Saturday Quiz – February 6, 2010

This Post Has 20 Comments

1. I answered “true” on 4. Then went back and re-read the referenced article and came across this sentence:

   “But a fiscal position can only be described as providing enough or not enough stimulution.”

   Or too much stimulation? You’ve convinced me that the appropriate level of deficit is equal to the desired net savings of the private and foreign sectors. This will generally be greater than zero, so a balanced budget is not generally desirable. (And currently in the US, even larger deficits could be appropriate). But doesn’t it remain true that “too much” deficit, creating more money/debt than the private and foreign sectors want to save, will push aggregate demand above supply and create inflation?

   So maybe you think 4 is False because “inflation *will* result” is too strong (it may or may not depending on whether the stimulus-added deficits are too stimulative for normal times or not). Or maybe you consider it false because you’re equating “withdraw their discretionary stimulus” with, “balance their budgets”, in which case I agree. Or maybe I don’t understand….

   Anyway, I’m pretty new here, and you’ve got me thinking, so I thank you for the blog.

2. Dear Lilnev

   Welcome to the blog and thanks for your comment.

   This is a case where the T/F dichotomy is less that perfect – a third option (all depends) is better but False is closer to the best answer. Those that are saying that the fiscal stimulus has to be withdrawn are assuming that there was full employment prior to the downturn and the budget stance was supporting non-government savings at that level. In virtually no economy did that situation hold which means that some of the stimulus is still required even when there has been a full recovery in non-government spending. So your conjecture “it may or may not depending on whether the stimulus-added deficits are too stimulative for normal times or not” is on the right track.

   I just wanted to focus attention on full employment and the role the government sector has to play in doing that beyond the crisis times we have been going through.

   best wishes
   bill

3. Hi Lilnev,

   I liked the paragraph in the article The Bogey Of Inflation by Robert Skidelsky a lot.

   But, as John Maynard Keynes never stopped pointing out, the Quantity Theory of Money is true only at full employment. If there is unused capacity in the economy, part of any increase in the quantity of money will be spent on increasing output rather than just buying existing output

   In other words, demand creates its own supply. Imagine a closed economy, for simplicity and let us consider the urban and rural areas and assume that unemployment is high in the rural areas. If there is a job guarantee scheme run by the government in the rural areas, it will automatically lead to higher activity in that area and the production will increase. Industries – small ones to start with – will be set up in the rural areas. People in the urban areas continue to visit shopping malls and people in the rural areas consume the extra production happening in the rural area. Producers who sell in urban areas will also increase production to satisfy the demand in the rural areas.

   I think Bill will always try to trap you into answering the choice which implies that deficits cause inflation and for you to find out by clicking “Show Results” that its wrong! The reason is simple – deficits do not cause inflation.

4. Further to my comment @18:17 …

   In the neoclassical theory, government deficit is said to lead to inflation because it is assumed that deficits will invariably lead to “monetization” and through a money-multiplier effect, higher money supply. Enter the monetarist argument: this causes prices to go up.

   However in the Modern Monetary theory, deficits lead to higher private sector net worth through the logic of double entry book-keeping. Money supply cannot be controlled by the central bank and it is demand led. But someone understanding a part of the modern monetary theory may still point out that higher net worth can cause inflation – hence my attempt at trying to point out the fallacies of such arguments in my previous comment.

5. Thanks for the responses, folks.

   “The Quantity Theory of Money is true only at full employment.” “Demand creates its own supply.”

   I’ve always been a bit skeptical of terms like “full employment” and “productive capacity”. It’s obvious when we’re well short of them (like now), but they get less clear as we approach. Perhaps better to say that the aggregate supply curve is not straight, but curved. When we’re in the flatter low-quantity (Q) regime, as now, adding aggregate demand will mostly push Q higher with little effect on P. Approaching “full employment”, producers can still respond somewhat to a demand increase, but it means paying overtime, adding temp workers who have to be trained, etc. The supply curve gets much steeper, and added demand now has more of its effect on prices (inflation), less on quantity. So then the appropriate deficit (or combined fiscal and monetary position) is the one that brings the aggregate demand curve to intersect the aggregate supply curve at its bend (e.g. slope of 1 on a log/log plot). The contribution of MMT, beyond more standard Keynesianism, is to point out that the private/foreign sectors will generally desire net savings, so a deficit of some size will generally be appropriate. Yes? (Of course, this just considers instantaneous curves. Adding elasticities, and trying for policies that will shift the aggregate supply curve rightwards over time…. more food for thought).

