17
Aug
2011
Murphy Twin Spin
On Monday I talked about deleveraging and not fearing the reaper.
Today I have an infomercial for the 4-week Mises Academy class starting next week on the sovereign debt crisis. (I’m still taking suggestions for the syllabus, if anyone has ideas.)
The Swiss Franc dilution debate would be a good subject – and a good article.
They think this prescription is a matter of simple arithmetic: if the private sector is (on net) reducing its indebtedness, then the only way to keep total incomes from falling is for the government to step in and increase its indebtedness.
Since S-I = G-T + X-M
If the domestic private sector is deleveraging S-I>0
.
then in presence of a trade deficit X-M0
that is, the government has to run a budget deficit, there is no choice.
If households are trying to save and pay down their debts — and we have seen that this is actually good for the economic recovery — then it obviously follows that government deficits only prolong the agony.
No, with a trade deficit, budget deficits result from the deleveraging and support it. Without the budget deficit deleveraging could not take place unless the trade balance suddenly reverted by some mysterious reason.
For one thing, to the extent that each household takes into account future tax obligations to service the government debt, private efforts at saving are offset by government borrowing. In other words, it saps the sweetness of paying down your American Express balance by $5,000 if your portion of the federal debt goes up by $3,000 during the same period.
Wrong, That is only applicable to a fixed exchange rate, gold standard, peg, but inapplicable to a sovereign country with its own free floating inconvertible fiat currency.
then in presence of a trade deficit X-M<0
it is an arithmetic fact that G-T>0
that is, the government has to run a budget deficit, there is no choice.
that is, the government has to run a budget deficit, there is no choice.
What if, given the market is deleveraging, S – I < 0, and given a trade deficit, X – M 0 part.
If the market is deleveraging, then it is NOT the case that S – I > 0, if by “S” we don’t use the MMT interpretation of savings, which is actually just inflation of the money supply, and we instead correctly interpreted savings to be abstaining from consuming, and paying down debt instead. That can be done in an economy with invariable money. So S – I = 0, NOT S – I > 0.
Thus, if the market is deleveraging, meaning debt is being paid down with money that is earned but not consumed, then it is possible for the government to run a balanced budget, G – T = 0 in the meantime. This is the solution to the problem that is generated by taking the ridiculous MMT interpretation of “savings”, which is actually just inflation of the money supply.
So the correct interpretation of the equation should be:
Given the fact that the government is inflating the money supply, then we can conclude that should there be a trade deficit, X – M < 0, then the government must be running a budget deficit.
In other words, it's just a dumb tautology once again. Given the government is inflating the money supply, then it has to be running a deficit if cash balances in the domestic private market are increasing in the presence of a trade deficit (cash outflow from domestic cash balances).
Your interpretation of Murphy's argument is misguided.
His statement:
"They think this prescription is a matter of simple arithmetic: if the private sector is (on net) reducing its indebtedness, then the only way to keep total incomes from falling is for the government to step in and increase its indebtedness."
is correct, if you understand that he is pointing out an error in your understanding of what is implied by the private sector deleveraging, and if you understand your confusion derived from narrowly focusing on the accounting equation has lead to you concluding something that the accounting equation isn't even able to answer (debt deleveraging in the market requires government deficits).
No, with a trade deficit, budget deficits result from the deleveraging and support it. Without the budget deficit deleveraging could not take place unless the trade balance suddenly reverted by some mysterious reason.
No, you’re still confused. If there is a trade deficit, then all else equal, money and spending would gradually decline in the domestic US market. Now, if this is the baseline, then it is STILL possible for the market to deleverage, by borrowers in the market reducing their consumption spending, saving, and paying down the debt they owe to lenders.
This process does NOT require the government to run a deficit. You MMT yahoos just believe it does because you’re not interpreting the equation properly, and you’re misunderstanding the meaning of saving. By saving, you MMTers mean inflation of the money supply and growing cash balances. But that is not what saving means. Saving means using money for purposes other than consumption. If people pay down their debt, then they are using their money for purposes other than consumption. They are in fact saving. Yes, nominally their cash balances are gradually declining due to the trade deficit, but this does not mean that they can’t still abstain from consuming out of their earnings, and pay down whatever debt they owe. It also does not mean that they can’t restructure the debt, or have it liquidated altogether.
Wrong, That is only applicable to a fixed exchange rate, gold standard, peg, but inapplicable to a sovereign country with its own free floating inconvertible fiat currency.
False. The fact that the government can inflate the currency, does not mean that an individual who owes $5,000 to American Express and who will owe an additional share of the national debt of $3,000, will be able to acquire that inflation for himself. Inflation does not reach everyone’s pockets at the same time. Someone on a fixed income, who owes $5,000 in credit card debt, and who will owe an additional $3,000 of the national debt, is not going to be reassured by you saying that there exists some people in Washington or New York that can print money for themselves and pay down the debt that they put on the credit card borrower. For then you’d only be saying that Bob shouldn’t worry, because yes, while he will owe an additional $3,000 share of the national debt, he won’t actually end up paying for it nominally, through taxes, he’ll just end up paying for it through decreased purchasing power, through inflation tax.
You MMTers are so hopelessly confused because you don’t understand the market process. You’re hoodwinked by an accounting identity and you think it answers all questions even if you are not understanding what others are saying.
Private sector is deleveraging means it is net saving, that is spending less than its income in order to repay its debt. Hence S-I=Income-Spending>0.
So the government needs to be in deficit.
You just don’t understand that monetary flows satisfy the accounting identity, so whatever happens to the economy it will always satisfy the accounting identity.
So you keep repeating nonsense.
Completely and utterly wrong. The concept of “net saving” means absolutely nothing, it is a hand waving idea that the MMTers happen to have defined for the purpose of making their sectoral balance equation seem important.
This “net saving” has no relation to actual saving in the economy, no relation to bank accounts, no relation to credit cards, no relation to mortgages, and no relation to personal agreements between private individuals. All of these common debt instruments involve the private sector and to not link up with the MMT sectoral balance equation in any manner whatsoever.
How does repeating the same erroneous claims constitute a valid rebuttal?
No Mammy, while private sector deleveraging means that people are paying down their debt, it does NOT mean that S – I > 0, if you understand that savings does not mean inflation of the money supply and increasing cash balances, but rather it means abstaining from consuming and using earnings for purposes other than consumption.
When you MMTers say S – I > 0, what you have in mind is that the government is printing money, which is causing cash balances to rise greater than private derived income. But “S – I” is totally unrelated to PRIVATE debt deleveraging.
