Saturday, February 18, 2012

S=I+(I-S)?

Commenter Greg points me to this post: More on Savings and Investment
“It is perfectly possible to hold the international balance constant, have the government reduce debt, and have “people” save more.

“People’s” financial savings consists of claims on firms and claims on government. If I perform some work for a firm that (however infinitessimally) increases the firm’s real economic value, and I accept as payment a share of that firm’s stock, I have performed the economic act of saving, and increased the net saving of “people” — of the household sector. Net private sector financial assets have not increased: my “savings” is the firms’ obligation, the household sector’s surplus is offset by the business sector’s deficit.

But much of what we call saving is exchanging real resources for claims on the private business sector. And as long as the private business sector doesn’t entirely squander those real resources, that act contributes to macroeconomic S. If the private business sector does squander the resources, then while I still perceive my contribution as “saving”, the value of macroeconomic S = I does not increase, and my claim amounts to a transfer from other shareholders of the firm.
It seems similar to this same theme raised in Interfluidity (here and here). At any rate, I think they are all related.

Honestly, I'm having difficulty making head or tail of the discussion. I'm not sure what distinction they are making, and I don't know why the distinction I think they are making is important. It seems to be that, the usual sector de-composition is between the Government and non-Government sector, where Government is the currency issuer (consolidated Treasury and Federal Reserve function) and non-Government is everyone else (all currency users, includes foreign Governments). I think they are saying that within the non-Government sector, distinguishing the household from commercial sector is important, but I don't know why.

Anyone care to enlighten me?

Thanks

Labels: ,

95 Comments:

Blogger Neil Wilson said...

They'rebtalking in real terms wi the veil of money argument again. And so they miss the main issue. All transactions in the real world of moeny involve a third party - the bank.

If you ignore bank transactions then all problems go away. And that will happen the day that Walmart start accepting shares in private firms for payment rather than credit cards

The problem is caused by abstracting away banks and their buffering process.

10:28 AM  
Blogger Greg said...

Well this all started, it seems to me, as a rebuttal to the notion that the govts deficit is represented "to the penny" by the non govts "savings". Cullen Roche, Mike Sankowski and Beowulf are now taking a third way approach to the different "saving" paradigms of MMT and Neo classical.

I am ill equipped to get real involved in this squabble but I think Neil sums it well. The MMRers are trying to focus more on the horizontal money, the privately created investment, and move away from vertical "state money" centered paradigm it seems. Their reasons have more to do with objecting to "taxes drives money" theories or Warrens "guy with a 44 magnum making you use his business cards" type metaphors.

I thought you might have something to add to their discussion Winter since accounting and MMT are your strong point.

These guys, it seems, are trying to clean up MMT and make it a more palatable paradigm for those who think it sounds too authoritarian.

I dont know if they have exposed some true weaknesses of the MMT paradigm or not. It seems that much of what they have said, I have heard Scott Fullwiler or Warren Mosler say before.

I think the biggest quibble they have is that they think the taxes drives money is overstated. They think production drives money and taxes are maybe 25% responsible. Ive never heard Warren or others state the percentage to which they think taxes drive money. Maybe they have never thought to quantify it and simply look at it as obvious that taxes are a reason why state money sits at the top of the pyramid.

I just thought you might find something of interest to comment on. JKH is there and Ive seen you two discussing matters here before.

1:10 PM  
Blogger paulie46 said...

"They think production drives money…"

I wonder where they think the money comes from? I know they know because they say it all the time so they have confused me. Magic?

4:56 PM  
Blogger Dan Kervick said...

I'm also finding the discussion extremely confusing. It seems to me they are on a wild goose chase.

9:02 PM  
Blogger Neil Wilson said...

You can get to a "we don't need no stinkin' state" description if you want. But then it isn't a description of what we actually have.

Banks are important in the horizontal circuit, and even more so if they are granted a licence to print money by the state (ie an account at the central bank)

11:29 PM  
Blogger Ramanan said...

The point is that one has to specify the problem well.

A household, an entity or a sector as a whole can have a positive saving - such as 4% of its income and yet be a deficit spender because saving net of investment is negative.

So we see the title of our post http://bilbo.economicoutlook.net/blog/?p=10384 which is not only misleading but WRONG because deficit is saving net of investment, not saving alone.

The best way is to actually check the national accounts data.

Both in the United States and the United Kingdom, the household sector (at least) had positive saving and its net worth kept rising before the crisis because of saving (and accumulated savings) and due to capital/holding gains.

On the other hand, due to its deficit spending (in spite of having positive saving), an entity or a sector as a whole (such as the household sector) runs into higher indebtedness and its stock/flow and flow/flow ratios may run into an unsustainable territory as interest payments begin to hit or due to some exogenous shocks for example.

which is very different from saying "...If the government continued in this vein, accumulated private savings would equal the cumulative budget deficits." which is wrong as an accounting identity.

Another example of the repeat in mistake.

"this also means it is impossible for the aggregate saving of the nongovernment sector to be less than (or greater than) the budget deficit."

http://www.neweconomicperspectives.org/2011/10/mmp-blog-20-effects-of-sovereign.html

(Aggregate saving is different from net saving - where net saving is saving net of investment).

Example: Closed economy. Budget deficit is 2%. S of the private sector is 10% and investment is 8%. "aggregate saving" of the private sector is 10%. Net saving - saving net of investment is 2%.

Agreed the MMTers sometimes use saving net of investment but one wrong and one right doesn't make a right!

5:16 AM  
Blogger Dan Kervick said...

The equation JKH has emphasized is S = I + (S-I), not the one in the title of this post.

For some reason, they think this means that I is the "backbone" of aggregate savings.

But one could just as well write the identity I = S + (I -S).

Have I now just proved that aggregate savings is the backbone of investment?

You can't derive substantive causal claims from identities alone. You can however, refute substantive causal claims if they are incompatible with identities.

The MMR guys also notice that if you divide the private sector into a household and non-household sector, then even if the private sector is in deficit on the whole, the household sector could be in surplus. So in principle, the government could run a surplus at the same time as the household sector, as long as the business sector ran a deep enough deficit. They're trying to make this a plausible policy option by building in a horizontalist theory of money.

They seem to be looking for ways to make common cause with Austrians on deficit cutting.

7:15 AM  
Blogger paulie46 said...

"You can't derive substantive causal claims from identities alone. You can however, refute substantive causal claims if they are incompatible with identities."

This should be a fundamental rule re the ongoing discussion.

8:39 AM  
Blogger Ralph Musgrave said...

I agree with Ramanan. Steve Waldeman is pointing to the fact that some MMTers (Randall Wray for example in the link that Ramanan gives) confuse stocks and flows. But as Waldeman rightly points out, that does not destroy the MMT argument When it comes to the equation, (I-S)+(X-M)+(G-T)=0 , MMTers just need to be clear that they refer to flows.

Waldeman also makes the daft accusation that MMTers confuse or conflate private sector net financial assets with household savings. Well that’s just rubbish. Why does he think MMTers use the phrase “private sector net financial assets” rather than “household net financial assets? Doh!

Re S = I + (S-I), effectively this says that “I” shouldn’t be there. I actually did a post arguing this just recently. See:

http://ralphanomics.blogspot.com/2012/02/alternative-sectoral-balance-equation.html

But my reasons are much simpler than Waldeman’s. My argument was that where a private sector entity makes an investment by buying something off another private sector entity (e.g. buying a new car) that simply involves money moving from one private sector entity to another, so there is no change to S. Alternatively if the asset is bought off the PUBLIC sector, that will be included automatically in S (or rather “net S”, since S is simply the net flow of funds into or out of the private sector).

1:50 AM  
Blogger Ramanan said...

Ralph,

Yes, the argument is not against deficit spending.

However, note the private versus household is another matter altogether.

Also it's not stock-flow inconsistency. It's flow-flow inconsistency.

5:06 AM  
Blogger Neil Wilson said...

There's generally a flow-flow inconsistency when measuring I anyway.

All I's are not created equally and the various definitions don't really help.

Essentially you have to flow more through the nominal circuit to get the real circuit operating at full capacity - because banks can't 100% match the desires of savers and borrowers over any particular time period.

6:09 AM  
Blogger Ralph Musgrave said...

I don’t get this business about flow – flow inconsistency. Strikes me that Randal Wray confuses stocks with flows for the following reasons.

