Tuesday, April 26, 2011

Increasing prosperity, increasing deficits

To maintain full employment, a sovereign currency issuer must generate sufficient net financial assets to satisfy the savings desire of the non-Govt sector. In other words, the Government must print enough money so the private sector can reach its savings target and have low unemployment. This money printing that shows up as deficit spending.

One question is whether deficit spending, all things equal, necessarily must go up as a State becomes more wealthy. ESM makes a clear argument for why it should here:
Once your level of consumption reaches an acceptable level, doesn’t it make sense to create a nest egg of financial assets equal to at least a low single-digit multiple of your annual income? If everybody could do that, you’d have government debt into the several hundred per cent of GDP range, without even considering the dollar savings desires of the rest of the world (which is understandably large given the stability of the government and the property rights in the US).

It all makes perfect sense to me that as the world develops and as people become wealthier, financial wealth will become a larger fraction of GDP than it is right now.
This is true. If 50% of the US decided to bank 1 years household salary, the USG would need to run a massively higher deficit than it does now.


Blogger Tom Hickey said...

Is it reasonable to expect all income groups, let alone all individuals, to bank a year's savings? With the funnel running to the top, wouldn't a government just be funding massive saving at the top in trying to make space for this level of general saving desire?

Seems like it would be simpler to provide a general annuity, which is what SS, Mediare, and Medicaid effectively are. Without these programs, people would be required to save much more than a year's salary to meet anticipated future expenses, especially medical. Seems like to get everyone to bank the prudent savings necessary for a margin of safety in the face of uncertainty, social welfare programs are the way to do it most efficiently and effectively. This is the system that is now in place and functioning reasonably well, although I would argue that it could be improved by expanding it.

10:50 AM  
Blogger JKH said...


All wealth shows up ultimately as household wealth.

Household wealth includes real assets (e.g. real estate) and financial assets less liabilities.

Household financial assets include net claims on the domestic business sector (which net to zero in the standard MMT private sector take on things), net claims on the foreign sector, and (net) claims on the government sector.

As the world gets wealthier, there’s no reason to believe that the first two categories of financial claims held by households won’t grow commensurately in the overall real/financial mix of household assets, reflecting the growth of underlying real business investment along with it.

There needn’t be any disproportionate reliance on claims on the government sector to satisfy this longer term trend.

Any such disproportion phenomenon comes about as a flow when the economy sucks – not when it’d doing well.

(Your final paragraph is a portfolio preference shock event, not a longer term wealth trend effect.)

11:46 AM  
Blogger winterspeak said...


Sure, the answer may be no. But I think there might be reasons (although whether they are "reasonable" is debatable") why household's net claims on domestic business and foreign sector may not grow commensurately with claims on the Govt sector. It is not a requirement, what we're discussing is whether there is a change in portfolio preference as a function of overall household budgets.

Tom: Maybe. Separate topic though!

12:23 PM  
Blogger Игры рынка said...

There should be a micro reason for accumulation of financial wealth. On macro level it makes no sense to allow for accumulation only because someone do not have time to spend. However certain reasons can be clearly considered as legitimate by the society. And ESM has just one vote.

3:27 PM  
Blogger winterspeak said...

Well, isn't the micro reason that, as a household gets wealthier, their immediate consumption needs are more fulfilled, and therefore they are able to save more of their income?

Within societies, don't we see savings go up as wealth goes up?

I also disagree with your assertion re: what "makes sense" to "allow" at a macro level. I see macro savings desire as the exogenous variable (although, sure, to Tom Hickey's point it is not *truly* exogenous).

5:34 PM  
Blogger The Arthurian said...

The post opens with an assumption I think...
"To maintain full employment, a sovereign currency issuer must generate sufficient net financial assets to satisfy the savings desire of the non-Govt sector."
... the assumption that "the savings desire of the non-Govt sector" has not been enhanced by policy.

7:07 PM  
Blogger Игры рынка said...

winterspeak, what economic purpose do savings fulfil on the macro level? I see none. So why do they make sense then?

Macro theory can agree to tolerate macro savings only because they aggregate from micro reasons. But not beyond that. Surely, you can argue that nominal savings shall grow proportionally to nominal income. But the way I read the argument is that nominal savings can grow disproportionately faster than nominal income. Until you answer the question why it makes sense it does not make sense to discuss whether it makes sense or not :)

10:00 PM  
Anonymous Anonymous said...

"One question is whether deficit spending, all things equal, necessarily must go up as a State becomes more wealthy."

Are you saying, "Is nominal net saving" increasing in real GDP?"

5:32 AM  
Blogger winterspeak said...

Arthur: I'm assuming a constant policy environment. Savings desire can, and does, and has, varied wildly under such conditions. This is why I view it as exogenous, even though really it is not.

Игры рынка: Not meeting savings desire results in unemployment -- certainly a macro (and micro) bad!

vimothy: I'm wondering (not stating!) whether an increase in real GDP will lead to an increase in private sector demand for nfa, all else equal. ESM has an interesting reason for why it should.

6:59 AM  
Blogger Игры рынка said...

winterspeak, you talk about the macro result while I am wondering about macro reasons. This is what any proper policy should be doing - ask questions.

7:02 AM  
Blogger zqxj said...

The post (I haven't read the comments) sounds unconvincing at least to me. Why do net financial assets have to come from the government when there's private debt and equity? Why do they even have to be financial assets when an earlier generation, aided by inflation, demonstrated that rental houses were an excellent way to save for retirement? To this we can add small business ownership. As people become wealthier they can afford to take more risk so the marginal investment mix will feature more and more equity. Lastly, what does saving have to do with the government printing money when deficits are made from bonds? The deficit is just a choice to shift income between age cohorts and I don't see why that choice, and increasing the amount of it that we do, is necessary to make saving possible. If real deficits were roughly fixed to some function of the population growth rate, wouldn't people simply bid up the Treasury bonds until other investments looked good by comparison?

