How is austerity doing in Europe

[oldfart]

I'm not the one that's confused. You seem to be confusing real assets and financial assets. Seriously.....

You had them going for quite a while, but you slipped up and let the cat out of the bag. Accounting definitions and identities apply to financial instruments and accounting, not real assets. When you look at stocks of real assets (like housing stock or military equipment) you have valuation problems, but you have moved beyond the financial instrument only balance sheets used in monetary policy.

Shame on you for teasing them with the defense industry example! They should have been able to figure it out from that one.

Well, it was fun watching while it lasted.

Folks, Kimura's point is correct when considering financial assets. It has to be because it is the essence of double-entry bookkeeping. A debit on one ledger has to be offset with a credit on another. Basic accounting.

When you introduce real assets (inventory, capital goods, housing, etc) it gets dicey. Take the Ford example. Suppose Ford issues $10 million in bonds to finance inventory in progress. The initial entries are to increase a liability account (bonds payable) by $10 million and to increase cash in bank by $10 million. So far, so good. Then Ford pays the $10 million for raw materials, labor, and expenses. The cash in bank goes back down again, and presumably Ford makes vehicles for inventory worth somewhat more than $10 million. Note I have finessed the accounts payable issue to keep it simple and I am assuming "full-absorption inventory accounting" for Ford. How does Ford value this finished inventory? Marx brothers: Groucho, Harpo, Zippo, FIFO, and LIFO. Sorry, a little accounting humor there (and yes accounting humor is that lame, if you want good jokes, hang out with actuaries; but I digress). If Ford values inventory strictly at cost, the inventory is valued at $10 million.

Now is where things get fun. Ford sells the vehicles through dealers (I'm collapsing the dealers and Ford together here, you really don't want to get into dealer financing do you?) The dealers sell the cars for $12 million, creating a profit of $2 million. We post $12 million to cash in bank, which can be used to pay off the bonds. We reduce inventory by $10 million and book a profit of $2 million (which is why assets= liabilities +capital!). Ford is all tidied up.

Now what about the buyers of the vehicles? They gave up $12 million for their vehicles. Their cash in bank goes down $12 million and the add an asset of $12 million to their personal balance sheets. So where did the $12 million cash in bank consumers had come from?

In an accounting sense it doesn't really matter; we assumed they had it to begin with. Alternately they could borrow it from the bank; if you have trouble figuring those postings out, K & R can walk you through it. From an economic standpoint you have to go back to day one of the first econ course, the "circular flow" diagram where money goes clockwise and real goods and services counterclockwise with product markets on top and factor markets on the bottom. The $10 million Ford spent for labor and other expenses went back to workers and factor owners, just like the $2 million of profit will be distributed to the household sector as dividends. Except of course for what has to be paid in taxes, which goes to the government to pay for the.....you get the picture.

So folks, it all really does work out and Kimura and Rshermr are not crazy.

 

[Oldstyle]

What's your IQ score? Care to put up a bet?

That is the thing. If you would just read the articles I have linked you to, then you could understand that cons are stupid. And that they believe they are smart. But, look, it is not your fault. You are a congenital idiot, nothing you can do to help yourself there. But it is fun to watch you prove it. And you do so over and over and over. And, me boy, I was just trying to help you. You should be angry at those who got you to believe the drivel you do, not those trying to help you understand the truth.

What do cons have to do with your asinine assumption that we'd have no assets without public debt?

Rshermr is another example of the liberal obsession with seeing themselves as "smarter" than everyone else...which is why everyone should let THEM call the shots.

But then when they had control of the House, the Senate and the Oval Office they gave us a stimulus that didn't stimulate and a health care reform bill that raises the cost of health care while it diminishes the quality of that care.

Which begs the question...if these guys ARE so doggone smart then why can't they fix things? I'm originally from Massachusetts and we had a long history of electing Republican Governors even though we are an overwhelmingly Democratic State. Why? Because Republicans were better at running the State than Democrats were and even died in the wool liberals understood that. They'd elect a few Democrats and then put a Republican in there to fix the mess that always seemed to result.

 

[Rshermr]

That is the thing. If you would just read the articles I have linked you to, then you could understand that cons are stupid. And that they believe they are smart. But, look, it is not your fault. You are a congenital idiot, nothing you can do to help yourself there. But it is fun to watch you prove it. And you do so over and over and over. And, me boy, I was just trying to help you. You should be angry at those who got you to believe the drivel you do, not those trying to help you understand the truth.

What do cons have to do with your asinine assumption that we'd have no assets without public debt?

Rshermr is another example of the liberal obsession with seeing themselves as "smarter" than everyone else...which is why everyone should let THEM call the shots.

But then when they had control of the House, the Senate and the Oval Office they gave us a stimulus that didn't stimulate and a health care reform bill that raises the cost of health care while it diminishes the quality of that care.

Which begs the question...if these guys ARE so doggone smart then why can't they fix things? I'm originally from Massachusetts and we had a long history of electing Republican Governors even though we are an overwhelmingly Democratic State. Why? Because Republicans were better at running the State than Democrats were and even died in the wool liberals understood that. They'd elect a few Democrats and then put a Republican in there to fix the mess that always seemed to result.

And there he goes again. The opinion of a con with no links to prove his drivel. Typical.

 

[Rshermr]

I'm not the one that's confused. You seem to be confusing real assets and financial assets. Seriously.....

You had them going for quite a while, but you slipped up and let the cat out of the bag. Accounting definitions and identities apply to financial instruments and accounting, not real assets. When you look at stocks of real assets (like housing stock or military equipment) you have valuation problems, but you have moved beyond the financial instrument only balance sheets used in monetary policy.

Shame on you for teasing them with the defense industry example! They should have been able to figure it out from that one.

Well, it was fun watching while it lasted.

Folks, Kimura's point is correct when considering financial assets. It has to be because it is the essence of double-entry bookkeeping. A debit on one ledger has to be offset with a credit on another. Basic accounting.

When you introduce real assets (inventory, capital goods, housing, etc) it gets dicey. Take the Ford example. Suppose Ford issues $10 million in bonds to finance inventory in progress. The initial entries are to increase a liability account (bonds payable) by $10 million and to increase cash in bank by $10 million. So far, so good. Then Ford pays the $10 million for raw materials, labor, and expenses. The cash in bank goes back down again, and presumably Ford makes vehicles for inventory worth somewhat more than $10 million. Note I have finessed the accounts payable issue to keep it simple and I am assuming "full-absorption inventory accounting" for Ford. How does Ford value this finished inventory? Marx brothers: Groucho, Harpo, Zippo, FIFO, and LIFO. Sorry, a little accounting humor there (and yes accounting humor is that lame, if you want good jokes, hang out with actuaries; but I digress). If Ford values inventory strictly at cost, the inventory is valued at $10 million.

Now is where things get fun. Ford sells the vehicles through dealers (I'm collapsing the dealers and Ford together here, you really don't want to get into dealer financing do you?) The dealers sell the cars for $12 million, creating a profit of $2 million. We post $12 million to cash in bank, which can be used to pay off the bonds. We reduce inventory by $10 million and book a profit of $2 million (which is why assets= liabilities +capital!). Ford is all tidied up.

Now what about the buyers of the vehicles? They gave up $12 million for their vehicles. Their cash in bank goes down $12 million and the add an asset of $12 million to their personal balance sheets. So where did the $12 million cash in bank consumers had come from?

In an accounting sense it doesn't really matter; we assumed they had it to begin with. Alternately they could borrow it from the bank; if you have trouble figuring those postings out, K & R can walk you through it. From an economic standpoint you have to go back to day one of the first econ course, the "circular flow" diagram where money goes clockwise and real goods and services counterclockwise with product markets on top and factor markets on the bottom. The $10 million Ford spent for labor and other expenses went back to workers and factor owners, just like the $2 million of profit will be distributed to the household sector as dividends. Except of course for what has to be paid in taxes, which goes to the government to pay for the.....you get the picture.

So folks, it all really does work out and Kimura and Rshermr are not crazy.

Well, thanks. But sometimes I am a bit crazy. Just trying to work my way out of it. But nice to see. I was on top of this basic econ stuff 40+ years ago. Funny how fast it comes back when someone who is on top of it puts it out there.
But, I could discus the wonders of z/OS if anyone were interested. And MVS to boot. But then, the fact is it is a whole lot like discussing actuarial tables.

 

[RKMBrown]

I'm not the one that's confused. You seem to be confusing real assets and financial assets. Seriously.....

You had them going for quite a while, but you slipped up and let the cat out of the bag. Accounting definitions and identities apply to financial instruments and accounting, not real assets. When you look at stocks of real assets (like housing stock or military equipment) you have valuation problems, but you have moved beyond the financial instrument only balance sheets used in monetary policy.

Shame on you for teasing them with the defense industry example! They should have been able to figure it out from that one.

Well, it was fun watching while it lasted.

Folks, Kimura's point is correct when considering financial assets. It has to be because it is the essence of double-entry bookkeeping. A debit on one ledger has to be offset with a credit on another. Basic accounting.