In the three sector equation (foreign, government and private) what is certain is that flows of money between sectors in a given time span must net to nothing. Wray then says (having assumed the external sector is in balance) that "this also means it is impossible for the aggregate saving of the nongovernment sector to be less than (or greater than) the budget deficit."

Either he is referring to the aggregate STOCK of savings, in which case he’s got flows and stocks confused.

Or he is referring to the ”aggregate flow of savings”. But I very much doubt he had in mind the creation of extra private sector savings in the form of upgrading your kitchen or seeing your shares rise in value. This is not a FLOW from one sector to another. Ergo I think he refers to stocks.

8:35 AM  
Blogger winterspeak said...

Thanks all

I'm still confused though

Ranaman: I think you came closest to explaining their point. is it the assertion that the non-govt sector can be decomposed into household and corporate, and that if the corporate sector runs large enough deficits, then the private sector and govt sector can run surpluses?

How serious is this position? The corporate sector cannot run negative equity the way the govt sector can (and does, and must)? Is it a pedantic point, or is there some important mechanic underneath it all?

As for investment, I think the MMT position on this is that it's the unit of account that books a non-spending (saving) decision? I'm having trouble seeing how it flows into sector decomposition


Thanks!

10:56 AM  
Blogger Ramanan said...

Winterspeak,

It is not really a question of decomposing the private sector or consolidating it. These two ideas are something of a digression.

But let us take the consolidated private sector and a closed economy.

Now, there is a tendency to argue that the private sector cannot save if the government does not run a deficit.

When the same language of national accountants is used, why then ultratemporarily shift the definition of saving or blur it?

When one writes S - I = G - T, it is clear that the definition of saving used is the one national accountants use.

The point brought forward by SRW and JKH is that many times, MMTers indulge in being imprecise in the difference between saving and saving net of investment to argue for deficit spending.

And it is not a minor point.

I am a diehard Keynesian and fiscal policy is central in my understanding of how economies work, but wouldn't try to blur to argue for deficit spending.

It is possible for the private sector to be saving to be high and to be in deficit at the same time which is what happened before the crisis. So even though the household net worth was increasing and in that short sighted way of looking at the big picture - seen as healthy, it's fragility was increasing a lot. And in such cases, one needs to point these things out.

Unfortunately to argue that something is wrong by making an argument such as "it is impossible to save overall if the government is in surplus" (or similar statement with the usage of the word "impossible" with some configuration of budget balance and external sector balance) is not the best argument because the statement is wrong.

And by doing so, the attention is diverted from a more powerful analysis about studying a composition of real assets versus financial assets. Also, the person who is aware of things such as saving rate may not see the point because he/she is getting the data from NIPA and will observe that things are fine.

Also, it is good to always specify net saving as saving net of investment. This is especially true when the usage of the phrase net coincides with an analysis where net financial assets is also used where the netting is a different kind of netting.

[If it is not specified that net saving is saving net of investment, then it is the net saving used by national accountants which has a different meaning altogether! You can check this from NIPA data.

Under such nonspecification, net saving of the whole private sector can also be positive when the government is in surplus! (closed economy for simplicity)]

9:43 PM  
Blogger winterspeak said...

Hi Ranaman:

Thanks for taking the time to explain this to me.

The definition of "saving" i've used is: nominal income that is not spent. So, if you buy an equity, you are not saving, you are investing. So, saving is actually defined as a negative -- it is not spending. Is this different from "savings net of investment"? In my head, savings can NEVER include investment.

If we look at the net financial assets (equity) of the non-governmental sector, we find a positive number, and a positive number that must, by accounting, be equal to the negative net financial assets position (equity) run by the Govt sector. I assume this is the national debt, but there may be many reasons why those two account entries aren't the same.

So, if the government runs a surplus and drains the non-governmental sector of net financial assets (equity), how can the non-governmental sector increase it's total quantity of savings?

11:53 AM  
Blogger Ramanan said...

Winter,

It is very simple. SR found this

“Without a government deficit, there would be no private saving.”

in two places at least by MMTers.

which is not right because

S = I + G - T

Let's say G - T is zero.

private saving is positive because of investment.

Now to your last comment:

Saving is defined as disposable income minus consumption (simple model). While consumption expenditure is subtracted, investment expenditure is not.

Take an example. (no loans to simplify complications)

I earn $1,000,000, pay taxes of $300,000 and have consumption expenditure of $100,000.

I also buy a home for $400,000 paying upfront.

My saving is $600,000

Net Saving is $200,000 ($600,000 - $400,000).

My saving is in the form of $400,000 in the house and $200,000 in financial assets accumulation(deposits here for simplicity).

1:02 PM  
Blogger Neil Wilson said...

R,

Are you sure that house is savings. That looks like consumption to me, or at best investment.

Buying a house is either a new one - in which case it is investment or consumption.

Or it is an old one in which case it is an asset swap which doesn't show in the aggregate (whoever you bought the house off now has the money and will either buy new production or save).

Aggregation matters.

1:52 PM  
Blogger winterspeak said...

Ranaman: If the MMT person said "without a government deficit, the private sector would not be able to increase its net financial assets (equity)" instead of saying “without a government deficit, there would be no private saving” would you still have a problem?

Secondly, I'm with Neil -- why is purchasing a house for $400,000 considered "saving"? I would not consider it "saving" because, to my understanding, saving is "not spending" and buying a house is certainly "spending".

If we define "saving" as "not spending" then the term "net savings" becomes meaningless. We would have to distinguish spending into two types: investment and consumption. It is also true that the categorization may change pre- and post- ante, and the consumption (or investment) may be voluntary or involuntary.

So, with the definitions I have in my head, I don't see the net savings vs savings as adding anything. But maybe the definitions I have in my head are different from those used in national accounts. Is that the problem? S=I works fine with the definitions I have in my head.

3:07 PM  
Blogger paulie46 said...

Ralph:

"In the three sector equation (foreign, government and private) what is certain is that flows of money between sectors in a given time span must net to nothing. Wray then says (having assumed the external sector is in balance) that "this also means it is impossible for the aggregate saving of the nongovernment sector to be less than (or greater than) the budget deficit."

What I read from this statement is that the net financial assets of the private sector will increase by the amount of the budget deficit. This is a flow. So he must mean aggregate saving as a flow. Sloppy but not a deal-breaker.

"Or he is referring to the ”aggregate flow of savings”.

Yes, at least I think so. And I think he means financial assets rather than traditional savings.

"But I very much doubt he had in mind the creation of extra private sector savings in the form of upgrading your kitchen or seeing your shares rise in value. This is not a FLOW from one sector to another. Ergo I think he refers to stocks.

His "aggregate flow of savings" would consist of new treasury (debt) issues generally, ie financial assets, not personal or household savings per se. M2 does not include treasuries.

5:36 PM  
Blogger Ramanan said...

Winterspeak,

Careful.

Saving is a residual. "Y-Disposable Minus C"

In my example saving was $600,000

However I need to know what adds up to $600,000. The investment of $400,000 (house) and acquisition of $200,000 of financial assets add up to $600,000.

In the national accounting way of doing is $400,000 appears as expenditure in the current account cancelled by $400,000 in the capital account.

In the example, the capital account also includes $200,000 of acquisition of financial assets in the accounting period.

That is different from saying that "Ramanan says purchasing a house is saving".

At any rate, I don't really care how MMTers will modify their literature given that they claim the private sector cannot save without a budget deficit.

The error is not minor.

9:05 PM  
Blogger Ramanan said...

Winter,

Btw, I have a blog and I show the claim "Without a government deficit, there would be no private saving." is incorrect with actual data from the Fed's Z.1

http://www.concertedaction.com/2012/02/21/saving-net-of-investment-updated/

12:27 AM  
Blogger Neil Wilson said...

"Saving is a residual. "Y-Disposable Minus C""

Indeed it is, but it is also an aggregate.

Bear in mind that for the two equations of GDP to work they have to have the same value of 'C' and the same value of 'Y'. So what adjusts one, must adjust the other in the same way.

So

(1) Y - C = S + T

and

(2) Y - C = I + G + (X - M)


So there are two ways to account for the house purchase.

You can add it to savings of household 1 and subtract it from the savings of household 2. That way Y stays the same and the aggregate effect on S is zero.

