over the price effects that are championed by neoclassical theorists.
In contrast, fiscal policy responds immediately to government decisions about spending and taxing. The transmission mechanism behind these changes is complex, as it operates within a portfolio setting, by changing relative rates-of-return between real investment, the equity-premium, and the term structure of bonds.
Sectoral balances
So the framework translates straightforwardly into the familiar sectoral balances accounting relations. They allow us to understand the influence of fiscal policy over private sector indebtedness.
You have seen this accounting identity for the three sectoral balances before:
(S – I) = (G – T) + (X – M)
So total private savings (S) is equal to private investment (I) plus the public deficit (spending, G minus taxes, T) plus net exports (exports (X) minus imports (M)), where net exports represent the net savings of non-residents. That has to hold as a matter of accounting. It is not my opinion.
Thus, when an external deficit (X – M < 0) and public surplus (G - T < 0) coincide, there must be a private deficit. While private spending can persist for a time under these conditions using the net savings of the external sector, the private sector becomes increasingly indebted in the process. For Australia, while the current account deficit has fluctuated with the commodity price cycle, it has continued to deteriorate slightly over the longer term. Accordingly, the dramatic shift from budget deficits to surpluses from the mid-1990s onwards was mirrored by a corresponding deterioration in private sector indebtedness. The only way the Australian economy could keep growing in the period after 1996 was for the private sector to finance increased spending via increased leverage. This is an unsustainable growth strategy. Ultimately the private deficits will become so unstable that bankruptcies and defaults will force a major downturn in aggregate demand. Then the fiscal drag compounds the problem. The solution is simple. The government balance has to be in deficit for the private balance to be in surplus for a stable external balance. In terms of the slightly worsening current account deficit, we can interpret that as signifying an increased desire by foreigners to place their savings in financial assets denominated in Australian dollars. This desire means that that the foreign sector will allow us to enjoy more real goods and services from them relative to the real goods and services we have to export. We note that exports are always a "cost" while imports are "benefits". As long as there is a foreign desire for our financial assets, the real terms of trade will provide net benefits to Australian residents which manifests as the current account deficit. An external deficit presents no intrinsic problem despite views by the orthodoxy to the contrary. In Japan, by way of contrast, the sectoral balances reveals that the private sector surplus increased on a par with the long-term increase in budget deficits. In other words, the persistent and substantial fiscal deficits financed the saving desires of the private sector and helped to maintain positive levels of real activity in the economy. Conclusion
This stock-flow accounting structure conditions the way modern monetary theorists think. It is ground in the operational reality of the flow of funds within the economy.
So you cannot possibly say, for example, that the government can run indefinite surpluses while the current account is in deficit, and expect the domestic private sector to be able to save. It has to be that the only way the economy can grow in these circumstances is for the private domestic sector to be increasingly going into debt.
You may think that is fine and we can argue about that as a growth strategy and a reasonable way to manage the need for public goods. That is the debate part. But you cannot deny the former.
The problem is that the Austrians and mainstream economists do deny the accounting statements and demean the rest of their arguments as a consequence. Most of their solutions cannot “add up” in terms of the stock-flow relations.
Enough for now.
Bill,
Modern monetary theory seems to ignore the importance of the level of gross debt in the private sector.
Is that the case?
I would have thought that the advantage of a private sector net financial surplus takes on even more importance when gross private sector debt is identified as problematic. In today’s environment, it seems the net private sector surplus is acting as an escape valve for a deflating, deleveraging gross private sector balance sheet. There should be a robust theoretical connection in this sense. Yet the connection is never mentioned explicitly. Why not? Is the gross private sector debt level in fact irrelevant to modern monetary theory?
(Steve Keen seems to be the other way around, focusing on gross debt levels within or across sectors, rather than net sector positions per se.)
Is modern monetary theory a formal branch of post Keynesian economics?
Dear JKH
I do not understand why you think we would ignore the level of gross (or net) debt in the non-government sector. I say often that a growth strategy based on ever increasing levels of the same is unsustainable.
But where the debt deflationists miss the boat is in relating it back to the fundamental stock-flow relations that have to exist in a fiat monetary system. In the terms of today’s blog their matrix doesn’t add up because they essentially ignore the impact of the government sector. I think to understand the crisis (and the debt build up) you have to understand that government transactions with the non-government sector create/destroy net financial assets whereas transactions within the non-government net to zero.
I have also often stated that the move to saving now (deleveraging as you call it) had to be accompanied by public deficits. The public deficits support (finance) the private saving and allow growth to occur. That is a common theme.
Where modern monetary theory fits is a good question. What Post Keynesian economics is also debatable. I prefer not to categorise myself or the work I do within a broader school. Our traditions are shared by Post Keynesians, in part. But the mainstream PKT position doesn’t reflect the comprehensiveness of modern monetary theory as a macroeconomic framework, in my view.
best wishes
bill
Bill – Awesomest post. Can refer this to a zillion people. Such stuff is usually in literature such as your article at Coffee.