When you introduce real assets (inventory, capital goods, housing, etc) it gets dicey. Take the Ford example. Suppose Ford issues $10 million in bonds to finance inventory in progress. The initial entries are to increase a liability account (bonds payable) by $10 million and to increase cash in bank by $10 million. So far, so good. Then Ford pays the $10 million for raw materials, labor, and expenses. The cash in bank goes back down again, and presumably Ford makes vehicles for inventory worth somewhat more than $10 million. Note I have finessed the accounts payable issue to keep it simple and I am assuming "full-absorption inventory accounting" for Ford. How does Ford value this finished inventory? Marx brothers: Groucho, Harpo, Zippo, FIFO, and LIFO. Sorry, a little accounting humor there (and yes accounting humor is that lame, if you want good jokes, hang out with actuaries; but I digress). If Ford values inventory strictly at cost, the inventory is valued at $10 million.

Now is where things get fun. Ford sells the vehicles through dealers (I'm collapsing the dealers and Ford together here, you really don't want to get into dealer financing do you?) The dealers sell the cars for $12 million, creating a profit of $2 million. We post $12 million to cash in bank, which can be used to pay off the bonds. We reduce inventory by $10 million and book a profit of $2 million (which is why assets= liabilities +capital!). Ford is all tidied up.

Now what about the buyers of the vehicles? They gave up $12 million for their vehicles. Their cash in bank goes down $12 million and the add an asset of $12 million to their personal balance sheets. So where did the $12 million cash in bank consumers had come from?

In an accounting sense it doesn't really matter; we assumed they had it to begin with. Alternately they could borrow it from the bank; if you have trouble figuring those postings out, K & R can walk you through it. From an economic standpoint you have to go back to day one of the first econ course, the "circular flow" diagram where money goes clockwise and real goods and services counterclockwise with product markets on top and factor markets on the bottom. The $10 million Ford spent for labor and other expenses went back to workers and factor owners, just like the $2 million of profit will be distributed to the household sector as dividends. Except of course for what has to be paid in taxes, which goes to the government to pay for the.....you get the picture.

So folks, it all really does work out and Kimura and Rshermr are not crazy.

Well, thanks. But sometimes I am a bit crazy. Just trying to work my way out of it. But nice to see. I was on top of this basic econ stuff 40+ years ago. Funny how fast it comes back when someone who is on top of it puts it out there.
But, I could discus the wonders of z/OS if anyone were interested. And MVS to boot. But then, the fact is it is a whole lot like discussing actuarial tables.

I wrote a z/OS simulator once. One of my past jobs was lead architect for the kernel and GUI for NT and that old OS IBM dropped OS/2.

Your arguments mixed terms between the fed and taxes/spending of the Treasury two completely different ledgers. What was described would have been correct only from the fed perspective. The fed is not the Treasury. If it was just a joke, it wasn't correct or funny Just cause you know the difference between a debt and a credit does not excuse leaving out the account number in the discussion and esp. does not forgive switching GLs without discussing the appropriate transfers. The fed does not tax. And the debt is not an asset of the Treasury.

 

[AmazonTania]

I'm not the one that's confused. You seem to be confusing real assets and financial assets. Seriously.....

You had them going for quite a while, but you slipped up and let the cat out of the bag. Accounting definitions and identities apply to financial instruments and accounting, not real assets. When you look at stocks of real assets (like housing stock or military equipment) you have valuation problems, but you have moved beyond the financial instrument only balance sheets used in monetary policy.

Shame on you for teasing them with the defense industry example! They should have been able to figure it out from that one.

Well, it was fun watching while it lasted.

Folks, Kimura's point is correct when considering financial assets. It has to be because it is the essence of double-entry bookkeeping. A debit on one ledger has to be offset with a credit on another. Basic accounting.

When you introduce real assets (inventory, capital goods, housing, etc) it gets dicey. Take the Ford example. Suppose Ford issues $10 million in bonds to finance inventory in progress. The initial entries are to increase a liability account (bonds payable) by $10 million and to increase cash in bank by $10 million. So far, so good. Then Ford pays the $10 million for raw materials, labor, and expenses. The cash in bank goes back down again, and presumably Ford makes vehicles for inventory worth somewhat more than $10 million. Note I have finessed the accounts payable issue to keep it simple and I am assuming "full-absorption inventory accounting" for Ford. How does Ford value this finished inventory? Marx brothers: Groucho, Harpo, Zippo, FIFO, and LIFO. Sorry, a little accounting humor there (and yes accounting humor is that lame, if you want good jokes, hang out with actuaries; but I digress). If Ford values inventory strictly at cost, the inventory is valued at $10 million.

Now is where things get fun. Ford sells the vehicles through dealers (I'm collapsing the dealers and Ford together here, you really don't want to get into dealer financing do you?) The dealers sell the cars for $12 million, creating a profit of $2 million. We post $12 million to cash in bank, which can be used to pay off the bonds. We reduce inventory by $10 million and book a profit of $2 million (which is why assets= liabilities +capital!). Ford is all tidied up.

Now what about the buyers of the vehicles? They gave up $12 million for their vehicles. Their cash in bank goes down $12 million and the add an asset of $12 million to their personal balance sheets. So where did the $12 million cash in bank consumers had come from?

In an accounting sense it doesn't really matter; we assumed they had it to begin with. Alternately they could borrow it from the bank; if you have trouble figuring those postings out, K & R can walk you through it. From an economic standpoint you have to go back to day one of the first econ course, the "circular flow" diagram where money goes clockwise and real goods and services counterclockwise with product markets on top and factor markets on the bottom. The $10 million Ford spent for labor and other expenses went back to workers and factor owners, just like the $2 million of profit will be distributed to the household sector as dividends. Except of course for what has to be paid in taxes, which goes to the government to pay for the.....you get the picture.

So folks, it all really does work out and Kimura and Rshermr are not crazy.

Good analogy, although you have overlooked a few things.

1. There are historic examples where a (the) nation's government deficit was zero or negative and the country has had net savings. A particular example would be Singapore. I don't know why I like to use this as my example for everything. It just seems like the country can do no wrong...
2. Of course, you don't need governments in order to save.

Let's say a school janitor saves his paycheck of $2,000 and in a few months he buys 50 shares of Ford Motor company at $40 dollars per share. Evidently, you would not call this an example of an accumulation of a net financial asset in the private sector. The savings of the janitor would be exactly offset by the "dissaving" of the person selling him the shares of stock (or bonds). In this case, the MMT doesn't work. Although, you could say that the $2,000 of this investment would be offset by the corresponding debt on the company's books. But this would require treating the newly issued shares as a liability on the part of the company, rather than an equity.

Debt = equity, as certain economic models have professed, but it gives the creedence that net wealth can never increase in the private sector. The analysis overlooks the fact that $2,000 of capital handed over to a company is an asset now owned by the corporation. If consumers aren't spending, this has to show up, somewhere, somehow, and it has to show up through government deficits. The theory implies that if my Janitor decided to invest his $2,000 paycheck into Ford Motor Company, then without deficits, it would drain $2,000 out of the economy. Well, what if everyone in the community decided to stop spending in their community and invest in the stock market? It's true, many people in the community would be out of a job, but business opportunities would be gained in many other sectors of the economy.

Despite all of the problems I have mentioned here, it's pretty easy to see what you are trying to say. A federal deficit of (enter amount here) caused an accumulation of same amount of net financial assets of the same amount, and at the same time, the foreign sector has a invested roughly the same amount in US financial assets. By this zero sum game, you have convince us that

1. The private sector can only save as much as the as the Government sector borrows
2. Foreigners accumulate dollar denominated assets roughly around the same amount equal to the US deficit.

Of course, you do realise the only why this accounting can work for the domestic sector in terms of savings is for the government sector to accumulate deficits larger than the trade deficit.... Which has kinda happened already.

Micro-accounting is like living inside of a mental prison (a nice way of saying it). MMTers normally define "private saving" as "private saving minus Investment" which is how MMTers normally use the word "saving", or sometimes "net saving". Then it's just standard National Income Accounting. Y=C+I+G, and S=Y-T-C, therefore S-I=G-T, which complete and utter self-perpetual rhetoric. You may not believe anyone who advocates this is crazy, but it's pretty crazy to assume that unless the Government runs a budget deficit, then the private sector cannot save... At all...

 

[Kimura]

I'm not the one that's confused. You seem to be confusing real assets and financial assets. Seriously.....

You had them going for quite a while, but you slipped up and let the cat out of the bag. Accounting definitions and identities apply to financial instruments and accounting, not real assets. When you look at stocks of real assets (like housing stock or military equipment) you have valuation problems, but you have moved beyond the financial instrument only balance sheets used in monetary policy.

Shame on you for teasing them with the defense industry example! They should have been able to figure it out from that one.

Well, it was fun watching while it lasted.

Folks, Kimura's point is correct when considering financial assets. It has to be because it is the essence of double-entry bookkeeping. A debit on one ledger has to be offset with a credit on another. Basic accounting.

