How is austerity doing in Europe

[RKMBrown]

Might as well ask what is an investment first.

 

[AmazonTania]

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.

Consumer spending is normal. Private savings is normal. Private Investment is normal. Government spending is normal. These all contribute to the overall growth of the economy. Deficits are neither normal nor abnormal. They're just the natural part of the Governmental accounting process, however, it's pretty difficult to deny that there is a crowding out effect. Again, going back to the equation:

G − T = S − I​

Again, if we take the foreign sector out of the equation and just focus on the domestic side. If government spending increases (G) while tax revenue (T) remains the same, then the left side of the equation gets bigger. Basic accounting (calculus rather) tells us that the right side of the equation must increase as well. It means people must cut down on consumption and save more, but this can also cause private sector investment to decrease.

In order for the government to finance such deficits, the government is forced to borrow from American Creditors or International Creditors. Every dollar that the Government borrows is a dollar that the private sector cannot borrow. There isn't an infinite supply of loanable funds. The more the Government Borrows, the upward pressure it places on interest rates which contrasts economic activity.

Regardless of what sort of budget the government decides to run, any individual in the private sector can adjust his or her savings according to their consumption ratio. This would leave net savings unchanged.

Income = Y = C+I+G

Savings = S=Y-C-T=I+(G-T)​

So consumption does not affect aggregate savings.

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.

We've discussed this many times before. And, uh, the Federal Reserve credits private banks to purchase bonds already issued to the private sector. I don't see how these IOU's were created after the fact. The government isn't creating much (if any at all) money through the issuance of bonds. The Government only creates a tiny portion of the money supply, namely the M0 monetary base. Much of the money creation happens in the private sector in the banking system.

Deficits and bonds are not only used to create money. In fact, budget surpluses can create money just as much as budget deficits can, as we have often seen.

 

[AmazonTania]

Might as well ask what is an investment first.

Good point, considering there are so many kinds of things people would call 'an investment.' However, when the Government spends money it doesn't always spends it within the same market as ordinary individuals. So, some clarification would be nice.

 

[Kimura]

Consumer spending is normal. Private savings is normal. Private Investment is normal. Government spending is normal. These all contribute to the overall growth of the economy. Deficits are neither normal nor abnormal. They're just the natural part of the Governmental accounting process, however, it's pretty difficult to deny that there is a crowding out effect. Again, going back to the equation:
G − T = S – I

Crowding out doesn’t really exists the way we’re taught at university. The whole notion being that government deficits cause interests rates to rise. The story then goes on to tells us this would crowd out private borrowing for any type of investments since loans would cost more and this makes investment less desirable and profitable. This stems from the erroneous belief that the government has to borrow in order to run a deficit. The is obviously incorrect because the government isn’t revenue constrained in ANY capacity. It spends by simply issuing currency.

The story then continues and the end result of borrowing and spending is that reserves are withdrawn from the banking system. Borrowing does remove reserves but spending puts then right back again. This reserve deficiency would increase the interest rate. Wrong, wrong, and wrong down the line. The interest rate is held in a constant state and is a policy which is set by the FED.

Government deficits actually put downward pressure on interest rates, because reserves are added and not removed within the banking system. The FED can stop this by using its monetary policy to drain excess reserves from the banking system. It can even theoretically let the rate go to absolute zero. Japan has had record government deficits for YEARS with an interest rate of zero. There wasn’t any type of crowding out in this situation.

There could theoretically be another form of crowding out, though. For example, if the government sector competes for real, tangible resources which could have been used by the private sector we could have a literal crowding out situation.

Again, if we take the foreign sector out of the equation and just focus on the domestic side. If government spending increases (G) while tax revenue (T) remains the same, then the left side of the equation gets bigger. Basic accounting (calculus rather) tells us that the right side of the equation must increase as well. It means people must cut down on consumption and save more, but this can also cause private sector investment to decrease.

In order for the government to finance such deficits, the government is forced to borrow from American Creditors or International Creditors. Every dollar that the Government borrows is a dollar that the private sector cannot borrow. There isn't an infinite supply of loanable funds. The more the Government Borrows, the upward pressure it places on interest rates which contrasts economic activity.

Regardless of what sort of budget the government decides to run, any individual in the private sector can adjust his or her savings according to their consumption ratio. This would leave net savings unchanged.

Income = Y = C+I+G

Savings = S=Y-C-T=I+(G-T)

So consumption does not affect aggregate savings.

The US doesn’t borrow. It doesn’t have to borrow its own fiat. Anybody purchasing US paper is doing so with dollars that have already been spent into existence. It can be the dollars in our checking accounts or dollars sitting in reserve accounts over at the FED. Personally, I'd like to see the day when we get rid of bonds. They aren't even operationally a requirement at this point in the game.

You have it backwards and you’re putting the cart before the horse. First if of all, there isn’t some fixed pool of savings out there. Savings is a byproduct of national income. When we have increasing national income, we have increased savings. If the government spends to stimulate aggregate demand, and this increases national income and GDP, savings will also increase. Savings simply cannot be a source of finance at any aggregate level.

