There's a lot of people wandering around the internet who are very confused about Investment = Saving. Maybe they have been mistaught, or maybe they have mislearned? I don't know. But I'm doing this as a public service, even though it's a thoroughly boring job for me. Someone's got to do it. And since I've done it almost every year for the last 33 years, it might as well be me. "Ours the task eternal" is Carleton's motto.
Let's get the arithmetic out of the way first, then I'm going to simplify, back up, and explain what it all means.
Start with the standard national income accounting identity:
1. Y = C + I + G + X – M
On the left hand side of we've got sales of (Canadian) newly-produced final goods (and services) Y. On the right hand side we've got purchases of (Canadian) newly-produced final goods (and services), divided up into various categories. Consumption, Investment, Government expenditure, eXports, and iMports.
2. S = Y – T – C
This is a definition of Saving as income from the sale of newly-produced goods minus Taxes (net of transfers, which are like negative taxes because the government gives you money instead of taking it away) minus Consumption.
Substitute equation 1 into 2 to eliminate Y and you get:
3. S = C + I + G + X – M – T – C
You can eliminate C in 3, and rearrange terms to get:
4. I – S + G – T + X – M = 0
If you simplify, by assuming a closed economy with no exports or imports, you get:
5. I – S = T – G
If you simplify further, by assuming no government spending or taxes, you get:
6. I = S
(Or, if you like, you could define S as "national saving" to include both private saving plus government saving, which is defined as T-G.)
Now let's talk about what it means.
Equation 1 is an accounting identity. It is just like saying "the number of apples sold = the number of apples bought". You can't sell an apple without somebody else buying it. That's what the words "buy" and "sell" mean. If we add up all the apples sold, and add up all the apples bought, we should get exactly the same answer. If we didn't, it means we miscounted, or had a different definition of "apple" in the two counts, or did the two counts over different time periods, or made some other screw-up. And National Income Accounting is the art of checking all the possible screw-ups we might make, and trying to make them as small as possible, so we can get as accurate a picture as possible of economic data.
For example, if you are counting apples sold by the Canadians who produced them, and counting apples bought by Canadians, you have to remember that some Canadian apples get sold to foreigners, and some apples bought by Canadians weren't produced in Canada. That's why you have to add exports and subtract imports in equation 1 to make it add up right.
Since apples sold = apples bought, and bananas sold = bananas bought, then apples and bananas sold = apples and bananas bought. If it adds up for each good, it also has to add up across all the goods. So it really doesn't matter if we add up the physical number of apples and bananas, or add up the market values of apples and bananas, or add up the market values adjusted for inflation, or what. A+B=A+B. A+2B=A+2B. 24A+32B=24A+32B. Whatever. Equation 1 is true in nominal terms, without any inflation adjustment. Equation 1 is true in real terms, adjusted for inflation. Equation 1 is even true if we adjust for inflation in some totally daft manner, just as long as we are consistent in our daftness on both sides of the equation. Of course, we get a different number for Y depending on which we choose, and some of those numbers will be more useful than others, but we should (unless we screw up) get the exact same number on both sides.
(There are lots more potential screw-ups we could make: like how exactly we define and count "Canadian" "newly-produced" "final" goods. But go read any intro economics textbook if you are interested, because it's not the main topic of this post.)
Now, I have defined Y as goods sold. Normally, we think of Y as "income", or "production". And you can think of cases where these don't seem to be the same.
For example, suppose you produce 100 apples and you don't sell them? If we want Y to measure the production of apples, and not just sales of apples, we have to remember to include apples that the grower consumes himself, or adds to his inventory of apples. "He sold them to himself, either for Consumption or for inventory Investment". That's a fudge, of course, but it's a fudge we need to make if we want Y to mean "production" as well as "sales".
Here's a second example. Suppose you have 100 apples in inventory, that were produced last year, and the price of apples suddenly goes up $1. You have just made a capital gain of $100. Shouldn't that capital gain be included in your income? Well perhaps it should, or perhaps it shouldn't. But if you want Y to mean "income", you had better not include it. Y has to be restricted to mean "income from newly-produced goods".
