Monday, March 26, 2012

Is MMR just politics?

Still trying to get my head around what the material differences are between MMR and MMT. MMR claims to be "economics without politics" and when someone claims to be "without politics" I've found that they are, essentially, very political indeed. In fairness, in today's society how can one now be. Pace Lenin, "you may not be interested in politics..." etc.

MMR seems to claim that MMT does not focus enough on private sector credit expansion and banks (what Mosler calls the horizontal element) and fixates excessively on the Government deficits (vertical element). This is news to me, as I came to MMT through bank operations, and think that it considers and embraces both. Indeed, hard to make sense of the monetary system without looking at both, even though operationally the lines are not always as clear as one would like.

Maybe "economics without politics" just means libertarian politics, which tries to take politics out of the financial system altogether? There is a natrual affinity between Austrians, gold bugs, and libertarians precisely because of this interest in making things less political. So, what I first dismissed as a cynical platitude, I now salute as a clever pun on words.

Pull from the comments:
'Actually, MMT’s design to bring the state back to “center stage” is wrong. There’s no “money monopolist”. There’s no “Without a government deficit, there would be no private saving.” There’s no rationale for setting prices. There’s no rationale for the job guarantee. That’s the whole point. When you visualize the picture correctly...MMT’s desire to bring the state “back to center stage” is wrong.'
--Cullen Roche,
This is purely a list of political oughts, so I guess that is at the heart of what MMR is. An (ironically) pro-bank political take on MMT. Because the Government is a "money monopolist" if your definition of "money" is NFA(e). There's over $10T worth of this stuff outstanding, and it's doing something, and it only has one source. You cannot ignore it, you need to understand it. And there are rationals for setting prices and the job guarantee -- rationales I find unconvincing -- but to deny their very existence is an exaggeration.

If MMR is all about facts, then why exaggerate and say things that just aren't true?

Finally, I don't see MMT as desiring to bring the state "back to center stage" but simply looking at things as they are. The State already occupies some stage -- center, left, right, forward, aft, whatever -- and the stage occupied in a fiat economy is simply different from a stage occupied in a gold-standard economy. This is a fact, not a political position, just as a country that uses a foreign currency locally is different from one that uses its own. You may disagree with the degree of sovereignty a state has, or should have, but that's different from refusing to recognize what actually is.

Friday, March 23, 2012

Politics of PK

Business Insider believes that Goldman embraces PK in their analysis. I don't see it.
In a study presented at the Brookings Panel on Economic Activity on March 22-23 in Washington D.C., Bradford DeLong and Lawrence Summers examine the effectiveness of fiscal policy in a depressed economy. Specifically, they use a simple model to explore the effects of fiscal stimulus in an environment when (1) monetary policy is constrained by the zero bound on nominal interest rates; and (2) a boost to output today brings longer-run benefits for the productive capacity of the economy (for example, by avoiding "scars" or "hysteresis" in the labor market). They call such an environment a "depressed" economy.
They reach two conclusions. First, while the fiscal multiplier is low, perhaps as low as zero, in a normal situation, fiscal stimulus today would be highly effective in affecting output both now and in the future. Second, temporary fiscal stimulus could be self-financing (and may well reduce long-run debt-financing burdens) when one takes into account the effects of present stimulus on the evolution of future output and debt-to-GDP ratios.
The DeLong and Summers paper, unsurprising for two Democrats, only talks about higher Government spending (G), not higher deficits (G-T).

The "higher G" argument to "prime the pump" is K, not PK.

It's also fun to see how careful the authors are to remain on the good side of Monetarists, who continue to set the orthodoxy for macro. Does any of this sound like PK to you?
In normal times the logic of Taylor (2000) that stabilization policy should be left to the monetary authority still holds.
The fear is that expansionary fiscal policy will lead to a collapse in confidence in the government, and a spiking of interest and inflation rates to previously-unseen values.
Sovereign debt crises can be triggered by rises in spending due to expansion
All basic gold-standard stuff.

