Wednesday, January 12, 2011

Real vs Nominal

Lots of activity in recent comments about the distinction between "real" vs "nominal". Here's my take:

Short version: "Real" equals atoms and/or sweat. "Nominal" equals a number in a spreadsheet.

Longer version: Real pertains to real goods and services produced by an economy. If the goods are available in a future period, they are termed "investment" in the prior period when they are produced. Nominal equals a number in a spreadsheet. When comparing numbers in a spreadsheet, you must be scrupulous to compare apples to apples, so book value to book value, or market value to market value as an example.

An inflation adjusted nominal term is not "real", because it is still a number in a spreadsheet. It is worth inflation adjust nominal values so you can account for inflation and compare nominal values meaningfully across time. Nevertheless, inflation adjusting a nominal value does not give you a real value, it just gives you an inflation adjusted nominal value. You do not need to inflation adjust real goods or services -- a chair is always a chair, a haircut is always a haircut.

"Real" also does not mean "material" or "significant".

The connection between real and nominal is subjective and contingent, and it can change. If you create a painting and sell it for $1M, then it can be booked for $1M, but $1M may be worth anything (or nothing) in the future. Moreover, if you create a painting that you think you might be able to sell for $1M, but decide to keep, it may or may not be booked at $1M depending on how accurate your perception of its market value really is. Or whatever.

Either way, the painting is "real" and its nominal value can be booked a number of different ways, but the link between them can change and is contingent.

At an economy wide level, if nominal incomes increase faster than real production, there is a risk of inflation (unless that extra income is "saved" and becomes, essentially, dead money).


Anonymous Anonymous said...

Touch fists bro

Spot on :-D

Next step is real liabilities, or real funding of liabilities

9:48 PM  
Blogger winterspeak said...

Why is this hard? This is also totally within MMT btw.

10:09 PM  
Blogger Greg said...

Sounds good Winterspeak.


Does the real funding of liabilities need to be done with real money?

1:51 AM  
Blogger The Arthurian said...

Looking at:
At an economy wide level, if nominal incomes increase faster than real production, there is a risk of inflation (unless that extra income is "saved" and becomes, essentially, dead money).

1. How can we know whether nominal incomes are rising faster than real production? We would have to measure real production and somehow convert it into numbers in a spreadsheet.

2. Interesting to think of saved money as "dead money" but I'm not sure that's right. Perhaps banks don't "need" savings in order to generate loans, but if banks "have" savings available to lend (and if conditions warrant) they will lend those savings, and bring saved money back to life.

2:17 AM  
Blogger JKH said...


“Why is this hard?”

It’s “hard” because I asked for a coherent explanation of how the term is used now in economics (meaning “mainstream” economics or “most” economics by default), and why. Hence my suggestion that somebody like Andy Harless might give it a go.

I didn’t ask for a revised definition and new rules for the use of the term, which is easy enough for anybody to do, including myself.

Or making it up, as in:

“inflation adjusting a nominal value does not give you a real value, it just gives you an inflation adjusted nominal value”

That’s OK as a proposition for a language/definition revolution, but it’s preposterously inaccurate as an observation on the regular use of the word in mainstream economics, which is what I was interested in. I don’t necessarily disagree with what you apparently would like in terms of reforming standard economic definitions.

And I don’t disagree that what you’ve made up might be “consistent” with MMT’s approach to the subject. But I do doubt the MMT’ers will go so far as to reject outright the use of the term “real value” in the sense of inflation adjusted nominal value. While they eschew the importance of much “real analysis”, that’s different than rejecting standard definitions, or rejecting language as they’ve done in a few other instances such as “printing money” and “monetization”. I’m not sure they even could reject the definition or language of “real value” against the backdrop of their own literature over time, although I may be wrong on that. I’d like to see this confirmed by somebody who knows the MMT literature in some detail, like Scott Fullwiler.

Even if you think this line of inquiry is useless because it touches on mainstream economics, I’d prefer you didn’t diminish the question through misinterpretation, inadvertent or otherwise. And so that you fully understand my meaning, as in the meaning of my words, this question is not the same thing as the idea of defending mainstream economics’ use of the term or its methodology in using it.

In summary, I rather like what you’ve written, but it doesn't respond at all to the question I was interested in.

4:01 AM  
Blogger Neil Wilson said...

"How can we know whether nominal incomes are rising faster than real production"

By monitoring inflation.