All the above was accounting. It wasn't really economics at all. "Apples sold = apples bought" is always true. But it tells us nothing whatsoever about what determines the number of apples traded. It is totally silent on what causes the number of apples bought-and-sold to increase or decrease. Or why it is bigger in some countries than in others. Is it the weather? Is it people's preferences for apples? Is it government rationing? Is it the rotation of the planets? There are 1,001 different theories of what determines the quantity of apples traded, and all of those theories are consistent with the accounting identity of apples sold = apples bought. Because "apples sold" and "apples bought" are just two different ways of describing the exact same number.
One of those 1,001 theories is the simple economic theory taught in Intro Economics. Supply and demand. Quantity demanded is the quantity of apples people would like to buy, given the price of apples, their income, etc.. Quantity supplied is the quantity of apples people would like to sell, given the price of apples, their productive abilities, etc.. The demand curve shows how quantity demanded varies with price, holding other things like income etc. constant. The supply curve shows how quantity supplied varies with price, holding other things like productive capacity etc. constant. And, according to this theory, the price of apples adjusts to make quantity demanded equal to quantity supplied, where the demand and supply curves cross. At that equilibrium price, and only at that equilibrium price, all 3 quantities are equal. Quantity demanded = quantity bought-and-sold = quantity supplied. According to this theory it is the supply and demand curves that determine quantity bought-and-sold.
That theory could be wrong. That's one of the dangers of having a theory that actually attempts to explain what causes or determines the facts. It could be wrong. But if we want to explain the world, that's the risk we have to take. One can easily think of examples where this theory would be wrong. For example, if the government imposes a binding price floor on apples it will be wrong. In that case, Intro Economics would replace it with a slightly modified theory: the quantity of apples traded is determined by the demand curve and the price the government sets; the supply curve plays no role. With the price fixed above where supply and demand curves cross, quantity demanded = quantity bought-and-sold < quantity supplied. In that "semi-equilibrium" actual purchases will be equal to and determined by the quantity of apples people want to buy (demand) at the fixed price. But the actual quantity sold will not be equal to nor determined by the quantity people want to sell (supply).
And if the government instead sets a binding price ceiling on apples the original supply and demand theory will also be wrong, but in a different way. In this case, according to the Intro Economics textbook, it's the supply curve and price that determine quantity bought-and-sold. In "semi-equilibrium", quantity demanded > quantity bought-and-sold = quantity supplied. Actual purchases will be equal to and determined by the the quantity people want to sell (supply) at the fixed price.
(The key assumption in all three of the above theories is that trade is voluntary. You can't force people to buy more than they want to buy; and you can't force people to sell more than they want to sell. So quantity actually bought-and-sold will equal whichver is less: quantity demanded; or quantity supplied. Only in full equilibrium, at exactly the right price, are all three quantities equal. Otherwise we are in what i call "semi-equilibrium", where only two of the three quantities are equal, and the third is bigger than the other two.)
"Apples sold = apples bought" is an accounting identity that is always true, but tells us nothing about what determines that quantity.
"Apples demanded = apples supplied" is an equilibrium condition. It might not be true. It is part of a theory that does try to explain what determines the quantity of apples bought-and-sold. That theory might be true, or might be false. But it is a theory about the world, and the risk of being false is an unavoidable occupational hazard of trying to explain the world.
Now, that was microeconomic theory. Let's switch back to macroeconomic theory. What's that got to do with I=S?
Look back at equation 1, and assume a closed economy with no government. You get Y = C + I. That equation is exactly the same as I = S. The two are mathematically equivalent. Just different ways of saying the same thing. But Y = C + I is a lot easier to compare to the microeconomic equilibrium condition "supply = demand". So I'm going to do that first, then come back to I = S.