The government does not need to be in a deficit in order for private citizens to settle their debts with each other.
You just don’t understand that while the accounting identity you cited is always held, it is not able to answer the implications of private debt deleveraging. You did not correctly interpret what private debt leveraging entails when you just ignorantly claimed that it must mean S – I > 0, such that cash balances are increasing faster than private derived income.
Net savings = S – I = Total Income – Total Spending.
No use reading your long ramblings when you don’t even get that simple fact.
“Net savings” to you MMTers just means increase in cash balances brought about by inflation.
But the importance of savings is not at the net income level, but the gross income level.
If inflation were zero, then saving out of net income would cease, and people would save only out of their gross revenues, and their accumulated savings to income ratio would continue on.
You’re not understanding the nature of what it means to save and pay down private debt. You see the word “saving” and that makes you believe you can ramble on about increasing cash balances brought about by inflation, as if it’s even related. IT’S NOT.
Net savings = Income – Expenditure = S-I.
It is not only important, but it is what drives the economy.
It has relation to bank accounts, credit cards, mortgages, etc, everything that is denominated in the national currency.
It has nothing to do with coconuts though.
Only a matter of time until we realize how much more valuable coconuts are than paper currency
Yes, because paper tastes so much better than coconuts.
It is not only important, but it is what drives the economy.
No, inflation of the money supply and growing cash balances do NOT “drive the economy.”
Saving and investment drive the economy, and that can occur with zero inflation, by people saving a portion out of their gross revenues and incomes.
It has relation to bank accounts, credit cards, mortgages, etc, everything that is denominated in the national currency.
The “net savings” in the MMT world
has NOTHING to do with loans, credit cards, mortgages, or anything else denominated in the national currency.
Net savings drive pretty much the economy. Just look around you.
Net Savings = Total Income – Total Spending
So it has everything to do with loans, mortgages and everything else that constitute much of the spending in the economy.
Net Savings are part of the real world, MMT only pays attention to them and show the inconsistencies not only of the mainstream but also of Murphy’s articles.
Net savings drive pretty much the economy. Just look around you.
Net saving in the MMT conception is just inflation of the money supply and increasing cash balances.
Net savings DO NOT drive the economy. Saving out of net income only takes place because nominal incomes keep growing on account of inflation of the money supply.
If inflation ended, then saving out of net income would eventually come to an end as the ratio between accumulated savings and nominal incomes reached a point where people would no longer feel any need to save out of their net incomes anymore. At that point, any saving that takes place would come out of gross revenues and gross incomes, and capital accumulation would take place on the basis of gradually declining prices of capital goods as more are produced, and depreciation charges would be able to not only replace capital goods used up, but more than replace them as the prices gradually fall.
Net Savings = Total Income – Total Spending
In the MMT world,
Net Savings = Inflation of the money supply and increase in cash balances.
So it has everything to do with loans, mortgages and everything else that constitute much of the spending in the economy.
No, not in the MMT conception of net savings it doesn’t. In the MMT conception, net savings is just inflation of the money supply and increased cash balances. That has NO BEARING on private loans, mortgages, nor credit cards, nor the paying off of such debt by abstaining from consumption.
Net Savings are part of the real world, MMT only pays attention to them and show the inconsistencies not only of the mainstream but also of Murphy’s articles.
Yes, net savings is a part of the real world, but MMT does not understand the nature of saving, nor the significance of saving. It only treats net saving as inflation of the money supply and increasing cash balances. That’s it.
Saving is not increasing cash balances in the private sector. Saving is abstaining from consuming and using one’s revenues or incomes to make expenditures for purposes other than consumption.
This process does NOT require inflation to continually take place, which means net saving can be zero in the MMT conception, and yet savings would still take place, and capital accumulation would still occur.
Which is (typical MMT) complete rubbish. Suppose Murphy has in his private hands and IOU issued by me (privately) and I later declare myself bankrupt then that IOU becomes worthless. This is known as debt deflation, and it is one possible way to deleverage.
The government neither takes nor pays any money in this scenario, the only role of government is as an administrative registry of the bankruptcy. Thus, the sectoral balances are completely unaffected, and the MMT magic equation demonstrates itself to be completely useless.
No, that is defaulting, not a way of delevaring, which is paying down the debt.
In order to pay its debt, the private sector spends less than it earns, it increases its net savings.
Which in presence of a trade deficit, means the budget will end up in deficit.
This is what is going on. You’ve got to live with it.
No, that is defaulting, not a way of delevaring, which is paying down the debt.
No, deleveraging does not necessarily imply default. It could, but not necessarily.
In order to pay its debt, the private sector spends less than it earns, it increases its net savings.
No, INDIVIDUALS in the private sector who are net in debt start to abstain from their consumption and pay down their private debts with other INDIVIDUALS who are net lenders.
Debt deleveraging does not mean that the entire private sector is lending to the government.
“Net saving” at the individual level is far different from the MMT conception of it, which is nothing but inflation of the money supply and increasing cash balances.
You don’t get it, that has been established for a long time.
For any individual to spend less than its income, another individual must be spending more than its income.
For any sector to spend less than its income in aggregate, another sector must be spending more than its income in aggregate.
Private sector deleveraging means it is spending less than its income in order to repay the debt from savings.
With a trade deficit, the external sector is also spending less than its income.
It follows that the government must spend more than its income, to offset the surplus of the domestic and external surpluses to the penny.
Suppose there is one silver dollar in the whole world, and only two people, no government whatsoever.
The Old Man owns the farm but he is getting too old to work it, the Young Man wants to buy the farm and he has only one silver dollar in his hand but the Old Man thinks the farm is worth more than that.
So the Young Man says, “I’ll buy this farm off you for $10000, but I’ll have to owe it to you and pay you back as I get the money.”
The Old Man says, “I’m going up to live on the mountain, but I’ll buy a meal off you for $1 per day.”
They shake hands on the agreement.
So the Young Man gives the Old Man one silver dollar as his first payment and he takes over the farm. Every day he takes a meal up the mountain, and he sells the meal to the Old Man for one silver dollar, then he gives the silver dollar back to the Old Man and deducts $1 from his debt.
At day zero (before the farm is sold) how much money exists in the whole world? Answer: one silver dollar.
At day two (just after the farm is sold) how much money exists in the whole world? Answer: one silver dollar plus $9999 in mortgage debt.
After 30 years (when the loan is paid back) how much money exists in the whole world? Answer: one silver dollar.
CONCLUSION: There is absolutely no requirement for government to even exist in order to expand total debt, nor to contract that debt.
Every day the young man net saves 1$ and the old man dis-saves 1$.