"Perhaps banks don't "need" savings in order to generate loans, but if banks "have" savings available to lend (and if conditions warrant) they will lend those savings, and bring saved money back to life."

Part of a bank's job is to recycle money. If somebody turns currency into a deposit by saving, they will inevitably get rid of that currency if they can by lending it to some entity who needs it.

But if the spending induced by the lending/saving cycle isn't sufficient to make the money disappear in taxation then the money will end up being saved somewhere in the system

ie you get net private savings, savings remaining after all lending choices have been made. And net private savings appear to act as 'leakages'.

4:30 AM  
Blogger winterspeak said...

JKH: LOL! I was trying to answer your question! Clearly I did a bad job.

Mainstream macro uses the term "real" in two ways: 1) atoms & sweat, and 2) inflation adjusted nominal.

There may be others, but the two definitions I have above are the big ones. I'm sure vimothy or Andy or someone will correct me if I'm wrong.

They tend to be a little sloppy in their usage because they are not crystal clear about real vs financial assets the way MMT is. In their equations, so long as you have pi (the inflation term), then you're measuring "real" value. In MMT, nominal really is just a number in a spreadsheet. You can see this in every discussion about the "affordability" of social security and various other programs as the population ages. You can also see this in the insane contortions that Rowe and Sumner get into when fixating on real vs nominal GDP -- just gotta get the E(pi) term right for the economy and we'll be back to full employment!

There are serious measurement issues with the CPI deflator, and any economist worth this salt can go through them. I can do this too, but you're probably aware of them. But I think trying to calculate an accurate CPI deflator is worthwhile, and I also think using a CPI deflator to figure out inflation adjusted nominal values is worthwhile too. It all depends on what question you are asking. But I don't think it's worthwhile to confuse atoms & sweat with nominal & pi.

I'm not rejecting either concept--both are valuable and have their place. But when I think about S=I, I get a consistent and coherent interpretation using atoms & sweat.

7:00 AM  
Blogger Current said...

I'm generally a support of Austrian economics, so I think to folks here I'm "orthodox".

When we talk about "real" we mean associated with exchange ratios. Let's suppose I can buy a pear for two apples. That means the exchange ratio or relative price between pears and apples is 1:2.

There are as many exchange ratios as there are pairs of goods trading, a vast number. Indexes can be made to express the change in price of one good compared to the general trend. There is no one correct "price level", many schemes are possible for calculating it, the summing and weighting of prices can be done in different ways. For any particular index we can talk about the price of a good compared to that index. If I took the goods I buy in a year, for example, and made them into an index then I could compare that to the price of iron for example. I could compare it to any other traded good, service or asset including money, stocks and bonds.

What Winterspeak is talking about here when he says "numbers in a spreadsheet" is the difference between ex ante and ex post. Let's suppose I own half the worlds supply of Scandium. I can look at the market price of Scandium and calculate the value of my holding in dollars, then I could use a price index to calculate what I could buy for that. That's an ex ante calculation. Since I own half the world's Scandium if I were to put it all on the market at once then the price of Scandium would fall. So, the nominal ex-post prices I'd receive wouldn't be as high as I previously calculated and consequently neither would the real price I'd get either. This is because I'm a large player in the market so my actions can affect the price, I don't just "take" a price that's determined by the actions of a great many others.

7:14 AM  
Blogger The Arthurian said...

Q: How can we know whether nominal incomes are rising faster than real production?

A: By monitoring inflation.

Q: Circular. Moreover, this approach does not account for the growth of credit-use in place of income.

7:50 AM  
Blogger Current said...

> If the goods are available in a future
> period, they are termed "investment" in the
> prior period when they are produced.

Sort of.

Normally investments are goods and services that are put into production processes, not ones put into consumption.

For example, suppose I buy a van for my delivery business on monday. Doing that is an investment. Suppose I accidentally drive it into a lake on tuesday. That doesn't mean that the it wasn't investment.

8:16 AM  
Blogger winterspeak said...

Current: I would not consider Austrian economics to be "orthodox".

By "numbers in a spreadsheet" I do not mean ex-ante vs ex-post. I mean "numbers in a spreadsheet". This is exactly the clear bright line MMT draws between real (atoms & sweat) vs nominal.

Any type of valuation exercise, as you describe, reveals how the amount of atoms & sweat you can convert your numbers in a spreadsheet into is contingent on many factors.

Finally, inventory is classified as investment. That's how the S=I identity works.