6. lilnev, as Bill pointed out many times if private sector alone is running on full employment – excellent and problem is solved. If it is government who provides fuller employment than private sector can then government does not compete with private sector in wages but pays legislated minimal wages for any unused resource. Full employment results and no inflation pressure

7. First question. None of the above, since there are other possibilities. For example it is possible for the citizens a country to be increasing their savings while running a trade deficit.

8. Dear Brian

   It is impossible under the conditions specified in the question for the private sector as a whole to save when there is an external deficit and the government budget is balanced – all measured as averages over the complete business cycle.

   The correct answer is not my opinion or interpretation but a requirement of national accounting relationships. Understanding this is basic to understanding how the monetary system operates.

   best wishes
   bill

9. You forget that there is a difference between nominal and real savings. Currency only measures nominal savings.

10. Dear Brian

    I didn’t forget the difference between real and nominal. I presume you mean real as in nominal deflated into purchasing power terms which is the usual meaning of the term. Irrespective of whether you are talking in nominal or real (deflated) terms the national accounting relationships between sectors that I outlined hold.

    best wishes
    bill

11. There are many other factors besides the ones you have in your scenario that can effect the economy. Let me set up a scenario so that you can see.

    There is a country Taxopia that has a fiat currency and a tax rate of 90%. Taxopia has many resources but because of the high tax rate the private citizens work only the most productive business model which consists of using factor X to fertilize land and produce crops. Because of the high tax rate the private citizens are virtual slaves and really don’t try that hard. They work to the point where they are able to feed themselves and support the the other nine people that live off them. Those in government on the other hand spend their time on unproductive tasks. For example the political economists, poets and bards who wander the land singing praises of the government.

    The government runs a balanced budget, and prints no additional currency. It takes the currency it taxed away from the citizens to pay government “workers” who then use that money to purchase and consume 90% of Taxopias productive output.

    One day the dear leader dies and Taxopia is thrown into turmoil as the child princess Freedonia takes power. Being a child she doesn’t understand the crazy rationalizations the government economists have produced to justify stealing to the work product of the citizens. It seems unjust to her simple mind that only one in ten work and the rest do nothing but consume and promote the status quo. So she fires the vast majority of the public sector till only 10% of the population is working for the government. She lowers taxes to 10% in order to support the public workers, and finds at first that she is running a balanced budget.

    What had happened during the long reign of the dynasty of her ancestors is that the population had never grow to the carrying capacity of the vast resources of her country. The 80% of the population that was out of work suddenly finds itself unemployed. At first they live off the charity of their fellow countrymen. Charity of the old kind where able bodied men are forced to do fairly unproductive busy work in order to get soup from the line. Production rises as they slowly begin to find jobs working the land.

    Productivity rises dramatically. There is a productivity driven price deflation. The princess finds that the 10% taxes are actually bringing in twice the real goods as before. So she drops the nominal pay of government workers by half and starts saving the other half of taxes.

    Meanwhile Taxopia is exasting it’s capacity to cheaply produce factor X which is used in agriculture. So they start importing factor X running a deficit with neighboring Neighbopia. The producers of factor X see the rising purchasing power of the currency of Taxopia and decide to save the currency to spend later.

    Meanwhile the productivity of Taxopia is rising. There are now nine times as many workers. Each worker has a much greater incentive to produced than before because of the tax rate drop from 90% to 10%. Also they are now able to live above a subsistence level and are able to save, which they invest in capital structure, which further boosts productivity. Productivity doesn’t merely rise nine fold but 20 fold.

    This is quite possible just so long as the citizens consume less than they produce. There are a whole host of reasons that prices will drop due to that savings.

    So here we have a country running a deficit and the government is running a balanced budget yet not only is there a net savings on the part of private citizens but the government is able to save, and foreigners are also able to have additional savings. All without the government printing a single additional note of its currency. It’s a win, win, win situation. It works because economics is not a zero sum game, and money is not of intrinsic value.