JKH,
What Bill has shown is just a surface of whole story. I think he did not want to complicate things and provide a simple yet rigorous post on how things work.
You can add private sector debt and expand out the rows and columns. You can add the central bank too. You can have households hold government bills and bonds. You can add IPOs in this. You can add Inventories here. And then you can add loans households take up as well. Firms’ loans at the banks in there in the figure. In short, anything you want to study, but there is no tool more powerful than what is given here – in my view.
Bill,
I guess I’ve missed the explicit references to gross debt.
I agree the debt deflationists overlook the importance of the government sector impact.
The type of deleveraging I’m referring to doesn’t necessarily result directly in net sector saving. Debtors repay lenders within the same sector. Debt is extinguished. If the lender is a bank, money is also extinguished (or equity). These are also accounting identities, but they imply nothing directly about net sector saving. So I don’t see that deleveraging defined in this sense actually requires net sector saving, according to the identities. I can see a natural relationship between the two types of deleveraging (intra-sector and inter-sector), but this is what could be spelled out more explicitly in my view.
bill, great post. It is frustrating that almost no economic debate can be had without hordes of rabid libertarians showing up to beat on any suggestion that collective and/or government action might be justified.
Some questions:
1. we have currently a tricky situation (especially in the US and UK) in which public deficits are funded by a mix of the domestic, foreign private and foreign soverign sectors. Some action seems necessary to alter these circumstances so that the public deficit is a home team issue. Can you comment on this?
2. do you have a feeling for the rough size of western public sector deficits in relation to the size of those economies (in percentage terms)?
3. do you agree with steve keen that debt money created by banks is not destroyed when repaid but in fact simply has the returngin principal credited to the baks reserves? If so, what is the status of excess reserves held at the central bank. These are liabilities of the central bank, and presumably can be and are used to purchase government debt on the asset side of the CB balance sheet. If so then do we not already have a situation in which net private sector surplus savings (as represented by the level of bank reserves) are available to the public sector for spending? If that’s the case, then presumably if excess bank reserves pay interest X, and short term public debt pays X+Y and there is nothing better for those reserves to be doing, the whole of the excess reserve should be soaked up by the government at an interest rate of X+Y?
4. when/if the private sector returns to growth as evidenced by a declining rate of net saving in the private sector, then the government sector needs to de-leverage via taxation and return the money it originall borrowed from excess reserves. What is the mechanism for the reversal of increased deficits when the private sector decides to pick up the ball again?
JKH,
Few more things.
In this framework, anything in http://www.federalreserve.gov/releases/z1/Current/z1.pdf can be analyzed. Of course, it may not really help always to go into such details of the Z1 accounts. (though its a great piece of work)
Also it is easy to miss the stock-flow consistency. In the two figures are about a flow but we see both flow (e.g., Consumption) as well as stock (e.g., quantities having -1 as a subscript)
Also note that the figures are for one time period – it could be a quarter, or a year. Now picture many such periods in your head. Both in the past and in the future. Less deficits in the past, say in the US led to continous decrease in the private sector savings. The US government didn’t finance the external sector deficit enough and the private sector was left to do it. Also consider the external sector. What happens (or should happen) in the future ? High deficits leading to increase savings for the private sector. In the US, it could happen either by a) more exports than imports b) increased budget deficits for many periods or both. How much deficit is needed? Can be gauged by looking at and keeping an eye on the Z1 accounts. Can you see that it can get the US out of recession and will not lead to the end of the world? Of course, active fiscal policy is needed. Some amount of deficit will purely be because the private sector is not able to pay enough taxes. However, that is passive recovery and will be slow and more government spending is needed.
Where are Greenspan and Bernanke in all this ? Well – the bubble should not have taken place in the first place and could have been prevented by suggestions given by Bill in a comment in another post. However, the focus of the world seems to have digressed here. Having the Fed Funds Target at 0-0.25% is not really going to solve the problem. Maybe you can see from the figures in the post that such measures will be weak. QE just exchanges one asset for another. Going back to the past, you can still see from the figures that bubble or not, the private sector would still have been left with insufficient stock of savings.
Governments running budget surpluses when the economy is not at full employment will always force the private sector to drive itself into unsustainable levels of debt.
Why ? Because the private sector will attempt to maintain their standard of living or in the worst case scenario they will go into debt merely to maintain their subsistence.
I cannot understand how so many people just don’t get this.
One thing about the exports are a loss/imports are a gain thing Bill.
Off the cuff, I would probably say that many if not most of the things we import are are own resources that we exported in the first place. We export crude fibre, crude plastic (gas and petroleum), crude metal of all kinds, crude metal-making carbon (metalurgical coal) and crude electricity for factories (thermal coal). In turn, we import all that right back in the highly value added form of manufactured goods.