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JKH writes a really long post

JKH has written a really long post on "S = I + (S – I)". Cool! Even after the really long comment threads written on the topic here, I still cannot figure out why this is important (although I agree that it is true).

I'm not very bright, so I use simple models to try and understand things.

Let's imagine a brand new world. T=0.

It has one entity with a monopoly on violence who can create demand for a currency only it can create. Therefore a monopoly on violence extends to a monopoly in issuing currency.

The non-currency issuers have no currency to spend unless the currency-issuer firsts prints some currency into existence, gives it to the non-currency issuers, and then doesn't take all of it back again as taxes.


Suppose the currency issuer sells debt to "fund" the printing. The people to buy the debt are the non-currency issuers, and the only money they have to buy the debt with is the currency that was just issued to them (and not taxed back). If the currency issuer sells debt equal to every unit they issued, then all the non-currency issuers will be left holding is the debt.

There are many non-currency issuers. Some are companies. Some are households. Some are foreigners. They trade the currency between themselves. Or not. Or partially. They can issue debt, but that doesn't change net currency in the non-currency issuer sector.

By consolidating the three different types of non-currency issuers into one, the model becomes a two sector model (currency issuer, non-currency issuer).

I do not understand what S=I+(S-I) adds to or changes this, but I hope to be enlightened on this soon.

Thursday, March 08, 2012

The Myth of High Powered Money

What is G-T?

When the Government spends (credits money in a non-Govt bank account) but doesn't tax it all bank (debiting money in that non-Govt bank account) what do you call the residual left in the non-Govt sector? On the Government side this is called the deficit (flow) or the national debt (stock). But what do you call it on the non-Government side?

I refer to it as "Net Financial Assets (equity)" because 1) we're talking about a financial asset here, not a real asset, and 2) the associated liability is out of sector. Therefore, unlike financial assets created in sector, the liability portion is booked as equity, not non-equity liability.

You cannot right call this savings (or net savings) because this causes all kinds of confusion as documented in the S=I debates rocketing around the internet these days. It does get close to the lay person's intuition about what "savings" are, or even what "nominal savings" are, but I don't think that term has been generally helpful.

You cannot really call it the nominal equity base that the private sector then leverages via the horizontal channel (gross financial assets) because all kinds of other things make up the equity value in non-Govt balance sheets.

You cannot call it "high powered money" or M0 because that actually refers to reserves, and reserves are a reactive function in that G-T generates a bank deposit, which generates a reserve by double entry book keeping. That reserve then either needs to be drained or it doesn't. But the causality is clear: NFA(e) creation causes reserve creation, but reserve creation does not necessarily lead to NFA(e) creation. NFA(e) is the private sector's nominal nest egg.

(Note: I'm ignoring exports etc. as I'm including foreign sectors as "non-Govt", because by Govt I mean the entity that is the currency monopolist).

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Wednesday, March 07, 2012

Don't trust the data

A nice post from the always interesting Venkatesh Rao on Big Data, and how it will eat us. (A small and geeky aside: reading Rao is seeing someone who has always lead with strong Ti suddenly discover Ni. His lack of fatigue remains extraordinary to me). You should read the post, because it's interesting and fun, and note this:
Data is also a world begging for tight vertical integration of the supply chain from raw, unrefined wild data all the way to AI programs whispering insights into CEO ears. If you are a Republican, the holy grail vision is a dashboard-driven company that will allow a CEO to run it as if he/she were driving a car, with no additional human involvement above minimum-wage levels. If you are a Democrat, the competing vision is the similarly empowered citizen (at the moment, the Republican vision is winning). I expect a keynote at the next Strata titled “Big Data and Little People” (hashtag #OccupyData).
Well, maybe. In my experience though, data without context is meaningless and can often lead one astray. I once designed a massive call center where, through Erlang C modeling, we thought we could run a very efficient operation using very high occupancy rates for the agents. In practise, the load, response time, and queuing looked nothing like our models. Calls weren't being answered, people were on hold forever, we had trunking problems, etc. The solution came from spending time on the floor. Even though an Erlang C model says you will have 99% occupancy, the truth is that humans need a break between calls before they are ready psychologically to task switch to the next one. In practice, you get 90% occupancy at the agent level, max. Because we modeled higher occupancy, we understaffed, so wait time increased, which caused abandonments to increase, which caused in-period re-dials to increase, which increased load, which trunked, which increase (apparant) load more etc. The solution was to acknowledge reality and put a 90% cap on occupancy. We staffed a little more, but suddenly everything started to behave just as the models predicted. I don't think any quantity of Big Data whispering into a CEO's ears would have produced this insight.