12. Here’s a simpler example that requires no change in the tax rate.

    Cottontaria is agricultural and produces cotton. Inventopia is an more advanced country. Inventopia invents the cotton mill and starts producing them for trade with Cottontaria. The manufactures of cotton mills save all their profits in the currency of Cottontaria because it is rising in value rapidly due to the increased productivity caused by the cotton gins. Not only that but the Cottontarian government makes enough on taxes that it pays down it’s debts, freeing that capital for borrowing by the private sector which invests in cotton mills instead of unproductive government debt. In this scenario the government could achieve a balanced budget or even run a surplus, while the private sector runs a surplus, and the foreigners are running a surplus, the extra productivity is split between all three.

    The extra production with a fixed amount of currency leads to massive productivity driven deflation, which is a very good thing. Nominally there is a decrease in currency holdings within Cottontaria but deflation erases any deficit in real terms. Sure the currency holdings of the Inventopians reflect real future calls on Cottontaria cotton production, however there is still a net present and future increase in real extra cotton production for the Cottontarian citizens and government.

    The kind of deflation that is bad is that caused by the exposure of the ponzi nature of fractional reserve banking, not productivity driven deflation. What’s bad is the kind of deflation we are experiencing now, fractional reserve monetary deflation. In fact, during most of the productivity driven deflationary experience of the US standards of living had risen for what are obvious reasons to those with correct economic understanding.

13. Dear Brian

    I suggest you apply some stock-flow accounting to your dream models and you will find that there will be some adding up difficulties. All you are telling us is in your free market paradise everything will be fine. Yes, in the way you set it up all will be fine. Except there will be no stock-flow consistency and the national accountant will be sacked for failing to account for the sectors properly.

    best wishes
    bill

14. There is no accounting problem. A country that increases productivity by a multiple of ten will easily have enough real goods for all sectors to expand, plus run a trade deficit with foreigners saving and accumulating the appreciating currency. The same works even with small increases in productivity. Even minor gains can be split among the “sectors” with each having a net saving. Of course, there will be productivity driven price deflation if the money supply does not increase. Which is just fine because it will allow the poor, those on fixed incomes (the retired, orphans, disabled) to participate in the benefits of increased productivity through their savings and cash holdings. They won’t be forced to place their savings in the hands of bankers, and stock brokers to protect themselves against inflation, so there will be less opportunity for financial swindling.

15. Brian,

    If there’s no accounting problem, care to show us the accounting? Good luck.

16. There are an infinite number of workable solutions and here’s one.

    Cottontaria has a tax rate of 10%. The government runs a balanced budget. The private sector produces an average of 1,000 bales of cotton a year. Farming is risky. Every so often single farmers will have a crop failure that ruins an entire year’s crop. Therefore the private citizens tend to hold a years cash needs in their balances for risk mitigation purposes. They mitigate their risk by holding cash as a store of value and buying cotton from other farmers on bad years. The fiat monetary unit is called the cottbill. The total cash in the system is 200 cottbills.

    The government only takes payment of taxes in cottbills. The demand for cottbills depends on the need to pay taxes on production; there is no backing commodity and so it is a fiat system. Average tax receipts are 100 cottbills, so the price of a cotton bale is one cottbill. The government collects this at the end of the year and spends the full amount through the year. There is no foreign trade at first.

    Cottontarians are relatively poor and only have one set of clothes for the year that wears out.

    The above situation is for all prior years.

    The Inventopians discover Cottontaria and see an opportunity. Cottontaria is much more suited to growing cotton than Inventopia even though it is grown there. They already have cotton gins. Cotton gins increase cotton production by ten fold. So the Inventopians sell enough cotton gins to the private citizens of Cottontaria to cover their needs. The price settled on is 50 cottbills which are bought at the beginning of the first year of the new discovery era.

    Cottontaria production rises ten fold. The price of cotton drops dramatically. The demand for cash to pay taxes is intense, while the excess cotton is meeting needs that on the margin decrease. Since there is so much more cotton the risk of not having enough to get through the year decreases, so the demand for cash for that purpose is reduced by ten fold freeing up 90 cottbills for paying taxes in addition to the original 100, minus the fifty held as cash in Inventopia. So there is 140 cottbills available for the purpose of paying taxes. The price of cotton drops to the point where ten percent of total production costs 140 cottbills. Why? It is because the only other demand for the notes is to pay taxes and the equilibrium point will be reached when prices drop that much.

