global financial crash yay!
- Thread starter sufi
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"Investment is simultaneously spending and saving for no change to net wealth but positive contribution to AD and total income.
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Yeah I think you've basically got it. The problem is that it's not necessarily a 1-for-1 relationship in the S=I sense. If the savings rates go up, but the banks don't want to lend, spending will fall.
People like Vickrey and myself argue that the banks can almost never fully recycle all of the savings into investment, because they first need to ensure that they get all of the money back, and there usually aren't enough clearly profitable lending opportunities for them to lend to an extent that would maximize output. That's where a sustainable deficit comes in. It would basically pick up the slack in spending where the financial system falls short.
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Yeah I think you've basically got it. The problem is that it's not necessarily a 1-for-1 relationship in the S=I sense. If the savings rates go up, but the banks don't want to lend, spending will fall.
People like Vickrey and myself argue that the banks can almost never fully recycle all of the savings into investment, because they first need to ensure that they get all of the money back, and there usually aren't enough clearly profitable lending opportunities for them to lend to an extent that would maximize output. That's where a sustainable deficit comes in. It would basically pick up the slack in spending where the financial system falls short.
haha yeah, the gall of the corporate welfare/deficit hawk crowd is really something, but I'm fairly desensitized to it now.
Dean Baker wrote a pretty good book on the subject that's available for free online:
The Conservative Nanny State:
How the Wealthy Use the Government to Stay Rich and Get Richer
http://www.conservativenannystate.org/
Dean Baker wrote a pretty good book on the subject that's available for free online:
The Conservative Nanny State:
How the Wealthy Use the Government to Stay Rich and Get Richer
http://www.conservativenannystate.org/
vimothy
yurp
So basically, S = I describes two flows in balance, like when G = T, where no spending is "leaking" out of or into the economy.
And if S + T + M = I + G + X, there are no AD leakages. If, however, S increased but I did not, ceteris paribus, the economy would contract.
That said, I'm still unsure of how an aggregate increase in saving can occur without some offsetting flow, since any fall in C will reduce income and lead to a fall in private sector saving by an equivalent amount, or a fall in total income.
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The overall sum in that equation isn't held constant
For instance you could have y(100) = C(50) + I(30) + G(10) + NX(10)
Then the Fed lowers interest rates to stimulate the economy, raising consumption and investment:
y(120) = C(60) + I(40) + G(10) + NX(10)
Government spending could also have the same effect:
y(120) = C(50) + I(30) + G(30) + NX(10)
Or an export boom:
Y(120) = C(50) + I(30) + G(10) + NX(30)
The flip side is that a cut in any of these categories, if not offset, can result in a fall in nominal GDP (all of this is in nominal terms btw).
For instance you could have y(100) = C(50) + I(30) + G(10) + NX(10)
Then the Fed lowers interest rates to stimulate the economy, raising consumption and investment:
y(120) = C(60) + I(40) + G(10) + NX(10)
Government spending could also have the same effect:
y(120) = C(50) + I(30) + G(30) + NX(10)
Or an export boom:
Y(120) = C(50) + I(30) + G(10) + NX(30)
The flip side is that a cut in any of these categories, if not offset, can result in a fall in nominal GDP (all of this is in nominal terms btw).
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vimothy
yurp
Yeah, that all seems pretty straightforward. Obviously, Y is the dependent variable and so it falls if any of the determinates of Y fall.
I'm stil having trouble getting my head round where that aggregate saving comes from, since spending influences income, which influences saving.
I'll try to formulate a coherent question when I get some spare time...
I'm stil having trouble getting my head round where that aggregate saving comes from, since spending influences income, which influences saving.
I'll try to formulate a coherent question when I get some spare time...
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vimothy
yurp
Not read this yet, but it's Richard Koo: http://csis.org/files/media/csis/events/081029_koo_handout.pdf
More Koo: http://welling.weedenco.com/files/NLPP00001/803.pdf
More Koo: http://welling.weedenco.com/files/NLPP00001/803.pdf
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yeah, Taleb is pretty ridiculous. Just a total poseur, really.