7:52 AM  
Anonymous Anonymous said...

Well, I don't know about that. But in any case, it's the mixing of real and nominal that I'm interested in. Why should people want higher nominal anything as their real income increases?

Also, pretend that we're not mixing real and nominal--say for instance that as income increases, desired saving increases. So far, looks okay. Say that the private sector would like to increase its *net* saving as its incoime increases. Does this make sense?

Perhaps it does, but riddle me this--Why should the private sector actively prefer that its savings fund govt consumption rather than business investment as it becomes wealthier?

8:43 AM  
Blogger STF said...


You may find this of interest. Not a perfect match, but along the same lines:


10:52 AM  
Blogger winterspeak said...

STF: Nice to see you here!

Thanks for the levy publication. It was quite interesting, although there are ways to increase government spending without actually increasing the size of Government (ie. negative tax rates, tax credits etc.). Similarly, the size of Government can expand while keeping taxing and spending the same, though increasing regulatory oversight. I'm not as ready as the paper to conflate size of "deficit" with size of "Government".

As for the Traders Crucible link, I only wish it were so!

12:36 PM  
Blogger winterspeak said...

vimothy: I very much like the way you phrase the question, but higher deficits do not necessarily mean higher government consumption, they could mean higher business investment.

For example, the Govt could lower taxes, increase the deficit, and we may see business investment increase and household consumption stay constant.

12:38 PM  
Blogger STF said...

Regarding Levy paper, I completely agree.

4:14 PM  
Anonymous Anonymous said...

Take S as given; then what I said follows--given S, some fraction will be spent on I and some on G - T.

5:26 PM  
Blogger Detroit Dan said...

If net financial assets don't increase, while real wealth increases, then you'll eventually get deflation...

1:56 PM  
Blogger winterspeak said...

Dan: Yup. Deflation which may not matter in a zero debt economy.

But the question is, must growth in NFA outpace growth in real wealth?

2:21 PM  
Blogger Detroit Dan said...

Zero debt economy? I must have missed something.

I don't know the answer to your question, but I will cogitate on it. I look forward to hearing what others think. That question has been in the back of my mind someplace...

2:26 PM  
Blogger BadTux said...

WInterspeak, deflation decidedly *does* matter in a zero debt economy, because deflation moves money out of the banking system (where it is available to use as leverage to pay for future production using the income produced by that future production, a.k.a. "loans", a.k.a. "that which allows capitalism to be the most flexible means of matching supply and demand, like, evah!" because otherwise you have to wait for people to slowly accumulate capital before they're capable of making the investment needed to meet new demands), and thus reduces the amount of investment in an economy. After all, if your money is gaining in value simply sitting under a mattress, why risk it in a bank?

Note that in this model, banks are merely mechanisms of risk aggregation -- that is, rather than you loan your money personally to someone, you're instead loaning it to a bank for a small amount of interest (what, you don't think they give you that interest out of the goodness of their heart, do you?) then the bank lends a tiny percentage of it to multiple other persons, limiting the loss if any one person defaults on their loan. (But if most of the people default on their loans, different problem altogether!).

Note that zero debt economies tend to get outcompeted over time by capitalist (debt-based) economies because capitalist economies, by leveraging current capital to create future capital, can react far more nimbly to market conditions.

Regarding the notion that more affluent nations save more, why, then, does the U.S. save less than virtually every other advanced nation on the planet?Why have savings rates in the EU countries, which were still in some difficulties economically in 1960 as they finished rebuilding from WW2 (indeed, food rationing in Britain was discontinued only in 1954) and are far more prosperous today, *declined* as the EU became more prosperous? Clearly more affluent people save more than poor people, but there appears to be a limit to that notion. For one thing, economies tend to eventually produce more things for more affluent people to consume. Who, forty years ago, would have predicted that virtually every home in the United States would have its own personal computer (or multiple ones!), plus iPads, iPhones, 50" wide-screen televisions, and all the other ways that increased affluence has led to increased consumption? In addition, it becomes hard to distinguish between savings and investment at the upper end of the income range. If I buy ten duplexes in Santa Clara and refurbish them as cashflow properties, am I saving, or am I making an investment? If I put a million dollars into stock in an established company, am I saving, or am I making an investment?

And finally, there appears to be no correlation in the historical data between deficits and inflation. In large part this is probably because governments tend to run the largest deficits during recessions, where monetary deflation is a major problem as bank lending contracts due to lack of demand and reduces the money supply via reversing the fractional reserve money multiplier, so any inflation generated by deficits gets offset by the general deflationary environment. But the fact remains that the overall economic environment, and bank lending in particular, appear to be a larger influence on inflation than deficit spending. At least in the United States, at least in the years we have economic data for.

- Badtux the Economics Penguin

3:43 PM  
Anonymous Anonymous said...


G-T is not private sector nominal savings.

G-T is typically 13% of GDP, and this doesn't change a whole whether the government runs deficits or whether the government budget is balanced.

G-T corresponds to how much output government purchases minus sales and excise taxes.

Whereas nominal savings are a function of how many liabilities the government issues -- total expenditures minus total taxes. The budget balance includes personal and corporate income taxes but these are just transfers and do not affect NIPA at all.

The government can purchasing zero output, yet issue many nominal liabilities, or the government may purchase a lot of output and not issue any nominal liabilities. The two issues are separate. Therefore nominal savings demands or even net savings demands have nothing to do with a desire for the government to consume more output or for the private sector to consume less output. Apples and oranges.

8:34 PM  

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