For an economy that produced only apples, "Y = C + I" tells us that apples sold equals apples bought (some for consumption, some to be added to stocks as an inventory investment). But that accounting identity tells us absolutely nothing about what determines the quantity of newly-produced goods bought-and-sold. It does not explain why it changes over time, or is higher in some countries than in others. There are 1,001 different theories, all compatible with that accounting identity, that do try to explain what determines Y.
Here is just one of those 1,001 theories. This theory will be found in most Intro Economics textbooks. It's the simple "Keynesian Cross" theory. This theory is very similar to the microeconomic theory above of a market for apples with a binding price floor, where quantity supplied exceeds quantity demanded. This theory says that the quantity of goods bought-and-sold will be equal to and determined by the quantity demanded, and will be less than the quantity supplied. But there's a clever macro twist. The macro twist is that the quantity of goods demanded depends on income, and income is equal to the quantity of goods bought-and sold.
This theory can be described by three equations:
7. Y = Cd + Id
Cd means "desired consumption". It's the quantity of consumption goods people would like to buy, given their income etc. Some economists call Cd "ex ante consumption". But a simpler name would be "quantity of consumption goods demanded", just like in micro. And Id is just the same, except it's "desired investment", or the quantity of investment goods demanded. And equation 7 is a "semi-equilibrium condition". It says that actual quantity of goods bought-and-sold (Y) will equal quantity of goods demanded (Cd+Id).
8. Cd = a + bY (where a>0 and 0<b<1)
9. Id = Ibar
Equations 8 and 9 are the behavioural equations. They tell us what determine desired consumption and desired investment. Desired consumption is an increasing function of actual income, and desired investment is fixed at some exogenous number, called Ibar. (That's supposed to be a bar over the I, but I can't write it).
Substitute 8 and 9 into the equilibrium condition 7, to get:
10. Y = a + bY + Ibar
Solving for Y we get:
11. Y = [1/(1-b)][a+Ibar]
Now that's a theory of the world. It might be false. But if true, it explains what determines the quantity of goods bought-and-sold. It says Y is determined by desired investment (and by the parameters a and b in the consumption demand function).
And it is a simple matter of math to relate that back to I=S. Simply define "desired saving" Sd as:
12. Sd = Y – Cd
So "desired saving" means "that part of income that people do not desire to spend on (newly-produced) consumption goods". What do they want to do with it instead? It could be anything, except spend on (newly-produced) consumption goods. They might want to spend it on newly-produced investment goods, they might want to buy government bonds, or corporate bonds or shares, or buy antique furniture, or add to their stocks of currency under the mattress. You name it, and if it's something you can want to do with your income (after taxes), other than spend it on newly-produced consumption goods, it's "desired saving".
We can re-write the old semi-equilibrium condition 7 as:
13. Y – Cd = Id
And substitute the definition for Sd into the left hand side to get:
14. Sd = Id
We can read 14 as "desired saving equals desired investment". Or "ex ante saving equals ex ante investment". It is mathematically equivalent to the semi-equilibrium condition 7. It's just another way of saying "quantity of goods bought-and-sold equals quantity of goods demanded". Only now it gets rearranged to become "quantity of goods bought-and-sold minus quantity of consumption goods demanded equals quantity of investment goods demanded". Which is a bit of a mouthful.
Substitute 8 into 12 to derive the desired saving function from the desired consumption function:
15. Sd = -a + (1-b)Y
Desired saving is an increasing function of income.
Substitute the desired investment and desired savings functions 9 and 15 into the "semi-equilibrium condition" 14 to get:
16. -a + (1-b)Y = Ibar
Rearrange 15 to get
17. Y = [1/(1-b)][a+Ibar]
Which, you will notice, is exactly the same as 11. You get exactly the same results whether you start from Y=Cd+Id or Id=Sd. And of course you should, They are exactly the same semi-equilibrium condition, just re-written.