Or you can add it to the savings of household 1 and the income of household 2. In which case 'Y' goes up by the same amount as 'S' does ($400K in this case).

Punching that into equation 2 either leaves 'I' the same or increases 'I' by $400K as a matter of accounting.

Overall - so what?

" I show the claim "Without a government deficit, there would be no private saving." is incorrect "

For your definition of 'I' and 'S', which is easy to do and advances nothing - since it tells nothing about the causalities.

Plus I've never really seen MMT guys push that line in context when you talk to them. 'Saving' has always been defined as 'excess saving' or 'net savings'.

Have you bothered confirming the statement with Scott, et al and what calculation methods of 'S' and 'I' they were referring to?

1:14 AM  
Blogger winterspeak said...

Ramanan:

Thanks for your response. I'm still struggling to understand though.

The two posts that most shaped my thoughts about S=I was from Mosler, and the classic one by Andy Harless. In both of those, they defined "saving" as "not spending". So, that would be "savings net of investment" by definition.

Also, my understanding of capital account and current account was that they were balance of payment components primarily concerned with money flowing into and out of a country, either via earnings or investment. I don't think that a home purchase of one American by another American would show up in either (but I may be totally wrong).

Also, I agree with Neil. The standard MMT line I've seen on "saving" as been the "not spending" definition which is what you're saying.

Even in the Wray paper you link to, the fuller quote is "Without a government deficit, there would be no private saving. Sure, one individual can spend less than her income, but another would have to spend more than his income."

Wray, in this context, is using the "saving=not spending" definition as he explains "without a govt deficit there would be no private saving because although one individual can spend less than their income, another individual would have to spend more than their income". This is straightforward fallacy of composition.

9:23 AM  
OpenID vimothy said...

WS,

In both of those, they defined "saving" as "not spending".

The actual definition is not spending income on consumption.

So, that would be "savings net of investment" by definition.

No--in that case, "saving net of investment" is a meaningless construction, since you've already defined saving as net of investment, and "saving net of investment" would actually then mean "unconsumed income net of investment, net of investment".

And clearly, S=I doesn't make the slightest bit of sense either, if saving is defined saving net of investment.

9:44 AM  
Blogger Detroit Dan said...

I get Waldman's point that household's can save by buying real assets (such as corporate stocks). But if net financial assets don't increase (i.e. if the government doesn't run a deficit), then it seems the private sector gets stretched too thin, as what happened in 1999-2000 during the dot-com bubble. The historical record seems to be pretty clear that MMT has it right. The MMR/Waldman point is valid, in my opinion, but I'm with Neil in thinking it is of minor significance in the real world...

11:39 AM  
Blogger Ramanan said...

Vimothy,

Excellent point on not spending income on consumption!

Winter,

"Even in the Wray paper you link to, the fuller quote is "Without a government deficit, there would be no private saving. Sure, one individual can spend less than her income, but another would have to spend more than his income."

Precisely because of Vimothy's point above.

Vimothy,

"No--in that case, "saving net of investment" is a meaningless construction, since you've already defined saving as net of investment,"

Careful. Even earlier today I wondered whether this phrase is accurate or not. I think it is.

Saving = Investment + S - I using JKH

Hence Saving Net of Investment is S - I

I think while wondering, we anti-net it somewhere else.

11:47 AM  
Blogger Ramanan said...

"Precisely because of Vimothy's point above"

I meant Wray is precisely wrong because of Vimothy's point above.

While it is true that one individual expenditure is less than his income, another should do the opposite, ... while calcuation saving, only consumption expenditure is used but for calculation financial balance, all expenditure is used.

11:53 AM  
Blogger Ramanan said...

"Excellent point on "

To sound not flattery,

Excellent catch...

12:01 PM  
OpenID vimothy said...

Ramanan,

Even earlier today I wondered whether this phrase is accurate or not. I think it is.

Yes—it’s perfectly valid.

My statement addressed the logical coherence of defining saving as income net of the sum of consumption and investment whilst also talking about saving net of investment.

If saving is equal to income net of consumption and investment, then saving net of investment is equal income net of consumption and investment, net of investment.

But this is pretty absurd, so...

12:29 PM  
OpenID vimothy said...

And it implies that S = I can't be generally true in a closed economy, unless S = I = 0.

12:42 PM  
Blogger Ramanan said...

Vimothy,

"My statement addressed the logical coherence of defining saving as income net of the sum of consumption and investment whilst also talking about saving net of investment."

Oh didn't notice.

1:02 PM  
Blogger winterspeak said...

vimothy/ranaman:

Sorry -- still not with you guys.

The definition of saving I have in my head is "not spending income". If you spend income on anything, then you are no longer saving it.

I think this is the standard MMT line on it too, but only because I came to this after working through MMT literature.

If you guys say the actual definition is "not spending income on consumption" then fine -- that's what I meant. And if this is the actual definition, then I agree, you need to stipulate "savings net of investment".

But I have to say, I think you're putting words into people's mouth here. Where in the Wray paper, for example, does he say that investment is a form of savings?

DETROIT DAN: Yes, SRW has claimed that if you buy an investment property, you are saving. In one sense you are perhaps, but not by my definition where ANY form of spending income (on consumption, investment, whatever) is NOT saving.

1:36 PM  
OpenID vimothy said...

And it implies that S = I can't be generally true in a closed economy, unless S = I = 0.

Assume a closed economy and assume that national saving is defined by,

S = Y – C – I – G;

By definition of a closed economy,

Y = C + I + G

Therefore,

S = (C + I + G) – C – I – G = 0, for all C, I, G;

If we are to have,

S = I

Then clearly

S = 0 if and only if I = 0;

Implying that aggregate (public + private) investment is impossible.

1:43 PM  
OpenID vimothy said...

WS,

Purchasing an asset is not dissaving.

2:52 PM  
Blogger winterspeak said...

vimothy:

says who?

i think purchasing an asset is dissaving. If I buy an asset, I am spending out of income. Since saving is NOT spending out of income, then purchasing an asset is dissaving (I assume that dissaving is the opposite of saving)

The MMT definition of saving is simply "not spending out of income". It seems that you guys are claiming it is something else in order to then claim that the MMT definition is wrong because they aren't netting out investment.

I guess at this point I need to see where MMT clearly claims that saving is anything other than "not spending out of income" on *anything*. The Wray paper Ranaman linked to doesn't do this, for example.

Now, I'm sure MMT is sloppy about this in places and they should be clear. On board. But if you can find me any place in MMT where they positively claim that spending out of income on investment is saving, but consumption is not saving, I would be obliged.

9:13 PM  
Blogger Ramanan said...

Winterspeak,

In MMT saving IS defined as the usual - not as income not spent.

This is because you see Warren Mosler standing with a card with has "S - I"

http://bilbo.economicoutlook.net/blog/wp-content/uploads/2012/02/Warren_Matt_Washington_Sectoral_Balances.gif

If saving is defined in the usual way, you get the identity.

If saving is defined as "income not spent", you don't get the identity Mosler is displaying in the poster.

9:50 PM  
Blogger Neil Wilson said...

The problem you guys are having is that you are not seeing the nominal circuit separately from the real circuit.

In MMT, there is not a one-to-one relationship between money and real things. Money exists in its own right (prior to trade as the FT puts it).

"and assume that national saving is defined by,

S = Y – C – I – G; "

Bad assumption. G can create money out of nothing.

So your arithmetic is based on a false assumption of a fixed amount of money in the system and doesn't stack up to reality where there is a dynamic amount of money.

Sovereign governments don't borrow money - they create it.

So with no investment and no consumption

Y = G

and therefore

S = G

for any accounting period.

G then has the option of confiscating that saving (via T), or accommodating the stock by simply producing more currency for the next accounting period.

Add investment and you get

(S - I) = G

in the nominal circuit.

The key finding of MMT is that G has to accommodate or confiscate the nominal leakage (S - I) which is caused by bank's inability to perfectly match saving and investment desires.

Trying to pretend (S - I) doesn't exist by playing with arithmetic doesn't alter the plain and simple reality: Banks Buffer. It's inherent in the design of our banks.

12:37 AM  
OpenID vimothy said...

says who?

Everyone else? Logic? Common sense?