I don’t think we have lost anything that we could have used ourselves (save the gas and oil) – we export skilled manufacturing jobs along with our crude product so that we can bypass our own more expensive local labour and instead import from cheaper production sources. So I would probably regard imports as a loss in terms of skilled jobs (although I’m sure plenty of jobs are created in retail, shipping and distribution but that isn’t the point).
As you know, I support the job gaurantee 100% but it cannot by itself prevent the exodus of manufacturing, IT and service jobs to cheaper sources – it can only replace skilled, better paid work with low paid work.
Ramanan,
Thanks for your comments.
I agree that the sector approach is a powerful tool, and that detail can be added within sectors.
Also, I’m very familiar with the Fed’s Flow of Funds report. It is non-ideological in construction, rich in detail, and fully reconcilable with Bill’s sector flow of funds approach.
I’m just saying there are things going on within sectors that add to the story.
Scepticus,
Steve Keen’s idea that debt repayment does not destroy money is a very curious aspect of his analysis. It is completely irreconcilable with any normal interpretation of financial accounting. I don’t think he cares about that, though. It’s a conceptual artifice designed to capture the relative duration/periodicity of credit and money in expansions and contractions.
The potential problem is that much of the rest of his framework does use accepted financial accounting entries. It is a mixed model of financial accounting and conceptual accounting in that sense, which can be confusing.
Another example is that he uses the construct of a bank deposit account to reflect part cash, part equity effects. Cash and equity are very different in financial accounting. This can be confusing also.
JKH
THis particular post was intended to describe only a particular part of the big circle. The stock flow approach has been used to do all the things you are discussing by a number of researchers, most of them related in some way or another with the Levy Institute. You can split the private sector out into households, firms, and banks. You can split the bank sector into commercial banks and investment banks. And so on, and so on. This wasn’t necessary for Bill’s purposes, but it’s been done by those doing research in this area.
Scepticus,
How is the loan repaid in Steve’s model . . . paper/coin or deposits?
Best,
Scott
Scott,
Thanks for your comment.
Quite frankly, every time I read a post about this subject (here or on other blogs, including yours), I get the distinct impression that there’s another slice of the onion still to be peeled away. I’m never satisfied that I’m getting the full story. Like many posts on the subject, this is not a short one. But I’d still prefer to see gross financial flows within the sectors and the strains they may cause referenced even briefly as part of the underbelly to the net sector model. Otherwise, the message of the net sector balance effect feels like a sledge hammer for dummies.
“I’m just saying” – as per reference on your blog to effective marketing of the central idea by putting context around it.
It’s an excellent post, Bill, but it’s a sledgehammer.
JKH, keen says this -taken from one of his recent blog comment sections:
“Hi AK,
I saw this exchange in another discussion I’m (involuntarily) a part of:
I am replying to all your list because of the idea that banks extinguish money when debtors pay their loans. I have seen this idea written many times, but it has always seemed strange to me. So I asked a banker about it. He reacted as if it was a nonsense idea. He said when debts are paid, the bank adds the payment to its capital account. What it extinguishes is the debt, not the payment.
That other correspondent’s feeling-and his banker friend’s reply-has always been my position on this topic. On the other hand, the vast majority of non-neoclassical economists make the “debt repayment destroys money” argument, using instances rather like the counterfactual you pose here.
It had always been my feeling that these stories misunderstood the dynamics somehow, which is one reason I constructed my model of a pure credit economy in the first place-to see what would happen in a properly specified dynamic model when this repayment and destruction of money process actually took place.
The result is shown in the paper “The Dynamics of the Monetary Circuit” on pages 167-172. A model where money is destroyed when debt is repaid does not have money remain constant-which is the obverse of the proposition you put here-but has money taper to zero over time. Conversely, a model where money is not destroyed after an initial injection of money settles down to a constant equilibrium level of money in circulation over time.
You’d best check that paper AK to get a thorough answer to your question: the type of unintentionally static but seemingly accurate verbal account-swap models like the one you’ve put forward here don’t hold up when you model them properly dynamically, because feedbacks that verbal and effectively static models ignore play a crucial role in an actual dynamic process.”
I must admit I am very confused as to how there can be any confusion over this issue of bank accountnig. Either when a loan gets repaid the principal is extinguished, or it is not. It can’t be that hard to confirm which is true.
One reason I tend to lean towards keens take on this is that principal is not paid back in one go, it is paid back in installments. How does the accounting work – at which point exactly does the bank extinguish the principal – when the principal is paid back, or when the whole loan – principal+ interest is paid back? Surely anyone who claims to know the answers to these questions will have precise knowledge of exactly how this works.
I believe in keens model the loans is paid back as a deposit. I don’t think he models cash, since to do that he needs to model the government sector, which he has not done yet but is next on his list.