Arthur: Good point -- horizontal OR vertical money expansion in excess of real production can generate inflation (but the vertical growth of course can also be absorbed as desired savings).

Nevertheless, the circularity you criticize is a feature, not a bug. The desire for the non-govt sector to save changes. It is the exogenous variable.

8:45 AM  
Blogger Current said...

What difference do you think there is between your "numbers in a spreadsheet" and "ex-ante"?

9:12 AM  
Blogger Neil Wilson said...

"Since I own half the world's Scandium if I were to put it all on the market at once then the price of Scandium would fall."

If you own half the world's Scandium and can affect market prices then the monopoly and anti-trust regulations in your jurisdiction probably aren't working properly.

9:16 AM  
Blogger Current said...

Let's not confuse this already difficult discussion by talking about monopolies. (But see Tim Worstall's blog for why I used this example).

My point is if you have a lot to sell on a particular market then you affect the price.

9:30 AM  
Blogger winterspeak said...

Current: "Numbers in a spreadsheet" are just that. They are a token count. They do not represent a specific binding claim on real assets. The only thing my nominal $100 will do for sure is satisfy a nominal $100 liability.

They can certainly be mapped to real (sweat & atom) assets, although that mapping is contingent on many variables as you point out. It is also good to keep this mapping stable.

Ex-ante is mapping, which may or may not represent reality once you get around to doing the transaction and find yourself in an ex-post world. All kinds of prices/ratios may change in the mean time, and the transaction itself may impact prices/ratios. I don't deny any of this. I'm just stressing that the number in the cell of my excel spreadsheet does not change no matter what may happen to ratios in the real world--this is pure nominal.

10:05 AM  
Blogger Current said...


Are you talking about how the accounting book value of an asset may differ from the ex ante price that someone selling it expects to get?

10:42 AM  
Blogger winterspeak said...

Current: Or to answer your question another way -- suppose you have 300 tonnes of Scandium (half the world's supply). The real asset you have is 300 tonnes of Scandium.

You can assign a contingent nominal value to this if you like. You can use various accounting approaches, book value, market value, etc. These are all reasonable depending on what you are trying to do.

But the nominal value you assign to a real asset is not a real asset. It is a nominal value you have assigned to a real asset.

if you have $100 in the bank, that's a real asset. And although what you are able to buy (real) with it may change dramatically, it's always "$100" in the spreadsheet.

10:49 AM  
Blogger winterspeak said...

Current: Our posts may have crossed. I'm not talking about the accounting value of an asset.

Imagine a balance sheet that does not assign nominal values at all. You have Scandium, and $100. Your balance sheets lists assets:

$100 Cash
300 tonnes Scandium

Note that the units are different. No matter what happens to any ratio, this balance sheet will always be accurate.

If you assign a nominal value to your Scandium the balance sheet might read
$100 Cash
$500 Scandium

How accurate is that $500? Depends on a lot of things as you well understand.

The $100 Cash is nominal. The 300 tonnes of Scandium is real. The $500 Scandium is a nominal value assigned to a real asset by some accounting convention that may or may not be what is actually the correct nominal value at any moment in time.

I am not opposed to assigning nominal values to real assets. It is a good and valuable thing to do. But nominal and real are different.

10:53 AM  
Anonymous Anonymous said...

Incidentally, I found some excellent and germane comments by Adam P at an old thread at Nick's blog that basically explain my criticism of Bill’s misunderstanding of saving in the previous thread with some clarity, and do so without any of my unnecessary waffling about the Flying Spaghetti Monster and economic ontology; e.g.:

JKH: "Pre-existing saving or wealth is the fixed money supply."

No, money is neither of neither of these.... In an economy without capital (a technology that transfers forgone consumption today into increased POTENTIAL output tomorrow) there simply is no saving.

Take... an economy that produces only back scratching services where nobody can scratch their own back. Suppose there are 100 people in the economy and suppose that everyone only has the strength to provide one back scratch per day. Thus, daily potential output is 100 backscratches, the money supply is $100 distributed uniformly in the population so each backscratch costs a dollar.

Now, suppose one person (only one) decides he'd like to save. He wants to forgoe todays scratch but get two tomorrow. Thus, he provides a backscratch and gets paid a dollar for it which is added to the dollar he already had. However, someone else was unable to sell a backscratch but still consumed his and now has no money. Today output fell to 99 backscratches.