Regardless of GDP levels there is a trade-off between (I) and (C). Any changes in GDP levels are related to changes in (I) and (C). If GDP is increased, we know one of its components must have changed at some point as well. For example, let’s say Y = C + I and (Y) has an increase from 200 units to 220 units – we must realize that total sum of changes in (C) and (I) is equal to 20 units. We would then see increased total levels of both (C) and (I). This isn’t rocket science, but just a result of how we calculate components of GDP. Basically, income is the total sum of all its working parts so speak. Any increased income levels must translate into increased (C) and/or (I). It’s increased income which translates into higher levels of savings and consumption.

We've discussed this many times before. And, uh, the Federal Reserve credits private banks to purchase bonds already issued to the private sector. I don't see how these IOU's were created after the fact. The government isn't creating much (if any at all) money through the issuance of bonds. The Government only creates a tiny portion of the money supply, namely the M0 monetary base. Much of the money creation happens in the private sector in the banking system.

Bonds primary function is to drain excess reserves from the banking system. This is the only way the FED can guarantee there isn’t competitive pressure in the FED’s target interest rate.

Also, MMT rejects the money multiplier. We can get into that if you like.

 

[Kimura]

Might as well ask what is an investment first.

Good point, considering there are so many kinds of things people would call 'an investment.' However, when the Government spends money it doesn't always spends it within the same market as ordinary individuals. So, some clarification would be nice.

We should stick with the textbook definition used in economics to avoid confusion.

 

[RKMBrown]

Consumer spending is normal. Private savings is normal. Private Investment is normal. Government spending is normal. These all contribute to the overall growth of the economy. Deficits are neither normal nor abnormal. They're just the natural part of the Governmental accounting process, however, it's pretty difficult to deny that there is a crowding out effect. Again, going back to the equation:
G − T = S – I

Crowding out doesn’t really exists the way we’re thought at university. The whole notion being the government deficits cause interests rates to rise. The story then goes on to tells us this would crowd out private borrow for any type of investments since loans would cost more and this makes investment less desirable and profitable. This stems from the erroneous belief that the government has to borrow in order to run a deficit. The is obviously incorrect because the government isn’t revenue constrained in ANY capacity. It spends by simply issuing currency.

The story then continues and the end result of borrowing and spending is that reserves are withdrawn from the banking system. Borrowing does remove reserves but spending puts then right back again. This reserve deficiency would increase the interest rate. Wrong, wrong and wrong down the line. The interest rate is held in a constant state and is a policy which is set by the FED.

Government deficits actually put downward pressure on interest rates, because reserves are added and not removed within the banking system. The FED can stop this by using its monetary policy to drain excess reserves from the banking system. It can even theoretically let the rate go to absolute zero. Japan has had record government deficits for YEARS with an interest rate of zero. There wasn’t any type of crowding out in this situation.

There could theoretically be another form of crowding out, though. For example, if the government sector competes for real, tangible resources which could have been used by the private sector we could have a literal crowding out situation.

Again, if we take the foreign sector out of the equation and just focus on the domestic side. If government spending increases (G) while tax revenue (T) remains the same, then the left side of the equation gets bigger. Basic accounting (calculus rather) tells us that the right side of the equation must increase as well. It means people must cut down on consumption and save more, but this can also cause private sector investment to decrease.

In order for the government to finance such deficits, the government is forced to borrow from American Creditors or International Creditors. Every dollar that the Government borrows is a dollar that the private sector cannot borrow. There isn't an infinite supply of loanable funds. The more the Government Borrows, the upward pressure it places on interest rates which contrasts economic activity.

Regardless of what sort of budget the government decides to run, any individual in the private sector can adjust his or her savings according to their consumption ratio. This would leave net savings unchanged.

Income = Y = C+I+G

Savings = S=Y-C-T=I+(G-T)

So consumption does not affect aggregate savings.

The US doesn’t borrow. It doesn’t have to borrow its own fiat. Anybody purchasing US paper is doing so with dollars that have already been spent into existence. It can be the dollars in our checking accounts or dollars sitting in reserve accounts account over at the FED. Personally, I'd like to see the day when we get rid of bonds. They aren't even operationally a requirement at this point in the game.

You have it backwards and you’re putting the cart before the horse. First if of all, there isn’t some fixed pool of savings out there. Savings is a byproduct of national income. When we have increasing national income, we have increased savings. If the government spends to stimulate aggregate demand, and this increases national income and GDP, savings will also increase. Savings simply cannot be a source of finance at any aggregate level.

Regardless of GDP levels there is a trade-off between (I) and (C). Any changes in GDP levels are related to changes in (I) and (C). If GDP is increased, we know one of its components must have changed at some point as well. For example, let’s say Y = C + I and (Y) has an increase from 200 units to 220 units – we must realize that total sum of changes in (C) and (I) is equal to 20 units. We would then see increased total level of both (C) and (I). This isn’t rocket science, but just a result of how we calculate components of GDP. Basically, income is the total sum of all its working parts so speak. Any increased income levels must translate into increased (C) and/or (I). It’s increased income which translates to high levels of savings and consumption.