JKH and Scepticus
First, don’t know what I was thinking when I said “big circle.” Someone stepped into my office to talk to me right at that moment . . . I”m going to blame it on him.
Regarding Steve, I haven’t read his papers carefully, but was present at one of his presentations 3 years ago and my impressions were about the same as JKH’s comments. I discussed this with Steve afterward, and as JKH notes, it seemed to me he was inventing his own version of accounting, or at the very least switching the names around. It seemed a bit like a biologist deciding to call the mitochondria the cell membrane, and then call the cell membrane the cytoplasm, etc. I was with another economist who is very good at accounting, and he was similarly puzzled.
That’s why I asked about currency vs. deposits. The balance sheet effects for the bank of loan repayment are quite different depending on which is used in repayment, but of course in the real world, loans are repaid almost exclusively with deposits.
Best,
Scott
So, in terms of Krugman’s division of “all macroeconomics” into saltwater and freshwater macroeconomics this would be, what … Real World Dry Land Economics?
Dear scepticus
As an aside: you don’t have to put an entry in the Home Page field on the comment section unless you want to highlight your home page. I just have to edit that out if it is a “9” (in your case).
Deficits are not funded by borrowing – basic point that needs to be stated over and over again. The voluntary arrangements that the governments have in place whereby they issue debt $-for-$ with net spending is not funding anything. Just draining the reserves added by the net spending. But having said that a government should only ever issue debt in its own currency. It can never be insolvent in that sense. They should never issue debt in a foreign currency.
For Australia I do – probably around 6-7 per cent (currently less than 3). The size is determined by the net saving desires of the non-government sector in the currency of issue. The most obvious indicator that you get monthly is the extent of labour underutilisation. If you put in place a Job Guarantee then the last person through the door for a job is the minimum the deficit should be.
I don’t agree with this view and you might look back over previous blogs to see the discussion we have had on that. Also there has been discussion today from others who also have shown the fundamental errors in that particular claim.
First, the private sector will recover.
Second, when the private sector returns to growth it is not necessarily a signal that the public deficits should be wound back. It all depends on where you started from in relation to full employment. My understanding of almost all advanced economies is that they were operating with large pools of labour underutilisation as part of the neo-liberal con that you needed that to control inflation. So there was a need before the crisis for substantial increases in public deficits. Not to mention the fact that before the crisis non-government saving in many countries was negative (because of public surpluses) and we cannot return to that situation.
Third, there are two mechanisms by which the public deficits will fall: (a) the automatic stabilisers will clearly bring back the deficits in a way that is consistent with the saving desires of the non-government sector; and (b) discretionary policy choices – cutting spending and/or increasing taxes.
I suspect we will still need large deficits as a percentage of GDP for some years and in most countries that do not enjoy net export surpluses significant public deficits forever!
best wishes
bill
Dear Lefty
Yes, the point you make is valid. I know you care about manufacturing. I am less concerned about which you also know. But I am very concerned about creating continued growth in skilled employment and making sure our productivity growth is solid (at whatever GDP growth rate we deem to be environmentally sustainable which might include being happy with a big 0 each quarter in the National Accounts growth estimates).
In an accounting sense, the concept of rising imports being lost opportunities to use skilled labour is reasonable. But in another sense, why would we want our skilled labour working for lower wages (to make sure the things we made here were produced at the same cost as we could import them? Isn’t it a better strategy to allow poorer nations to grow and improve living standards (as long as the trade is fair and they do not shoot union members) by importing their goods at the lowest prices possible and then free that skilled labour here to pursue other things that we cannot easily (or at all) import? So over time an educational focus to make sure workers who used to go into metals might now go into cancer research.
But I also realise that some people like making things and I think there is tremendous untapped potential in renewable energy to divert our manufacturing into. I would not subsidise private profit though. Rather I would develop a range of new public enterprises. Very dinosauric of me, but then what else would you expect!
The Job Guarantee is a safety net only. It is not the answer to everything. It is the minimum the government should have in place to ensure that workers who cannot find a job elsewhere do not find themselves in poverty.
On top of that we need skills development frameworks, strong public employment growth, high quality public goods, and industry strategies to create environmentally sustainable outcomes. A good place to start is to revitalise our degraded public education and health systems. Plenty of skilled jobs there for everyone.
best wishes
bill
Dear JKH
Sledgehammers are for bashing through resistent (thick) concrete.
I think it is an appropriate tool for this purpose because the offerings of those who oppose public spending fail to get beyond even the most basic two-sector understandings of accounting. Like 1 -1 = 0. We learned that in primary school but most economists can no longer solve the sum, debt deflationists included.
Once we establish that 1 – 1 = 0, then we can get fancier.
best wishes
bill
Dear Bruce
Well I am a surfer so I like a bit of salt water. But I also ride a bike a lot so I like dry land. But then I have installed rainwater tank systems at home so I must like fresh water. I also start from operational understandings rather than a priori religious outpourings (neoclassical approach) so I must like the real world.