Now, tomorrow the guy with the extra money gets 2 backscratches and still provides one, the guy with no money gets none but still provides a backscratch. Output is back to 100 and the money is back to its uniform distribution. Furthermore, because potential output is capped at 100 total backscratches printing an extra dollar and giving it to the guy who was unemployed on day 1 just causes inflation, no increase in aggregate output. (Although it does have a welfare effect by allowing the unlucky guy to get a fraction of a backscratch.)

So, no net savings, just forgone ouput. Without capital, a way that forgone consumption today is transformed into increased potential outupt tomorrow there will always be zero net savings and any attempt on the part of agents to save in real terms will only result in an output loss. Money in no sense represents past savings here, only productive capital can do that.

11:04 AM  
Blogger Tom Hickey said...

Ludwig von Mises, The Causes of Economic Crisis (1931), 162

"Credit expansion cannot increase the supply of real goods. It merely brings about a rearrangement. It diverts capital investment away from the course prescribed by the state of economic wealth and market conditions. It causes production to pursue paths which it would not follow unless the economy were to acquire an increase in material goods. As a result, the upswing lacks a solid base. It is not a real prosperity. It is illusory prosperity. It did not develop from an increase in economic wealth [i.e. the accumulation of savings made available for productive investment]. Rather, it arose because the credit expansion created the illusion of such an increase. Sooner or later, it must become apparent that this economic situation is built on sand."

11:43 AM  
Anonymous Anonymous said...

The dispute is with the concept of "real savings" as it applies to the economic decision maker. Not the concept of "real savings" as it applies to the economy.

The economy is not a decision maker.

When a household decides it wants less consumption in the present, and more consumption in the future, it does *not* have the option of increasing national investment, or re-allocating economy-wide resources more towards production of capital and less towards production of consumption.

It is faced with the currently available goods that are offered for sale.

To change that mix requires time and coordination with producers.

But the decision to save is immediate and autonomous.

The individual household, by making it's own present-future trade-off, is *not* changing the composition of consumption/investment goods that are available for sale. It is finding someone else to consume in their place, by accumulating IOUs (and here, "money" would also be considered an IOU).

Should this result in lower borrowing costs, then the increase in household savings *might*, under *certain cases*, result in an increase in real investment at the economy-wide level. But it might not, it could be interpreted as a reduced demand for both future and present consumption.

So it is one thing to say that, from the point of "The Economy", real savings must equal real investment. But then the "real savings" that you are talking about are not the savings of decision makers.

For the household, savings takes the form of accumulating IOUs.

11:53 AM  
Blogger Current said...


You're last two posts make it clearer for me why you mean.

I agree that there is a number entered in an account for an asset. We agree that that is nominal.

I don't think you really understand what mainstream (or austrian) economists mean by "real" though. We can mean the "real thing", the 200 tonnes of Scandium or whatever. But, the other meaning is exchange ratio. Let's suppose that in 1995 a particular price index bundle was $100, in 2011 it was $150. Let's suppose that a carrot cost $1 in 1995 and $1 in 2011. It could be said that according to that price index carrots have fallen in price by 33% in real term compared to their 1990. As I mentioned earlier there are many problems in making price indices both practical and conceptual.

Now, if you have a price index then you can work out a "real" price for any good. There is a type of real price for every type of nominal price.

Extending the above example. Suppose you own 100 carrots now, their nominal price on your spreadsheet is $100 and corresponds to some fraction of the index bundle. If you sell those carrots then the nominal amount you receive can also be compared to the index bundle. So, there are ex-ante nominal prices, ex-ante real prices, ex-post nominal prices and ex-post real prices.

12:13 PM  
Blogger winterspeak said...

RSJ: The household that wants to save is in an even worse position than you say. Suppose they want to consume more now and less later (because "inflations expectation" has gone up -- how can they actually shift consumption forward?

This was precisely the question I asked here -- read through the comments and subsequent posts for hilarity. But this "defer/move real consumption" is exactly how orthodox economists model savings conditions. And you get ridiculous pronouncements as Andy Harless claiming we're in a recession because people are too rich (tell that to your underwater neighbour), and Nick Rowe buying luxury kayaks on the eve of his life savings evaporating.

But you are exactly correct -- households save in IOUs, but the actual real goods and services made available by that decision are independent. This was the point I made at interfluidity as Steve Waldman got Righteous and Totalitarian in his quest for Power. Or something.