    So the price of cotton drops to 0.14 cottbills per bail. An 86% reduction in prices, which is a 7.14 times rise in the value of the cottbill. Production rises from 1000 bails to 10000 bails. Nominal gross production is 10000*.14 = 1400 cottbills. Subtracting the cost of the gins at 50 cottbills we have net of 1350 cottbills taxable. Government tax receipts are 135 cottbills. Since we are proposing that the government runs a balanced budget it increases government salaries from 100 to 135 cottbills, raising real government wages from 100 bales of cotton to 964.28 bales (which is ten percent of production).

    For that first year the private farmers of Cottontaria see their nominal gross income rise only 40% but they experience a ten fold increase in real terms.

    By the second year there will be no deductions for the cotton gin expenditures and government receipts will rise to 140 cottbills. If they raise wages yet again then government workers total compensation would rise to 1000 bales of cotton which is ten times what it was in the old era.

    Meanwhile the Inventopians have seen a real rise in value of their 50 cottbills. By the beginning of the second year the value of their cash holdings have increased tenfold in real terms. Whatever year they decide to spend the cash will inject money back into Cottontaria. This would again cause a readjustment of prices. Cotton prices would rise to .19 cottbills due to the extra cash available for paying taxes.

    I picked arbitrary numbers for various items such as farming risk, and the division of the benefits of trade, demand for money due to risk, but these are tunable over a wide range and the numbers will still work out. That’s the magic of market prices. It’s not really magic once you understand that money is only claims to goods.

17. Dear Brian

    Thanks for the numbers. But they don’t add up.

    First, I assume cottbills are issued by the government given you indicated it is a fiat currency system. I also assume the price level is 1 although you don’t mention that (it is implied). So the total cash balances in the system (200) has to reflects prior budget deficits.

    Second, there can be no saving in the system once the budget is balanced because all disposable income (900) has to be consumed (900). Otherwise, the 1000 production level is not stable because aggregate demand has to equal 1000 and so consumption (C) = 900 and government spending (G) = 100. There is also no investment in the system under these conditions. It is possible that investment might be exogenous and set (for argument sake) at 180. If the 1000 was an equilibrium output level then this would imply a saving ratio of 0.20 (20 cents in the dollar) and so consumption would be 720. Then AD = C + I + G = 720 + 180 + 100 = 1000. So AD equals total output and firms can sell all they produce which means they are in equilibrium.

    Now do the sectoral balances which have to obey the following national accounting rule: (I – S) + (G – T) + (X – M) = 0, where I = Investment, S = Saving, G = government spending, T = tax revenue, X = exports and M = imports. In Year 1, NX = X – M = 0. The budget is balanced so (G – T) = 0 and the private sector balance (its total net saving) = 180 – 180 = 0. So the private domestic sector spends exactly what it earns. No saving overall.

    In other words, with net exports equal to zero, and the budget balanced, the private sector cannot save overall.

    Third, the numbers get very messy in year 2 because you conflate nominal and real and also there is no correspondence between aggregate demand and supply. So lets work out what we can!

    Total nominal output for the year = P.Y = 0.14*10000 = 1400. So for that to be stable AD has to equal 1400 overall and you have to have a convincing story as to why AD has increased from 1000 to 1400. I will leave the explanation for the spectacular fall in prices – and we can accept it is all to do with productivity increases. The distributional implications for real wages growth etc are staggering but we can live in your suspended fantasy world for the moment.

    We also know that imports are now 50 which is a leakage from the expenditure system. You are valuing imports at 50 which implies that the import bill is 50 nominal units (because they were imported at the start of the year when the price level was 1 and the parity adjustments which you ignore must be implicit).

    Lets continue to assume that the saving ratio is 0.2 and the tax rate = 0.1. It doesn’t matter much. So for the 1400 nominal GDP to be stable (it generates 1400 cottbills in nominal income), there has to be demand of 1400. I think your tax treatment is confusing. Taxes are applied in year 1 on nominal income. In this case, nominal income (output times price) is 1400. It doesn’t matter in the end but I will tax that 10 per cent to get a T = 140. G then rises to 140 to meet your balanced budget rule. If C equals 0.8 times disposable income we get = 0.8 times 1260 = 1008. Given AD = C + I + G + NX, then the only way that this situation could be stable is if AD = 1400 = 1008 + I + 140 + (-50). So investment would have to rise to 302 to ensure AD = nominal output.