But I note that some of the travellers listed as saltwater macroeconomists are not remotely in my camp. So the Salt Water affiliation is out. The crew listed as fresh water macroeconomists including the CGE types (computable general equilibrium for non-economists) are not my cup of tea. So that is out.
So water seems to be out.
And … so we are getting closer to Real World Dry Land macroeconomics. A division of its own.
best wishes
bill
Scepticus . . .
YOu wrote . . “do you agree with steve keen that debt money created by banks is not destroyed when repaid but in fact simply has the returngin principal credited to the baks reserves?”
Steve wrote . . . “So I asked a banker about it. He reacted as if it was a nonsense idea. He said when debts are paid, the bank adds the payment to its capital account. What it extinguishes is the debt, not the payment.”
These are VERY different statements . . . bank reserves are on the asset side, the capital account is on the liability/equity side.
Here’s what happens . . . first semester financial accounting:
1. If the borrower’s bank happens to also be the lending bank, then the borrower’s deposit is debited, and the loan is debited, but the debited deposit is larger than the debit to the loan given the interest payment. The interest payment is divided into retained earnings (the capital account) and also to accruals (since the bank’s tax liability has increased given its interest income).
2. IF the borrower banks at a different bank, then the borrower’s deposit is debited as the payment is sent by his/her bank via a debit to the bank’s reserve account at the central bank. The lending bank receives a credit to its reserve account on the asset side, the loan is debited on the asset side, but again the payment received (that is, the credit to the reserve account) is larger than the debit to the loan given the interest payment. The interest payment, as in the previous example, is divided between the capital account and the accrued tax liability.
Steve’s comment seems at least a bit confused in light of this, though certainly the capital account is increased given the interest payment.
Finally, it wouldn’t surprise me at all if a banker got this wrong. I know fairly well all the bankers in my community (I have an endowed chair in banking that they established collectively in the mid-1990s) and I would guess that 80% or more of them don’t know that the money multiplier is inapplicable.
Best,
Scott
I apologise if this detracts from the current discussion. I have some questions raised by my father regarding the endogenous money creation process. I don’t have the accounting knowledge that he has to be able to answer these questions.
1. When a Bank makes a loan to a customer the accounting journal is debit loan to customer (the asset). What term is given to the corresponding credit (liability)?
2. Where does this credit appear on the Bank’s balance sheet?
Regards,
Mark
Dear Mark
It is a bit off the issue. The answer is the bank debits the loan account of the borrower (an asset) and credits the deposit account of the borrower (liability). The exact terminology a particular bank may use for these accounts is moot (and irrelevant). The credit is a libaility held by the bank to the customer (they are liable to hand over dollars).
best wishes
bill
Scott, Scepticus,
I agree entirely with Scott. There is no question about what the correct financial accounting is.
Steve K.’s circuit model features his own concept of a bank’s own “deposit account” as a sort of modified blend of cash (reserve) and capital (equity) accounting. I have little doubt that he has made this construction work from a double entry accounting perspective, according to the definitions of his own model. It is a logical construction that works according to what he is attempting to demonstrate in his model. But it certainly doesn’t reflect generally accepted financial accounting principles. The interesting thing is that his deposit account includes both capital flows (e.g. loan repayment and deposit payment) and income flows (e.g. spread between loan and deposit interest). This commingling is about as serious a breach of financial accounting standards as you can find. But that doesn’t matter and doesn’t compromise the integrity of his model, since he is consistent in his construction and application. As I attempted to say earlier, I believe he has used this construction to illustrate more easily the sustainability of bank balance sheets, including loan and money supply, within a dynamic model, where there is considerable velocity of loan repayment and loan relending over time, resulting in a steady state system under a no growth assumption, rather than a net decline in balance sheet size over time. He has captured this velocity of micro churning with macro stability in his construct of bank “deposit accounts” and “reserves” as he uses those terms, which is very different from the way in which they are used in generally accepted financial accounting.
But as Scott notes, there is no question from a banking system financial accounting perspective that when a loan is repaid, a loan debit balance disappears and a corresponding deposit credit balance disappears (or alternatively the payee’s bank’s holdings of central bank notes and coins increases.)
I think the banker who answered the question may have been half right and half wrong, in his chosen context. He’s half right if the loan is repaid with a payment sourced from another bank. The payee bank is paid in cash reserves, and its balance sheet doesn’t shrink, even though the system balance sheet shrinks. But the banker was confused on the correct terminology as between the reserve account at the central bank and the bank’s equity account. And I doubt he was reading Steve’s mind as to Steve’s own use of related terms in his circuit model.
Bill,
Understood on the hammer issue. It’s a reasonable teaching approach in the circumstances.
Agree completely, JKH.