That’s a good example of how for any individual to spend less than its income, another must spend more than its income, to the penny.
Total net savings for both men are 0 each day.
Clearly this is not what is happening in the economy, past savers are not spending their previous savings and the private sector in aggregate is net saving.
And that, in presence of a trade deficit, will always push the government budget into deficit.
I agree with your conclusion though.
Every day the young man net saves 1$ and the old man dis-saves 1$.
That doesn’t mean the old man is running a deficit. He is earning $1 a day through his loan, and spending $1 a day by buying bread.
Tel is right. No inflation is needed.
That’s a good example of how for any individual to spend less than its income, another must spend more than its income, to the penny.
But the old man ISN’T spending more than his income. He is earning $1 a day through being paid off the loan, and he is spending $1 to buy bread. He is running a zero deficit/surplus.
Total net savings for both men are 0 each day.
Of course net savings are zero. THERE IS NO INFLATION, HENCE NO NET SAVINGS IN THE MMT WORLD.
Clearly this is not what is happening in the economy, past savers are not spending their previous savings and the private sector in aggregate is net saving.
Of course that is not what is happening in the real world. In the real world, we have inflation, and hence we have “net savings” in the MMT conception.
And that, in presence of a trade deficit, will always push the government budget into deficit.
Irrelevant to Tel’s example.
Tel EASILY exposed the fallacy of MMT, and his example is brilliantly simple and yet penetrating.
Tel, if you don’t mind, I am going to use your example whenever some MMT yahoo thinks a private citizen paying off debt requires the government to spend money on molesting little children at the airports.
MF, if I can save just one child at an airport… just one child… it will all be worth it! You can have my example.
I’m glad you liked it.
And every day total mortgage debt in the system goes down by one dollar. Thus the system as a whole is deleveraging.
And every day total mortgage debt in the system goes down by one dollar. Thus the system as a whole is deleveraging.
Because the private sector on aggregate is not net saving!
But this is not what is happening in the economy where the private sector is spending less than its income. (S-I>0) to pay down its debt.
So because of the trade deficit, the government must be in deficit.
You should tell people to dis-save or stop buying imports.
Tel is right. No inflation is needed.
$10000 in debt had been created. That’s inflation!
The silver coin was not even necessary.
It just shows that for any individual to spend less than its income then another must spend more than its income, which he does going into debt, or running down his savings as in his example.
Start spending your saving on goods and services, and much of the government deficit will disappear.
Because the private sector on aggregate is not net saving!
Aggregates don’t save, only individuals save.
In Tel’s example, the young man is in fact saving 100% of his earnings. Every day, he earns $1. Every day, he abstains from consuming that $1 and instead makes an expenditure for purposes other than consumption, namely, paying down the debt he owes to the old man.
But this is not what is happening in the economy where the private sector is spending less than its income. (S-I>0) to pay down its debt.
Red herring. You’re not answering the substance of Tel’s example.
In the real world, and in his example, the entire private sector is not in debt you yahoo. Only INDIVIDUALS are in debt.
So because of the trade deficit, the government must be in deficit
False. There can be a trade deficit, and there can be deleveraging at the individual level, with ZERO inflation.
You keep repeating the same fallacies over and over and over again, as if it will become true if you just repeat it long enough.
It’s blatantly obvious that all you MMT yahoos have is an accounting tautology, and an ignorance of real world economic principles.
You should tell people to dis-save or stop buying imports.
Not needed in Tel’s example.
<i$10000 in debt had been created. That’s inflation!
No, that is NOT inflation. Not a single new silver dollar was created. There is one silver coin and that’s it. The money supply remains $1 the entire time.
The notional amount of the mortgage debt is not inflation, because it is not an act of creating money. Loans are not money, they are claims to money,
The silver coin was not even necessary.
It’s a thought experiment to show you that deleveraging can occur without a single cent of inflation from any counterfeiter.
It just shows that for any individual to spend less than its income then another must spend more than its income, which he does going into debt, or running down his savings as in his example.
False. In Tel’s example, the old man is earning $1 a day through being paid back the mortgage, and he is spending $1 a day on bread from the young man. The old man is not running any deficit.
The young man is earning $1 a day through selling bread, and he is saving 100% of it by abstaining from consumption, and making $1 a day expenditure for purposes other than consumption.
The young man’s deleveraging of his debt does not require that the old man be running a deficit.
Start spending your saving on goods and services, and much of the government deficit will disappear.
Nonsense. The young man is saving 100% of his earnings each day, and paying off his loan, and not a single new silver dollar needs to be introduced in order to make this possible.
Deleveraging does NOT require inflation.
You’re still hopelessly confused.
For any individual to spend less than its income, another individual must be spending more than its income.
Utterly false. You can earn $100 a day and spend $100 a day on buying my goods and services, and every day I will spend $50 and hoard $50.
You are not spending more than your income, and yet I am still spending less than my income.
For any sector to spend less than its income in aggregate, another sector must be spending more than its income in aggregate.
Not true, for the reasons above. One individual can spend less than they earn, while another spends what they earn.
In the aggregate, total cash balances cannot rise, so if anyone attempt to accumulate cash, then it requires others to reduce their cash balances.
If everyone in the private sector tried to accumulate cash, then that won’t make total cash balances rise, but it will make the prices of assets and other things with prices fall. Full employment and full utilization can take place at lower prices, which means people will be spending less from their cash balances on average.
Private sector deleveraging means it is spending less than its income in order to repay the debt from savings.
The whole private sector is not indebted. Only some people are net in debt, while others are net lenders. Those in net debt can abstain from consuming, and save by pay downing their debt to net lenders, while not taking on any new debt in the meantime.
This does not require inflation of the money supply. Interest and incomes and debt are flow concepts. Money supply is a stock concept.
With a trade deficit, the external sector is also spending less than its income.
It’s the exact opposite. With a trade deficit, the private sector is spending more on imports than they are earning through exports.
It follows that the government must spend more than its income, to offset the surplus of the domestic and external surpluses to the penny.
No, that doesn’t follow at all. The entire private sector is not indebted. Only some individuals are net in debt. They can pay down their debt by abstaining from consumption.
Utterly false. You can earn $100 a day and spend $100 a day on buying my goods and services, and every day I will spend $50 and hoard $50.
Utterly false.
Every day I earn $100 and spend $100, so I net save 0.
The rest of you earn 100$ (from me) + 50$ (from you) and spend 100$ (to me)+ 50 (to me)$, so you net save 0.
Got it? The economy is a closed system.
So you are hopelessly confused. And your confusion is too long.
