global financial crash yay!

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rumble

Well-known member
This bit: "money can only be created when the government spends money"

So it's not actually even an endogenous money theory then? I don't think Wray believes in exogenous money. This is what I mena about the inconsistency.

do they only mean high-powered money or something like that? and if so why do they just say "money"
 
vimothy

vimothy

yurp
HPM / insider money / NET money - everything else nets out according to double-entry bookkeeping for no additional (net) financial wealth.

It is badly expressed at times, I agree.
 
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vimothy

vimothy

yurp
This thread really has blown my mind. Not just this thread, I guess coming across the MMTers as well, but if you had told me in December that by February I would consider myself to be a fucking old school Keynesian...

It's like a light has turned on over the last couple of months and I've suddenly "got" macro.

I consider this to be a significant personal breakthrough. What's that you say about the paucity of diminished expectations? Maybe so, but you've still gotta dance with the gal what brung ya.
 
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vimothy

vimothy

yurp
BTW, I have also put together what I think is an absolutely watertight case for deficit spending:

A common fallacy is to assume that if spending on consumption falls, then investment spending will increase because there are more savings available for investment, so that there is no change to output.

If (and only if) C falls while Y remains constant, then of course the additional spending must have come from one of the other components in the identity. If G and NX do not rise then it must be from I—this is simply circular reasoning.

However, you cannot hold output constant: it is the dependent variable, the determinate of the other variables in the identity. Aggregate savings do not increase as C falls. This paradox is hard to grasp, but let me give it a shot.

Consider a closed economy at T0 with potential output of $100 and a stock of money equal to the same. If at T1 AD is $100 the economy is at potential. But what happens when the economy as a whole saves 5% of its income? At T2 total spending equals $95 and so total income equals $95. GDP is now $95—output has fallen below potential and the economy is in recession. The stock of paper wealth did not increase so there are no additional funds available to boost investment spending—all we have is the same $100 we started with.

There can never be an aggregate increase in paper wealth from within this closed system. It has to come from somewhere else—a cross-sectoral deficit flow.
Click to expand...
 
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rumble

Well-known member
That's right in a deflation/liquidity trap/ZLB situation, as Paul Krugman has argued, but that's because monetary policy is ineffective in those situations, not because it is universally true.

In normal times, your argument would be ignoring bank money creation.

Y = C + I + G + CA

Falling C and Y would lead the Fed to lower interest rates, which (as long as there is no deflationary spiral) would pump up the value of both C and I, and therefore Y. Beyond that, falling C does normally lead to rising I, since the money that is saved usually ends up in a bank and gets lent out again - it's just not necessarily a 1-for-1 relationship, which is why Vickrey argues for deficit spending to take up the slack. there are limits on the efficacy of monetary policy, but it does work.

you're falling into the MMT error of thinking that monetary policy never has any effect. Like I said, that's where they go wrong.
 
vimothy

vimothy

yurp
No I think my reasoning is water-tight. You can add a banking sector if you want, and it can be neo-Wicksellian or monetarist, money multiplier or endogenous credit growth. It makes no difference: all new financial assets are someone else's new financial liabilities. After netting the new credit-money disappears: there can never be any net new money in the system without a cross-sectoral deficit flow. Otherwise the system is logically and stock-flow inconsistent. The paradox of thrift always holds.

We can talk about the long run and short run curves, but basically, I don't see how there can be any escape. Not-spending (income > expenditure for the sector) never increases net financial assets available to fund investment. This is Sumner's error. He lets the identity drive causality in the model and ends up talking gibberish.

EDIT: The important thing to remember is this:

For any discrete sector, the flow of savings is equal to the flow of income minus the flow of expenditure.

C and I are both private sector expenditure.

For monetary policy to have any effect (I'm not denying that it can; the fact that it does is not inconsistent with the model) on total output it must by definition change that private sector savings flow.
 
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rumble

Well-known member
you're still ignoring the Fed.

Very simple example: Say that the Fed prints a $100 bill, and buys a coffee maker for their lounge with it.

How does that fit in to your model?
 
vimothy

vimothy

yurp
You haven't distinguished between fiscal and monetary policy. Your example could be either. If the Fed spends it G goes up and output increases (fiscal policy). If we simply double the money supply to $200 (monetary policy), there is no effect whatsoever, so long as the savings rate remains the same (5% of total income).

EDIT: Only by changing that savings rate can monetary policy affect total output in the private sector.
 
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vimothy

vimothy

yurp
In a closed economy,

Y = C + I + G​

Therefore, by definition, for monetary policy to have any effect, one of these components must post an aggregate/net spending increase.
 