Well said, and appreciate your elucidation of Steve’s model. Again, sounds like what I was thinking when he presented it originally (internally consistent but redefining basic accounting terms), but hadn’t had the patience to go through it in detail as you did.
JKH,
Your comment on slices of onion got my attention. My reaction to that would be both yes and no. Or yes and why.
First I cant help comparing with other kinds of theories. There are stuff written all over the internet and people have theories and stories. From Schiffs to Roubinis to debt deflationists. They get your attention faster because there is so much hysteria built into the whole story.
What Bill has written here would be like a Chapter 1:Introduction of a book. In this imaginary book (he is anyway coming up with a book) his Chapter Last would NOT end with “A deeper theory is required” “Further Analysis” is different.
As Scott says, we can play the game and divide banks into commercial banks and investment banks and do all that. You can say many things about the housing sector in the present scenario. May help a bit but it doesn’t change things – the private sector savings will still be low.
Again further analysis is different from “deeper truth”. Further analysis would be how people consume – again it has to be done in a stock-flow consistent manner. Inventories can also be studied using this approach. Inflation and inflation accounting can be done as well. Very well.
Again, any model which ignores the government is doomed to be a failure. I recently looked at what the fiscal deficit for the US and added it for all years (simple addition, no PVing) and it came to around $4.5T. The total public debt seems to be $9T or so. Imagine you create a model and you ignore $4.5T of deposits of a country with a nominal GDP of around $14T ! Huge error that model has, no ?
JKH,
Don’t mean to chase you. So many of my posts targeted on you. I had posted the following 2 pargraphs in another post. Cash does not create an issue. Scott has answered this as well. He is an expert so his explanation is totally better than mine. Here is my way of looking at it:
Steve Keen is not to be believed beyond a certain point 🙂 He is very jazzy, though. Also, his convention is different. Of course as Scott says, he will flunk an Accounting 101 (as will I) but its just that his definitions are different. Don’t really know if one can maintain self-consistency of his definitions though and hence we have to be careful in what he is saying. To illustrate that debt repayment doesnt destroy money (it does), he gives an example of debt repayment by cash instead of, paying back the bank loan by cheque. He takes this logic further and says something like “Have you seen a bank burning the cash” and hence debt repayment does not destroy money and reserves increase and hence reserves should increase in the general case. I don’t think this logic makes any sense. Here one has to be careful and ask where did the cash come from in the first place.
Lets do an experiment. Let us say there are two banks A and B. You have $1 at bank B and none at bank A. Bank A gives you a loan of $1 and this has created a deposit of $1 on your name in bank A. At this point Bank A has the asset increase of $1 as loan and a liability increase of $1 as deposits. Lets go to bank B and withdraw the $1. At this point, the bank B’s assets and liabilities have reduced by $1. Now lets go to bank A and hand over the $1 of cash. It cancels your debt in the papers and keeps the $1. However, its liability is still there – the initial deposit of $1 it gave you – Probably you can begin to see some inconsistencies in Keen’s definitions.
guys, thanks for the detailed explainations. WHile I can accept that perhaps steve’s model is incomplete so has taken some liberties with how certain parts of the accounting are modelled, he does seem to actually believe that credit money is not destroyed.
On a raelated not, despite your problems with his model, do you agree that in theory that the bank money circuit is sustainable from a steady state perspective in which there is no net expansion of credit?
Scepticus,
My answer to your question is yes.
And I don’t have any problems with Steve K.’s model. I think its unusual in its construction, but well constructed.
P.S. One reason that he constructed some of the accounts the way that he did may have to do with the fact that he’s initially modeled a banking system without a central bank. That makes the task of modeling bank transactions as principal (as opposed to agent) necessarily creative.
Prof. Mitchell,
Your whole analysis relies on a fixed industrial structure. This is along the lines of Keynes’ vision of how the economy should be run when he refers to complete socialisation of investment in his General Theory. The logical conclusion to this theory is that the interest rate must be zero. This, in my opinion, is a recipe for long-run stagnation. In that case then, do you acknowledge that having a zero interest rate will distort the intertemporal structure of production? Your model can say nothing about the intertemporal structure of production because labour, capital and output are all homogeneous in your theoretical world. production has no structure. What role for technological progress? What role for relative prices? There is no technological progress in modern monetary theory, as far as I can tell. I would appreciate if you could provide some references to where this issue is discussed by yourself or you Modern Monetary colleagues. Modern monetary theory suffers from the same problems that traditional Keynesian theory (i.e. that espoused by Hicks and Samuelson), monetarism, New Keynesianism and Neoclassical theory. The level of aggregation is too high. The fact that you have said nothing about the intertemporal structure of production reveals that you have merely destroyed your straw man version of Austrian economics, not the real thing. I would just like to ask the question, why do you think governments have the knowledge, information and motivation to solve the socialist calculation problem? After all, the claim that policy makers can solve the problem is essentially the basis of Lerner’s functional finance i.e. what underpins modern monetary theory. My answer is they can’t solve it. That is what markets are for – to coordinate activity. In Austrian economics at least, there is no suggestion that each and every transaction is made at the “market clearing price”, in a Walrasian fashion. There is no suggestion that prices don’t take time to adjust. But markets do serve as a coordination mechanism that serve to bring together people who would otherwise have no cause to deal with each other except to satisfy mutually beneficial needs and wants. Prices transmit information to consumers and producers about scarcity or surplus. The focus of Austrian economics is on market process and that is what distinguishes it from Neoclassical thought. Modern monetary theory is silent on market process.