We've discussed this many times before. And, uh, the Federal Reserve credits private banks to purchase bonds already issued to the private sector. I don't see how these IOU's were created after the fact. The government isn't creating much (if any at all) money through the issuance of bonds. The Government only creates a tiny portion of the money supply, namely the M0 monetary base. Much of the money creation happens in the private sector in the banking system.

Bonds primary function is to drain excess reserves from the banking system. This is the only way the FED can guarantee there isn’t competitive pressure in the FED’s target interest rate.

Also, MMT rejects the money multiplier. We can get into that if you like.

>>> The US doesn’t borrow. It doesn’t have to borrow its own fiat. Anybody purchasing US paper is doing so with dollars that have already been spent into existence. It can be the dollars in our checking accounts or dollars sitting in reserve accounts account over at the FED. Personally, I'd like to see the day when we get rid of bonds. They aren't even operationally a requirement at this point in the game.

Again, you are wrong. You are purposefully mixing the FED and the Federal Government. They are two completely different things. The US most certainly does borrow. What do you think a US T-Bill is, if not a loan instrument?

Yes, the US Government could in theory "end" the FED or pay the T-bills off with fairy dust by forcing the FED to take ownership of the T-Bills and pay them off as yet another "expansion" of credit. As it stands, we the tax payers are on the hook to pay the T-Bills back to the owners.

 

[RKMBrown]

Might as well ask what is an investment first.

Good point, considering there are so many kinds of things people would call 'an investment.' However, when the Government spends money it doesn't always spends it within the same market as ordinary individuals. So, some clarification would be nice.

We should stick with the textbook definition used in economics to avoid confusion.

lol yeah which economics text book

 

[RKMBrown]

in•vest•ment
1. the investing of money or capital for profitable returns.
2. a particular instance or mode of investing.
3. a thing invested in, as a business.
4. something that is invested; sum invested.
5. the act or fact of investing or state of being invested, as with a garment.
6. a devoting, using, or giving of time, talent, emotional energy, etc., as to achieve something.
7. any covering or outer layer, as of an animal or plant.
8. the act of investing with a quality, attribute, etc.
9. investiture with an office, dignity, or right.
10. a siege or encirclement.
11. Archaic. a garment or vestment.

I guess the question over what particular definition to use, goes to the "context" of the sentence. Does government investment cover some level of devoting, using, or giving of time, talent, emotional energy, etc., as to achieve something that is desirable for the people and thus worthy of the costs inherit within? Or does it only cover the investing of money or capital for profitable returns? And if only money or capital... what is capital? just assets? What about experience, time and talent provided through labor?

I can build a house on my own land using my own timber and my own two hands. But that asset would be worth nothing in traditional economics until someone borrowed money from a bank to buy it from me.

 

[Kimura]

Again, you are wrong. You are purposefully mixing the FED and the Federal Government. They are two completely different things. The US most certainly does borrow. What do you think a US T-Bill is, if not a loan instrument?

Yes, the US Government could in theory "end" the FED or pay the T-bills off with fairy dust by forcing the FED to take ownership of the T-Bills and pay them off as yet another "expansion" of credit. As it stands, we the tax payers are on the hook to pay the T-Bills back to the owners.

No, I'm not. The FED is part of the US government. The publicly appointed Board of Governors execute monetary policy, not the member banks, so your statement doesn't make any sense. Any and all profits by the FED are also remitted to the Treasury every year, year in and year out. This isn't even open to debate. The whole FED conspiracy meme has zero basis in reality.

A Treasury is similar to a savings account. Basically, it's an interest-bearing asset where the private sector can park its wealth in a risk-free form. These Treasury bills are purchased with dollars which are a result of previous government spending. A currency issuer doesn't borrow its own fiat. What you're saying makes zero sense at all. Taxpayers aren't on the hook for US Treasuries, why would they be?

 

[Kimura]

Good point, considering there are so many kinds of things people would call 'an investment.' However, when the Government spends money it doesn't always spends it within the same market as ordinary individuals. So, some clarification would be nice.

We should stick with the textbook definition used in economics to avoid confusion.

lol yeah which economics text book

In economics, regardless of the textbook, we can define investment as the purchase of goods that will used at some future date to create wealth. Investments aren't immediately consumed.

 

[RKMBrown]

Again, you are wrong. You are purposefully mixing the FED and the Federal Government. They are two completely different things. The US most certainly does borrow. What do you think a US T-Bill is, if not a loan instrument?

Yes, the US Government could in theory "end" the FED or pay the T-bills off with fairy dust by forcing the FED to take ownership of the T-Bills and pay them off as yet another "expansion" of credit. As it stands, we the tax payers are on the hook to pay the T-Bills back to the owners.

No, I'm not. The FED is part of the US government. The publicly appointed Board of Governors execute monetary policy, not the member banks, so your statement doesn't make any sense. Any and all profits by the FED are also remitted to the Treasury every year, year in and year out. This isn't even open to debate. The whole FED conspiracy meme has zero basis in reality.

A Treasury is similar to a savings account. Basically, it's an interest-bearing asset where the private sector can park its wealth in a risk-free form. These Treasury bills are purchased with dollars which are a result of previous government spending. A currency issuer doesn't borrow its own fiat. What you're saying makes zero sense at all. Taxpayers aren't on the hook for US Treasuries, why would they be?