According to your reasoning, if I take my risk free bank deposit (insured by the government, I might add) and exchange it for a direct risk free claim on the government (e.g., a gilt or treasury), I’ve dissaved, even though there has been no change to my assets or liabilities.

You probably can see why this might be a problem for MMT—it implies that, amongst other things, government bonds cannot by (your idiosyncratic) definition be savings for the private or non-government sector, unless they are given away for free.

That’s what your definition commits you to.

It also means, as Ramanan alluded to in his comment, that you can no longer write things like,

(S – I) + (G - T) + (X - M) = 0

Which are nonsensical under your definition of saving.

Now, I'm sure MMT is sloppy about this in places and they should be clear. On board. But if you can find me any place in MMT where they positively claim that spending out of income on investment is saving, but consumption is not saving, I would be obliged.

I think the issue is more fundamental than that.

Prior to the epic thread over at MR, I would have said that MMT is sloppy at times but ultimately there can be no doubt that more knowledgeable types know the difference between saving and net saving. But now it seems that it’s not just n00b enthusiasts misrepresenting what they’ve misunderstood, but that academic MMT economists don’t even know basic stuff like the proper definition of saving.

You are suggesting that if Wray et al are at least consistent, then that’s okay. Obviously, your mileage may vary, but that doesn’t do it for me for the following two reasons:

1, MMTers are making claims about “saving” that are very different in their implications depending on what “saving” means. Since the rest of the world is operating according to the usual definition of the term, MMTers ought to be a lot more up front about the fact that they are talking about something completely different.

2, Taking this new definition at face value, all the usual relationships from the national accounting framework are invalid. This needs to be addressed by MMT, but manifestly it is not, and instead you guys are mixing oil and water.

4:36 AM  
OpenID vimothy said...

Neil,

I know it’s a bad assumption: that was the whole point of the exercise.

If saving is income not spent on anything, be it consumption or new assets, then in a closed economy, given that aggregate income equals aggregate expenditure, aggregate savings are identically equal to zero at all times. Since S = I, investment is impossible by definition.

5:19 AM  
Blogger Ramanan said...

Vimothy,

Great points!

It is extremely important to maintain self-consistency.

5:55 AM  
Blogger Neil Wilson said...

"If saving is income not spent on anything, be it consumption or new assets, then in a closed economy, given that aggregate income equals aggregate expenditure, aggregate savings are identically equal to zero at all times. Since S = I, investment is impossible by definition."

You're really struggling with the viewpoint shift that MMT implies.

Until you shift your mental view of the world you simply won't get it. Linearising from a different viewpoint will cause you to miss the obvious point - governments create money and don't need an income to spend.

Therefore how does aggregate income = aggregate expenditure 'at all times' when you have one party to the process that doesn't need an income and can therefore simply spend?

Necessarily what the government net-spends into the private sector without income pops out the other end of the process as net-savings with the government sector, which is essentially income without spending.

Those are equal - because that's the insight. NetG is there to offset the effects on the dynamics of the economy from savings trying to be in excess of investment (or vice versa).

That Net government injection means that 'at all times' there is a nominal net-savings buffer in the economy. And that allows S and I to be out of kilter with each other for longer dynamically - offsetting the deflationary impact of not being able to S and I when you want to.

I'm pretty sure this is all in Keynes.

6:52 AM  
Blogger winterspeak said...

vimothy:

I disagree. By my logic, if you move your money from a FDIC insured back account and by a Treasury I have not dissaved. I've simply changed the term structure of dollars. Similarly, if I move cash from my wallet to my checking account, or from my checking account to my savings account, I have not dissaved either. My nominal position is the same.

However, if I buy an Apple stock with my money, then yeah, I say I have dissaved. I've invested instead.

By your logic, buying Apple stock is "saving", not "investing" as Apple stock is an asset.

Or if I buy a house, you guys would claim that's saving as well, not investing. In fact, I think Ranaman made this exact claim in an earlier example.

Now a house is a little complex, because living in the house in consumption, but the property itself is a durable good, available in multiple periods, and clearly has an investment element to it. It's not "saving".

And OK, you're right, Mosler was sloppy in his placard. I don't think that's enough to say they've been systematically incorrect in their literature (which again, may be true -- I just haven't seen it yet).

7:30 AM  
OpenID vimothy said...

WS,

I disagree. By my logic, if you move your money from a FDIC insured back account and by a Treasury I have not dissaved.

But that's not very consistent.

Upthread you wrote that if you buy an asset, then you’re spending and so this should count as dissaving. That doesn’t make sense to me, but it seems like now you’re arbitrarily distinguishing between assets for no good reason. Spending on some assets is dissaving and spending on others is not. What claims against what actors constitute legitimate forms of savings?

Say I have a claim against the bank. I take it this can represent savings in your view. But what if the claim is backed by loans to firms in the business sector, e.g. to Apple?

And how can you have S = Y – C – I – G and S = I for the whole economy? Which one is wrong?

However, if I buy an Apple stock with my money, then yeah, I say I have dissaved. I've invested instead.

But that isn’t what investment means. Investment represents the creation of new fixed assets. If you buy some Apple stock you haven’t saved and you haven’t invested. You’ve swapped one asset for another of (let’s hope) equivalent value.

Say you start with bank deposit worth $X and no liabilities. In state A you buy a bond from Apple worth $X. In state B you buy a bond from the government with $X. In both states the value of your assets and your liabilities is unchanged, and your net assets equal $X. How can you have dissaved in state A vs. the outcome in state B?

By your logic, buying Apple stock is "saving", not "investing" as Apple stock is an asset.

By my logic, which is just to apply the usual definitions of the words, buying Apple stock is not saving.

Not spending income on consumption is saving.

Or if I buy a house, you guys would claim that's saving as well, not investing

If you buy a house with your savings, then you haven’t dissaved.

If you buy a house in any case, you haven’t invested.

Buying assets isn’t saving and it isn’t dissaving.

It’s not investment either, necessarily.

Building new houses would be investment.

Well, technically investment is the market value of aggregate expenditure on new investment goods.

So buying and selling already existing assets isn’t investment just like it isn’t saving or dissaving. The production and sale of new fixed assets is investment.

Otherwise you could end up concluding that every time someone buys an asset they are simultaneously dissaving and investing.

9:01 AM  
Blogger Oliver said...

Macroeconomic saving a la MMT is the accumulation of NFAs (government issued financial assets) by the private sector, which I suppose includes those of foreign countries. This isn't consistent with the placard that Mosler is holding, but it's how I understand the official MMT position. It says nothing about household worth, the value of land, nor about whether the corporate financial assets they hold are being put to good use (investment). It is a macro statement deriving from slicing a nation financially into public and private sectors along the usual MMT lines of consolidated CB and treasury. I'm sure there are a gazillion reasons for slicing things differently to arrive at different conclusions. One can e.g. further divide the private sector, one can focus on households (which is where I see the S from the placard), one can question the usefulness of the concept of nation in a globalized world and one can venture into related fields of politics, but those are all separate discussions. Yes, clear definitions are a must and I agree the MMT use of S for accumulating NFA is sloppy wrt to standard definitions. But it is also very simple and useful.

9:33 AM  
Blogger Neil Wilson said...

Investment, Saving and Inflation are the three Humpty Dumpty words in economics.

You have to nail down precisely what each of them mean every time you read anything.

10:13 AM  
Blogger winterspeak said...

Hi vimothy:

I certainly agree that there are grey areas, but I also think I'm being kind of consistent.

Is it really so crazy to claim that having $100 cash in my wallet is like having $100 in a checking account, or having $100 in a savings account, or having a $100 CD, or having $100 worth of 30 year Treasuries? In all cases, you're talking about nominal money that's backed by the guys with the spreadsheet.

If I have money in the bank, because of FDIC insurance, that money isn't backed by the quality of the bank's loan book. It's backed by the Govt.

So I think there's a reasonable way to distinguish what claims against which actors constitute legitimate forms of saving, but I also agree that there are grey areas (Fannie and Freddie anyone?)

And yes, I think that on an individual level, it's reasonable to conclude that every time someone buys and asset they are simultaneously dis-saving and investing. For example, when I buy a car (an asset), I am dis-saving (my savings are going down) and investing. If I buy stocks, I am dis-saving and investing.

is this really so crazy?

10:32 AM  
Blogger Neil Wilson said...