Tel is not confused, and he is concise.
That should be:
The rest of you earn 100$ (from me) + 50$ (from you) and spend 100$ (to me)+ 50 (between you)$, so you net save 0.
Every day I earn $100 and spend $100, so I net save 0.
I know, that’s what I just said. Thanks for admitting that you don’t need to be running a deficit if I choose to hoard cash out of my earnings.
The rest of you earn 100$ (from me) + 50$ (from you) and spend 100$ (to me)+ 50 (to me)$, so you net save 0.
What is this blathering nonsense? The rest of you? What, is only part of me spending the $50 a day?
Got it? The economy is a closed system.
If you and I are a two person economy, and I spend $50 out of my $100 earnings from you each day, on you, THEN yes, you’d have to be running a deficit if I am running a surplus.
You’d be spending $100 each day, but earning $50 each day.
I’d be earning $100 each day, but spending $50 each day.
But your two person closed economy suggestion doesn’t apply to the real world economy, and it doesn’t apply to Tel’s example.
In the aggregate, cash balances are fixed, and people could only run a zero surplus/deficit, or a surplus. If they run a surplus, then others would have to be running a deficit. But others could only run a deficit if they already accumulated a cash balance, and the rate of their deficit will determine how long they can keep that up.
But this is all neither here nor there.
If an individual owes debt to someone, then they can abstain from consuming and pay off the debt without a single new dollar having to be inflated. Yes, I am saving, but no it doesn’t need inflation.
What you MMTers are defining as net saving is simply inflation of the money supply. You are just saying that if the private sector is experiencing an increase in cash balances in total, then the ONLY explanation is that the government is inflating. Well duh. Way to “contribute” something that everyone already knew.
Net saving, again, is not necessary to generate economic growth. Saving of of net income only takes place BECAUSE the government is inflating the currency. If inflation were zero, then saving out of net income would eventually reach zero, and saving would only take palce out of gross revenues and incomes, and capital accumulation can take place on the basis of falling prices of capital goods.
You remain hopelessly confused.
Tel is not confused
If you claim Tel is not confused, then because he also proved you wrong, you are admitting that you were proven wrong.
What is this blathering nonsense? The rest of you? What, is only part of me spending the $50 a day?
You said I earn $100 a day.
Who is paying me $100 if not you?
Someone is, and this some has got to be running a deficit.
As a point of logic, since the economy is a closed system.
If you claim Tel is not confused, then because he also proved you wrong, you are admitting that you were proven wrong.
Tel is not confused and didn’t prove me wrong.
He just proved how for any individual to spend less than his income another one must be spending more than his income.
The only way you can spend more than your income is by going into debt or using your previous savings.
As a point of logic, since the economy is a closed system.
Yes, in a closed two person economy, if one individual is running a surplus, then the other must be running a deficit, and vice versa.
But in the real world economy, which is closed, one individual who runs a surplus vis a vis another individual does not have to follow that constraint, because this two person economy would be open, not closed. Each individual can make exchanges with others, and hold any combination of surplus/deficit between the two.
Tel is not confused and didn’t prove me wrong.
He just proved how for any individual to spend less than his income another one must be spending more than his income.
No, that is not what he proved at all. He proved that two individuals can be running an exactly zero surplus/deficit with each other. The young man receives $1 each day for selling the bread, and pays $1 each day to amortize the loan, making his budget a zero deficit/surplus, and the old man receives $1 each day as lender of a mortgage loan, and pays $1 each day for the bread, making his budget also a zero surplus/deficit.
Both are running a zero surplus/deficit, and yet the two person economy as a whole is deleveraging over time. No inflation is necessary to facilitate this. No government needs to print and spend money in order to kill babies.
The only way you can spend more than your income is by going into debt or using your previous savings.
Neither are spending more than their income. Both are spending no more than their daily income. And yet, deleveraging is taking place.
Tel did prove you wrong.
The whole economy is a closed economy.
Hence for any sector to spend less than its income another must spend more than its income.
Tel didn’t prove anything. He only showed how the old man payed 1$ out of his savings of 10000$ IOUs from the young man, one at a time.
He is constantly running a deficit, that is dis-saving.
The whole economy is a closed economy.
The whole economy is closed, but the private sector are not only borrowing or lending to the government.
Hence for any sector to spend less than its income another must spend more than its income.
The entire private sector is not indebted, only individuals are indebted, so the government doesn’t have to print money if the private sector is to deleverage.
Tel didn’t prove anything. He only showed how the old man payed 1$ out of his savings of 10000$ IOUs from the young man, one at a time.
Wrong. He showed that an economy that has an individual or individuals who have debt outstanding, can deleverage and pay off their debt with zero need for a counterfeiter to increase the money supply.
The old man isn’t paying $1 a day out of his savings of $10,000. He is earning $1 a day from the loaned property, and paying $1 a day for bread.
He is constantly running a deficit, that is dis-saving.
No, he is constantly running a zero surplus/deficit. His money earnings are $1 a day. His money payments are $1 a day. He is not running a deficit at all.
The whole economy is closed, but the private sector are not only borrowing or lending to the government.
That is why the external sector matters. But the external sector is net saving too. So the government must be in deficit.
No, he is constantly running a zero surplus/deficit. His money earnings are $1 a day. His money payments are $1 a day. He is not running a deficit at all.
No, he is constantly running a deficit of 1$ of IOUs from the young man.
I know you don’t understand basic accounting, but it has to be stock-flow consistent.
The 1$ coin is useless as I pointed out. It has no effect on debt reduction.
Debt reduction is the destruction (or accounting for) of outstanding debt.
When the wise man points his finger at the moon, you look at the finger.
“The whole economy is closed, but the private sector are not only borrowing or lending to the government.”
That is why the external sector matters. But the external sector is net saving too. So the government must be in deficit.
No, that is exactly why the external sector does NOT matter.
If individuals in the private sector are indebted, and they want to pay down their debt, then it does not mean that the entire private sector is indebted and in need of inflation in order to run a surplus so that the debt can be paid off. It only means that some individuals who are in debt have to abstain from consuming out of their incomes, and pay off their debts. They can do this by running a surplus in combination with other individuals who are just reducing their cash balances by spending. Those individuals in turn do not have to be running a deficit. They just need to be spending enough out of their incomes to enable the indebted individual to accumulate cash to pay off his debt.
“No, he is constantly running a zero surplus/deficit. His money earnings are $1 a day. His money payments are $1 a day. He is not running a deficit at all.”
No, he is constantly running a deficit of 1$ of IOUs from the young man.