But if you start with the same semi-equilibrium condition and add different behavioural functions you will get a very different theory of the world. For example another macroeconomist would say that desired investment and desired saving also depend on the rate of interest, and that the central bank will adjust the interest rate so that desired saving equals desired investment at potential output. In which case you cannot say that desired investment determines desired saving (or vice versa) because they are both endogenous variables, and it is the central bank that determines the equilibrium level of income. And yet another macroeconomist would say that that's not quite right either, because if the central bank tries to set the interest rate too high or too low the result will be accelerating deflation or inflation, so in the long run, if it doesn't want to destroy the monetary system, the central bank can only set it at some "natural rate" where desired saving equals desired investment at the level of income determined by the long-run supply of output.
In other words, the semi-equilibrium condition Sd=Id leaves open the question of what variable(s) adjust (or is adjusted) to bring the two sides into equality. It might be Y, as the Keynesian Cross model assumes. But it might be the rate of interest. Or the price level. Or anything else.
Let me sum up the main lessons.
First, you can't get anywhere with just accounting identities, if you want to explain the world. Convert that accounting identity into an equilibrium condition, and add some assumptions about people's behaviour, and what adjusts to what, and you might have a theory.
Second. The I=S approach is exactly equivalent to the Y=C+I approach. The latter is more easily re-interpreted as the semi-equilibrium condition Y=Cd+Id, which is the macroeconomic version of "apples bought-and-sold = quantity of apples demanded", but Id=Sd is saying the exactly the same thing. (I was taught both these methods of representing the old Keynesian Cross model back in high school).
Third. The key question is not just the equilibrium condition you assume, but what variable or variables you assume adjust to make that equilibrium condition hold. What are the behavioural functions? Different behavioural functions will give you a very different theory.
Fourth. A lot of economists wasted an awful lot of time and ink getting this stuff straight 50 years ago. If you start your theory with I=S as an accounting identity, it really is your responsibility to try to explain to anyone reading the difference between I=S as an accounting identity, and Id=Sd as some sort of equilibrium condition, and why that difference matters. Because, as I said at the beginning, there's an awful lot of poor lost souls wandering around the internet who have just discovered the marvellous truth of I=S as an accounting identity, and think they have found some magical philosopher's stone that "mainstream" economists have never heard about, and that this blinding flash of divine truth will lead them to the Promised Land. It's a bit like being accosted at airport terminals by people with a glow in their eyes repeating "apples sold equals apples bought". Because that's exactly what they are saying.
Worthwhile Canadian Initiative 
Scott:
Thanks for chiming in on this post. I am hoping you can comment on some thoughts I had for you.
At one time I was an enthusiast of the balance sheet recession view, but have become more skeptical thanks in part to the influence of Nick Rowe and his views on excess money demand. Let me explain what I mean by responding to this comment you made above:
“But you have not received any income from this aside from debt service (interest), just a portfolio shift from a loan or bond to deposits. You would have to make an additional assumption that the creditor now spends more out of income (i.e., as a result of the portfolio shift now moves to spend instead of save), which I don’t see any inherent reason for; the creditor could desire to continue saving and just convert to a time deposit or whatever… “
If the debtor starts deleveraging at a faster rate than the creditor expected, then this would be a shock to the creditor’s portfolio. As you suggest, the creditor may now have more deposits and fewer bonds. But, given this was unexpected it is now not an optimal allocation of assets. The creditor, therefore, needs to rebalance his/her portfolio and this sets in motion a series of transactions that should to some extent lead to an offset in spending. For example, if the creditor buys more bonds and uses funds from the deposits to purchase them, now the seller of the bonds has more money. That seller now has extra money in his/her portfolio and must decide whether to save or spend it too. At some point, this hot potato effect should eventually lead to investment or consumption spending. The only reason it would not is that somewhere in this process someone decided to not to spend the money (i.e. they left it sitting as a deposit). I would call that an excess money demand problem, rather than a deleveraging problem.
Also, on the role banks play in the system you noted the following:
Further, if it is a bank that is the creditor, the payment to reduce debt has simply resulted in a debited deposit of the payor and a debited loan for the bank. There is clearly no reason for the bank to “spend” more out of income. I agree, but the problem here is that the bank allowed the money supply to fall for a given amount of money demand, creating an excess money demand problem.