"is this really so crazy?"

No. It's just a matter of accounting policy.

What we really need to do is define what the MMT accounting policy is and where necessary show how the aggregation differs from the System of National Accounts definitions.

In one of Bill Mitchell's latest posts he mentions SNA 2008 and doesn't mention any derogation from that to get the MMT values.

11:05 AM  
Blogger Ramanan said...

Bill Mitchell has his own confusions here in the quiz and the comments section. (and JKH confirmed to me Bill is wrong).

http://bilbo.economicoutlook.net/blog/?p=14867

12:16 PM  
Blogger winterspeak said...

Ramanan:

You still seem to be begging the question (and I'm sorry if I'm seeming dense -- I'm really just trying to understand your point).

Let's try a different tack:

1. When I refer to the type of "savings" that increases in the non-govt sector when a currency issuer deficit spends I try to scrupulously call it "net financial assets (equity)".

Are you OK with that term being used to label that accounting entry?

2. What is the functional difference between my current definition of "saving" ("not spending out of income on ANYTHING") and your definition ("saving net of investment")?

In my mind, if you are defining saving as "not spending out of income on consumption", and you add the proviso "net of investment" this leaves "not spending out of income on consumption OR investment" which is what I think I'm saying (let's leave whatever the standard MMT line may be or not be aside for the moment).

Thoughts?

12:57 PM  
Blogger Neil Wilson said...

"Bill Mitchell has his own confusions here in the quiz and the comments section. (and JKH confirmed to me Bill is wrong). "

It doesn't look to me like Bill is confused there. He's clearly referring to sectoral balances.

I do feel that you are looking for holes where none exist.

1:20 PM  
Blogger Ramanan said...

Winterspeak,

You should be careful of the word "savings". In national accounts it is used as a plural of saving and hence a flow and not as wealth - a stock.

Let us still use "savings". But it does not have a relevance really in #2.

While it is true that the government sector's liabilities is held as assets by the private sector, the latter has real assets in addition.

On #2, you could define it that way but there is nobody including the MMTers who define it that way.

You may see them sometimes defining it that way but it is inconsistent. It's like giving two definitions about the same.

As Vimothy pointed out, if you define it that way, you lose the sectoral balances identity written as I linked in the poster. It would be written differently.

More importantly, if you go down the path the system of accounting won't work well.

The flow of saving increases the stock of net worth.

So I can write

Net Worth (end of period) = Net Worth (beginning of period) + Saving + Holding Gains

By not counting saving as per standard definition you would need a more complicated rule for connecting stocks and flows.

People consider their house as a part of their wealth and it is a bit strange if it is saving is defined another way.

Of course there is a flip side to this as I mentioned earlier.

People looking at NIPA data and household net worth data may conclude that nothing seems wrong and those who were analysing this using these two measures thought nothing is wrong - forgetting that in spite of having a positive saving, the private sector was incurring liabilities at a large scale adding to its indebtedness every period.

There should be balance - some people would just consider real assets and some would just talk financial.

Both are important but it doesn't make sense to continue to mix saving and net saving especially when people such as JKH and SRW have been pointing out since a long time.

It has a danger that if one goes around claiming that saving is negative whereas someone else points out it is not then the debate becomes more like the $29 Fed secret loans debate.

And it also misses the chance of doing a more powerful approach by pointing out how despite positive saving and good net worth, the United States went into troubles.

By yourself pointing out to others that saving and net saving are different and each has its advantage, and pointing it to others provides a more solid analysis.

2:12 PM  
OpenID vimothy said...

Ramanan,

Good comment.

2:19 PM  
Blogger winterspeak said...

Ranaman:

Thanks for your reply. Again, sorry to be dense, but I want to make sure I'm understanding you clearly.

It sounds like, re #1, you are in agreement with me. I never denied that the private sector also holds real assets, but I am focused on *financial* assets. In particular, I'm focused on net financial assets (equity) because I specifically want to exclude real assets, and highlight how the non-govt sector cannot increase those without the govt sector running a deficit.

This is a core MMT point.

As for #2, it is true, in the national savings identity, "national savings" is defined as income not spent on consumption or by the government, which is therefore all assumed to be I by identity. I did not realize this, so I've learned something new.

So yes, to get from this definition of savings to the one I have been using, you need to get out investment as well -- and not at a sectoral level. But I have to take issue with your assertion that "nobody" defines it this way. I do! I think Andy Harless did as well, at least in the now-classic post on S=I. And it was the only way I understood Warren's point about S=I as well.

I don't want to put words in either of those guys' mouths, just letting you know what I had to do to understand what they were saying.

"People consider their house as a part of their wealth and it is a bit strange if it is saving is defined another way."

I don't know. I've never heard anyone say "I saved a lot of money this year by buying a house". And yes, a house is part of their wealth, just like a car is, or an IKEA couch, or shares of APPL. I won't complicated this with the fact that the durable goods are a mix of investment (inventory) and consumption, and that a house adds in real estate speculation as a component (usually associated with investment) but I will say that I don't think this point is as clear cut as you assert.

As for looking at NIPA data, I would simply say that you need to track horizontal money as well as vertical money to see if households are becoming overleveraged or not.

My issue with classifying things are investment vs consumption ex-ante, is that, after a crash, those decisions can become reclassified. So the big McMansion I bought in 2007 while home prices were doubling every year became a really expensive way to consume marble columns in 2008. Asset prices can change, especially when the price is credit sensitive. This is the essence of credit bubbles. The number in your back account just doesn't change the same way (although what you can buy with it might change dramatically).

The power of S=I to me was that it delineated, with crystal clarity, the difference between real (sweat and atoms) and nominal (numbers in a spreadsheet) and how to properly account for those and track them across periods.

SRW has, to me, really strange ideas about saving--including a moral dimension to it--that I don't agree with. It goes way beyond keeping the accounting identities straight, he rejects the notion that saving is a non-action, and gives it all kinds of moral and directive weight, which (in my eyes) is simply not true.

2:41 PM  
OpenID vimothy said...

WS,

But since you've redefined S you can't write S = I generally any more.

3:07 PM  
Blogger winterspeak said...

vimothy: sure I can so long as I define my terms.

To me, savings is simply "not spending out of income". Or, if you would prefer, savings net of investment (S-I).

This is different from the national account definition of saving which is "income not spent on consumption or by the government".

So, according to the national account definition of saving, if you put your paycheck into the Pets.com IPO, you are saving. In my world, if you keep money in your pocket, you are saving, otherwise you are not.

I'm not saying rejecting the identity, but I do now recognize where the confusion was.

4:30 PM  
Blogger Ramanan said...

Winterspeak,

"I don't know. I've never heard anyone say "I saved a lot of money this year by buying a house".

This is where the whole thing comes to. Neither would I say, I saved a lot of money this year by buying a house!

I also cannot say I saved a lot of money by buying the Apple stock because the saving already occured.

I don't think there is anything called an act of saving.

In my example (1:02PM) with a person earning $1,000,000...

He didn't "save by buying a home" rather with his saving which was Income less taxes less consumption, and he bought a home and some financial assets.

The saving was already done by his decision of consuming only $100,000.

Now, this can go into an infinite loop because you can come and argue that someone else got those $400,000 by constructing this house for you.

That is why you need to argue this for the whole economy by aggregating.

Here one needs to really understand the difference in the "net" in net financial assets and the "net" in net private saving.

In the former, one is netting across sectors and also assets and liabilities.

In the net private saving, while there is netting, the "net" crucially is net of investment.

And consumption and investment are different. An icecream simply goes away, whereas investment has benefits. A house can be resold etc.

The icecream you bought does not appear in your balance sheet because it simply disappears whereas the house is in your balance sheet.

"I do! I think Andy Harless did as well, at least in the now-classic post on S=I. And it was the only way I understood Warren's point about S=I as well."

Don't remember these links. Do you have them?

5:07 PM  
Blogger Ramanan said...

"I don't think there is anything called an act of saving. "

As in except preventing yourself from consuming.

5:09 PM  
OpenID vimothy said...

WS,

sure I can so long as I define my terms

You've already defined saving, and it's different from the standard definition that the S = I identity relies on.

Under the standard definition, saving is not consuming income.

How that saving is allocated across asset classes is a separate issue to saving vs. not saving (although given that saving occurred, assets must have been acquired, even if only deposit balances).