>> Taxpayers aren't on the hook for US Treasuries, why would they be?
WOW where do you think the revenue comes from to pay for government spending if not tax payers?

>> The FED is part of the US government.

OK What branch of our Government does it report to?

The Federal Reserve (FED) does not report to any part of our government. It is not a part of our Government. It does not report to the executive branch. It barely submits a report on policy once a year. But the FED is not a part of the US Dept. of the Treasury as you have so mixed so many numerous time. The FED is is a completely independent organization formed of and by its member banks (aka. the banking cartel). The Fed Board nominated by the president supervises the banks of the cartel and manages monetary policy. The FED is NOT the US Treasury. These are two completely different organizations. The US Treasury is a part of this government and reports to the executive branch. The FED is NOT a part of this government. Though it's head and board are selected by the POTUS and approved by congress they do not report to the POTUS. The head of the FED is not a member of the POTUS cabinet, nor does the head of the FED report directly to any government entity.

>>> The whole FED conspiracy meme has zero basis in reality.
Yeah cause there's no money to be made in A NEARLY UNLIMITED AMOUNT OF ZERO PERCENT RATE MONEY handed out during a recession to the very banks that caused the recession so they can buy up the properties that went bankrupt because the owners had no income... all while we are paying these bankers out of the taxpayer's pocket to remunerate the banks for their losses for the very loans that caused the recession.

 

[AmazonTania]

Crowding out doesn’t really exists the way we’re thought at university. The whole notion being the government deficits cause interests rates to rise. The story then goes on to tells us this would crowd out private borrow for any type of investments since loans would cost more and this makes investment less desirable and profitable. This stems from the erroneous belief that the government has to borrow in order to run a deficit. The is obviously incorrect because the government isn’t revenue constrained in ANY capacity. It spends by simply issuing currency.

The story then continues and the end result of borrowing and spending is that reserves are withdrawn from the banking system. Borrowing does remove reserves but spending puts then right back again. This reserve deficiency would increase the interest rate. Wrong, wrong and wrong down the line. The interest rate is held in a constant state and is a policy which is set by the FED.

There could theoretically be another form of crowding out, though. For example, if the government sector competes for real, tangible resources which could have been used by the private sector we could have a literal crowding out situation.

Government deficits actually put downward pressure on interest rates, because reserves are added and not removed within the banking system. The FED can stop this by using its monetary policy to drain excess reserves from the banking system. It can even theoretically let the rate go to absolute zero. Japan has had record government deficits for YEARS with an interest rate of zero. There wasn’t any type of crowding out in this situation.

Well, if you are going back to University level though on crowding out, then you should know that crowding out is consistent with higher private sector savings. What is being crowded out are the investments. Technically, the government can fund itself without issuing bonds or raising taxes at all. It can just spend what it needs to spend. The cost of government waste would come in the form of inflation.

If the deficits are due to tax cuts rather than spending, then this gives deficit-finance lump sum tax rebate. This generally causes tax payers to save more in order to prepare for the higher taxes in the later future. And normally, government deficits up upwards pressure on interest rates, not downward. The excess reserves in banks are mainly due to a portion in the Emergency Economic Stabilization Act of 2008. Section 128 of this act allows the Federal Reserve to pay high interest rates to depository institutions for their reserve requirements.

Here is the actual statute in regards to reserve requirements regulated by the Fed:

12 USC § 461 - Reserve requirements | Title 12 - Banks and Banking | U.S. Code | LII / Legal Information Institute

If we take this market distorting regulation out of the equation, deficits puts upward pressure on interests rates and increase demand for loanable funds. This further pushes interest higher than they would otherwise be. If interest rates are higher than they would normally be, it makes it very expensive to borrow, therefore private businesses invest less money. As a result of this, government has shifted some private sector savings away from the private sector of which would have otherwise gone to private investment. Most likely, it would have gone to Government Spending (G), not Investment (I).

The data can easily be seen as thus:

I've used GDP pre-revision data, but I don't really think it makes much of a difference in this particular case. The top line is private investment as a share of GDP. The bottom line is Net Government Savings as a share of GDP, otherwise known as the Government Budget as a share of GDP. But notice how they move very close to one another. When Government deficits shrink, private investment increases. When deficits skyrocket, investment falls.

Even MMTers understand the bad spending and the shifting preferences when it comes to deficit spending. Thus, government cannot spend recklessly. The extra dollars in the system will chase too few goods and drive up prices. If the government spends too much and taxes too little, it will create mal-investment and inflation.

Also, to address Japan, their situation is rather unique. Their situation is one of demographics, not economics. The Japanese population has aged and their birth rate has fallen. The population has drawn down on savings as there are more people retiring than there are entering the labour force. As a result, you don't have the same crowding out effect there as you do in America.

The US doesn’t borrow. It doesn’t have to borrow its own fiat. Anybody purchasing US paper is doing so with dollars that have already been spent into existence. It can be the dollars in our checking accounts or dollars sitting in reserve accounts account over at the FED. Personally, I'd like to see the day when we get rid of bonds. They aren't even operationally a requirement at this point in the game.