No, he is constantly running a zero surplus/deficit, because he is spending and receiving $1 each day. His income is exactly equal to his expenditures each day.
I know you don’t understand basic accounting, but it has to be stock-flow consistent.
But it you that doesn’t understand basic economics, so how can you even claim to know basic accounting? You’re still wrong, still confused, and still repeating the same irrelevant truisms that do not apply to anything anyone is saying in this matter of deleveraging.
The 1$ coin is useless as I pointed out. It has no effect on debt reduction.
Yes it does. If the young man didn’t pay the old man $1 a day, then the young man could not deleverage his debt. He would remain owing $10,000 to the old man.
Debt reduction is the destruction (or accounting for) of outstanding debt.
Debt reduction in the private sector does not require the government to print money.
When the wise man points his finger at the moon, you look at the finger.
When the MMTer points at his arse, the wise man laughs because the MMTer thinks he is pointing to a valid argument.
Althogh unlikely, what happens if both the private sector and the government deleverage at the same time, and thus the money supply starts shrinking? I guess central bankers will be terrified, because money supply growth is the mechanism by which they keep inlfation up. But what could be other consequences?
I believe we will see this happening at some point since we can’t pile up debt to infinity (or can we?).
But what could be other consequences?
Aggregate spending will plummet, unemployment will rise, the private sector won’t be able to deleverage anymore, more debt will turn toxic, the bank system will be at risk of collapse again, and some other details.
Aggregate spending will plummet
Not true. Borrowers who used to be making consumption and investment expenditures, can cut back on those expenditures, and pay down their debts instead, after which the lenders have more money to make consumption and investment expenditures.
unemployment will rise, the private sector won’t be able to deleverage anymore, more debt will turn toxic
Liquidating toxic debt IS deleveraging.
the bank system will be at risk of collapse again, and some other details.
They will always be at risk of collapse as long as they practice FRB.
I don’t understand the charge of ‘overconsumption.’ I can see that relative to the interest rate created by FED suppression, not enough real savings is taking place. But that is hardly ‘overconsumption’ — it is simply not responding to what the FED and the banks would really like consumers to do. And I thought we were all about screwing the FED around here.
If consumers let the FED dictate their consumption priorities…well, that just doesn’t make any sense. I thought the point was that they don’t. They continue on with their old time preferences, even as the FED creates the illusion of lower time preference and more resource availability by printing money.
If (as according to your chart) interest rate suppression really did result in a lower savings rate, that would say that people responded by raising their time preferences — that savings rates were a response to interest rates, rather than interest rates reflecting savings rates (and therefore time preferences).
But if you are to make this argument, don’t you also have to take into account the investment rate, since savings and investment are considered the same? Would the reduction of savings be taking place as the return to investment appeared to increase, so that it was investment that was actually siphoning off savings, not consumption?
Why would FED policy change time preferences, which I thought were supposed to be intrinsic to the population? In short, which is it — the chicken or the egg?
Perhaps ‘characterization’ rather than ‘charge’ is better. Actually, I’m sure it is. I don’t see how it can be characterized as overconsumption.
I once had a chemistry professor tell me that it wasn’t up to us to tell electrons what they could or couldn’t do or how they should behave. Electrons do what they do and it is up to us to describe the behavior. That’s not quite the perfect metaphor, but it is kind of on the track of what I mean.
I don’t see how consumers could be characterized as overconsuming unless they were consuming more than their entire incomes, or they were somehow consuming more than they thought they were consuming (?). They were — and are — always being just what they are, and the economy is supposed to develop around that. If their preferences and decisions are inconvenient to some other party, well that’s just tough beans.
Business cycle theory says that consumer prices are mostly flat through the business cycle until one approaches the end, at which point they move up. Capital goods are the ones that see appreciation. Wouldn’t that say that consumption patterns hadn’t changed much, and it was the investment side of things where demand was rising (and the action was?)
Ok, I’m answering my own question. Besides, replying to myself is more fun than I expected it to be. 🙂
Personal savings rate = Personal income – PCE (personal consumption expenditure) and some other stuff.
PCE includes durable goods, which by definition cannot be consumer goods. Thus, capital goods are being included in consumption, so the personal savings rate probably isn’t what it says it is.
Though I didn’t completely straighten this one out, I’m filing it under ‘Not sure about the answer yet, but I’m not quite a complete idiot.’
Scott Fullwiler scolds Krugman for allegedly not comprehending MMT:
http://tinyurl.com/3uhtp4h
Fullwiler links to his “famous” paper which states:
First is the accounting logic of real-world transactions. Every transaction in a real-world economy affects financial statements of those engaged, and if an economic theory or a posited model is not consistent with how real-world financial statements are affected, then the theory is inapplicable. A typical example used by MMT’ers is a framework used in mainstream economics, the so-called loanable funds market. It posits a demand for loanable funds and a supply of loanable funds available for the macroeconomy, and contains classic supply-demand curve assumptions from goods markets, that higher prices (in this case interest rates) will elicit more “supply” (as in investors will divert more funds from other uses, such as risky venture investments, and make them available for lending). This model is simply inapplicable to our current monetary system in which empirical studies have demonstrated that banks create loans “out of thin air” without the requirement of prior reserve balances or deposits to “fund” the loan’s creation. Completely contrary to the loanable funds model, in fact, the vast majority of bank liabilities have been created by banks simply growing their balance sheets through loans and asset purchases. Similarly, there are macroeconomic accounting identities, such as the often-cited sector financial balances equation in which the domestic private sector’s net saving of financial assets is by definition equal to the government sector’s deficit and the current account balance (see here, here, and here for further discussion). MMT’ers understand very well that an accurate understanding of accounting is not in itself a theory.
I fail to understand how a normal person would not be appalled at the idea of a government program that allows the creation of loans and money “out of thin air”. Keep talking MMTers. Keep being explicit and help educate the public about your ghastly fiat system.
Keep talking MMTers. Keep being explicit and help educate the public
We have to do it. People don’t have a clue, like you. Although they are morons and pretend to know everything, like you.
MMT by their own definition:
If a) the government obtains the power to create money out of thin air and has a monopoly on that power enforced through its vast police powers, then b) the government must go into debt for the private sector to net save.
According to the MMTers, (b) is only true if (a) obtains.
I still fail to see why anyone would support inflicting (a) upon a society.
You don’t have to support it, just accept reality.
It is a fact that in every monetary system for an individual (or whole sector) to net save (that is spend less than its income) then at least some other individual (or other whole sector) must be spending more than its income (dis-saving or going into debt).