When you introduce real assets (inventory, capital goods, housing, etc) it gets dicey. Take the Ford example. Suppose Ford issues $10 million in bonds to finance inventory in progress. The initial entries are to increase a liability account (bonds payable) by $10 million and to increase cash in bank by $10 million. So far, so good. Then Ford pays the $10 million for raw materials, labor, and expenses. The cash in bank goes back down again, and presumably Ford makes vehicles for inventory worth somewhat more than $10 million. Note I have finessed the accounts payable issue to keep it simple and I am assuming "full-absorption inventory accounting" for Ford. How does Ford value this finished inventory? Marx brothers: Groucho, Harpo, Zippo, FIFO, and LIFO. Sorry, a little accounting humor there (and yes accounting humor is that lame, if you want good jokes, hang out with actuaries; but I digress). If Ford values inventory strictly at cost, the inventory is valued at $10 million.

Now is where things get fun. Ford sells the vehicles through dealers (I'm collapsing the dealers and Ford together here, you really don't want to get into dealer financing do you?) The dealers sell the cars for $12 million, creating a profit of $2 million. We post $12 million to cash in bank, which can be used to pay off the bonds. We reduce inventory by $10 million and book a profit of $2 million (which is why assets= liabilities +capital!). Ford is all tidied up.

Now what about the buyers of the vehicles? They gave up $12 million for their vehicles. Their cash in bank goes down $12 million and the add an asset of $12 million to their personal balance sheets. So where did the $12 million cash in bank consumers had come from?

In an accounting sense it doesn't really matter; we assumed they had it to begin with. Alternately they could borrow it from the bank; if you have trouble figuring those postings out, K & R can walk you through it. From an economic standpoint you have to go back to day one of the first econ course, the "circular flow" diagram where money goes clockwise and real goods and services counterclockwise with product markets on top and factor markets on the bottom. The $10 million Ford spent for labor and other expenses went back to workers and factor owners, just like the $2 million of profit will be distributed to the household sector as dividends. Except of course for what has to be paid in taxes, which goes to the government to pay for the.....you get the picture.

So folks, it all really does work out and Kimura and Rshermr are not crazy.

 

[Kimura]

I'm not the one that's confused. You seem to be confusing real assets and financial assets. Seriously.....

You had them going for quite a while, but you slipped up and let the cat out of the bag. Accounting definitions and identities apply to financial instruments and accounting, not real assets. When you look at stocks of real assets (like housing stock or military equipment) you have valuation problems, but you have moved beyond the financial instrument only balance sheets used in monetary policy.

Shame on you for teasing them with the defense industry example! They should have been able to figure it out from that one.

Well, it was fun watching while it lasted.

Folks, Kimura's point is correct when considering financial assets. It has to be because it is the essence of double-entry bookkeeping. A debit on one ledger has to be offset with a credit on another. Basic accounting.

When you introduce real assets (inventory, capital goods, housing, etc) it gets dicey. Take the Ford example. Suppose Ford issues $10 million in bonds to finance inventory in progress. The initial entries are to increase a liability account (bonds payable) by $10 million and to increase cash in bank by $10 million. So far, so good. Then Ford pays the $10 million for raw materials, labor, and expenses. The cash in bank goes back down again, and presumably Ford makes vehicles for inventory worth somewhat more than $10 million. Note I have finessed the accounts payable issue to keep it simple and I am assuming "full-absorption inventory accounting" for Ford. How does Ford value this finished inventory? Marx brothers: Groucho, Harpo, Zippo, FIFO, and LIFO. Sorry, a little accounting humor there (and yes accounting humor is that lame, if you want good jokes, hang out with actuaries; but I digress). If Ford values inventory strictly at cost, the inventory is valued at $10 million.

Now is where things get fun. Ford sells the vehicles through dealers (I'm collapsing the dealers and Ford together here, you really don't want to get into dealer financing do you?) The dealers sell the cars for $12 million, creating a profit of $2 million. We post $12 million to cash in bank, which can be used to pay off the bonds. We reduce inventory by $10 million and book a profit of $2 million (which is why assets= liabilities +capital!). Ford is all tidied up.

Now what about the buyers of the vehicles? They gave up $12 million for their vehicles. Their cash in bank goes down $12 million and the add an asset of $12 million to their personal balance sheets. So where did the $12 million cash in bank consumers had come from?

In an accounting sense it doesn't really matter; we assumed they had it to begin with. Alternately they could borrow it from the bank; if you have trouble figuring those postings out, K & R can walk you through it. From an economic standpoint you have to go back to day one of the first econ course, the "circular flow" diagram where money goes clockwise and real goods and services counterclockwise with product markets on top and factor markets on the bottom. The $10 million Ford spent for labor and other expenses went back to workers and factor owners, just like the $2 million of profit will be distributed to the household sector as dividends. Except of course for what has to be paid in taxes, which goes to the government to pay for the.....you get the picture.

So folks, it all really does work out and Kimura and Rshermr are not crazy.

Good analogy, although you have overlooked a few things.

1. There are historic examples where a (the) nation's government deficit was zero or negative and the country has had net savings. A particular example would be Singapore. I don't know why I like to use this as my example for everything. It just seems like the country can do no wrong...
2. Of course, you don't need governments in order to save.

Let's say a school janitor saves his paycheck of $2,000 and in a few months he buys 50 shares of Ford Motor company at $40 dollars per share. Evidently, you would not call this an example of an accumulation of a net financial asset in the private sector. The savings of the janitor would be exactly offset by the "dissaving" of the person selling him the shares of stock (or bonds). In this case, the MMT doesn't work. Although, you could say that the $2,000 of this investment would be offset by the corresponding debt on the company's books. But this would require treating the newly issued shares as a liability on the part of the company, rather than an equity.

Debt = equity, as certain economic models have professed, but it gives the creedence that net wealth can never increase in the private sector. The analysis overlooks the fact that $2,000 of capital handed over to a company is an asset now owned by the corporation. If consumers aren't spending, this has to show up, somewhere, somehow, and it has to show up through government deficits. The theory implies that if my Janitor decided to invest his $2,000 paycheck into Ford Motor Company, then without deficits, it would drain $2,000 out of the economy. Well, what if everyone in the community decided to stop spending in their community and invest in the stock market? It's true, many people in the community would be out of a job, but business opportunities would be gained in many other sectors of the economy.

Despite all of the problems I have mentioned here, it's pretty easy to see what you are trying to say. A federal deficit of (enter amount here) caused an accumulation of same amount of net financial assets of the same amount, and at the same time, the foreign sector has a invested roughly the same amount in US financial assets. By this zero sum game, you have convince us that

1. The private sector can only save as much as the as the Government sector borrows
2. Foreigners accumulate dollar denominated assets roughly around the same amount equal to the US deficit.

Of course, you do realise the only why this accounting can work for the domestic sector in terms of savings is for the government sector to accumulate deficits larger than the trade deficit.... Which has kinda happened already.

Micro-accounting is like living inside of a mental prison (a nice way of saying it). MMTers normally define "private saving" as "private saving minus Investment" which is how MMTers normally use the word "saving", or sometimes "net saving". Then it's just standard National Income Accounting. Y=C+I+G, and S=Y-T-C, therefore S-I=G-T, which complete and utter self-perpetual rhetoric. You may not believe anyone who advocates this is crazy, but it's pretty crazy to assume that unless the Government runs a budget deficit, then the private sector cannot save... At all...

It's pretty basic, unless someone else is creating net financial assets as US financial assets besides the US government.

It boils down to the following: (S – I) = (G – T) + (X – M)

This is MMT from a macro standpoint.

We're talking government sector, domestic private sector, and foreign sector.

 

[Oldstyle]

What do cons have to do with your asinine assumption that we'd have no assets without public debt?

Rshermr is another example of the liberal obsession with seeing themselves as "smarter" than everyone else...which is why everyone should let THEM call the shots.

But then when they had control of the House, the Senate and the Oval Office they gave us a stimulus that didn't stimulate and a health care reform bill that raises the cost of health care while it diminishes the quality of that care.

Which begs the question...if these guys ARE so doggone smart then why can't they fix things? I'm originally from Massachusetts and we had a long history of electing Republican Governors even though we are an overwhelmingly Democratic State. Why? Because Republicans were better at running the State than Democrats were and even died in the wool liberals understood that. They'd elect a few Democrats and then put a Republican in there to fix the mess that always seemed to result.

And there he goes again. The opinion of a con with no links to prove his drivel. Typical.

That's called "original thought", Tommy...it's what intelligent people do. Intellectual lemmings like yourself are wedded to Google because you don't have the capacity to formulate your own opinion or express it in a well thought out manner. It's why you felt the need to embellish your intellectual "credentials" by making up stories about teaching Economics as an undergrad. If you really HAD the intellectual chops to argue your point you wouldn't be reduced to posing as an authority.

 

[AmazonTania]

You had them going for quite a while, but you slipped up and let the cat out of the bag. Accounting definitions and identities apply to financial instruments and accounting, not real assets. When you look at stocks of real assets (like housing stock or military equipment) you have valuation problems, but you have moved beyond the financial instrument only balance sheets used in monetary policy.

Shame on you for teasing them with the defense industry example! They should have been able to figure it out from that one.

Well, it was fun watching while it lasted.

Folks, Kimura's point is correct when considering financial assets. It has to be because it is the essence of double-entry bookkeeping. A debit on one ledger has to be offset with a credit on another. Basic accounting.