You have it backwards and you’re putting the cart before the horse. First if of all, there isn’t some fixed pool of savings out there. Savings is a byproduct of national income. When we have increasing national income, we have increased savings. If the government spends to stimulate aggregate demand, and this increases national income and GDP, savings will also increase. Savings simply cannot be a source of finance at any aggregate level.

Regardless of GDP levels there is a trade-off between (I) and (C). Any changes in GDP levels are related to changes in (I) and (C). If GDP is increased, we know one of its components must have changed at some point as well. For example, let’s say Y = C + I and (Y) has an increase from 200 units to 220 units – we must realize that total sum of changes in (C) and (I) is equal to 20 units. We would then see increased total level of both (C) and (I). This isn’t rocket science, but just a result of how we calculate components of GDP. Basically, income is the total sum of all its working parts so speak. Any increased income levels must translate into increased (C) and/or (I). It’s increased income which translates to high levels of savings and consumption.

If the private sector can only save as much as the government spends, then there is a fixed amount of savings. The general fallacy is that you define 'savings' as net financial assets, rather than the final consumption of goods and services. Without the government issuing it's own liabilities, supposedly public sector cannot save.

The private sector can save just as much with surpluses as it can with deficits. Perhaps even more so without the use of government creating it's own liabilities.

Bonds primary function is to drain excess reserves from the banking system. This is the only way the FED can guarantee there isn’t competitive pressure in the FED’s target interest rate.

Also, MMT rejects the money multiplier. We can get into that if you like.

Yes, but this does not explain how Bonds are created after the fact. The government runs a deficit, it sells a bond. The bonds are purchased from private individuals. The private individuals who have no intention of holding the bond to term then sells the bond to the Federal Reserve and the Fed credits the private individual. I don't see how the Bond comes into the equate after. In fact, this is a very simple explanation of how the bond leaves the equation.

And I guess you can tell me how MMT rejects the money multiplier. I'm into hearing all points of view, so long as I haven't heard it all before.

 

[TheGreatGatsby]

In economics, regardless of the textbook, we can define investment as the purchase of goods that will used at some future date to create wealth. Investments aren't immediately consumed.

Depends on what you mean by immediately and consumed. For that matter it depends on what you mean by investment.

The idea that the term investment should be applied in the same manner to govt. as is with private businesses is laughable. Study after study has shown that the govt. is a black hole with little to no concern for return on investment. The only reason the post office even succeeded for so long was because of the semi-monopoly and the economies of scale. Of course, even they have decided that they need a bigger chew of the carrot and to be less efficient now.

Immediate? If I buy inventory and sell it right after, then is that immediate? Perhaps you're referring to R&D. Little of that is an 'investment' though. Govt. has presumed the regulator role in which profit or return on investment is not a chief concern.

Earlier you errantly used the idea that liabilities create steady assets. That is not the case. Depreciation and waste are livid realities that affect the real consumers (us) and not them so much as they have a near bottomless supply of money.

 

[oldfart]

Might as well ask what is an investment first.

Good point. First an observation: this has turned into a first-year graduate level discussion, where the name-calling has at least temporarily stopped, we are using the same basic economic toolkit, and brains are engaged. Who'da thunk it could happen on USMB?

Generally there are two definitions of "investment" used in economics and it causes a lot of confusion. The first is financial investment, which refers to the acquisition of financial assets representing wealth, such as bank deposits including CD's, shares of stock, partnership interests, and so forth. In looking at the real economy, we call this "savings".

The second is "real" investment: real estate, plant and equipment, tangible personal property, and so forth. When held for the purpose of engaging in a business or similar economic activity (like renting apartments) we call them capital assets. This is generally considered private physical capital.

There are other kinds of capital as well. Human capital is the education and training, work habits and discipline, and the value of having a labor force assembled and in place. Intangible capital is property such as patents, trademarks, copyrights, trade secrets, and research results. Physical infrastructure is the physical capital owned by primarily government, but also some non-governmental organizations and individuals which is held for the common good. This includes public buildings like schools and libraries, public hospitals and office buildings, roads and bridges, airports and seaports, parks and zoos, aircraft carriers, M1A1 tanks, F-35 fighter jets, public landfills, water treatment plants and sewage plants, and on and on and on. Lastly there is something called "social overhead capital" which includes a legal system which can resolve commercial and civil disputes, a body of law and regulation necessary for industry and commerce (such as defining weights and measures, environmental controls, labor relations, regulation of airspace, and a myriad of similar necessary (or at least useful) measures.

Now all of this put together is the capital stock of a nation. Modern growth theory generally holds that the productive capacity of an economy at a point in time is limited by the availability of factors of production, which are traditionally land (including natural resources), labor, capital as enumerated above, perhaps entrepreneurship (or management and/or risk-taking), a stock of financial assets and institutions which can form markets that determine time-preference, and "technological advance". The last three are hard to define, harder to measure, left out of most models, and account for most economic growth over longer periods!