I don’t accept that at all. All I accept is that YOU ARE SAYING it. I’m just trying to accurately repeat your argument. I don’t want to be accused of misrepresentation.
Yes you can keep ignoring reality. That’s what characterizes ignorants by the way.
You’re ignoring reality.
You’re ignoring the reality that you can run a zero deficit with me, and I can run a surplus anyway.
You earn $100 a day and you pay me $100 a day, and I will hoard $50 a day and spend $50 a day.
Are you this dense that you can’t even understand how one person running a surplus does not at all require another person to run a deficit?
In the aggregate, it is true, if one person runs a surplus, then it requires THE TOTALITY of everyone else to run a net deficit with that individual. But that is not how people engage in market exchanges. One individual deals with only certain other individuals, not the entire population other than him.
With zero inflation, it would be impossible for total cash balances to increase, but that doesn’t mean that individuals can’t run surpluses or deficits vis a vis other individuals who run a surplus, deficit, or net zero surplus/deficit.
Any combination is possible when it comes to individuals trading.
It is a fact that in every monetary system for an individual (or whole sector) to net save (that is spend less than its income) then at least some other individual (or other whole sector) must be spending more than its income (dis-saving or going into debt)
Patently absurd.
You can earn and spend everything you earn on me, and I will hoard a portion of each payment you make to me. You are not spending more than you earn, and I am spending less than I earn.
It is not true that one person spending less than they earn requires another person to spend more than they earn.
You’re totally confused.
We have to do it.
How can you educate the public when you MMTers don’t even know basic economics?
As I pointed out in my example about buying the farm (above), any two private individuals can also create loans “out of thin air” provided they make an agreement to do so. Banks are merely a private institution doing what anyone can do. There’s no magic.
The word “similarly” in the above quote is a lie. There is no similarity between sectoral balances and the creation of loans, no relationship to speak of. They are unrelated concepts.
This creation of money out of thin air is exactly equivalent to a promise being made. The special power that government offers to the banks is that government will dip into taxpayer’s pockets as necessary to fulfill those promises, should a problem occur. If I make a promise, my promise is only backed by me, so there is a risk of default. When banks make a promise it is backed by government, so the risk of default becomes linked to how much tax government can extract from future generations. That’s the only difference…
Bob (M): it would be interesting to take a look at some of the Eastern European countries, such as Estonia, that took their medicine a few years ago by limiting the bailouts, and are doing fairly well now.
Blimey, the link to your mises article is not working!
Copying this down from above, because I’m sick of being squashed over into the corner of the screen…
MamMoTh:
Major_Freedom:
This is a deeper point and probably deserves more careful consideration. I’ve been calling mortgage debt “money” above, and I believe that most Western nations do list it under the title of “Broad Money”, however it is always accounted separately to “cash and coin” type money. It is undoubtable that although the accounting ledger gives both silver coins and mortgage debt equal wieghting, they cannot be considered the same thing. In my “selling the farm” example above, what would happen if there’s a big fire and the farm is destroyed and the young man dies? Any remaining mortgage debt becomes worthless. Real money can’t suddenly become worthless, so therefore mortgage debt implicitly contains an element of risk that sets it aside from other money.
In this respect, mortgage debt should be treated as more similar to shares in a business. Yes, it is an asset, but no it is not a cash asset.
Getting into this a bit further, I note that just a few weeks back Fannie Mae got yet another $5.1 billion from the US government (i.e. taxpayer’s money) as they are stuck with being guarantor for a whole lot more bad mortgages. How did this happen? Well of course, one of the great financial developments of recent times has been to allow Joe Sixpack to monetize his mortgage debt and spend it like cash. Needless to say, once this debt has been translated to actual spendable money, is has to be inflationary (by every definition of the word). One of the things the banks have managed to do (with a bit of governmen thelp) is launder the risk of mortgage debt and convert that into liquid spending money.
However, there’s a fundamental problem here — you simply cannot turn a risk into a certainty, the physical world will not allow such a thing. All you can do with financial instruments is move that risk around (or hide it). Fortunately, government accounting does not show up risky liabilities (until they actually come due) so it offers infinite room for disguising risk.
Major_Freedom and I had a disagreement about whether defaulting on treasury bonds would be corecive. The difficulty being how to deal with the nature of risk, and the fact that the bondholders were aware that a risk existed when they bought the debt (although I personally believe that treasury debt is sold under somewhat suspect pretenses). This comes around to a very similar question about the nature of money, and how risk is linked to that money. Simple balanced ledger accounting does a poor job of this, and government cashbook accounting does a shockingly bad job (which no doubt is the attraction of exploiting such a loophole).
For what it’s worth, I still argue that there is an element of coercion involved in acts of deliberate deception, and I think the seeds of that are the trouble in this case as well.
This is a deeper point and probably deserves more careful consideration. I’ve been calling mortgage debt “money” above, and I believe that most Western nations do list it under the title of “Broad Money”, however it is always accounted separately to “cash and coin” type money.
In fractional reserve banking economies, commercial bank loans do become a part of the broad money supply because such loans are accompanied by banks crediting checking accounts, and these checking accounts are accepted as general means of payment and hence acquire money characteristics (fiduciary media).
Individual promises to pay, such as verbal agreements for one person to give another person $1 a day for 10,000 days, that is not inflation, if there is no fiduciary media created. In your example, the only media with monetary characteristics is the $1 silver dollar coin, so it alone is part of the money supply.
The old man’s loan to the young man could be accepted by both as a media of exchange, if there is a piece of paper or whatever that says “the bearer of this note is entitled to $1 payable on demand, not exceeding $1 a day, rights expiring no sooner than January 5th, 2039 (i.e. 10,000 days from today).” However, in your example, only the coin is a universally accepted means of payment, so it alone is money.
In Tel’s example the 1$ coin is useless, The verbal agreement is equivalent to exchanging the farm for 1 meal a day for the next 10000 days.
However, in a modern monetary economy, loans are accounted for as a liability of the debtor matched to the penny by an asset of the creditor.
Debt creation within the private sector always nets to 0.
With two people in the economy the only way the debtor has to repay his debt is if his creditor runs a deficit with him, which are his net savings that he then uses to repay the debt.
The young man net savings flow is each day in a 1$ surplus that reduces his outstanding debt by 1$ a day.
The old man net savings flow is each day in a $1 deficit, that reduces his outstanding loan by 1$ a day.