When you introduce real assets (inventory, capital goods, housing, etc) it gets dicey. Take the Ford example. Suppose Ford issues $10 million in bonds to finance inventory in progress. The initial entries are to increase a liability account (bonds payable) by $10 million and to increase cash in bank by $10 million. So far, so good. Then Ford pays the $10 million for raw materials, labor, and expenses. The cash in bank goes back down again, and presumably Ford makes vehicles for inventory worth somewhat more than $10 million. Note I have finessed the accounts payable issue to keep it simple and I am assuming "full-absorption inventory accounting" for Ford. How does Ford value this finished inventory? Marx brothers: Groucho, Harpo, Zippo, FIFO, and LIFO. Sorry, a little accounting humor there (and yes accounting humor is that lame, if you want good jokes, hang out with actuaries; but I digress). If Ford values inventory strictly at cost, the inventory is valued at $10 million.

Now is where things get fun. Ford sells the vehicles through dealers (I'm collapsing the dealers and Ford together here, you really don't want to get into dealer financing do you?) The dealers sell the cars for $12 million, creating a profit of $2 million. We post $12 million to cash in bank, which can be used to pay off the bonds. We reduce inventory by $10 million and book a profit of $2 million (which is why assets= liabilities +capital!). Ford is all tidied up.

Now what about the buyers of the vehicles? They gave up $12 million for their vehicles. Their cash in bank goes down $12 million and the add an asset of $12 million to their personal balance sheets. So where did the $12 million cash in bank consumers had come from?

In an accounting sense it doesn't really matter; we assumed they had it to begin with. Alternately they could borrow it from the bank; if you have trouble figuring those postings out, K & R can walk you through it. From an economic standpoint you have to go back to day one of the first econ course, the "circular flow" diagram where money goes clockwise and real goods and services counterclockwise with product markets on top and factor markets on the bottom. The $10 million Ford spent for labor and other expenses went back to workers and factor owners, just like the $2 million of profit will be distributed to the household sector as dividends. Except of course for what has to be paid in taxes, which goes to the government to pay for the.....you get the picture.

So folks, it all really does work out and Kimura and Rshermr are not crazy.

Good analogy, although you have overlooked a few things.

1. There are historic examples where a (the) nation's government deficit was zero or negative and the country has had net savings. A particular example would be Singapore. I don't know why I like to use this as my example for everything. It just seems like the country can do no wrong...
2. Of course, you don't need governments in order to save.

Let's say a school janitor saves his paycheck of $2,000 and in a few months he buys 50 shares of Ford Motor company at $40 dollars per share. Evidently, you would not call this an example of an accumulation of a net financial asset in the private sector. The savings of the janitor would be exactly offset by the "dissaving" of the person selling him the shares of stock (or bonds). In this case, the MMT doesn't work. Although, you could say that the $2,000 of this investment would be offset by the corresponding debt on the company's books. But this would require treating the newly issued shares as a liability on the part of the company, rather than an equity.

Debt = equity, as certain economic models have professed, but it gives the creedence that net wealth can never increase in the private sector. The analysis overlooks the fact that $2,000 of capital handed over to a company is an asset now owned by the corporation. If consumers aren't spending, this has to show up, somewhere, somehow, and it has to show up through government deficits. The theory implies that if my Janitor decided to invest his $2,000 paycheck into Ford Motor Company, then without deficits, it would drain $2,000 out of the economy. Well, what if everyone in the community decided to stop spending in their community and invest in the stock market? It's true, many people in the community would be out of a job, but business opportunities would be gained in many other sectors of the economy.

Despite all of the problems I have mentioned here, it's pretty easy to see what you are trying to say. A federal deficit of (enter amount here) caused an accumulation of same amount of net financial assets of the same amount, and at the same time, the foreign sector has a invested roughly the same amount in US financial assets. By this zero sum game, you have convince us that

1. The private sector can only save as much as the as the Government sector borrows
2. Foreigners accumulate dollar denominated assets roughly around the same amount equal to the US deficit.

Of course, you do realise the only why this accounting can work for the domestic sector in terms of savings is for the government sector to accumulate deficits larger than the trade deficit.... Which has kinda happened already.

Micro-accounting is like living inside of a mental prison (a nice way of saying it). MMTers normally define "private saving" as "private saving minus Investment" which is how MMTers normally use the word "saving", or sometimes "net saving". Then it's just standard National Income Accounting. Y=C+I+G, and S=Y-T-C, therefore S-I=G-T, which complete and utter self-perpetual rhetoric. You may not believe anyone who advocates this is crazy, but it's pretty crazy to assume that unless the Government runs a budget deficit, then the private sector cannot save... At all...

It's pretty basic, unless someone else is creating net financial assets as US financial assets besides the US government.

It boils down to the following: (S – I) = (G – T) + (X – M)

This is MMT from a macro standpoint.

We're talking government sector, domestic private sector, and foreign sector.

Oldfart didn't use the foreign sector in his example. I assume it was to keep it simple. Because of this, I have omitted the foreign sector in my example. I only disregarded the foreign sector and concentrated on the domestic private sector and government sector in my example. The basic premise is that if the if no one is spending, then everyone must be saving and that savings is shown through government sector deficits.

Even if you believe that the net private savings of private investment can't grow without the government budget deficit, so what? The entire benefit of private savings is that it allows for private investment.

Net private savings can equal a budget deficit, but it doesn't has to. That's where the external sector with international trade comes in. Deficits are not required for the public sector to have savings. The Government run surpluses without the need for the private sector to spend. It's generally encouraged that both the private sector save as well as the government, hence the creation of sovereign wealth funds.

I also find it very cute that MMTers divide the economy into only three parts: Government Sector, Private Sector and Foreign Sector. If it doesn't involve a transaction between those, they just ignore it. Very kooky indeed

 

[oldfart]

Good analogy, although you have overlooked a few things.

To keep the post shorter than "War and Peace" I chose to make a LOT of simplifications. You are correct, and in second year accounting people get a lot of the nuances.

There are historic examples where a (the) nation's government deficit was zero or negative and the country has had net savings. A particular example would be Singapore. I don't know why I like to use this as my example for everything. It just seems like the country can do no wrong...

That's why I left the foreign sector out of the Ford example. Try explaining the entries for product shipped to UK when the exchange rate fluctuates!

Of course, you don't need governments in order to save.

That sort of depends on the kind of economic model you look at. As you aggregate, more and more transactions net out. For example if we divide the private sector into a business sector, household sector, and financial sector; when Last National Bank loans Bubba Barfwell the $55k to buy his Ford 350, the household sector increases debt and tangible personal property, the business sector increases cash in bank and decreases inventory, and the financial sector increases loan assets and decreases cash on hand (it went to Ford!). But when you aggregate into one private sector, all of these net out to zero. Only transactions involving the government or foreign sectors can create net financial saving for the private sector as a whole. K & R assumed away the foreign sector and arrived at their two sector model where the only way for the private sector to save (i.e. have a surplus) is for the government sector to have an equal deficit, "to the last dime".

There's a reason why this is called a "two-sector model" in monetary theory!

Let's say a school janitor saves his paycheck of $2,000 and in a few months he buys 50 shares of Ford Motor company at $40 dollars per share. Evidently, you would not call this an example of an accumulation of a net financial asset in the private sector. The savings of the janitor would be exactly offset by the "dissaving" of the person selling him the shares of stock (or bonds).

Agreed. Secondary financial markets must always net to zero, as in every transaction what the seller receives is identical to what the buyer pays.

In this case, the MMT doesn't work. Although, you could say that the $2,000 of this investment would be offset by the corresponding debt on the company's books. But this would require treating the newly issued shares as a liability on the part of the company, rather than an equity.

I sense a little confusion here. Our janitor buys 50 shares of Ford on a secondary market, and Ford makes no entries on its books at all (its liabilities and equity are unchanged). It is not a party to the transaction. Should Ford issue new stock, sell treasury stock, or redeem stock, then Ford is a party to the transaction and its balance sheet changes. For newly issued stock, it increases paid-in capital and cash in bank by the same amount.

Debt = equity, as certain economic models have professed, but it gives the creedence that net wealth can never increase in the private sector. The analysis overlooks the fact that $2,000 of capital handed over to a company is an asset now owned by the corporation. If consumers aren't spending, this has to show up, somewhere, somehow, and it has to show up through government deficits. The theory implies that if my Janitor decided to invest his $2,000 paycheck into Ford Motor Company, then without deficits, it would drain $2,000 out of the economy. Well, what if everyone in the community decided to stop spending in their community and invest in the stock market? It's true, many people in the community would be out of a job, but business opportunities would be gained in many other sectors of the economy.

This is, I think the "crowding-out" argument. I'll defer it to another post in the interest of brevity. If we aggregate the household sector (the janitor) and the business sector (Ford) the transaction nets out.

Despite all of the problems I have mentioned here, it's pretty easy to see what you are trying to say. A federal deficit of (enter amount here) caused an accumulation of same amount of net financial assets of the same amount, and at the same time, the foreign sector has a invested roughly the same amount in US financial assets. By this zero sum game, you have convince us that

1. The private sector can only save as much as the as the Government sector borrows
2. Foreigners accumulate dollar denominated assets roughly around the same amount equal to the US deficit.