Thursday, March 01, 2012

Confused about MMR

There's a long comment thread I would recommend re: S=I + (I-S).

Honestly, I'm still confused by this distinction they're making, because I'm not sure what difference it makes. At a sector level, I stick with Net Financial Assets (equity) instead of "savings" because there's lot of ambiguity around the word "saving", and at an agent level, it seems that if you spend some of your income on an apple you want to consume next period you are saving, but if you intend to eat that apple sooner you are no longer saving. I'm actually sure that's right from a NIPA perspective, but it obscures for me the key intuitions I found in the Harless post, and when Mosler calls savings the "account of record" for investment. Maybe it was the other way around.

Anyway, I must be stupid.

Moving on, I become even more confused about what MMR's beef is with MMT. I suspect it's because MMR suspects that MMT is really Communist. The irony is unimaginably delicious. But first, this post:
For instance, when the USA runs a current account deficit and a budget deficit that does not offset the leakage in the current account the private sector position has been described as experiencing a “net loss” in some MMT literature. But no clarification as to the specifics of this “net loss” is provided (in terms of real or financial wealth) and the reader is likely to come away from the lesson believing that the private sector position is automatically worse off if the government does not deficit spend at all times. But this is clearly not the case as the majority of private sector real wealth creation occurs through the horizontal banking system through credit creation. This can clearly be seen over the period from 1997q1 to 2008q2 when the government budget deficit failed to offset the current account deficit in 38 of the 42 quarters and household net worth increased by 110% while corporate profits rose by 140%. Clearly, the private sector did not experience a “net loss” over this period even though the budget deficit failed to offset the current account leakage.

The confusion arises from the difference between real wealth and financial wealth as well as misunderstanding saving. A good way to think about all of this is to understand that the private sector can create real wealth entirely independent of the government. A farmer does not need the government to turn 1 cow into 10. But the farmer has achieved real wealth creation regardless of the government’s spending position. What the government must generally do over time is help to facilitate the wealth accumulation process by providing the net financial assets to help the private sector monetize this real wealth. But it’s important not to put the cart before the horse here. It’s best to think of government as being a facilitator of wealth creation and not the driver. Hence, our focus on S=I+(S-I) with the emphasis on the idea that “the backbone of private sector equity is I, not Net Financial Assets.” The idea is not novel, but simply clarifies the understanding of the private sector component.
Talk about confusing!

1. Whether the private sector is better or worse off if the Government runs deficits or surpluses depends on whether the private sector lacks or has excess net financial equity (assets). Without this context, there is no "better" or "worse".

2. I have no idea if the majority of private sector real wealth creation happens through bank loans. Is raising a child real wealth creation? Do you need a bank loan for that?

3. 1997-2008 is a terrible time period, because of this thing called credit bubbles. If you don't understand how credit bubbles happen, you really don't understand the interplay between vertical and horizontal money creation.

4. The government mustn't "facilitate the wealth accumulation process by providing the net financial assets to help the private sector monetize this real wealth". It must correctly fund the private sector's demand for net financial assets (equity) so as to maintain full voluntary employment, without politically unacceptable levels of inflation.

5. Government can create real wealth too. (Heresy, I know. Please observe, I'm not saying that it does very often, or that it does it well, or that it should do it. I'm merely pointing out that it is, at least, theoretically possible, and there are probably an example or two we can all think of where this has happened if we're being honest with ourselves).

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