1) In a closed economy someone’s spending is someone else’s income, to the penny
2) In a closed economy total income = total spending, to the penny (or there is a mistake in the accounting)
3) If you divide the closed economy in 2 (or more) disjoint sectors then one sector can net save (spend less than its income) if and only if the other sector net dis-saves (spends more than its income) by an equal amount
I1+I2 = S1+S2 (total income = total spending) => I1-S1 = S2-I2
4) The world economy is a closed economy that can be divided in 3 disjoint sectors: government, private domestic, and external sector
5) For any sector to spend less than its income (be in surplus) at least another sector must spend more than its income (be in deficit)
6) In case of a trade deficit the external sector is in surplus. Hence for the private sector to be in surplus the government must be in deficit.
QED
In Tel’s example the 1$ coin is useless, The verbal agreement is equivalent to exchanging the farm for 1 meal a day for the next 10000 days.
“Monetary economies are useless. The agreements are equivalent to exchanging real goods for real goods.”
However, in a modern monetary economy, loans are accounted for as a liability of the debtor matched to the penny by an asset of the creditor.
Debt creation within the private sector always nets to 0.
The same reason why debt liabilities and loan assets net to zero is the same reason why amortizing debt liabilities and reducing the market value of loan assets can net to zero. No inflation is needed.
With two people in the economy the only way the debtor has to repay his debt is if his creditor runs a deficit with him, which are his net savings that he then uses to repay the debt.
If money is loaned, then sure, one person accumulating cash means he must find others who reduce their cash.
The young man net savings flow is each day in a 1$ surplus that reduces his outstanding debt by 1$ a day.
No, the young man isn’t running a surplus because he is spending $1 a day paying down his debt, and receiving $1 a day through selling bread. He is running a zero surplus/deficit.
The old man net savings flow is each day in a $1 deficit, that reduces his outstanding loan by 1$ a day.
No, the old man isn’t running a deficit because he is spending $1 a day paying for bread, and receiving $1 a day through his loan.
1) In a closed economy someone’s spending is someone else’s income, to the penny
In a closed economy, deleveraging of one or more individuals in the private sector does not require inflation of the money supply from any monopoly counterfeiter or bank.
2) In a closed economy total income = total spending, to the penny (or there is a mistake in the accounting)
Yes, money spent is money received.
3) If you divide the closed economy in 2 (or more) disjoint sectors then one sector can net save (spend less than its income) if and only if the other sector net dis-saves (spends more than its income) by an equal amount
The private sector as a whole is not net in debt. Some individuals are net debtors, others are net lenders.
I1+I2 = S1+S2 (total income = total spending) =>I1-S1 = S2-I2
Repeat.
4) The world economy is a closed economy that can be divided in 3 disjoint sectors: government, private domestic, and external sector
We’re not talking about the world economy. We are talking about the ability of indebted individuals to pay off their debt without any need for inflation of the money supply.
5) For any sector to spend less than its income (be in surplus) at least another sector must spend more than its income (be in deficit)
The entire private sector is not indebted, so this accounting truism does not apply to the real world.
6) In case of a trade deficit the external sector is in surplus. Hence for the private sector to be in surplus the government must be in deficit.
The private sector as a whole is not what is being considered when the argument is made that deleveraging does not require inflation of the money supply from government.
QED
You’re proving nothing except an abstract accounting tautology that does not apply to anything either myself or Tel or anyone else discussing deleveraging is talking about.
The private sector as a whole is not net in debt. Some individuals are net debtors, others are net lenders
Wrong, that only applies to the whole economy.
The private sector is not a closed economy.
“The private sector as a whole is not net in debt. Some individuals are net debtors, others are net lenders”
Wrong, that only applies to the whole economy.
False. It can apply to within the non-counterfeiting, i.e. private, sector only.
,The private sector is not a closed economy.
As a narrow-minded MMTer, you keep trying to mentally force all economic phenomena into the worn out MMT accounting tautology.
It’s not necessary to anything I said that the private sector is not closed, where “private sector is not closed” means there exists a monopoly counterfeiter that has to be taken into account at all times.
One individual is not trading with the entire private sector; they only trade with other individuals. That the private sector is not closed vis a vis the monopoly counterfeiter/thief is irrelevant.
One individual in the private sector, who is in debt, can deleverage by abstaining from consuming out of their earnings that they acquire from those who decumulate their cash balances, and then the individual debtor pays down their debt to the lender. This process does not require any counterfeiter of money, it does not require total cash balances to increase, it does not require government, and no matter how many times you make these stupid, irrelevant MMT tautological claims, it won’t change the economic reality that MMT seems to not even be able to comprehend.
You yahoos aren’t economists. You’re shrill statist accountants with a bad attitude.
“The private sector as a whole is not net in debt. Some individuals are net debtors, others are net lenders
Wrong, that only applies to the whole economy.”
Wrong, that only applies to the whole economy.
False. It can apply to the non-counterfeiting, i.e. private, sector only. All that is required is that the individual debtor who runs a surplus to pay down their debt, finds others in the private sector to trade with who are each willing to decumulate their cash balances with the individual debtor. It is possible that these other individuals be running a surplus themselves, but their money expenditures are being made with the individual debtor, enabling him to deleverage.
The private sector is not a closed economy.
We are not talking about the entire private sector. We are just talking about some individuals who are net in debt, who are paying down their debt by abstaining from consuming out of their income, and pay down their debt instead.
This process does not require a government to inflate the money supply for the entire economy. The individual debtors are not trading with the entire private sector.
You remain completely confused, because you’re trying to force all economic phenomena into the narrow MMT worldview that cannot answer or interpret deleveraging in the private sector.
Wrong, that only applies to the whole economy.
False. It does not apply to the whole private sector. It only applies to whoever is being considered in a given example of individual borrowers and individual lenders, the borrowers of which pay down their debt instead of buying consumer goods. Instead of consumer goods sellers getting this money, lenders are getting it instead, after which they can spend that money on consumption and/or investment and/or add to their cash balances.
The private sector is not a closed economy.
The entire private sector is not being considered. Only borrowers and lenders, and whoever the borrowers trade with, are considered.
It applies to the whole economy.
It does not apply to the domestic private sector.
Period.
It applies to the whole economy.
False. One individual paying back their debt is different from an entire population of citizens being in debt to some non-private sector.
It does not apply to the domestic private sector.
“It” certainly does apply to the domestic private sector, if you realize “it” is the example, and not the MMT accounting tautology statement regarding inflation of the money supply and increase in cash balances in the private sector.
Period.
What you seem unable to understand is that the total debt in the system can expand and contract, and since this debt is denominated in dollars, in “Broad Money” terms we have more money in the system some days than other days (but not necessarily more money in circulation).
This has been explained to you in many different ways, by many different people, and you even accepted that it is true. So if total debt can expand and contract, why should we care about sectoral balances?