The national accounts certainly do not define saving as buying a stock. Saving is not about buying anything, including financial and non-financial assets.

Saving is about not consuming income.

Anyway, for the whole economy, S = I.

Under your definition of S however, S != I in general. And if S = I, then S = I = 0.

So your definition of S and S = I are mutually incompatible.

5:34 PM  
Blogger Neil Wilson said...

"So your definition of S and S = I are mutually incompatible."

No they're not.

If the definition of S changes the definition of I changes as well.

What you call 'standard definitions' are just elements of an accounting policy applied to a series of cash flows.

There is no 'I' in reality - its an accounting opinion. In cash terms people either buy stuff or they don't. There either is, or there isn't a transaction in the real economy.

7:26 PM  
Blogger Detroit Dan said...

Neil, winterspeak -- I'm with you guys 100% here. JKH is generally the smartest guy in the room, so when he goes off into minutia, as he does from time to time, it tends to create mass confusion...

7:27 AM  
OpenID vimothy said...

"In the simplest case... it is trivial to prove that “savings equal investment.” It starts from the premise that all income is earned by producing something, so that the total of everyone’s income equals the total value of everything that gets produced. That “income equals output”... is a very basic truism in macroeconomics.... Everything produced is valued either for benefits it has in the present (“consumption”) or for benefits it will have in the future (“investment”). Thus “output equals consumption plus investment.” Savings are defined as unconsumed income. Thus “savings equal income minus consumption.” You do the algebra."

Andy Harless, "Investment Makes Saving Possible"

http://blog.andyharless.com/2009/11/investment-makes-saving-possible.html

"Saving represents that part of disposable income... that is not spent on final consumption goods and services. It may be positive or negative depending on whether disposable income exceeds final consumption expenditure, or vice versa. Assuming that saving is positive (and in the absence of capital transfers), the unspent income must be used to acquire assets (possibly only an increase in cash) or reduce liabilities. If saving is negative, some financial or nonfinancial assets must have been liquidated, (including a run down of cash) or some liabilities increased"

SNA 2008

http://unstats.un.org/unsd/nationalaccount/docs/SNA2008.pdf

9:17 AM  
Blogger Neil Wilson said...

"It starts from the premise that all income is earned by producing something,"

The government doesn't produce anything for the items it purchases. It just causes them to come into being by simply buying them with its magic liabilities.

And that forces the net savings at the other end of the chain - because there is no 'government production' to purchase with it. (Unless you consider government bonds production).

So since the premise is incorrect the conclusion cannot follow.

9:51 AM  
Blogger Ramanan said...

Vimothy,

Good stuff!!

Unlike what Detroit Dan says, JKH has highlighted a mass confusion instead of ... well did create mass confusions actually ... but not in the sense meant by Dan, but by highlighting the confusion.

Further confusions exists - as you and JKH have pointed out many times about claims that the "government cannot save" and the definition of "national saving"

While it is true that the government shouldn't run surpluses without an underlying economic reason, it is an entirely different matter whether the government saves or not in reality.

For example, it can run a deficit and still save ;-)

But MMTers will assert the government cannot save.

10:45 AM  
Blogger Ramanan said...

Vimothy,

How does this look:

Galileo: By denying scientific principles one may maintain any paradox

Ramanan: By denying SNA principles one may maintain any paradox.

11:04 AM  
OpenID vimothy said...

lol

11:12 AM  
Blogger Neil Wilson said...

R,

"But MMTers will assert the government cannot save."

Again looking for holes that are not there.

Because the government sector is the consolidated balance sheet of the central bank and the Treasury it is an accounting fact that it 'does not save' in fiscal terms - since the liability and asset elements on the balance sheet can be cancelled out by journal.

But that doesn't mean you can't make it look like there is saving by implementing the appropriate accounting policy.

If you want to lie to yourself you can always do it in a set of accounts. The banks have been doing that for several years - hence why they are always 'well capitalised'.

But MMT is about revealing the reality of the operational function of a fiat money system to provide a government sector with extra policy space.

11:22 PM  
Blogger Neil Wilson said...

"How does this look:"

It looks like the pronouncements of somebody who is hard of accounting promoting the pages of some holy book.

Accounting policy is a matter of opinion.

11:23 PM  
Blogger winterspeak said...

vimothy & ranaman: I feel we're no longer in dialogue here, which is a pity. If you want to re-engage that's cool, or you guys can swap yucks via email to each other or on another blog.

The Harless essay really is excellent, and I do feel like we're missing an opportunity because I hold that up as an example of exactly what I mean. Harless talks explicitly about saving being income not spent on anything:

Like “to rest” or “to fast,” the verb “to save” is defined not by what you do but by what you don’t do. “To save” means “to receive income and not to spend it.”

This is the definition I've been using, and it is at odds with the national savings identity where the act of buying an asset is counted as saving.

So how do we reconcile this? Perhaps this is all a fallacy of composition confusion. As Harless makes clear in his essay, and I agree, at a sector level, spending income on an asset does not alter savings, it just transfers them from one agent to another.

At an individual level, buying assets is not saving, and should not be considered saving from an identity, accounting, or common sense perspective.

Back to the aggregate level, yes an economy can save by investing more all by itself but note, net financial assets (equity) stays the same, and "saving" manifests as real resources piling up. Unsold inventory and idle workers. "Net financial assets (equity)" is the common sense notion of savings. Unsold inventory is not the common sense notion of investment (although it is truly and rightfully investment from an accounting perspective)

Harless makes this point at the end of his essay.

I'm sure MMT has been sloppy in places about meaning "net financial assets (inventory)" when it really means saving, or not highlighting how idle workers and unsold inventory are "savings" as well, but I cannot get that worked up about it myself.

And when MMT says that the Government cannot save, what they mean is that, as a currency issuer, it doesn't make sense to claim that the Government ever has or does not have money. There are legitimate discussions you can have over the division between the Fed, Treasury, and Government but I think that taken in context the point is correct and helpful to someone trying to understand fiat money operations.

3:16 PM  
Blogger Ramanan said...

Winterspeak,

Those things you mention at the beginning of your comment weren't directed toward you since your comments come out as more engaging.

The act of buying an asset is not saving because it can be via incurring additional liabilities - such as a home loan or sale of assets. What matters is disposable income and consumption/current expenditures.

Neither is purchase of financial assets saving. The saving also already occured by deciding to consume less to purchase the financial asset.

If you really want to change the definition (which even Harless, MMTers stick to) then you can having Private Saving = Govt Deficit.

In MMT where it is indeed defined as per national accountants.

"And when MMT says that the Government cannot save, what they mean is that, as a currency issuer, it doesn't make sense to claim that the Government ever has or does not have money."

It doesn't make sense for the government to run a surplus without an underlying economic reason but if does, it is saving. Which is different from saying "A government *cannot* save".

It can also save while simultaneously running a deficit - if its receipts exceed current expenditures.

(But not in your definition where consumption and investment are given the same accounting treatment).

So http://www.federalreserve.gov/releases/z1/Current/annuals/a1995-2004.pdf Table F.8 shows the US government in 2001 had a deficit (line 49) but it's saving was positive(line 8)

10:24 PM  
Blogger Oliver said...

Ramanan wrote:It can also save while simultaneously running a deficit - if its receipts exceed current expenditures.

Is that an artefact of lagged accounting or of the endogeneity of the budget outcome?

3:45 AM  
Blogger Oliver said...

Warren Mosler from that post by Andy Harless:

Deficit spending increases net financial assets of the private sector, also known as nominal savings.

But real savings is the accounting record of real investment.

4:04 AM  
Blogger Ramanan said...

Oliver,

"Deficit spending increases net financial assets of the private sector, also known as nominal savings. "

The discussion is obscured by the usage of the phrase "savingS". We are discussing flows here.

Yes, deficits add to private sector wealth.

"But real savings is the accounting record of real investment."

These terms need to be defined. "Real savings" ?? "Real Investment" ?? Have defintions?

This does not escape the fact that if the budget is balanced (closed economy for simplicity), the private sector can have positive saving (as opposed to Saving net of Investment).

"Is that an artefact of lagged accounting or of the endogeneity of the budget outcome?"

Neither.

It is a result of the definition of Saving.

4:52 AM  
Blogger Oliver said...

right, confusion.