    Now do the sectoral balances again as above. The budget is balanced so (G – T) = 0, Net exports = -50. Saving is 0.2 times disposable income = 252 and Investment = 302. So the sum of the sectoral balances is:

    (I – S) + (G – T) + (X – M) = (302 – 252) + 0 + (-50) = 0 (so it works). Now the private domestic balance (I – S) = 50 which means the private domestic sector is now spending more than it is earning, that is, running a deficit or dissaving overall. It would not matter if we used different assumptions about the saving ratio.

    So while your example is very messy, the national accounting that one might glean from it categorically tells us that when the government is running a budget balance and there is an external deficit, the private domestic sector must be dissaving. You cannot escape that conclusion – I am sorry.

    I suggest if you want to understand this better you should start from a stock-flow consistent model – please see this blog – Stock-flow consistent macro models

    Then carefully articulate each of the flows and the corresponding stock balances at the end of each period that would arise. Then do some adding up and you will find out that the sectoral balance statements I make are without doubt 100 per cent accurate and rely on no opinion or interpretation on my part.

    best wishes
    bill

18. “First, I assume cottbills are issued by the government given you indicated it is a fiat currency system. I also assume the price level is 1 although you don’t mention that (it is implied).”

    Yes, before first contact the price of a bail of cotton happened to be one cottbill. This says nothing about how the fiat system was established.

    “So the total cash balances in the system (200) has to reflect prior budget deficits.”

    Your question was not about prior deficits but current ones. So this is a moot point to bring up. In addition it is wrong.
    You are mistaking the government for a business operating on the basis of free trade. The taxpayer’s relationship with the government is anything but free. When the government establishes a fiat currency and prints quantities of that currency it doesn’t owe anybody anything.

    It could have issued the original 200 cottbills over a period of two years and given them to the taxpayers it had collected from, or it could have handed them out at random dumping them from helicopters, it doesn’t matter in establishing their value. The fact that they accept the bills as payment of taxes is what matters, and that they continue to do so. That is what makes the bills marketable.

    As an aside to a prior comment of yours, I thought it funny that you referred to this example as a “free market paradise.” There is nothing free about the monetary system in both examples and there isn’t much else to them. Certainly the examples are not designed to show the advantages of free markets over socialist economies (like the U.S.S.R, or Communist China under Mao). The only aspect of these examples that would distinguish a free market system from a command economy is the monetary system, and that is clearly one of a command economy. In the US, we have a mixed economy, not a free market paradise. In that mixed economy we essentially have central planning of our monetary system.

    ” Second, there can be no saving in the system once the budget is balanced because all disposable income (900) has to be consumed (900). Otherwise, the 1000 production level is not stable because aggregate demand has to equal 1000 and so consumption (C) = 900 and government spending (G) = 100.”

    There was no net saving in the system before the new era. Furthermore since I said that the consumption level of 900 bails of cotton a year was subsistence prior to the new era there was no way to have net savings except to fire all government employees and put them to work producing their own cotton, in which case, they could save 10% per year if they desired.
    Had I not specified they were living at subsistence levels the population would have had another avenue to increase savings, and that is to consume less.

    The whole point of the example is to show how one can end up with an answer that is outside the multiple choices you provided. Your question never specified the very unrealistic condition of “stability”. Obviously the introduction of the cotton gin is not a condition that happens in some kind of Keynesian evenly rotating economy. It’s a one time historical even.
    I could have made set up the same initial conditions and had the citizens decide to reduce consumption as a historical event. If they can survive on 800 bales of cotton a year there is no reason why they couldn’t decide to consume only 800 bales and start saving the rest. They could continue this for as long as they desired. Later they could decide to stop working altogether and live off their savings.

    “There is also no investment in the system under these conditions.”

    There are lots of things that this example doesn’t contain. For example there is no debt. At no point does any actor, nor the government ever take out a loan. Since the government never takes out a loan, nor issues any bonds, it is never running a deficit despite your claims. It also doesn’t print any money.

    You spit out some formulas that are part of your model in order to support your model. This is circular reasoning. I dispute that your formulas are valid. They have led you to obvious absurdities. I on the other hand could put my examples in tabular form and they would be perfectly consistent mathematically and with possible and self interested human behavior. It’s quite clear that the citizens of Cottontaria could keep consuming at the same rate as before and save as many of the extra cotton bails as they wish to.

    It’s absurd to believe that the level of government deficit spending sets a limit on how much people can save. What determines how much people can save is how much they produce minus taxes vs. how much they consume.