Finally, if the debtor is defaulting then the problem is whether the debtor chooses to spend or hoard the funds they would have paid the creditor. If they spend it, no problem, If they hoard it, then the excess money demand problem arises again.
So what are your criticism of this view? I like this approach because, as Nick has pointed out many times here, money is the one asset on every other market. Disrupt it and you affect all markets. But I am sure you can offer up a MMT critique of this view, so please do.
“Can the firm that sells scrub-clearing services to farmers build up a stock of unsold inventory of land-clearing services? No. So that is an example of a newly-produced investment service where there are no inventories.”
And my explanation was that scrub clearing is not an investment. The value improvement to the land is the investment. And the land is inventory in the longer term sense.
Because scrub clearing is not an investment in any sense, it can’t be an investment in the inventory sense. So the argument again is moot.
“The whole economy is moving towards a service economy.”
Not the part that remains investment, which is still substantial. And that’s the only part that can generate macro saving.
“We end up with Eugene Fama insisting that a fiscal stimulus can’t possibly be expansionary because the savings to finance it have to come from somewhere.”
Yes, as Krugman pointed out in “Dark Age of Macro”.
I would add that to Scott Fullwiler’s earlier list, along with James Galbraith’s disembowelment of CBO projections earlier this year.
I agree with Nick about the role of inventories. My own post makes its argument without using inventories, and it uses custom software as an example of investment. My argument that “investment makes saving possible” is complicated by the introduction of inventories, because then the investment that facilitates saving may have been investment that took place in the past. With respect to inventories, it might be more reasonable to say that “saving forces investment,” in the sense that saving prevents intended disinvestment from taking place.
In the shower just now, I suddenly remembered (if my memory is correct) a published paper that did make an accounting mistake. Martin Weitzman once did a macro paper that showed a rather strange equilibrium result that he attributed to firms’ having increasing returns to scale. But, IIRC, he had forgotten to include firms’ profits in the household budget constraint. And that explains why, when he switched to the long run model with free entry, where profits went to zero, his equilibrium results became much more normal. It didn’t matter if he had forgotten profit income, if profits were zero anyway.
A lot of post-keynesians went rather gaga over his results at the time, IIRC, because they liked his underemployment equilibrium and they liked his increasing returns to scale assumption too. But it all was based on forgetting to include profit.
Now, would someone who knew accounting have immediately spotted that mistake? I don’t know. But I spotted it, and I never much thought about accounting, nor knew any past the basics of NIA.
(All the above based on very old memories, so don’t trust its accuracy0.
Andy,
If you assume no inventories, then investment equals saving trivially, as you noted in your post.
If there is an inventory process, then saving may force investment, as you say here.
That’s the case in the flow sense of saving, as it corresponds to a change in inventories.
And it’s the case in the stock sense of accumulated saving (savings), as it corresponds to the level of inventory investment.
Andy: On Fama. OK. It was maybe lack of clarity rather than a mistake. Job to tell.
David: good to see you wading in here, with the Paradox of Hoarding (Md=Ms) view as opposed to the Paradox of Thrift (Sd=Id) view.
(Funnily enough, when I first had inklings of MMT I was rather hoping they might be more in tune with monetary disequilibrium analysis, because of the different way most of them talked about saving, which they often speak of as S’ = S-I, and how they talked about “money”. But on further reading I figured they weren’t really. They tend to speak of “money” under a very broad definition. So I was a little disappointed. My current interpretation is that they are a bit more like Old Keynesians in their analysis of this sort of thing.)
JKH: “If you assume no inventories, then investment equals saving trivially, as you noted in your post.”
If you mean actual saving and actual investment, then they are equal always, regardless of inventories.
If you mean desired saving and desired investment, then they can be unequal even if there are no inventories. Just take any example where there is a line-up of buyers who want to buy some good that’s included in GDP, but can’t. Id exceeds Sd.