Anyhow, what makes one arbitrary selection of sectoral division more significant than any other? Thus, I am individually one sector, and the rest of the world is the other sector.
So if total debt can expand and contract, why should we care about sectoral balances?
Because it is not the fact that debt can expand and contract within the private sector that is the issue, but the fact that the private sector is spending less than its income.
As a consequence, given the trade deficit, the government must be in deficit.
As in your example, to extinguish debt within the private sector, the creditor must dis-save to pay the debtor who will use this income to repay the debt. Clearly banks are not hiring their debtors nor is enough people dis-saving or going into debt to hire them.
The debtors who can pay, do pay, the debtors who can’t pay go into default. Either way the system deleverages.
The debtors who can pay do pay only as much as their creditors net spend on them, as your example shows.
Yes, default is another way to extinguish debt and it’s also happening to some extent, destroying part of the creditor’s financial capital.
The debtors who can pay do pay only as much as their creditors net spend on them, as your example shows.
Untrue. It’s not necessary that a borrower’s creditors net spend on the borrower in order for the borrower to pay back the loan. The borrower can earn money FROM ANYONE and use those earnings to pay down the debt to his creditors.
Yes, default is another way to extinguish debt and it’s also happening to some extent, destroying part of the creditor’s financial capital.
Capital was misallocated during the credit financed boom, so destroying what should not have been created in the first place is a step in the direction of recovery.
Let’s suppose I go out to a restaurant every night and I also pay the mortgage at the minimum rate.
Then I get worried about the state of the economy so I stop going out to the restaurant and pay the mortgage faster to get out of debt before the storm hits. There’s nothing the bank can do to prevent me paying back my debts faster.
It may be that the restaurant owner also has a mortgage with the same bank and now (with no customers) is completely unable to pay. So my austerity drives the restaurant owner into default. Well, there’s nothing the bank can do about that either.
My loan gets paid back faster, the restaurant loan get written off. Welcome to debt deflation.
The bank goes crying to the government: Wa! Wa! Wa! We got ourselves into trouble with bad loans. So government goes and bashes me with higher tax and I get even more determined to pay off my loans even faster.
Defaulting on debt is nothing else than the creditor net dis-saving by the amount of the debt, and the debtor net-saving by an equal amount to the penny (without even the meals the old man got in return).
Defaulting on debt is nothing else than the creditor net dis-saving by the amount of the debt, and the debtor net-saving by an equal amount to the penny (without even the meals the old man got in return).
Wrong. Defaulting on debt entails zero additional saving. The contract is simply cancelled. The notional amount of accumulated savings on the lender’s side is marked down to zero, which is an accounting dissaving, not an expenditure dissaving.
Call it dis-saving if you wanr, or call it a writeoff. I don’t care what you call it.
Point is, it happens, and there’s nothing the banks can do to stop it happening, and there’s nothing government can do to stop it happening either (short of totalitarianism). The debt deflation runs it course completely independent of any stupid sector balance equations, and completely independent of any government budgets.
The whole debt deflation engine is driven by an 800 pound gorilla wearing a tutu, and a tiara, and carrying a three foot piece of steel waterpipe with gold star bolted to one end. Krugman laughingly calls this creature the “confidence fairy”, but what you are actually looking at is a confidence fairy with leverage, and she’s in a bad mood today.
The government can attempt to inject QE money into the hole attempting to fill the gap, which doesn’t really fix the problem if you think about it. An IOU note is a promise, and a promise can either be fulfilled or broken, but making plenty of new promises does not undo broken promises (especially when Cantillon effects are taken into account, because the new money is not injected at the same place the debt deflation is eating away old money).
That sort of stunt just makes the confidence fairy even more cranky.
Because it is not the fact that debt can expand and contract within the private sector that is the issue, but the fact that the private sector is spending less than its income.
No, Tel’s example is not about the entire private sector. It”s only about individuals within the private sector.
What you are insisting is “the issue” is just the MMT accounting tautology that total cash balances in the private sector cannot rise unless the government runs a deficit. Big deal. That is not related at all to INDIVIDUAL borrowers who pay down their debts by earning money given to them by other private sector individuals who are just lowering their cash balances.
No government counterfeiter is needed.
As a consequence, given the trade deficit, the government must be in deficit.
Tel is not talking about total cash balances in the private sector increasing. He is talking about some individuals paying off their debts to other individuals within the private sector.. He is not talking about the entire population of individuals in the private sector being indebted to the individuals in the government.
As in your example, to extinguish debt within the private sector, the creditor must dis-save to pay the debtor who will use this income to repay the debt.
Duh, that’s what always happens in the private sector when individuals pay down their debt. You finally get it.
Clearly banks are not hiring their debtors nor is enough people dis-saving or going into debt to hire them.
Clearly there is monetary deflation and inflation,and changes in demand for money. If an individual debtor cannot pay off their debt, then they should go BANKRUPT and liquidate their debt.
It’s almost like money is a veil over barter.
You could be onto something there. 🙂
Not in a modern monetary economy anymore.
If I might jump in here, kids: When people in the private sector “deleverage,” that is NOT the same thing as an MMTer talking about “net saving.” To take Krugman’s fable of Sam and Janet, if Sam initially owes Janet $100,000, and then pays off $40,000 of it, he has reduced his debt by $40,000. In order to facilitate this, Janet has to allow her assets to fall by $40,000. Krugman says normally falling interest rates would accomplish this, but shucks they are already at 0% and so that’s why we have a glut of desired saving.
But from an MMTer viewpoint, even if it works, it’s not net saving. Sam has saved $40,000 but Janet has dis-saved $40,000.
Bob, how do you think the private sector is deleveraging?
By spending less than its income in order to repay the debt! That is, it is net saving. (Net Savings = Income – Spending).
So if the private sector is spending less than its income, another sector must be spending more than its income.
Since the external sector is also spending less than its income, that only leaves the government to spend more than its income.
QED.
Right MamMoth, the Janets of the country are living above their means, letting their assets dwindle.
If yesterday Sam owes Janet $100,000, and today he owes her $60,000, a lot of people will say, “The total debt in the system went down.” But not if you originally were scoring Janet as having -$100,000 in debt (which is how you are scoring it).
So I’m just pointing that out.
And the link to your mises article is still not working.
Link just worked for me; not sure what’s happening on your end. (I’m not being sarcastic: I’ve noticed some links to Mises lately are flaky.)
OK, It worked for me but doesn’t any more:
Sorry, an error occurred while processing your request.
Works for me.
Works for me again now.