"Deficit spending increases net financial assets of the private sector, also known as nominal savings. "

The discussion is obscured by the usage of the phrase "savingS". We are discussing flows here.


a change in stocks (increase of savings (stock)) is a flow, no?

if its receipts exceed current expenditures

this, to me, sounds like a definition of a surplus. how can one simultaneously run a surplus and a deficit? Or do you mean to say that the value of the savings (stock) that belong to government can increase at the same time as it spends more $ than it receives in taxes? But where are the receipts in that? Does one receive receipts for revaluations?

5:47 AM  
Blogger Oliver said...

or is revaluation of assets the better term? an upward revaluation of asstes leads to a flow that is termed saving, the plural of which is referred ro as savings?

5:54 AM  
Blogger Ramanan said...

Oliver,

"a change in stocks (increase of savings (stock)) is a flow, no? "

Yes it is but there is a flow of investment as well.

While it is true that deficit spending increases the wealth of the private, by no means it is the only way.

"this, to me, sounds like a definition of a surplus. how can one simultaneously run a surplus and a deficit?"

A deficit is usually defined by considering ALL expenditures.

So the situation I am discussing (as shown by the Fed's Z.1) is a situation in which the government has saving and a deficit.

No need to define two types of deficits.

Receipts as in taxes here but it can have other sources of income such as central bank profits, interest income from holding of financial assets - for example interest from foreign reserves.

"Or do you mean to say that the value of the savings (stock) that belong to government can increase at the same time as it spends more $ than it receives in taxes? "

If the government has more expenditures than income, then it's liabilities increases.

However in the situation it had a positive saving.

Now, one doesn't usually discuss the full balance sheet of the government and restricts the discussion to public debt which increased in our case. However it had saving and the stocks - i.e., in Assets it has more real assets because of Net Investment than it began with which is more than the increase in liabilities.

The discussion can go off tangent if we start discussing what is the meaning of real assets of the government and all those things!

Does not escape the fact that it is possible for the government to have a positive saving in spite of having run a deficit.

"Does one receive receipts for revaluations?"

No one doesn't.

"or is revaluation of assets the better term? an upward revaluation of asstes leads to a flow that is termed saving, the plural of which is referred ro as savings?"

Revaluations of assets is a different matter altogether. Saving is about flows in one period. We start with "Opening Stocks" and then write down all the flows. Then we do revaluations and reach "Closing Stocks".

Saving appears in flows not in revaluations.

Plural as in Savings of sectors for example. I am a bit against the usage of savings for wealth because it unnecessarily confuses the discussion but consistent with SNA.

6:25 AM  
OpenID vimothy said...

WS,

That lol was not directed at you but some of the other commenters here who seem to think that meaningful economic analysis starts and ends with their speculative and uniformed hunches about how the world works.

In general, I think that you have a clue, which is why I was commenting in the first place, and why I was surprised that you seemed to be making such claims.

7:24 AM  
Blogger Oliver said...

right, at least i see where that income is coming from. mostly from financial assets, local and foreign, that sit on the cb's balance sheet and generate income which is accounted seperately from the gvt. expenditure / tax receipt circuit?

could one not say, in simplified terms, i.e. by aggregating all those separate circuits, that profits from domestic financial assets constitute a flow that is akin to taxation in that they transfer financial wealth from the private sector into the public domain? and similarly that profits from foreign financial assets are akin to exporting, albeit without the accompanying flow of real goods or services to foreigners? official international rent seeking, so to speak.

8:03 AM  
Blogger Ramanan said...

"right, at least i see where that income is coming from. mostly from financial assets, local and foreign, that sit on the cb's balance sheet and generate income which is accounted seperately from the gvt. expenditure / tax receipt circuit?"

Not necessarily separately Oliver. In many cases - such as even in the case of the United States, the Treasury holds foreign assets. So in addition to indirect sources of revenue, through central bank profits, there's direct source as well.

"that profits from domestic financial assets constitute a flow that is akin to taxation in that they transfer financial wealth from the private sector into the public domain? "

Yes agree we could say that.

"and similarly that profits from foreign financial assets are akin to exporting, albeit without the accompanying flow of real goods or services to foreigners? official international rent seeking, so to speak."

Yeah because these income flows appear together with exports in the current account of the balance of payments.

8:14 AM  
Blogger winterspeak said...

vimothy:

here are my crazy claims:

1. at an individual level, spending income on ANYTHING is not saving. It is dis-saving to the extent that !saving=dis-saving.

Ranaman disagreed and says that spending income on an asset (like housing) IS saving.

2. at an aggregate level, spending income on an asset has no impact on saving, it just shuffles savings around.

3. Yes, the private sector can increase saving (in this sense) by cutting back on spending and increasing investment, but the "investment" this income hoarding will generate is unsold inventory and unemployed workers.

I don't think you'll find anyone saying that a private sector cannot create unemployment and stockpiles of unsold goods by itself.

12:42 PM  
Blogger Ramanan said...

Winter,

"Ranaman disagreed and says that spending income on an asset (like housing) IS saving."

Imagine I spend all my disposable income on consumption and imagine I buy a home whose price is five times my annual income this year by borrowing. Would that mean I am saving five times my annual income? No!

My saving is zero.

1:23 PM  
Blogger winterspeak said...

Ramanan:

The borrowing is a red herring. If I go into debt to buy a house, I am dis-saving. If I buy a house for cash, similarly I am dis-saving.

To me, if you spend income on an asset, you are not saving. If you borrow money (whether to buy an asset, or to purchase a consumption good) similarly you are not saving.

1:35 PM  
Blogger Ramanan said...

Winterspeak,

Well...let's do this.

I earn $1,000,000.

Pay Taxes $300,000

Consume $100,000

Buy a home for $400,000 (no loans).

My Saving = $1,000,000 - $300,000 - $100,000

i.e., Saving = $600,000 :-)

Whether I but a home with the $600,000 or buy stocks does not change the saving.

In your definition of Saving

Saving = $$1,000,000 - $300,000 - $100,000 - $400,000

which is $200,000.

Which of course, you are free to define but only you in the whole world does it that way.

Which is contradictory to the fact that this is an MMT blog.

It is counterproductive to count spending on house similar to consumption when everyone else does not.

2:48 PM  
Blogger winterspeak said...

Ramanan:

I asked a couple of people if they thought buying a house or a car was "saving". They said they did not.

So, there are at least three people who do not think buying houses or cars count as saving. They think not spending your income counts as saving, which is what Harless says in his essay as well.

8:27 PM  
Blogger Ramanan said...

Winterspeak,

You have to leave the notion that I say buying a house is saving. Because I don't.

But I won't say it is dissaving either.

Saving is defined as disposable income less consumption.

In my example above what one does with the $600,000 - buying a house or buying a financial asset does not change the saving because it has already occured.

Andy Harless clearly uses everyone's definition as Vimothy quoted.

In your accounting however buying a house is dissaving because expenditure on the house is given the same treatment as consumption expenditures.

So you have to ask the same people if they consider buying a house as dissaving.

By "everyone" I meant everyone we are discussing with some background on such issues. What I meant was that to criticize someone you have to use their definitions. It may be the case that the definition itself is faulty and self-inconsistent but it isn't.

The whole debate was focussed on the observation by JKH and SRW that the "saving" and "net saving" are are blurred frequently.

11:31 PM  
Blogger Neil Wilson said...

I thought I'd get to the bottom of this by doing the work on the national accounts.

And from that we get the National Accounts definition of Gross Saving

Gross Saving = Gross National Disposable Income - Household Final Consumption - Government Final Consumption

Net Saving has a particular definition in the national accounts which relates to the depreciation of fixed capital. It is not something we use in the MMT sector calculations.

(S - I) is referred to in National Accounts as the 'net lending (or borrowing)' of the domestic private sector. Excess Savings would probably be a better term.

So to be entirely certain as to which saving you are talking about you really need to qualify it with 'Gross', 'Net' or 'Excess'.

11:37 PM  
Blogger Oliver said...

Taking Ramanan's example

Person A earns $1,000,000.

Pays Taxes $300,000

Consumes $100,000

Buys a home for $400,000 (no loans).