That's the basic argument. I don't like two sector models for a variety of reasons, one of which is that this reasoning relies too much on accounting identities and ignores much of what is happening with real assets. In particular I am disturbed that there is no distinction between consumer goods and capital goods. The fundamental national income accounts identity is:

Ip+Ig+If+(X-M)=Sp+Sg+Sf+T

where Ip is private investment, Ig is government investment, If is net foreign investment, X is total exports, M is total imports, Sp is private savings, Sg is government savings (surplus), Sf is foreign repatriation of capital, and T is tax revenue.

This is a far more robust model and produces a much better analytical framework.

Of course, you do realise the only why this accounting can work for the domestic sector in terms of savings is for the government sector to accumulate deficits larger than the trade deficit.... Which has kinda happened already.

That's a three-sector model midway between K & R's two-sector model and the robust NIA model.

Micro-accounting is like living inside of a mental prison (a nice way of saying it). MMTers normally define "private saving" as "private saving minus Investment" which is how MMTers normally use the word "saving", or sometimes "net saving". Then it's just standard National Income Accounting. Y=C+I+G, and S=Y-T-C, therefore S-I=G-T, which complete and utter self-perpetual rhetoric. You may not believe anyone who advocates this is crazy, but it's pretty crazy to assume that unless the Government runs a budget deficit, then the private sector cannot save... At all...

You are correct. But if you look at the model I described, some interesting things occur. First, you have a three-sector capital stock and therefore three investment flows. It depends on where the investment is coming from, the private sector, government, or foreign sources. An Interstate highway becomes a balance sheet asset for the government, adding to the national stock of capital just like the trucks which drive upon it. Exports and imports become more nuanced, as it makes a difference if they are for consumer or capital goods. As you play with this model most of the oversimplifications drop out. Then one morning you discover input-output tables! God bless Wassily Liontieff!

Peace all.

 

[Kimura]

Good analogy, although you have overlooked a few things.

1. There are historic examples where a (the) nation's government deficit was zero or negative and the country has had net savings. A particular example would be Singapore. I don't know why I like to use this as my example for everything. It just seems like the country can do no wrong...
2. Of course, you don't need governments in order to save.

Let's say a school janitor saves his paycheck of $2,000 and in a few months he buys 50 shares of Ford Motor company at $40 dollars per share. Evidently, you would not call this an example of an accumulation of a net financial asset in the private sector. The savings of the janitor would be exactly offset by the "dissaving" of the person selling him the shares of stock (or bonds). In this case, the MMT doesn't work. Although, you could say that the $2,000 of this investment would be offset by the corresponding debt on the company's books. But this would require treating the newly issued shares as a liability on the part of the company, rather than an equity.

Debt = equity, as certain economic models have professed, but it gives the creedence that net wealth can never increase in the private sector. The analysis overlooks the fact that $2,000 of capital handed over to a company is an asset now owned by the corporation. If consumers aren't spending, this has to show up, somewhere, somehow, and it has to show up through government deficits. The theory implies that if my Janitor decided to invest his $2,000 paycheck into Ford Motor Company, then without deficits, it would drain $2,000 out of the economy. Well, what if everyone in the community decided to stop spending in their community and invest in the stock market? It's true, many people in the community would be out of a job, but business opportunities would be gained in many other sectors of the economy.

Despite all of the problems I have mentioned here, it's pretty easy to see what you are trying to say. A federal deficit of (enter amount here) caused an accumulation of same amount of net financial assets of the same amount, and at the same time, the foreign sector has a invested roughly the same amount in US financial assets. By this zero sum game, you have convince us that

1. The private sector can only save as much as the as the Government sector borrows
2. Foreigners accumulate dollar denominated assets roughly around the same amount equal to the US deficit.

Of course, you do realise the only why this accounting can work for the domestic sector in terms of savings is for the government sector to accumulate deficits larger than the trade deficit.... Which has kinda happened already.

Micro-accounting is like living inside of a mental prison (a nice way of saying it). MMTers normally define "private saving" as "private saving minus Investment" which is how MMTers normally use the word "saving", or sometimes "net saving". Then it's just standard National Income Accounting. Y=C+I+G, and S=Y-T-C, therefore S-I=G-T, which complete and utter self-perpetual rhetoric. You may not believe anyone who advocates this is crazy, but it's pretty crazy to assume that unless the Government runs a budget deficit, then the private sector cannot save... At all...

It's pretty basic, unless someone else is creating net financial assets as US financial assets besides the US government.

It boils down to the following: (S – I) = (G – T) + (X – M)

This is MMT from a macro standpoint.

We're talking government sector, domestic private sector, and foreign sector.

Oldfart didn't use the foreign sector in his example. I assume it was to keep it simple. Because of this, I have omitted the foreign sector in my example. I only disregarded the foreign sector and concentrated on the domestic private sector and government sector in my example. The basic premise is that if the if no one is spending, then everyone must be saving and that savings is shown through government sector deficits.

Even if you believe that the net private savings of private investment can't grow without the government budget deficit, so what? The entire benefit of private savings is that it allows for private investment.

Net private savings can equal a budget deficit, but it doesn't has to. That's where the external sector with international trade comes in. Deficits are not required for the public sector to have savings. The Government run surpluses without the need for the private sector to spend. It's generally encouraged that both the private sector save as well as the government, hence the creation of sovereign wealth funds.

I also find it very cute that MMTers divide the economy into only three parts: Government Sector, Private Sector and Foreign Sector. If it doesn't involve a transaction between those, they just ignore it. Very kooky indeed

Here's an in-depth analysis of the Stock Flow Consistent Model used by Wynne Godly. I used a good portion of his work while developing my master's thesis.

Here

You have to realize that the government sector’s budget can either be in surplus or deficit. Correct? A deficit results when the government spends more than it receives in tax payments; a surplus being the opposite whereby the government sector taxes more than it spends. In Modern Monetary Theory, we realize, as a matter of accounting identity, that government deficits add net financial assets to the private sector. Basically, the government sector has deposited more currency into banks accounts than its received back in taxes. Again, without trying to sound redundant, with a surplus, the government sector has withdrawn more currency from private banks accounts than has been deposited through spending.

If we go back to our basic identity: (G-T) = (S-I) – NX

This identity is utilized all throughout macroeconomics. We can ascertain from this that private net saving can only when the government runs deficits. On the flip side, if the government goes into surplus, then the private sector cannot save.

Then we have (S – I) = (G – T) + (X – M) whereby (S) is total private savings and is equal to (I) which private investment plus deficits (G-T) which is spending minus our taxes plus our next exports (X) minus out imports (M). Net exports as an identity of total net savings of the foreign sector. These are basic accounting identities and not really open to debate.

This has ramifications during time periods where we high effective demand, since the private sector will have use credit to fund any consumption needs. Thank back to the Clinton’s second administration. We can run budget surpluses when there is an inflationary risk I would presume or if there’s skyrocketing aggregate demand.

 

[RKMBrown]

I'm not sure if I exactly follow every point of what you said Oldfart, or put another way I don't want to follow every point But I do appreciate the point that more robust models produce better analytical frameworks. I don't mind when the Economics expert(s) claim to have a model for a framework for discussion and prediction. The part that bothers me is when the terms used and/or explanation appear to entirely ignore inconvenient data outside of the framework of discussion. Especially when it appears that the model was carefully selected and/or artificially designed as a means to prove a political point.

 

[RKMBrown]

Here's an in-depth analysis of the Stock Flow Consistent Model used by Wynne Godly. I used a good portion of his work while developing my master's thesis.

Here

You have to realize that the government sector’s budget can either be in surplus or deficit. Correct? A deficit results when the government spends more than it receives in tax payments; a surplus being the opposite whereby the government sector taxes more than it spends. In Modern Monetary Theory, we realize, as a matter of accounting identity, that government deficits add net financial assets to the private sector. Basically, the government sector has deposited more currency into banks accounts than its received back in taxes. Again, without trying to sound redundant, with a surplus, the government sector has withdrawn more currency from private banks accounts than has been deposited through spending.

If we go back to our basic identity: (G-T) = (S-I) – NX

This identity is utilized all throughout macroeconomics. We can ascertain from this that private net saving can only when the government runs deficits. On the flip side, if the government goes into surplus, then the private sector cannot save.

Then we have (S – I) = (G – T) + (X – M) whereby (S) is total private savings and is equal to (I) which private investment plus deficits (G-T) which is spending minus our taxes plus our next exports (X) minus out imports (M). Net exports as an identity of total net savings of the foreign sector. These are basic accounting identities and not really open to debate.

This has ramifications during time periods where we high effective demand, since the private sector will have use credit to fund any consumption needs. Thank back to the Clinton’s second administration. We can run budget surpluses when there is an inflationary risk I would presume or if there’s skyrocketing aggregate demand.

>>> In Modern Monetary Theory, we realize, as a matter of accounting identity, that government deficits add net financial assets to the private sector.

True.