Not that time plays a big part and that you have to constantly keep stocks concepts and flow concepts separate. Capital stock is a stock concept. Investment is a flow concept, and addition to the capital stock. There is also a constant reduction (depreciation) of the capital stock due to tangible property breaking or wearing out or being destroyed in the next hurricane, things becoming obsolete due to changes in consumer preferences or technological change, or similar processes. So there is a "replacement level" of investment needed just to keep the capital stock at the same level!

I have not commented on a lot of posts which I would like to due to time considerations, but I'll try to work them in.

I am very proud of everyone for proving that it is possible to have a high level economic discussion on USMB and hope everyone continues to participate!

 

[AmazonTania]

A meaningful economic discussion is always possibly, so long as you can take the children and the cheerleaders out of the room.

Pathetic to see how far people can take online discussions.

 

[Kimura]

Again, you are wrong. You are purposefully mixing the FED and the Federal Government. They are two completely different things. The US most certainly does borrow. What do you think a US T-Bill is, if not a loan instrument?

Yes, the US Government could in theory "end" the FED or pay the T-bills off with fairy dust by forcing the FED to take ownership of the T-Bills and pay them off as yet another "expansion" of credit. As it stands, we the tax payers are on the hook to pay the T-Bills back to the owners.

No, I'm not. The FED is part of the US government. The publicly appointed Board of Governors execute monetary policy, not the member banks, so your statement doesn't make any sense. Any and all profits by the FED are also remitted to the Treasury every year, year in and year out. This isn't even open to debate. The whole FED conspiracy meme has zero basis in reality.

Taxpayers aren't on the hook for US Treasuries, why would they be?
WOW where do you think the revenue comes from to pay for government spending if not tax payers?

If a country collects one trillion in tax receipts, but has a four trillion dollar deficit, where do the additional funds come from? Spending, operationally, precedes taxation and borrowing.

OK What branch of our Government does it report to?

The Federal Reserve (FED) does not report to any part of our government. It is not a part of our Government. It does not report to the executive branch. It barely submits a report on policy once a year. But the FED is not a part of the US Dept. of the Treasury as you have so mixed so many numerous time. The FED is is a completely independent organization formed of and by its member banks (aka. the banking cartel). The Fed Board nominated by the president supervises the banks of the cartel and manages monetary policy. The FED is NOT the US Treasury. These are two completely different organizations. The US Treasury is a part of this government and reports to the executive branch. The FED is NOT a part of this government. Though it's head and board are selected by the POTUS and approved by congress they do not report to the POTUS. The head of the FED is not a member of the POTUS cabinet, nor does the head of the FED report directly to any government entity.

Congress regulates the FED by statute. The FED is subject to oversight by Congress and they can alter their responsibilities through legislation and statute.

Also, the POTUS, through the Secretary of the Treasury, regulates fiscal policy related to the FED. The FED is "independent within government" as opposed to "independent of government".

I never said the FED and Treasury were one in the same. I said monetary operations should be viewed through the consolidated government model.

 

[Kimura]

Well, if you are going back to University level though on crowding out, then you should know that crowding out is consistent with higher private sector savings. What is being crowded out are the investments. Technically, the government can fund itself without issuing bonds or raising taxes at all. It can just spend what it needs to spend. The cost of government waste would come in the form of inflation.

If the deficits are due to tax cuts rather than spending, then this gives deficit-finance lump sum tax rebate. This generally causes tax payers to save more in order to prepare for the higher taxes in the later future. And normally, government deficits up upwards pressure on interest rates, not downward. The excess reserves in banks are mainly due to a portion in the Emergency Economic Stabilization Act of 2008. Section 128 of this act allows the Federal Reserve to pay high interest rates to depository institutions for their reserve requirements.

If we take this market distorting regulation out of the equation, deficits puts upward pressure on interests rates and increase demand for loanable funds. This further pushes interest higher than they would otherwise be. If interest rates are higher than they would normally be, it makes it very expensive to borrow, therefore private businesses invest less money. As a result of this, government has shifted some private sector savings away from the private sector of which would have otherwise gone to private investment. Most likely, it would have gone to Government Spending (G), not Investment (I).

I'd like to address some of the misconceptions surrounding loanable funds before we address the money multiplier.

We need to differentiate between real crowding out and the myth found in mainstream econ texts at universities.

At the the very center of this misconception is the loanable funds theory, which is an aggregate simulation of how financial markets are supposed to work according to orthodox macroeconomic theory. The whole premise being how aggregate demand could never fall shy of aggregate supply due to interest rate adjustments constantly yielding equal savings and investment.

The epicenter of this erroneous hypothesis is a distorted view of financial markets. The loanable funds market is the brainchild of orthodox economists as a way to mediate investment and savings through interest rate variations.

The was all before JM Keynes and was a major component of the classical model where flexible prices give us market-clearing aggregate markets. If consumption decreased, the saving would increase and this would prevent an oversupply of goods because capital goods production would increase in tandem with saving.

The supply of funds (saving) is throught of as a positive mechanism of the real interest rate because increasing rates will increase costs of consumption and encourage savings. Investment then decreases with the interest rate due to the cost of funds to in invest increases.