I found an interesting Fed report on monetary transmission that basically tries to put together every possible channel into one model. Kind of a useful tool for thinking about these debates. It's on page 2 here:
http://www.nyfedeconomists.org/research/epr/02v08n1/0205kutt.pdf
I found an interesting Fed report on monetary transmission that basically tries to put together every possible channel into one model. Kind of a useful tool for thinking about these debates. It's on page 2 here:
http://www.nyfedeconomists.org/research/epr/02v08n1/0205kutt.pdf
yeah I'm a big Koo fan. That report he did for Nomura last year was great:
http://krugman.blogs.nytimes.com/2009/04/06/balance-sheets-and-the-trade-cycle-somewhat-wonkish/
I think his approach is good, basically consistent with the Minsky/Godley strain.
http://krugman.blogs.nytimes.com/2009/04/06/balance-sheets-and-the-trade-cycle-somewhat-wonkish/
I think his approach is good, basically consistent with the Minsky/Godley strain.
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vimothy
yurp
Okay, what about this:
Economy is fine and at full employment. Suddenly, consumers decide to increase saving. In the first instance (i.e. the short run), there is a reduction in demand with only two possible outcomes:
1, producers, facing a fall in income, maintain their spending patterns and draw down their savings for no net change to aggregate savings, total income or output. Or,
2, ouput and total income fall, and unemployment rises.
In either case, there is no immediate increase in the stock of loanable funds. Furthermore, there is no one available who can read this change in saving preferences as any kind of desire for more investment of whatever kind, so that even in the long run things look dodgy (obviously price and wage adjustments have a role to play in the long run too).
???
Economy is fine and at full employment. Suddenly, consumers decide to increase saving. In the first instance (i.e. the short run), there is a reduction in demand with only two possible outcomes:
1, producers, facing a fall in income, maintain their spending patterns and draw down their savings for no net change to aggregate savings, total income or output. Or,
2, ouput and total income fall, and unemployment rises.
In either case, there is no immediate increase in the stock of loanable funds. Furthermore, there is no one available who can read this change in saving preferences as any kind of desire for more investment of whatever kind, so that even in the long run things look dodgy (obviously price and wage adjustments have a role to play in the long run too).
???
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the problem with that article (and most of the Chartalist stuff) is that it ignores banks, and substitutes capital markets for banks - not the same thing at all. When people save they don't necessarily buy bonds, when people borrow they don't necessarily issue bonds. Banks create money (and NFAs in MMTspeak), capital markets don't. From what I've seen, the Chartalists seem to have some sort of radical doubt about the existence of any monetary channel (unless of course you call it fiscal - then they seem OK with it (?))
If you don't like mainstream econ, you should check this stuff out:
http://en.wikipedia.org/wiki/Monetary_circuit_theory
The reason that Godley & Lavoie are far superior to either the Chartalists (Bill Mitchell) or the circuitists (Steve Keen) is that they incorporate the good parts of both, but get rid of the half-baked aspects, which you must be noticing by now
If you don't like mainstream econ, you should check this stuff out:
http://en.wikipedia.org/wiki/Monetary_circuit_theory
The reason that Godley & Lavoie are far superior to either the Chartalists (Bill Mitchell) or the circuitists (Steve Keen) is that they incorporate the good parts of both, but get rid of the half-baked aspects, which you must be noticing by now
vimothy
yurp
Fazzari is not a Chartalist--he's a Kaleckian (according to Lavoie, at least).
Back to my example: what happens when we decide on aggregate not to spend all of our income? Does output fall in the short run, or is that money immediately reallocated to investment spending by business?
Back to my example: what happens when we decide on aggregate not to spend all of our income? Does output fall in the short run, or is that money immediately reallocated to investment spending by business?
"Fazzari is not a Chartalist--he's a Kaleckian (according to Lavoie, at least)."