In the interests of robust and constructive debate.
Skuter
Dear Skuter
Modern monetary theory will not tell you who will win the football this weekend either.
Modern monetary theory is macroeconomics. All your concerns are the realm of microeconomics. But in saying that your criticism is also missing the mark. There is no presumption of a fixed industrial structure at all. Indeed, the fact that the composition of industrial output is in flux provides even more justification for keeping a strong fiscal stance to ensure aggregate spending is maintained when the uncertainty of entrepreneurs at the industry level leads some to forestall investment plans.
A zero overnight interest rate (being the rate under direct control of the central bank) will not add any distortion at all to the term structure of rates and so your claims about distortions to the intertemporal structure of production are not sustainable.
Further, there is no negation of technical or technological progress in modern monetary theory. It is just at a layer of theory below the macroeconomic. TP will alter productivity and investment patterns and ultimately impact on spending. It is at the aggregate spending level that modern monetary theory is focused.
You seem to be saying that macroeconomics is not a legitimate area of economics – so I guess you have nothing to say about budgets, public debt levels, inflation, national income, external trade, and the rest of the aggregates that occupy our attention. But moreover, if you think you can make statements about the economy by focusing on the micro level then you will quickly fall foul of the fallacy of composition which renders all such statements erroneous.
Economists prior to the Great Depression thought they could make macro statements by simply summing their micro statements (person to market to economy reasoning). They applied tools they considered would work for an individual firm to the economy and what did they find – they didn’t work. There is a macroeconomic sphere that goes beyond the micro and which needs separate and distinct theorising. Even the Austrian School recognises that in their business cycle theories.
My statements about the Austrian school are aimed at their pronouncements on macroeconomics issues. Their ideas about individual markets are beyond my attention and interest. I am not, however, ignorant of the literature. I have studied the writings of Von Mises, Böhm-Bawerk, Van Hayek, Rothbard, and more in considerable depth over the course of my career as a student and then academic. In fact I have spent too much time given the relevance their ideas have to anything. I find their reasoning at the micro level to be tantamount to an obsession against socialism which reflects the period that the ideas were developed and the people who were developing them.
There is no presumption of “socialist calculation” in modern monetary theory. There is a presumption that the non-government sector will save and that that spending gap has to be filled. The only other sector left is the government sector. It will make mistakes inevitably in doing so – this is social science after all. But in my view the order of the mistakes will be smaller than the costs that are incurred by those who allow unemployment to persist at high levels indefinitely.
However, on socialist calculation, I wonder how Oskar Lange would see the world now with the computer networks and instantaneous transfer of information that is possible. The socialist calculation was solved analytically it was just problematic due to information insufficiency. We can solve that problem now easily. So most of the Austrian critique from that time would lapse in my view. But that is another story.
Further, there is no presumption that private markets do not operate or are extinguished in modern monetary theory. Where do you get that from? As an example (of many), if you really understood the Job Guarantee you would see it doesn’t interfere with the private labour market at all. It just hires workers who have zero bid in the private market at a wage below the private market wage structure (the effective minimum wage). The private sector can at any time they like hire those workers away from the Job Guarantee pool. Further, if the private markets do not like the size of the budget deficit they have total control over reducing it – invest and spend more themselves.
Finally, after reading your post – you will realise you don’t address the blog topic at all – which is about stock-flow consistency and what it means for the statements about aggregates. I have observed this as a tactic that Austrian-leaning commentators use regularly. It doesn’t help your cause. It would be better to address the issue rather than divert it. But the issues I write about here are so problematic for the Austrian school that wants to get rid of most of government spending and taxation that it is actually hard for them to stay on topic.
best wishes
bill
Scepticus . . . see my post to Steve’s blog. Short answer is I agree with JKH. Appreciate the opportunity to clear this all up.
Bill . . . VERY well said.
Best,
Scott
As an example (of many), if you really understood the Job Guarantee you would see it doesn’t interfere with the private labour market at all. You can call it the generalized no-crowding-out.