According to this batshit theory, if there’s an increasing budget deficit, it will result in rising demand which puts pressure on savings, which is where the alleged need to borrow by the government sector comes from. This allegedly will nudge interest rates clear out the loanable funds market, thus resulting in decreased investment spending.

The government then allegedly borrows to finance its budget deficit, thus crowding out any private borrowers also trying to finance some investment. Then orthodox economists tell us this is decreasing national saving and increase interest rates.

This all relies on various myths which has prevalent in the public for years where it’s acceptable as a fact.

This basic flaws in the orthodox story is that the government has to borrow back its own net financial assets that it creates as a function of the nature of government spending. It’s a crock of shit. I have no other way to describe it.

This erroneous line of thought continues by saying that savings are finite and the governments are constrained by spending which is why government must source funding to meet its fiscal needs. However, government spending will increase income which will increase savings.

This type of erroneous nation of crowding out needs to relegated to the dustbin of history.

In MMT, however, we do realize we have to avoid real crowding which is caused by not enough real resource being able to satisfy nominal demands.

Under the aforementioned scenario, this will result in inflationary pressures and decreased demand which is what would be needed to get nominal demand growth on par with real output capacity.

Real crowding out boils down to politics in my estimation. If the economy is at full capacity, and the government wants full employment output, then it would have to crowd out the private sector in a very real way. We can to this through our tax laws, but again, we’re dealing with a political decision as opposed to a financial one.

By the way, now that I’ve got the cobwebs dusted out, I’m going to put together an in-depth analysis regarding deficits over this weekend.

 

[oldfart]

OK, since now is later, let's talk about the crowding out effect. This is related to something called Ricardian equivalence and has been around classical economics for a long time. The problem is that it dates from the period economists ASSUMED full employment of resources.

however, it's pretty difficult to deny that there is a crowding out effect. Again, going back to the equation:

G − T = S − I​

Again, if we take the foreign sector out of the equation and just focus on the domestic side. If government spending increases (G) while tax revenue (T) remains the same, then the left side of the equation gets bigger. Basic accounting (calculus rather) tells us that the right side of the equation must increase as well. It means people must cut down on consumption and save more, but this can also cause private sector investment to decrease.

Remember that this is an accounting identity and not a function. It describes the equilibrium post facto equivalence after the market effects have worked themselves out, not what happens in getting to that equilibrium. So the argument is that if we start from a full-employment equilibrium of all factors of production and increase government spending in a two-sector model, savings must go up by an equal amount in the next equilibrium, by definition. This is true.

The usual was to explain the MECHANISM is that the government increases the supply of government securities to fund the deficit, which drives prices down in the bond market, effectively raising interest rates. Confronted with higher interest rates, the household sector will find savings relatively more attractive and consumption slightly less and adjust their behavior to a new equilibrium involving less consumption and more saving. The process only stops when an interest rate is reached at which the additional saving enticed from the household sector matches the increased government spending.

Have I stated this fairly?

Regardless of what sort of budget the government decides to run, any individual in the private sector can adjust his or her savings according to their consumption ratio. This would leave net savings unchanged.

Income = Y = C+I+G

Savings = S=Y-C-T=I+(G-T)​

So consumption does not affect aggregate savings.

This is where the sticky part is. When interest rates increase, households will adjust their "consumption ratio" downward. Most of this effect will probably be consumers who cannot afford to borrow as much and thus lower plans for consumption, which is why consumer durables are more volatile than food or clothing, the mechanism is not on the consumer wants side, it is on the consumer capacity side of household optimization. Households are to some extent income-constrained.

But all of this rests on the initial assumption of full employment of all factors of production. Suppose this is not true. In linear programming terms the "shadow cost" of the partially unused resource is zero. Economists would say the opportunity cost of that resource was zero. Both mean that we can utilize more of that resource because it is "free". But while the resource may have a marginal productivity of zero, it is still likely to be paid a traditional price for that resource. Where I work the woods are full of half empty commercial space whose asking rents have not fallen the last five years. Combine sticky resource prices and excess capacity and you set up a new possibility. The government spending immediately injects income into the household sector (labor is paid wages and property owners start receiving rent on formerly vacant space). They are no longer as income-constrained as they were before, and can increase both consumption and savings!

I leave it to you to explain how this gives rise to the multiplier effect. In summary, the closer we are to full utilization of resources (which is reflected in markets by price inflation), the more "crowding-out" we will observe. The more unused resources in an economy (high unemployment rates and commercial vacancy rates), the less "crowding-out" and the higher the multiplier. Both descriptions of an economy are correct given they are applied to the appropriate set of circumstances.

 

[Rshermr]

OK, since now is later, let's talk about the crowding out effect. This is related to something called Ricardian equivalence and has been around classical economics for a long time. The problem is that it dates from the period economists ASSUMED full employment of resources.

however, it's pretty difficult to deny that there is a crowding out effect. Again, going back to the equation:

G − T = S − I​

Again, if we take the foreign sector out of the equation and just focus on the domestic side. If government spending increases (G) while tax revenue (T) remains the same, then the left side of the equation gets bigger. Basic accounting (calculus rather) tells us that the right side of the equation must increase as well. It means people must cut down on consumption and save more, but this can also cause private sector investment to decrease.