Current: I know what Austrians mean, and it's fine if you're Austrian, as I was once upon a time. I rejected it for much the same reasons as I reject orthodox macro. I know what a price index is, I know when it's useful, and I know that price index adjust nominal values are too, and I know when they are useful.

YMMV of course.

1:21 PM  
Blogger winterspeak said...


Yes, I think the Mises quote sums up the Austrian position pretty well, including all the implicit moralism.

It's wrong of course, credit expansion absolutely can increase the supply of real goods depending on what the initial conditions are like, and this expansion need not collapse.

There is such as thing as a credit-non bubble too.

1:24 PM  
Blogger Current said...


I came over here because I just had an email conversation with Vimothy about MMT/Neo-Chartalism. I'm not really here to promote the Austrian Business Cycle theory. What I'm interested in here is the real/nominal distinction and how that affects MMT.

If you agree with the distinction that I made above then how does it fit in with your first post? Why did you say "inflation adjusted nominal isn't real?"

What I think you're really saying there is that an inflation-adjusted ex-ante price isn't an inflation-adjusted ex-post price. I agree with that and I think most other economists would too.

(Though I don't want to get into this now I think that the Mises quote you mention means something different to what you think it means).

1:39 PM  
Anonymous Anonymous said...


Can I make quick suggestion? It might be easier for everyone to understand (esp. lurkers) if you explain this in terms of factor income or the real wage: what is the real wage, can it change, what does it mean to say that it has changed, etc. That could be very helpful, actually.

1:44 PM  
Blogger winterspeak said...

Current: When I said "inflation adjusted nominal" isn't real I didn't mean that "inflation adjusted nominal" isn't a term people use, and that it is not useful in some instances.

I meant that "inflation adjusted nominal" is not equivalent to atoms & sweat "real", although sometimes it's helpful to fudge the distinction. There are two different definitions of "real" floating around, and I'm trying to be precise over which I'm using when, and why.

It becomes unhelpful to fudge the distinction when you start getting too deep into the accounting entries. How do you do the mapping? Book vs Market? What is a valid book? What is a valid market? etc. These are all fine questions in the right context, but if you're trying to understand S=I, then let the excel entries be excel entries, and let the atoms be atoms.

1:59 PM  
Anonymous Anonymous said...


I understand that the actual psychological drivers can be different -- i.e. the utility obtained from having savings is complex, but as a measurement or definition of savings, I don't see how else you can do it other than in terms of IOUs. Savings is a claim on future consumption. A claim is just an IOU.

Savings can't be measured by looking at the present state of the economy, unless you build in some expectations about the future state of the economy. You need an expectation of return in order to tie savings together with investment.

The accounting conventions regarding depreciation and valuation of assets is an example of such assumptions. You can imagine that the production function used by economics is another such example.

But because those assumptions are decided by a committee or built into the model does not mean that no return assumptions are being made.

It is a mistake to think that you can define savings just by looking at the "stuff". You have to look at the combination of "stuff" + "predictions about future productivity of stuff".

That will determine how much consumption is available next period.

And for the individual household, all they care about is the value of their own IOUs.

If their IOUs can deliver more stuff next period, then they have saved more.

What happens to the national capital stock is irrelevant for them.

To say that households measure their own individual savings by looking at the real capital stock, and then dividing by the number of households is just non-sensical.

2:00 PM  
Anonymous Anonymous said...


Also, I suspect that the that the point winterpeak is trying to make is a bit clearer if you follow our discussion from the previous thread. On the other hand, it might make it less clear as well!


The way savers defer consumption on aggregate is explained by Adam P in the comment I quoted upthread. They invest the resources they do not consume in productive technology.

Also, I think you are being a bit unfair to Andy and Nick there.

2:01 PM  
Blogger Tom Hickey said...