Austrian economists seem like religious fanatics to me. They do not want to talk in a logical framework. They keep spreading the myth that the banking system is a Ponzi scheme even though it is not even close to it. Even Steve Keen believes that the present ‘system’ is a Ponzi scheme, but the difference is that he honestly believes it and does not have any propaganda. He is just interested in debunking neoclassical economics and Knowledge is his ‘kick’. Plus he seems to be smart.
I think Austrian economists have been brought up with the obsession for gold. They are long gold. Any argument which suggests gold price should go up is true and any argument which debunks gold and gold standard is bad for them.
Scott, thanks for clearing up the misconceptions re steves model. I hope I didn’t ruffle any feathers.
Bill, your post above is one of the best rebuttals to austrian dogma I have yet seen. In fact, I have to say its actually better in this regard than the main blog post, IMO.
Dear All
Given E-mails I received overnight it seems that Steve has indicated that his models etc are in fact stylised mathematical doodlings about a pure credit economy. This means they are not ground in the operational reality of the fiat monetary system and the banking system that interacts with the government (via treasury and central bank). So a comparison with modern monetary theory is not possible nor I suppose is a necessity to follow the agreed rules of accounting and stock-flow consistency.
best wishes
bill
Bill,
Just a curiosity – does a pure credit economy make sense ? In Post Keynesian literature, people seem to have considered it – though reaching the conclusion that an increase in the desire to save will lead to a recession from which there is no escape.
It may not be so easy to dismiss this because as you once put it, money is an IOU and with so many IOUs around, it may happen to run.
On the other hand, Steve Keen’s (re)construction seems Ponzi by construction. I remember seeing somewhere on Steve’s website that Randy Wray called his model a model of loonsharks.
Bill,
Just a curiosity – does a pure credit economy make sense ? In Post Keynesian literature, people seem to have considered it – though reaching the conclusion that an increase in the desire to save will lead to a recession from which there is no escape.
It may not be so easy to dismiss this because as you once put it, money is an IOU and with so many IOUs around, it may happen to run.
On the other hand, Steve Keen’s (re)construction seems Ponzi by construction. I remember seeing somewhere on Steve’s website that Randy Wray called his model a model of loonsharks.
I like Steve Keen for this. He himself puts up others’ criticism of his theory. His ideas may be controversial and I stopped believing his Circuit model, but he is honest.
scepticus: If you are still interested in getting a sense of the relative sizes of public debt around the world, this blog post I wrote a few months ago has a chart with some comparisons, sourced from the IMF.
As for Steve Keen’s model of a pure credit economy, Fisher Black got there first with the chapter “A World Without Money” in Business Cycles and Equilibrium. Still, I’d be interested in any links anyone might have to Keen’s writing on the topic.
Scott: do you have a link to your comments on Steve’s blog?
Bill,
You have cited ‘Deficit, deficit, Who’s Got the Deficit?’ in your paper by James Tobin. Any link ?
Libertarianism is an ideology with strong appeal for Americans, “land of the free,” with its strong Jeffersonianism and its roots in the great Western expansion: against big government, against standing armies, and against the welfare state. The whole thing is built on a series of political myths and conflations of things which should be discerned and kept separate. Currently Ron Paul is against the Fed, because it is not really a government institution, but an entity owned by banks, and therefore a private entity in the last analysis, function in the interests of the great banks. But this goes against his thesis that government is the criminal always. In reality, the US government has been hijacked by financial interests, which is quite different. To some extent, this has always been the case, hence the adage “follow the money.” The US is a “lobbocracy,” as many have noted. American views of their political system are largely a pastiche of myths.
Mrshall Auerback:
By the same token, the US is no more a “free market” today than the Soviet Union was during the heyday of its empire. The United States is now a species of State Capitalism. The top federal government executives are a partnership of top political and corporate managers who operate a war economy to enlarge their power as their main continuing goal. Less Adam Smith, more Mussolini style corporatism.
http://counterpunch.org/auerback09152009.html
Bill,
I apologize if this is a hopelessly naïve, but as I follow your flow of funds I can absolutely agree with what you are saying, from an accounting perspective. However, when I read the maxim: “…the only way that the non-government sector can save is for the government sector to run continual budget deficits,” my instinctive reaction is “Sure, nominally.” Is this what you acknowledge when you mention no net savings of “financial assets”?
For simplification, if the government sector ran an exactly balanced inflow/outflow, how would ‘real’ savings, improvements in productivity for example, be manifested?
Sincerely,
Buck
I’ve referred Money Week readers to this blog in answer to this… http://www.moneyweek.com/news-and-charts/economics/global/beginners-guide-to-austrian-economics-12301
In Figure 1 the Dividends row does not sum to zero and the Interest on Deposits row should surely use i superfix d, not i superfix b.
“The Austrians claim that they predicted the crisis etc is nothing more than recognition that their major hypothesis is that anytime the government is involved in the economy eventually things turn sour. So eventually, given that economic activity cycles, you are going to be correct. ”
This is a good one. haha.