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rumble

Well-known member
vimothy said:
You haven't distinguished between fiscal and monetary policy. Your example could be either. If the Fed spends it G goes up and output increases (fiscal policy). If we simply double the money supply to $200 (monetary policy), there is no effect whatsoever, so long as the savings rate remains the same (5% of total income).

EDIT: Only by changing that savings rate can monetary policy affect total output in the private sector.
Click to expand...

OK, well the Fed does routinely spend "printed" money to buy things, so if that's the definition you want to use, you should group the Fed's activities under G and call it fiscal policy. That would mean that monetary expansion and deficits are both means of increasing G.
 
vimothy

vimothy

yurp
rumble said:
OK, well the Fed does routinely spend "printed" money to buy things, so if that's the definition you want to use, you should group the Fed's activities under G and call it fiscal policy. That would mean that monetary expansion and deficits are both means of increasing G.
Click to expand...

No! ONLY IF the Fed's policies lead to an increase in net spending flows from the government sector--then by definition it is fiscal policy that raised output, not monetary policy. You have to keep the model internally consistent or none of this will make sense. rumble, I know that you are better at this than me but you are missing the essential insight here. Go back to the paradox of thrift in my toy economy and have another go.
 
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rumble

Well-known member
alright, let me try again.
if the Fed prints $100, and gives it to a poor spendthrift, helicopter drop style, and that person spends it all right away, where is the negative flow in your model that corresponds to this increase in C?

The other problem is that say my income is $100 million, and I decide to save $10 million this year instead of buying a yacht and consuming all of my income. How do I keep that $10 million from being at least partially reinvested? If I put it in a bank, it gets effectively lent out. It's only in a liquidity trap situation where the banks hoard, or pay down debts instead of lending or investing that savings don't get recycled into investment (at least partially). It's not a normal assumption to make generally.
 
vimothy

vimothy

yurp
There is no short run. The toy economy is modelled in discrete time. Any increase in net financial assets (helicopter drop/monetary policy) at the start of a period affects nothing provided the other parameters (potential output and savings preference) do not move. Potential output is now $200. Total income must be $200 and savings must be zero to keep the economy at full employment.

There is no loanable funds market--it is a fairy tale, as you surely know. Banks create credit-money ex nihilo whenever they want--the supply curve is horizontal and AD determines the (credit) money supply. Your point is essentially moot in the real world. But even if it is true in the toy the outcome does not change. It cannot. There are no additional net financial assets (over the initial $100) to fund investment and support AD. Where do they come from? It has to be from another sector to maintain stock flow and logical consistency.
 
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rumble

Well-known member
here check out this animation:
http://people.cedarville.edu/employee/wheelerb/macro/ni/ni.htm

Essentially what you are saying is that savings just all ends up in the financial institutions but not lent out. That happens in the liquidity trap, but not normally.

The diagram would probably be better with the Fed as an intermediary between the government and the financial sector, but whatever.

edit: the important part is that the financial system as well as the government can introduce "new" money into the flow. The financial sector does this by making loans before taking in repayment, the government by spending money before taking in taxes

An export boom can also have the same effect
 
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rumble

Well-known member
alright, to go back to the particulars of your model: there is a $5 drop in spending, the saving is not lent out again. The Fed helicoptor drops $5 to a homeless person who buys a meal with it. Total spending just rose to $100, output is now at $100, and there is no $5 outflow on the fiscal balance sheet
 
vimothy

vimothy

yurp
Essentially what you are saying is that savings just all ends up in the financial institutions but not lent out. That happens in the liquidity trap, but not normally.
Click to expand...

That isn't what I'm saying. The original stock of money never changes, any extra credit-money will simply net net out at zero for no additional net financial assets. Back to the model and keep consistency:

At the start of T0 net financial assets (NFA) = $100

Banking system of any specification therefore has NFA = $100 at T0

Regardless of the type of system (fractional reserve, endogenous credit growth), at T2 when the economy is in recession the bankings syem still has exactly the same amount of NFA to leverage (MM), straight lend (100% reserve) or ignore (endogenous money growth). The level of savings and/or output does not alter this inescapable fact.
 
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rumble

Well-known member
huh?

credit-money is a net financial asset that exists until the debt is paid off. Same as government spending before taxation. Credit growth expands the money supply by creating net financial assets. The money supply shrinks when debts are paid off at a greater rate than new debts are being created. This happens endogenously, but is generally influenced by the interest rate.
 
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