>>> We can ascertain from this that private net saving can only when the government runs deficits.

False. Just because government deficits can add to the assets of the private sector, does not mean that private net saving can only occur when the government runs deficits. You have made this assumption by assuming that all private sector net assets are the result of the government deficits. Private sector assets are not SOLELY due to the cash infusion into lending banks. You have completely left out the largest means for increasing private sector assets. You have left out Labor, intellectual capital, ... discovered resources.

>>> On the flip side, if the government goes into surplus, then the private sector cannot save.

False. Just because government surplus payments on debt lead to a reduction in total amount of debt loaned to the government from the private sector does not mean the private sector cannot save. This is just a ridiculous claim.

 

[Rshermr]

It's pretty basic, unless someone else is creating net financial assets as US financial assets besides the US government.

It boils down to the following: (S – I) = (G – T) + (X – M)

This is MMT from a macro standpoint.

We're talking government sector, domestic private sector, and foreign sector.

Oldfart didn't use the foreign sector in his example. I assume it was to keep it simple. Because of this, I have omitted the foreign sector in my example. I only disregarded the foreign sector and concentrated on the domestic private sector and government sector in my example. The basic premise is that if the if no one is spending, then everyone must be saving and that savings is shown through government sector deficits.

Even if you believe that the net private savings of private investment can't grow without the government budget deficit, so what? The entire benefit of private savings is that it allows for private investment.

Net private savings can equal a budget deficit, but it doesn't has to. That's where the external sector with international trade comes in. Deficits are not required for the public sector to have savings. The Government run surpluses without the need for the private sector to spend. It's generally encouraged that both the private sector save as well as the government, hence the creation of sovereign wealth funds.

I also find it very cute that MMTers divide the economy into only three parts: Government Sector, Private Sector and Foreign Sector. If it doesn't involve a transaction between those, they just ignore it. Very kooky indeed

Here's an in-depth analysis of the Stock Flow Consistent Model used by Wynne Godly. I used a good portion of his work while developing my master's thesis.

Here

You have to realize that the government sector’s budget can either be in surplus or deficit. Correct? A deficit results when the government spends more than it receives in tax payments; a surplus being the opposite whereby the government sector taxes more than it spends. In Modern Monetary Theory, we realize, as a matter of accounting identity, that government deficits add net financial assets to the private sector. Basically, the government sector has deposited more currency into banks accounts than its received back in taxes. Again, without trying to sound redundant, with a surplus, the government sector has withdrawn more currency from private banks accounts than has been deposited through spending.

If we go back to our basic identity: (G-T) = (S-I) – NX

This identity is utilized all throughout macroeconomics. We can ascertain from this that private net saving can only when the government runs deficits. On the flip side, if the government goes into surplus, then the private sector cannot save.

Then we have (S – I) = (G – T) + (X – M) whereby (S) is total private savings and is equal to (I) which private investment plus deficits (G-T) which is spending minus our taxes plus our next exports (X) minus out imports (M). Net exports as an identity of total net savings of the foreign sector. These are basic accounting identities and not really open to debate.

This has ramifications during time periods where we high effective demand, since the private sector will have use credit to fund any consumption needs. Thank back to the Clinton’s second administration. We can run budget surpluses when there is an inflationary risk I would presume or if there’s skyrocketing aggregate demand.

This is again very obvious analysis. You are about to run into the inability of a significant group to believe what they do not want to believe. Regardless of how obvious it is.
Proof positive that you can not help those who want to believe what they LIKE.

 

[AmazonTania]

It's pretty basic, unless someone else is creating net financial assets as US financial assets besides the US government.

It boils down to the following: (S – I) = (G – T) + (X – M)

This is MMT from a macro standpoint.

We're talking government sector, domestic private sector, and foreign sector.

Oldfart didn't use the foreign sector in his example. I assume it was to keep it simple. Because of this, I have omitted the foreign sector in my example. I only disregarded the foreign sector and concentrated on the domestic private sector and government sector in my example. The basic premise is that if the if no one is spending, then everyone must be saving and that savings is shown through government sector deficits.

Even if you believe that the net private savings of private investment can't grow without the government budget deficit, so what? The entire benefit of private savings is that it allows for private investment.

Net private savings can equal a budget deficit, but it doesn't has to. That's where the external sector with international trade comes in. Deficits are not required for the public sector to have savings. The Government run surpluses without the need for the private sector to spend. It's generally encouraged that both the private sector save as well as the government, hence the creation of sovereign wealth funds.

I also find it very cute that MMTers divide the economy into only three parts: Government Sector, Private Sector and Foreign Sector. If it doesn't involve a transaction between those, they just ignore it. Very kooky indeed

Here's an in-depth analysis of the Stock Flow Consistent Model used by Wynne Godly. I used a good portion of his work while developing my master's thesis.

Here

You have to realize that the government sector’s budget can either be in surplus or deficit. Correct? A deficit results when the government spends more than it receives in tax payments; a surplus being the opposite whereby the government sector taxes more than it spends. In Modern Monetary Theory, we realize, as a matter of accounting identity, that government deficits add net financial assets to the private sector. Basically, the government sector has deposited more currency into banks accounts than its received back in taxes. Again, without trying to sound redundant, with a surplus, the government sector has withdrawn more currency from private banks accounts than has been deposited through spending.

If we go back to our basic identity: (G-T) = (S-I) – NX

This identity is utilized all throughout macroeconomics. We can ascertain from this that private net saving can only when the government runs deficits. On the flip side, if the government goes into surplus, then the private sector cannot save.

Then we have (S – I) = (G – T) + (X – M) whereby (S) is total private savings and is equal to (I) which private investment plus deficits (G-T) which is spending minus our taxes plus our next exports (X) minus out imports (M). Net exports as an identity of total net savings of the foreign sector. These are basic accounting identities and not really open to debate.

This has ramifications during time periods where we high effective demand, since the private sector will have use credit to fund any consumption needs. Thank back to the Clinton’s second administration. We can run budget surpluses when there is an inflationary risk I would presume or if there’s skyrocketing aggregate demand.

No one debates those are account identities. If the government runs deficits, then it issues bonds. It's generally assumed that private individuals purchase these bonds. Thus, government deficits = private savings. Of course, it isn't as simple in real life. And this is the premise. These accounting identities are often used self-perpetual tautologies.

As I've said before, using accounting identities net private savings does not always equal to government deficits.

(S - I) - (X - M) = (G + TR) - TA​

S = Savings (Domestic)
I = Investment
X = Exports
M = Imports
G = Government Spending
TA = Taxes
TR = Transfer Payments

If we assume domestic savings equals domestic investment, then S - I = 0. So this means:

M - X = (G + TR) - TA​

Because domestic savings is equal to domestic investment, a trade deficit can finance a budget deficit at 100%. This can be done with with no net private savings provided by the domestic sector. Net private savings can be stated as S - I = (G + TR) - TA, which is a budget deficit, with government public dis-savings), or you can have net private investment which can be as I - S = TA - (G + TR), which is a budget surplus with net government public savings. Either of which is synonymous with countries today operates a trade deficit, a government sector surplus and net private savings. Very similar to what the country of Hong Kong is experiencing.

Even using the same accounting identities, a government deficit is not required for private sector savings. We know this because history shows us this. The problem with these accounting identities is that it ignores the behavioral process. Some people (the taxpayers) have notes payable, and other people (investors) have notes receivable. The reality is that government deficits represent what some people owe to other people. To say that private net savings increases with increased government deficits is virtually the same thing as saying notes receivable increases when government debt increases. This is true, but this accounting identity does not prove that deficits are helpful during recessions as the 'deficits don't matter' crowd generally implies. Ultimately, running more deficits helps a few at the expense of many more.

 

[Kimura]

Here's an in-depth analysis of the Stock Flow Consistent Model used by Wynne Godly. I used a good portion of his work while developing my master's thesis.

Here

You have to realize that the government sector’s budget can either be in surplus or deficit. Correct? A deficit results when the government spends more than it receives in tax payments; a surplus being the opposite whereby the government sector taxes more than it spends. In Modern Monetary Theory, we realize, as a matter of accounting identity, that government deficits add net financial assets to the private sector. Basically, the government sector has deposited more currency into banks accounts than its received back in taxes. Again, without trying to sound redundant, with a surplus, the government sector has withdrawn more currency from private banks accounts than has been deposited through spending.

If we go back to our basic identity: (G-T) = (S-I) – NX

This identity is utilized all throughout macroeconomics. We can ascertain from this that private net saving can only when the government runs deficits. On the flip side, if the government goes into surplus, then the private sector cannot save.

Then we have (S – I) = (G – T) + (X – M) whereby (S) is total private savings and is equal to (I) which private investment plus deficits (G-T) which is spending minus our taxes plus our next exports (X) minus out imports (M). Net exports as an identity of total net savings of the foreign sector. These are basic accounting identities and not really open to debate.

This has ramifications during time periods where we high effective demand, since the private sector will have use credit to fund any consumption needs. Thank back to the Clinton’s second administration. We can run budget surpluses when there is an inflationary risk I would presume or if there’s skyrocketing aggregate demand.