Haha, well don't blame me for not being able to keep track of all the nuances and contradictions of heterodox economics. Davidson and Lavoie can't even agree on what "Post-Keynesian" means.
"Back to my example: what happens when we decide on aggregate not to spend all of our income? Does output fall in the short run, or is that money immediately reallocated to investment spending by business?"
"In either case, there is no immediate increase in the stock of loanable funds. Furthermore, there is no one available who can read this change in saving preferences as any kind of desire for more investment of whatever kind, so that even in the long run things look dodgy (obviously price and wage adjustments have a role to play in the long run too)."
Yes there is: the Fed and the banking system. That's the point of having a central bank.
When the Fed sees demand falling and savings rising, they will lower rates, encouraging borrowing and investment, and discouraging saving, in the hopes of heading off a fall in output and prices. They always keep the pump primed (2% inflation) so there is a buffer between drops in demand and falling prices, where the real trouble comes in. If it doesn't work, and no one wants to spend or invest or borrow/lend, and people still want to save at 0% (ZLB) then you will start seeing big falls in prices and output, unless offset by demand from somewhere else.
The banking system doesn't really have a "loanable funds" constraint. It can just create the money by crediting it to accounts, if there are creditworthy borrowers who want to borrow at the offered rate.
Haha, well don't blame me for not being able to keep track of all the nuances and contradictions of heterodox economics. Davidson and Lavoie can't even agree on what "Post-Keynesian" means.
"Back to my example: what happens when we decide on aggregate not to spend all of our income? Does output fall in the short run, or is that money immediately reallocated to investment spending by business?"
"In either case, there is no immediate increase in the stock of loanable funds. Furthermore, there is no one available who can read this change in saving preferences as any kind of desire for more investment of whatever kind, so that even in the long run things look dodgy (obviously price and wage adjustments have a role to play in the long run too)."
Yes there is: the Fed and the banking system. That's the point of having a central bank.
When the Fed sees demand falling and savings rising, they will lower rates, encouraging borrowing and investment, and discouraging saving, in the hopes of heading off a fall in output and prices. They always keep the pump primed (2% inflation) so there is a buffer between drops in demand and falling prices, where the real trouble comes in. If it doesn't work, and no one wants to spend or invest or borrow/lend, and people still want to save at 0% (ZLB) then you will start seeing big falls in prices and output, unless offset by demand from somewhere else.
The banking system doesn't really have a "loanable funds" constraint. It can just create the money by crediting it to accounts, if there are creditworthy borrowers who want to borrow at the offered rate.
vimothy
yurp
In that presentation, Lavoie even managed to divde PKE into Post Keynesian Post Keynesians and non-Post Keyensian Post Keynesians!
Anyway, think it's making sense now: as demand drops, CB reduces rates disincentivising saving and incentivitsing consumption and investment spending, ensuring that S = I for the most part and that output and employment isn't bouncing around all over the place every time consumer spending patterns change...?
Anyway, think it's making sense now: as demand drops, CB reduces rates disincentivising saving and incentivitsing consumption and investment spending, ensuring that S = I for the most part and that output and employment isn't bouncing around all over the place every time consumer spending patterns change...?
vimothy
yurp
Yeah, I grok this, of course--it's why I've been having trouble seeing how a rise in saving could lead to an offsetting rise in investment, since no additional savings are needed to fund additional investments in the first place.
But it doesn't, because the CB is there to ensure limited AD leakages, by raising the cost of saving and lowering the cost of investment, so that the flow of saving is directly offset by the flow of investment.
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yeah that's right
Also since there is growth in real output (rgdp growth) and in the nominal price level (2% inflation) under normal circumstances, the Fed usually stimulates more investment than savings in order for the price level to track output plus desired inflation.
Also since there is growth in real output (rgdp growth) and in the nominal price level (2% inflation) under normal circumstances, the Fed usually stimulates more investment than savings in order for the price level to track output plus desired inflation.