Saving thus far = $1,000,000 - $300,000 - $100,000 = $600,000

Person B receives 400'000.- for his house and does nothing with it.

saving thus far

according to standard definition:

Person A: 600'000.-

Person B: 0.-

Total: 600'000.-


according to winterspeak's definition:

Person A: 200'000.-

Person B: 400'000.-

Total: 600'000.-

Different story, same outcome? One keeps track of people's $ balances (deposit stocks) and the other of flows of income into consumption, i.e. 'the destruction of tangible goods' through consumption, but both end up with the same outcome? One is purely nominal, the other combines financial and real goods and thus also keeps track of the depletion of natural and use of human resources in $ terms. Are there examples where one would arrive at different macro conclusions depending on which definition one uses?

3:33 AM  
Blogger Oliver said...

or does winterspeak arrive at total of 200'000.- saving?

3:36 AM  
Blogger Oliver said...

and what about the person whose produce was consumed? is that person saving? in both cases?

sorry about my severed questions. i'm late to the S=I show.

4:32 AM  
OpenID vimothy said...

WS,

It’s not that I think that your claims are crazy—I suspect that they approach the expected opinion of the population on such matters. But they are wrong and confused, in my view. Or at least, if you are going to hold to colloquial definitions of saving and investment, then you ought to forget about their meaning in terms of economic theory, because equivocation in this context is the royal road to total confusion.

1. at an individual level, spending income on ANYTHING is not saving.
Two comments follow directly:

1, Nobody else defines saving in such a fashion;
2, Given that you have defined saving in such a fashion, you are going to have to create your own framework for the national accounts, in order to make your definition work.

So what’s the point?

Ranaman disagreed and says that spending income on an asset (like housing) IS saving.

We seem to be going round and round here without really getting anywhere. You’ve said this several times, and have been corrected several times, both by Ramanan and by me, but it doesn’t seem to register.

BUYING AN ASSET IS NOT SAVING. SAVING IS NOT CONSUMING INCOME.

Savings are a source of finance for the acquisition of assets. Savings must be allocated across the spectrum of available assets, given that they exist. But saving and buying assets are two different things.

2. at an aggregate level, spending income on an asset has no impact on saving, it just shuffles savings around.

At an aggregate level, the flow of saving (out of current income) is equal to the flow of expenditure on new non-financial assets, plus or minus some other stuff at the margins (e.g., “net saving”), depending on the nature of the aggregation and how you’re partitioning the economy in terms of sectors.

3. Yes, the private sector can increase saving (in this sense) by cutting back on spending and increasing investment, but the "investment" this income hoarding will generate is unsold inventory and unemployed workers.

That’s not a statement that is true in a general sense. What if the private sector increases its investment? Then either private saving will increase, or their will be a net financing flow from some other sector.

Or say that investment is fixed at I’. Current private saving is S’’, say, where, S’’ < I’, with the difference made up by the foreign sector. The private sector can increase its saving to S’ = I’ without any need for an increase in the level of investment.

4:56 AM  
Blogger Ramanan said...

Vimothy,

Good you drive these points. It seems to get stuck at the same place.

One technicality - saving can also be used to retire liabilities. So I can be saving in one year without having accumulated assets but with a negative incurrence of liabilities.

(Of course in one definition, accumulation of assets already includes the latter).

So let us say I save $100 in one period and prepay $100 principal on previous loans. My saving is still $100.

Worse is the technicality brought into the discussion because of consumption of fixed capital and the flow of funds and SNA used Net Saving for Saving Net of Consumption of Fixed Capital.

Which of course I already know and referred to a blog post a week back initially here.

One cannot hide behind this technically and say that MMTers are right when they that it is *impossible* to save when the government budget is balanced. The private sector can both gross save and net save (in SNA language) with a balanced budget! (where this net refers to net of consumption of fixed capital).

6:00 AM  
OpenID vimothy said...

R.,

Agreed--was trying to keep things simple!

The point that I'm trying to hammer home is that saving connects income to the stock constraint via changes net worth. Like you say (& per my quote from the SNA2008) saving could could represent either an increase in assets or a decrease in liabilties.

But best to try to be intuitive about these things given the context, and not bring in to many comp[licating factors and qualifications.

8:15 AM  
Blogger Ramanan said...

Vimothy,

Yes assumed you would know. Should have addressed differently.

Was trying to point to WS about the fact that there is so much of this which is counterintuitive but once one has a good handle, things appear fine.

But best to keep it simple.

8:31 AM  
OpenID vimothy said...

R.,

Yes, the logic is always the same and is very straightforward once you understand it--even when you're applying it to situations that are quite complicated in terms of the interactions between economic entities and aggregates.

Which is why it is possible to be very imprecise and informal as long as everyone knows the precise and formal definitions--e.g., I am writing S = I, but there's a lot that one could say about this identity and how the variables are defined.

9:00 AM  
Blogger Ralph Musgrave said...

1. Movements of cash across sectoral boundaries must net to nothing.

2. Thus for the sectoral balance equation to hold, S,I,X,M,G and T must be defined in such a way that they refer to cash movements, and nothing else. E.g. the conventional definion of exports, which is something like “stuff shipped to foreigners” just won’t do. The definiton has to be something like “cash receipts from foreigners in payment for exports or for any other reason”.

3. Including investment in the equation is a nonsense because if I buy an investment type good off another private sector entity, cash does not cross a sectoral boundary.

Plus there is no sharp distinction between investment goods and consumption goods.

For more on this, see:

http://ralphanomics.blogspot.com/2012/03/sectoral-balance-equation-again.html

10:07 PM  
Blogger Игры рынка said...

I realize that there is another thread but I made thus far only. There clearly seems some background massaging of definitions of commonly accepted terms. There is no problem with it if new terms can be shown to be better than the commonly accepted definitions.

I like to view “budget surplus”, “retained profits” and “household savings” (obviously all flow) as conceptual equivalents which for some strange reason have different names for different economic sectors. Talk about confusion ...

To me the key to understanding the concept of saving is the corporate balance sheet from which the concept automatically and naturally expands onto the other sectors.

The idea of P&L and retained profits is very natural to everybody’s mind. And it is also natural that retained profits “accrue” to the corporate equity. That is the way how P&L statement is integrated into the balance sheet statement.

As the balance sheet size goes up, so do both sides of the balance sheet. However, it is impossible to have an accounting link between individual liabilities and individual assets. They only have to match in aggregate. So be it a house or cash in the bank account or government bonds, all and any of them can be a counterpart to equity. It is obvious here that corporate savings are NOT house, deposit or government bonds. Corporate savings is the equity while house, etc. are just *possible* representations of savings.

The only confusing point which needs additional attention here is that there is an external counterparty which has a claim on corporate equity. That is shareholders. But the thing is that this claim is *artificially* external. Corporate equity is related to the entity itself and they can not be separated. Equity is the fact of existence of the company. No company – no equity. No equity – no company.

With this background in mind if we switch to households and apply the same framework, it becomes clear that household savings is not houses, deposits and bonds, but it is what is called net worth or, as JKH likes to call it, equity (I believe a-la corporate equity though he might come from a different perspective). Houses and bonds are just possible representations of savings/equity/net wealth. While there IS a *transactional*, i.e. cashflow, relationship between them at the point of transaction, there is no balance sheet relationship. 99.(9)% of transactions involve cash transfer but it means nothing for the balance sheet. Mixing different financial statements (cashflow statement and balance sheet statement here) makes no accounting good. Individual financial statements serve different purposes but all together are required to understand the underlying reality. Finally, in case of household, its equity as liability is clearly internal and can not be separated from the existence of household. The loop is closed again.

Now to the question of (contestable) definition of savings as per MMT in various discussions. Remembering that we need to keep in mind separate representations of P&L statement, cashflow statement and balance sheet it is clear that any income received aggregates to a corresponding increase in the balance sheet size through the increase of equity, i.e. savings (P&L statement vs balance sheet). “Income” spent on consumption (in the balance sheet language we are already talking about *assets* spent on consumption which can be cash and then it also affects cashflow statement) obviously leads to a reduction of balance sheet size through the decrease of equity, i.e. savings. Transactions with assets like a purchase of a house or Apple stock do NOT lead to changes of the balance sheet size, changes in balance sheet liabilities, and therefore to changes in equity, i.e. savings.

And the only issue that we are left with is the macro-aggregation but I will not go into it. It is quite clear.

4:48 AM  

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