>>> In Modern Monetary Theory, we realize, as a matter of accounting identity, that government deficits add net financial assets to the private sector.

True.

>>> We can ascertain from this that private net saving can only when the government runs deficits.

False. Just because government deficits can add to the assets of the private sector, does not mean that private net saving can only occur when the government runs deficits. You have made this assumption by assuming that all private sector net assets are the result of the government deficits. Private sector assets are not SOLELY due to the cash infusion into lending banks. You have completely left out the largest means for increasing private sector assets. You have left out Labor, intellectual capital, ... discovered resources.

>>> On the flip side, if the government goes into surplus, then the private sector cannot save.

False. Just because government surplus payments on debt lead to a reduction in total amount of debt loaned to the government from the private sector does not mean the private sector cannot save. This is just a ridiculous claim.

Insufficient deficits can be compensated for, but in an bad way. It involves private debt. For example, if actors in the economy aren’t net saving – or if the government sector enters surplus – then the stock of wealth will be decreased. Actors can spend less – reducing aggregate demand – or keep up spending levels through the private going into debt by borrowing from various financial institutions. This net saving is offset by what we refer to as horizontal money creation so to speak. We can keep spending through this mechanism; however, private sector net financial assets will naturally decrease.

This type of credit bubble within the private sector can work for quite some time. This usually involves firms and households going into liquidation mode and increasing debt loads. This is a limited hangout, since it temporarily replaces government deficit spending with finite private deficit financing. As opposed to the US government, individuals, households and firms are constrained from a financial standpoint.

Eventually, at some point, debt-to-income levels reach unsustainable levels, destabilizing the financial system which causes problems in assets prices and the ability for this private debt to be serviced.

Credit growth occurring within the private sector can support a growing economy like this for a while. This typically involves households liquidating assets and going into debt. It is however not a sustainable growth path, as it replaces sustainable government deficit spending with unsustainable private deficit spending. Unlike a modern money government, private households and firms are ultimately financially constrained.

At some point, debt-to-income-ratios will reach unhealthy levels, making the financial system vulnerable to disturbances such as changes in asset prices or interest rates. If debt expansion increases further, there will come a point where incomes are simply not high enough to service the interest payments.

Lastly, the US government has averaged a deficit of about three cents for every dollar of national income. If the foreign sector, using the sectoral balances model, is ever balanced, it wouldn’t be possible for the domestic private sector to net save in any capacity unless the government sector is running a deficit. If we don’t have a government deficit, net private saving is out of the question.

 

[Kimura]

Oldfart didn't use the foreign sector in his example. I assume it was to keep it simple. Because of this, I have omitted the foreign sector in my example. I only disregarded the foreign sector and concentrated on the domestic private sector and government sector in my example. The basic premise is that if the if no one is spending, then everyone must be saving and that savings is shown through government sector deficits.

Even if you believe that the net private savings of private investment can't grow without the government budget deficit, so what? The entire benefit of private savings is that it allows for private investment.

Net private savings can equal a budget deficit, but it doesn't has to. That's where the external sector with international trade comes in. Deficits are not required for the public sector to have savings. The Government run surpluses without the need for the private sector to spend. It's generally encouraged that both the private sector save as well as the government, hence the creation of sovereign wealth funds.

I also find it very cute that MMTers divide the economy into only three parts: Government Sector, Private Sector and Foreign Sector. If it doesn't involve a transaction between those, they just ignore it. Very kooky indeed

Here's an in-depth analysis of the Stock Flow Consistent Model used by Wynne Godly. I used a good portion of his work while developing my master's thesis.

Here

You have to realize that the government sector’s budget can either be in surplus or deficit. Correct? A deficit results when the government spends more than it receives in tax payments; a surplus being the opposite whereby the government sector taxes more than it spends. In Modern Monetary Theory, we realize, as a matter of accounting identity, that government deficits add net financial assets to the private sector. Basically, the government sector has deposited more currency into banks accounts than its received back in taxes. Again, without trying to sound redundant, with a surplus, the government sector has withdrawn more currency from private banks accounts than has been deposited through spending.

If we go back to our basic identity: (G-T) = (S-I) – NX

This identity is utilized all throughout macroeconomics. We can ascertain from this that private net saving can only when the government runs deficits. On the flip side, if the government goes into surplus, then the private sector cannot save.

Then we have (S – I) = (G – T) + (X – M) whereby (S) is total private savings and is equal to (I) which private investment plus deficits (G-T) which is spending minus our taxes plus our next exports (X) minus out imports (M). Net exports as an identity of total net savings of the foreign sector. These are basic accounting identities and not really open to debate.

This has ramifications during time periods where we high effective demand, since the private sector will have use credit to fund any consumption needs. Thank back to the Clinton’s second administration. We can run budget surpluses when there is an inflationary risk I would presume or if there’s skyrocketing aggregate demand.

No one debates those are account identities. If the government runs deficits, then it issues bonds. It's generally assumed that private individuals purchase these bonds. Thus, government deficits = private savings. Of course, it isn't as simple in real life. And this is the premise. These accounting identities are often used self-perpetual tautologies.

As I've said before, using accounting identities net private savings does not always equal to government deficits.

(S - I) - (X - M) = (G + TR) - TA​

S = Savings (Domestic)
I = Investment
X = Exports
M = Imports
G = Government Spending
TA = Taxes
TR = Transfer Payments

If we assume domestic savings equals domestic investment, then S - I = 0. So this means:

M - X = (G + TR) - TA​

Because domestic savings is equal to domestic investment, a trade deficit can finance a budget deficit at 100%. This can be done with with no net private savings provided by the domestic sector. Net private savings can be stated as S - I = (G + TR) - TA, which is a budget deficit, with government public dis-savings), or you can have net private investment which can be as I - S = TA - (G + TR), which is a budget surplus with net government public savings. Either of which is synonymous with countries today operates a trade deficit, a government sector surplus and net private savings. Very similar to what the country of Hong Kong is experiencing.

Even using the same accounting identities, a government deficit is not required for private sector savings. We know this because history shows us this. The problem with these accounting identities is that it ignores the behavioral process. Some people (the taxpayers) have notes payable, and other people (investors) have notes receivable. The reality is that government deficits represent what some people owe to other people. To say that private net savings increases with increased government deficits is virtually the same thing as saying notes receivable increases when government debt increases. This is true, but this accounting identity does not prove that deficits are helpful during recessions as the 'deficits don't matter' crowd generally implies. Ultimately, running more deficits helps a few at the expense of many more.

There’s absolutely nothing wrong with government deficits, nor do they crowd out private sector activity. Constant government deficits are normal in a growing and expanding economy. They add net financial assets, as currency and bonds, to the non-government sector which helps with the propensity to net save.

If the government has deficits which are too large, we have a situation where effective demand outpaces the capacity for the economy to expand and meet it. This scenario would occur if were ever to hit full employment and the economy was at full capacity. This could lead to inflationary pressure and increase the price level.

If budget deficits are used properly whereby it meets the savings needs of the domestic private sector and foreign sector it could theoretically be 2, 3, 4, 5, or even 15% of GDP with zero possibility of inflation. It’s only when budget deficits increase move the economy past it real capacity limits that we could have a problem. Permanent deficits are perfectly acceptable if that’s what’s required to offset the non-government sector’s intention to save so to speak.

There should be zero concern about government sector deficits especially when we compare them to private sector deficits or even the foreign sector deficit. These things all add to total aggregate demand at the end of the day.

If we get back to some national accounting, we can define net saving from a time period when we have income minus taxes and spending on aggregate consumption. We can also subtract aggregate investment. This leaves us with actual net saving. If use (N) to represent net savings of our domestic private sector, we have N = (S-I). (I) being investment and (S) representing gross saving (income minus taxes and consumption). This being S = Y - T – C. We then of net saving in dollars within with foreign sector represent by (M – X). This would be imports minus exports. By accounting identity alone, the net saving of the foreign sector and domestic private sector must be offset a government deficit which is represented by (G –T). We have government spend minus taxes. This gives us (S – I) + (M – X) = (G-T).

We can tweak this, as you posted previously, from our standard GDP national accounting equation: GDP = C + G + I + (X- M). We have Y = C + T + S where Y = GDP and we rearrange some deck chairs.

Edit to add:

No one debates those are account identities. If the government runs deficits, then it issues bonds. It's generally assumed that private individuals purchase these bonds. Thus, government deficits = private savings. Of course, it isn't as simple in real life. And this is the premise. These accounting identities are often used self-perpetual tautologies.

Bonds are issued after the fact. Money creation is basically done through crediting private bank accounts. This has the effect of increasing reserves. In order to deal with these excessive reserves on any given day, the US issues bonds to drain any excess reserves from the banking system. The helps to enure we don't have any pressure on the FED's target interest rate. I hope you can see how the function of government bonds is much more than lending the government money.

 

[RKMBrown]

Here's an in-depth analysis of the Stock Flow Consistent Model used by Wynne Godly. I used a good portion of his work while developing my master's thesis.