Another view, from Chris Meaken — Saving equal borrowing

Gunnar quotes General Theory:
Amidst the welter of divergent usages of terms, it is agreeable to discover one fixed point. So far as I know, everyone is agreed that saving means the excess of income over expenditure on consumption.
I am not of the view Keynes' General Theory was a well-written book. It was given a pretentious title ('I hope some of Einstein's intellectual allure will rub off on me' ) but that does not guarantee its contents.
Unlike his earlier, better stuff such as his much shorter 'The Economic Consequences of Mr Churchill' of a decade earlier, by the 1930s Keynes was becoming far too bigheaded and resorting to a personal vocabulary which he possibly understood but which no-one else did. That's why the 'Keynesians' were able to get away with murder in the thirty years after he died.
Yes, there was under-consumption in the 1930s but Keynes only scratched the surface of the logic. 'Spending' is a difficult economic concept. If I buy a computer, and I use it to play games on - that's presumably consumption. But if I use it to run a business - that's presumably investment. Same computer, same manufacturer, same shop. Are they selling consumer goods or investment goods - indeed do they give a tuppenny damn which it is ?
At which point My Keynes's carefully-argued distinction between spending and investment goes straight down the pan and takes much of the General Theory with it. His much-vaunted equation 'savings equals investment' is bollocks, because in the sense he tries to use them, neither of those terms is amenable to economic definition; as Gunnar would say 'indeterminate'  which is a posh was of saying 'it's bollocks'. 
The safe route is the route Geoffrey took in his book in 1993 "savings equals borrowing". That is the logic of a banker, which both Geoffrey and I were, and which Keynes never was - and it shows.
Geoffrey's version is NOT an equation - it is a statement of an identity; one man's lending is, must be, another man's borrowing. You can only save by lending your money to someone else. Even if you simply stuff banknotes under your mattress, you are still generously lending to the government.
Much flows from that. As I have been arguing for a number of years, once you accept that savings will always equal borrowing because they are an identity, then the definition and understanding of interest rates changes completely. The rate of interest is NOT some price-balancing mechanism to bring savings and borrowings into line with one another. Since saving and borrowing are the two sides of the same coin anyway, they need no economic mechanism to bring them into balance.
Here endeth the First Lesson In Creditary Economics. It is the genesis of a whole raft of logic about interest rates, and money, and er - anyone else thought of linking those economic concepts in a book title before?
And that, guys, is what we are all collectively edging towards here on Gang8. If only John Maynard Keynes could have had a computer, the internet and email  . .  .  .   if only.   Mind you, one can argue exactly the same about those three precise contemporaries Pythagoras, Confucius and the Buddha with even more profoundly earth-shattering consequences.
Chris Meakin, London, 10 January 2011.

Completely (underscore) agreed, Chris.
Dirk Bezemer

3:42 PM  
Blogger Tom Hickey said...

Winterspeak @ 1:24


3:44 PM  
Anonymous Anonymous said...

If your balance sheet consists of

100 tons of Scandinavium

Promise to deliver 110 tons of Scandinavium

Then by just looking at the "real" side of the economy you see no problem.

Part of the issue here is the bait and switch. It's all well and good to say "I am focusing on the real side of the economy." But what that means in practice is to completely ignore debt and to incorrectly measure both savings and income.

I'm reminded of FDR's speech:

"Yet our distress comes from no failure of substance. We are stricken by no plague of locusts. Compared with the perils which our forefathers conquered because they believed and were not afraid, we have still much to be thankful for. Nature still offers her bounty and human efforts have multiplied it. Plenty is at our doorstep [...]"

And yet we *did* have the depression, and the depression did cause a real loss of output.

I think the abject failure of economists, even in the present day, to understand why is due in large part to assuming that the micro process of saving by accumulating claims on future output must correspond in a one-to-manner with present investment.

By sheer magic, the aggregate trade-off will be exactly the same as the individual's trade-off, and therefore no individual will take steps to even attempt to purchase an IOU for for $1 unless he is certain that $1 of investment will occur. Profound moral forces ensure that this will be so.

7:02 PM  
Blogger Neil Wilson said...

Half the problem is including stocks of unsold goods and services in 'investment'.

If you invest in plant the bias is to increase production because you are responding to a market demand signal that shows there is a gap in the market.

If you 'invest' in stocks of unsold items the bias is to reduce production because you are responding to a demand signal that there is a glut in the market.

Assets they may both be but they have entirely different connotations for what will occur in the next period.

12:08 AM  
Blogger Current said...


I never said that I was ignoring debt. A financial asset has a nominal price and a real price. It has ex-ante and ex-post prices. A financial liability is a duty to pay a nominal amount, and therefore to transfer real resources.

1:58 AM  
Blogger winterspeak said...

RSJ: "Savings" is easily measured at the household level -- it's money not spent (and usually in the bank). But this is not a claim on future consumption, it's just a number in a spreadsheet. It may or may not be able to buy anything in the future. People may think it's a claim on future consumption, but it is not. Look at how anyone of means in the third world saves and you'll see what happens when households don't have faith that their currency will maintain purchasing power.