Remember that this is an accounting identity and not a function. It describes the equilibrium post facto equivalence after the market effects have worked themselves out, not what happens in getting to that equilibrium. So the argument is that if we start from a full-employment equilibrium of all factors of production and increase government spending in a two-sector model, savings must go up by an equal amount in the next equilibrium, by definition. This is true.

The usual was to explain the MECHANISM is that the government increases the supply of government securities to fund the deficit, which drives prices down in the bond market, effectively raising interest rates. Confronted with higher interest rates, the household sector will find savings relatively more attractive and consumption slightly less and adjust their behavior to a new equilibrium involving less consumption and more saving. The process only stops when an interest rate is reached at which the additional saving enticed from the household sector matches the increased government spending.

Have I stated this fairly?

Regardless of what sort of budget the government decides to run, any individual in the private sector can adjust his or her savings according to their consumption ratio. This would leave net savings unchanged.

Income = Y = C+I+G

Savings = S=Y-C-T=I+(G-T)​

So consumption does not affect aggregate savings.

This is where the sticky part is. When interest rates increase, households will adjust their "consumption ratio" downward. Most of this effect will probably be consumers who cannot afford to borrow as much and thus lower plans for consumption, which is why consumer durables are more volatile than food or clothing, the mechanism is not on the consumer wants side, it is on the consumer capacity side of household optimization. Households are to some extent income-constrained.

But all of this rests on the initial assumption of full employment of all factors of production. Suppose this is not true. In linear programming terms the "shadow cost" of the partially unused resource is zero. Economists would say the opportunity cost of that resource was zero. Both mean that we can utilize more of that resource because it is "free". But while the resource may have a marginal productivity of zero, it is still likely to be paid a traditional price for that resource. Where I work the woods are full of half empty commercial space whose asking rents have not fallen the last five years. Combine sticky resource prices and excess capacity and you set up a new possibility. The government spending immediately injects income into the household sector (labor is paid wages and property owners start receiving rent on formerly vacant space). They are no longer as income-constrained as they were before, and can increase both consumption and savings!

I leave it to you to explain how this gives rise to the multiplier effect. In summary, the closer we are to full utilization of resources (which is reflected in markets by price inflation), the more "crowding-out" we will observe. The more unused resources in an economy (high unemployment rates and commercial vacancy rates), the less "crowding-out" and the higher the multiplier. Both descriptions of an economy are correct given they are applied to the appropriate set of circumstances.

Damn. Had not thought of Ricardian equivalence for YEARS. And hearing and seeing the definition just made me go to my calender looking to see if I could (hopefully) find a forgotten appointment for a root canal. Yeah, I get it, but the concept is so far from eligent imho that it is a pain to discuss. But, as usual, nice job, oldfart.

 

[oldfart]

I agree with you for economies with less than full employment. See my previous post and I'll try to tidy this up.

According to this batshit theory, if there’s an increasing budget deficit, it will result in rising demand which puts pressure on savings, which is where the alleged need to borrow by the government sector comes from. This allegedly will nudge interest rates clear out the loanable funds market, thus resulting in decreased investment spending.

I finessed this point. Savings equals investment as an accounting identity in a two sector model only as a description of how things end up in the new equilibrium; it is not a description of the mechanism that gets them there!

The government then allegedly borrows to finance its budget deficit, thus crowding out any private borrowers also trying to finance some investment. Then orthodox economists tell us this is decreasing national saving and increase interest rates.

In classical economics the interest rate is the mechanism in the financial markets that decreases consumption and increases savings. As I noted, this is mostly because the household sector is income-constrained, not because the households are avaricious to get higher rates of return!

This erroneous line of thought continues by saying that savings are finite and the governments are constrained by spending which is why government must source funding to meet its fiscal needs. However, government spending will increase income which will increase savings.

We're on the same page here.

In MMT, however, we do realize we have to avoid real crowding which is caused by not enough real resource being able to satisfy nominal demands.

True, AS WE APPROACH FULL EMPLOYMENT.

Under the aforementioned scenario, this will result in inflationary pressures and decreased demand which is what would be needed to get nominal demand growth on par with real output capacity.

Real crowding out boils down to politics in my estimation. If the economy is at full capacity, and the government wants full employment output, then it would have to crowd out the private sector in a very real way. We can to this through our tax laws, but again, we’re dealing with a political decision as opposed to a financial one.

The key is that full employment and price stability are not exactly competing goals. Richard Nixon was able to achieve low growth, high inflation, and rising unemployment at the same time! To the extent there is a trade-off the relevant questions are:

1. What is the elasticity of that function in the current neighborhood (i.e. how much additional inflation will be generated by policies we expect to reduce unemployment to say, 6%?

2. What level of real percapita GDP growth would be associated with those policies?

At that point the decision is indeed political (or a proper subject for welfare economics if Congress could understand Pareto-optimality in Walrasian general equilibrium!).

By the way, now that I’ve got the cobwebs dusted out, I’m going to put together an in-depth analysis regarding deficits over this weekend.

I look forward to reading it!