And this would be really obvious if we stopped talking about S and I and talked about demand and supply instead. Is it possible to have a good that is in excess demand, where quantity demanded exceeds quantity bought-and-sold? Obviously, yes. Go to Cuba and you see it all the time.
This is all too complicated. The confusion becomes because people are not understanding what is in the national accounts. All the matters is that the national accounts reckons people get income from selling things (including services) and use that income to buy either buy goods and services that are either considered final consumption goods or investment goods (and net intermediate goods such as inventories). Since every income comes from selling something (here labour complicates things because it is netted as income to one group and a cost to another) what is not spent on consumption goods must be a sort of savings (for some participants it will actually be savings in a bank account – but that must be exactly offset by others who borrow and invest). The key is the exclusive categorisation of goods and services into consumption goods and services and investment goods and services.
Nick wrote: “Look, Scott understood what I was saying. Suppose I have a debt to you of $100. Suppose I drop my consumption by $100, pay you the $100, and you increase your consumption by $100. Then private gross debt has fallen, private consumption and saving have stayed the same in aggregate, and nothing changed with I,G,T,X, or M. If your accounting identities are stopping you understanding that, then you are being mislead by your own accounting identities.
*Part right, part wrong. 1) Private debt has fallen only if when you pay me the $100 in reference to the debt. For deleveraging you need to ask, does it extinguish debt? You understand you can give me the $100 bill, now I owe you $100 and you still owe me a $100 debt? 2) In your example, private savings have fallen only if private debt has also fallen.
Hi Bruce W.! Economistview is a lesser blog without you. I worked out a deal with Mark where he just deletes my posts that offend him, he no longer feels the need to email to explain why. Brad D. just blocks me (for good reason).
I’d suggest reading ‘Understanding Modern Money’ by Randall Wray for the real definitions.
My definition:
Horizontal money (bank money) is created by loans/deposits and extinguished by the repayment of loans.
Vertical money (fiat money) is created by government spending and extinguished by government taxation.
And is it possible to have cases without inventories where Id is less than Sd? No. Because that would mean quantity demanded is less than quantity bought-and-sold. Which doesn’t make sense. Why would anyone buy more of a good than they wanted to? Is the mafia selling the good?
Winslow: OK. Agreed.
And there’s one more important problem with S=I as a way of thinking about things, compared to demand and supply:
Do we define desired saving as actual income minus desired consumption Sd=Y-Cd ?
Or do we define it instead as desired income minus desired consumption Sd=Yd-Cd.
It makes a big difference when we have an excess supply of newly-produced goods.
In Keynesian underemployment equilibrium:
1. Sd=Id, output demanded = output bought-and-sold.
2. But Sd exceeds Id. Output supplied exceeds output bought-and-sold.
God, but S=I is a crappy way to look at the world. Qs=Q=Qd is so much better.
“If you mean desired saving and desired investment, then they can be unequal even if there are no inventories. Just take any example where there is a line-up of buyers who want to buy some good that’s included in GDP, but can’t. Id exceeds Sd.”
No problem with that, Nick.
I suppose the point of my original comment related much to the area of economic forecasting, where economists need to make sure that their future scenarios are compatible with accounting logic. If you look at much of the MMT blogs recently (actually I’m thinking most of Marshall Auerback), a good deal of has to do with accounting integrity in terms of reasonable outcomes for sector financial balances as a result of government policy, particularly austerity versus stimulus policy. So the accounting again is a constraint on the outcomes that you forecast using your best judgement on supply/demand behavior. This may be obvious to you, but the fact is that a lot of MMT writing emphasizes it in policy analysis. The implication is that MMT thinks in general that there’s a lot of economic analysis out there that isn’t understanding the nature of contradictory sector accounting outcomes that are implied in their forecasts and policy assumptions.
S=I is a crappy because it assumes away the government and the foreign sector. S=I relies solely on deposits/loans to provide money for exchange.