Savings can absolutely be measured in the present state of the economy -- down to the penny. I agree with you -- it is nonsensical to say that households measure their own individual savings by looking at real capital stock and then dividing by the number of households.

vimothy: adam p sounds like a orthodox economist who has no idea how any of this stuff works. He's part of a big crowd with muddled ideas about real vs nominal, gross vs net financial assets etc.. And if you think I'm being unfair to Harless or Rowe that's fine -- everyone can read what they wrote and make up their own minds.

Savers do not invest in anything. They make room for investors to invest in things (real--atoms & sweat).

8:33 AM  
Blogger Current said...

I've now read that long thread to the end so I have more idea what people are talking about. I'll explain what I see as the problems with Neo-Chatalism, which I think are the same ones Vimothy was talking about. Let's consider a closed economy, since the Neo-Chartalists say their theories work for those as well as open economies. I'll start with aggregate stocks rathat than starting with aggregate flows. Private agents own financial assets, we can call the private sector's aggregate stock of financial assets PFA. Similarly, private agents have liabilities, we can call the aggregate of those PFL. The same quantities exist for government too, I'll call those GFA and GFL. For every pound of borrowing there is a pound of lending, so we can write:

These figures we record in accounts are ex-ante nominals, they're the amounts agents believe they can get. Continuously a portion of each of these stocks is being traded or redeemed, whenever that happens expectations may or may not be met.

The Neo-Chartalists look at the output flow aggregates. They derive an equation from the national income identity:
Net Private Sector Savings = Government Deficit

They go on to claim that there must be government deficits for there to be a flow of savings to the private sector. It seems to me that the implication is that the private sector will be impoverished in some real material sense if thatis doesn't happen. To see the problem with this consider the stock equation I give above. Savings are additions to PFA and those from government deficits come from GFL. So, we come to the same initial conclusion that the Neo-Chartalists do from the GDP identity, but the stock equation exposes the problem with their case. Changes in the value of money affect stocks as well as flows. Suppose PFA = £1000B at the beginning of a year, during that year the government add £40B to their budget deficit and there is unexpected price inflation of 10%. That means next year PFA = £1040B but because of the inflation that amount is worth less in real terms than the £1000B of last year.

In the case of debt the nominal value of a stock may be worth the sum of the nominal flows into it. If I put £100 into an account with zero interest every year then I have £1000 in 10 years. But, the real value of that stock is something different. I can't say that I put in an amount of money worth the same as the CPI bundle every year and therefore after 10 years I have an amount worth 10 * the CPI bundle.

The truth of the matter is that there is no need for a flow of "net savings" to the private sector. If there were no deficit then we'd have PFA=PFL, savers would match borrowers, which is perfectly acceptable. Both of those can grow in real terms because of growth of the capital stock. In the long run saving can equal investments. Certainly, in the short run, in recessions that market may not be able to adjust quickly, but that's a different issue.

3:21 PM  
Blogger winterspeak said...


LOL! You have a lot of catching up to do, but you're game and I like that.

Would now be a bad time to tell you that loans create deposits, not the other way around?

Savings equals investment at all times. PFA=PFL at all times. But the private sector, by itself, cannot generate net financial assets, only gross, and it wants them.

The AdamP quote actually illustrates the MMT dynamic nicely. A post on that then.

8:40 PM  
Blogger Current said...


You sound like a Rothbardian. I have fought many of those. Explain in more details why you think I'm wrong.

9:22 PM  
Blogger Current said...

> Savings equals investment at all times.
> PFA=PFL at all times.

PFA and PFL are not savings and investment.

PFA is the stock of financial assets owned by the private sector. It includes bonds created by banks for example, and bonds created by government.

GFA is the stock of financial assets owned by the government. It includes deposits at private banks for example. It could also include government bonds that another branch of government owns (like the social security reserve fund in the US).

PFL is the stock of financial liabilities the private sector is responsible for. So, a bank may be responsible for paying out on bonds it's issued, and may owe taxes to the government.

GFL is the stock of financial liabilities the government is responsible for. It includes bonds the government must pay out on to private holders and other government departments that own bonds.

So, no, PFA doesn't equal PFL, unless GFA=GFL. If the government run a deficit then GFA doesn't equal GFL.

> But the private sector, by itself, cannot generate
> net financial assets, only gross, and it wants
> them.

I don't believe that it does. Besides, if it were that PFA=PFL as you say above then it couldn't have them.

8:37 AM  

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