19. Dear Brian

    You said:

    You spit out some formulas that are part of your model in order to support your model. This is circular reasoning. I dispute that your formulas are valid.

    The formulas are nothing more than those used by the national accountant in all countries to record official data. They are “circular” because they add up in a stock-flow consistent way as any accounting framework does (and should). They are not my formulas and there is no sense that an accounting formula can be “invalid”. You can dispute the conceptual structure of national accounting and many do (what does it measure? etc). But the accounting is impeccable.

    You said:

    I on the other hand could put my examples in tabular form and they would be perfectly consistent mathematically and with possible and self interested human behavior

    I won’t continue the discussion until you do this so that we can establish whether your formulas etc accord with the national accounting conventions used by all governments. Until we know that then we are wasting our time. I have pointed out that in your presentations to date there is not a skerrick of understanding shown for the accepted principles of national accounting. Anyone can invent their own system of accounts to show anything but to mean anything they have to be stock-flow consistent. Your “models” are not and so clearly do not add up – and that is why you think your result holds. It doesn’t.

    You said:

    It’s absurd to believe that the level of government deficit spending sets a limit on how much people can save. What determines how much people can save is how much they produce minus taxes vs. how much they consume.

    In the second sentence you actually negate the statement in the first and establish the point I have been making. Here is the logic that will show you that:

    What determines how much people can save and consume at a macroeconomic level (that is the whole sector)? Answer: the level of GDP (income).

    What determines the tax revenue? Answer: the level of GDP and the tax rate (the latter set by government).

    What determines GDP? Answer: the level of aggregate demand.

    What determines the level of aggregate demand? Answer: the expenditure components.

    So after non-government spending decisions have been made in aggregate what other sector contributes to GDP determination? Answer: the government sector.

    Work through the logic and you will see the point I am making.

    So for me the conversation is closed for now until you produce a model that is consistent with national accounting conventions (of the type I outlined for you previously). Then we are talking the same language and you will see that the propositions you are making can never satisfy the rules that govern the sectoral relationships.

    best wishes
    bill

20. No, it doesn’t handle html table format. So I will not be able to show you what is very easy to glean from my comment, that the numbers all add up both nominally and in real terms. Each year there is a precise balance of currency flows to each sector, and also the numbers add up for the amount of real goods produced.

    So you think your formula works based on the credibility of what the “national accountants” use? Do you realize that accounting rules themselves only work in real terms, and only for business, under non-fiat monetary system. If business is trying to use accounting to determine what is truly profitable in a world of fiat money can fail in real terms. It may show nominal gains while at the same time actually losing real capital.

    It’s even worse at the level of the an entire country that can print up it’s own money. Do you think accounting would work for individual businesses if each used a separate unit of measurement, it’s own currency, and each were able to print as many as it wished?

    Don’t be silly.

    There need be no accounting balance in real terms when using a fiat currency. Each part of your formula is prone to errors in real terms over time. For example, the (X – M) portion of the formula exports minus imports can balance in nominal terms but not in real terms. All that need happen is the printing of additional bills. A real world example being the US inflating it’s way out of it’s debts. We have purchased vast quantities of real goods with all the money we have given the Chinese and Japanese. They have accumulated dollars and dollar denominated credit in return for these goods. This is all fine in nominal terms but the US need merely print more dollars to screw them in real terms.

    Your theory is that such a printing of money would allow the US citizens to save even more. However that too is only nominal, and in fact the high inflation rates would discourage savings precisely because it would be a drain in real terms. Presumably the government would be buying goods with all the money it printed and draining real resources away from the private sector.

    It’s quite apparent that these rules followed by supposed “national accountants” are doing a very poor job given the state of the world economy.

    Another reason why your formulas and claims are obviously wrong is because people can produce and save goods directly without even resorting to the use of currency for trade. Thus real savings can rise without any change in the flows between sectors. It only requires a desire of people to save more of the goods they produce. Perhaps they think that there will be 7 years of good followed by 7 years of famine, so they save in order to later trade. Who better to save extra corn than the farm who already has silos? Your assumption that things must remain in equilibrium at all times is nonsense. Your assumption that all savings must be measured in currency flows, or bank accounts is equally invalid.

    This was all old knowledge a hundred years ago to the Austrian economists. I suggest you bone up.