Here

You have to realize that the government sector’s budget can either be in surplus or deficit. Correct? A deficit results when the government spends more than it receives in tax payments; a surplus being the opposite whereby the government sector taxes more than it spends. In Modern Monetary Theory, we realize, as a matter of accounting identity, that government deficits add net financial assets to the private sector. Basically, the government sector has deposited more currency into banks accounts than its received back in taxes. Again, without trying to sound redundant, with a surplus, the government sector has withdrawn more currency from private banks accounts than has been deposited through spending.

If we go back to our basic identity: (G-T) = (S-I) – NX

This identity is utilized all throughout macroeconomics. We can ascertain from this that private net saving can only when the government runs deficits. On the flip side, if the government goes into surplus, then the private sector cannot save.

Then we have (S – I) = (G – T) + (X – M) whereby (S) is total private savings and is equal to (I) which private investment plus deficits (G-T) which is spending minus our taxes plus our next exports (X) minus out imports (M). Net exports as an identity of total net savings of the foreign sector. These are basic accounting identities and not really open to debate.

This has ramifications during time periods where we high effective demand, since the private sector will have use credit to fund any consumption needs. Thank back to the Clinton’s second administration. We can run budget surpluses when there is an inflationary risk I would presume or if there’s skyrocketing aggregate demand.

>>> In Modern Monetary Theory, we realize, as a matter of accounting identity, that government deficits add net financial assets to the private sector.

True.

>>> We can ascertain from this that private net saving can only when the government runs deficits.

False. Just because government deficits can add to the assets of the private sector, does not mean that private net saving can only occur when the government runs deficits. You have made this assumption by assuming that all private sector net assets are the result of the government deficits. Private sector assets are not SOLELY due to the cash infusion into lending banks. You have completely left out the largest means for increasing private sector assets. You have left out Labor, intellectual capital, ... discovered resources.

>>> On the flip side, if the government goes into surplus, then the private sector cannot save.

False. Just because government surplus payments on debt lead to a reduction in total amount of debt loaned to the government from the private sector does not mean the private sector cannot save. This is just a ridiculous claim.

Insufficient deficits can be compensated for, but in an bad way. It involves private debt. For example, if actors in the economy aren’t net saving – or if the government sector enters surplus – then the stock of wealth will be decreased. Actors can spend less – reducing aggregate demand – or keep up spending levels through the private going into debt by borrowing from various financial institutions. This net saving is offset by what we refer to as horizontal money creation so to speak. We can keep spending through this mechanism; however, private sector net financial assets will naturally decrease.

This type of credit bubble within the private sector can work for quite some time. This usually involves firms and households going into liquidation mode and increasing debt loads. This is a limited hangout, since it temporarily replaces government deficit spending with finite private deficit financing. As opposed to the US government, individuals, households and firms are constrained from a financial standpoint.

Eventually, at some point, debt-to-income levels reach unsustainable levels, destabilizing the financial system which causes problems in assets prices and the ability for this private debt to be serviced.

Credit growth occurring within the private sector can support a growing economy like this for a while. This typically involves households liquidating assets and going into debt. It is however not a sustainable growth path, as it replaces sustainable government deficit spending with unsustainable private deficit spending. Unlike a modern money government, private households and firms are ultimately financially constrained.
At some point, debt-to-income-ratios will reach unhealthy levels, making the financial system vulnerable to disturbances such as changes in asset prices or interest rates. If debt expansion increases further, there will come a point where incomes are simply not high enough to service the interest payments.

Lastly, the US government has averaged a deficit of about three cents for every dollar of national income. If the foreign sector, using the sectoral balances model, is ever balanced, it wouldn’t be possible for the domestic private to net save in any capacity unless the government sector is running a deficit. If we don’t have a government deficit, net private saving is out of the question.

I'm not sure why, but you continue to "mix" fed actions to increase the monetary supply (aka unlimited expansion of credit), with US government deficits. The fed could continue to increase the monetary supply independently from any US Government Treasury related taxes and spending. If by "government deficit" you mean fed expansion of the monetary supply through their "fairy dust" system of backing loans to the cartel with "nothing" to back them... then you are being disingenuous, because most people see government deficit as meaning federal tax revenues over federal outlays. Most people see government deficit solely as the number that goes into our "national debt." Again, the fed is not the US government. Even if the US Government stopped borrowing, we would still increase our money supply to fit the need for economic expansion.

You appear to believe all economic expansion is based entirely on "government" spending.

I, by contrast, see the government as a services corporation that works for the people. Albeit one that, from time to time, operates above the law.

 

[AmazonTania]

To keep the post shorter than "War and Peace" I chose to make a LOT of simplifications. You are correct, and in second year accounting people get a lot of the nuances.

That's why I left the foreign sector out of the Ford example. Try explaining the entries for product shipped to UK when the exchange rate fluctuates!

Well, you can try it with a country with a pegged currency. Not sure how much easier that is...

That sort of depends on the kind of economic model you look at. As you aggregate, more and more transactions net out. For example if we divide the private sector into a business sector, household sector, and financial sector; when Last National Bank loans Bubba Barfwell the $55k to buy his Ford 350, the household sector increases debt and tangible personal property, the business sector increases cash in bank and decreases inventory, and the financial sector increases loan assets and decreases cash on hand (it went to Ford!). But when you aggregate into one private sector, all of these net out to zero. Only transactions involving the government or foreign sectors can create net financial saving for the private sector as a whole. K & R assumed away the foreign sector and arrived at their two sector model where the only way for the private sector to save (i.e. have a surplus) is for the government sector to have an equal deficit, "to the last dime".

There's a reason why this is called a "two-sector model" in monetary theory!

It could net out, but not all transactions are created equal. Bubba Barfwell has an income of $55,000 decides to consume $50,000 of that income and then lends the $5,000 to a neighbor at 5% interest. The neighbor decides to sign an IOU promising to pay Bubba Barfwell $5,250 in twelve months. Did Bubba save money? Yes. Did Bubba accumulate a net financial asset? Yes. After all, he is holding an IOU from a neighbor of his which has a market value of 5,000 and will grow by the time it the IOU matures.

However, suppose the neighbor decides to raise the money to pay Bubba back by selling services to Bubba. She uses the $5,000 to go to Massage Therapy school and learns to become a massues. Bi-weekly or monthly, Bubba pays the neighbor for services and fees and after 12 months has ended she has accumulated the $5,250 to pay Bubba back. The scenario is still the same. Bubba has a financial asset, and has decided to voluntarily accept services from his neighbor.

We can make the work alittle easier for the neighbor and have her point a gun at bubba demanding for $5,250 in cash. Bubba hands over the cash, the neighbor gives it right back. In this scenario, did Bubba acquire a net financial asset? No, no he didn't. From Bubba's viewpoint, his 5,000 just vanished while his neighbor got to consume without increasing his debtload at all. This is really no different from what happens with you get the taxpayer involved to these transactions.

Agreed. Secondary financial markets must always net to zero, as in every transaction what the seller receives is identical to what the buyer pays.

I sense a little confusion here. Our janitor buys 50 shares of Ford on a secondary market, and Ford makes no entries on its books at all (its liabilities and equity are unchanged). It is not a party to the transaction. Should Ford issue new stock, sell treasury stock, or redeem stock, then Ford is a party to the transaction and its balance sheet changes. For newly issued stock, it increases paid-in capital and cash in bank by the same amount.

There is no confusing. I am saying that there is no net accumulation of a net private savings, as very seller requires a buyer. This is in the case of buying and selling shares of stock. I guess I forgot to add if a individual decides to invest $2,000 worth of funds directly into a company. The corresponding debt is completely offset debt on the company's books.

Get what I'm trying to say?

This is, I think the "crowding-out" argument. I'll defer it to another post in the interest of brevity. If we aggregate the household sector (the janitor) and the business sector (Ford) the transaction nets out.

Not always. As the Government borrows and spends more, accounting equations tells us that we might see lower private consumption, rising interest rates and real responses taken out of the private sector.

That's the basic argument. I don't like two sector models for a variety of reasons, one of which is that this reasoning relies too much on accounting identities and ignores much of what is happening with real assets. In particular I am disturbed that there is no distinction between consumer goods and capital goods. The fundamental national income accounts identity is:

Ip+Ig+If+(X-M)=Sp+Sg+Sf+T

where Ip is private investment, Ig is government investment, If is net foreign investment, X is total exports, M is total imports, Sp is private savings, Sg is government savings (surplus), Sf is foreign repatriation of capital, and T is tax revenue.

This is a far more robust model and produces a much better analytical framework.

I've done the same thing in an earlier post, except my variables are completely different.

(S - I) - (X - M) = (G + TR) - TA​

That's a three-sector model midway between K & R's two-sector model and the robust NIA model.

You are correct. But if you look at the model I described, some interesting things occur. First, you have a three-sector capital stock and therefore three investment flows. It depends on where the investment is coming from, the private sector, government, or foreign sources. An Interstate highway becomes a balance sheet asset for the government, adding to the national stock of capital just like the trucks which drive upon it. Exports and imports become more nuanced, as it makes a difference if they are for consumer or capital goods. As you play with this model most of the oversimplifications drop out. Then one morning you discover input-output tables! God bless Wassily Liontieff!

Peace all.

Besides the Interstate Highway System, what do you consider a government investment?