Nick,
How about: if ACTUAL economic outcomes reflected perfect mathematical continuity, then there would be no supply and demand functions, because each point on the continuum would reflect an actual accounting event. Because economics reflects discrete mathematics, supply and demand functions fill in the gaps between actual accounting outcomes.
Really great discussion between Scott and Nick in the comments.
My primary quibble with Nick’s post is this piece here, which is more of side point: “So “desired saving” means “that part of income that people do not desire to spend on (newly-produced) consumption goods”. What do they want to do with it instead? It could be anything, except spend on (newly-produced) consumption goods.”
That might be true from an accounting perspective, but from a behaviorial point of view, desired savings is not the part of income that I do not desire to spend; it is the part of income that I want to transfer to claims on future spending. If I was single and expected to die in a month, I have no doubt I could find newly produced goods and services to spend any and all income. But, I do not expect to die so soon and do have a child, so I ‘save’ income for my future consumption or investment balancing risk and return to the best of my quasi-rational ability. And that’s why I am still in the DeLong camp.
JKH: I am with you on your 12.25, but I’m going to stab a guess at your 12.33:
It’s the econometric problem, of how to estimate a supply and demand curve. (Stephen spends his life on questions like this. I’m just going to give the simple version, which is all I understand.)
Assume (just to keep it simple, because it’s hard enough already) that the market for apples is always in equilibrium where the supply and demand curves cross.
If we have just one snapshot, at one time, all we see are P and Q. We do not see the demand curve or the supply curve. We just think they are out there somewhere. We only see the point where they cross
If we knew (somehow) that the demand curve never moved, but that the supply curve moved around a lot, and if we had a movie camera, we would be able to see the demand curve. As the supply curve moved back and forward the points we see (the Ps and Qs) would trace out the demand curve.
If we knew (somehow) that the supply curve never moved, but that the demand curve moved around a lot, and if we had a movie camera, we would be able to see the supply curve. As the demand curve moved back and forward the points we see (the Ps and Qs) would trace out the supply curve.
The job of econometricians like Stephen who do simultaneous equation estimation is to figure out that “somehow”. They find some variable (the weather) that they are pretty sure shifts the supply curve and not the demand curve. Then they figure out another variable (doctors saying apples are good for you) that they are pretty sure shifts the demand curve and not the supply curve. Then they throw it all in the computer and the computer tries to figure out what the demand and supply curves look like from watching P, Q, the weather, and doctors, with a movie camera.
Hello David,
This would be my view on the points you’ve raised.
Best,
Scott
You said:
If the debtor starts deleveraging at a faster rate than the creditor expected, then this would be a shock to the creditor’s portfolio. As you suggest, the creditor may now have more deposits and fewer bonds. But, given this was unexpected it is now not an optimal allocation of assets. The creditor, therefore, needs to rebalance his/her portfolio and this sets in motion a series of transactions that should to some extent lead to an offset in spending. For example, if the creditor buys more bonds and uses funds from the deposits to purchase them, now the seller of the bonds has more money. That seller now has extra money in his/her portfolio and must decide whether to save or spend it too. At some point, this hot potato effect should eventually lead to investment or consumption spending. The only reason it would not is that somewhere in this process someone decided to not to spend the money (i.e. they left it sitting as a deposit). I would call that an excess money demand problem, rather than a deleveraging problem.
My response:
There is always a virtually default risk-free asset that earns essentially the risk-free rate . . . time deposits. Further, converting to a time deposit does not affect relative asset prices, since it arbitrages with the cb’s target rate, and this ends the hot potato effect since the “cash” no longer exists but has simply been renamed a time deposit. (If we’re talking about “cash” in the form of currency, then the conversion to a time deposit means the bank has more vault cash, which it can sell to the Fed for an interest earning reserve balance; or, without IOR, the Fed would drain the reserve balance via a reverse repo. Again, no hot potato effect.)
Further, this “decide whether to save or spend” conflates behavior related to “money” with that related to “income.” My mother on the verge of retirement doesn’t spend more simply because the Fed buys her Treasury and she now has a deposit (she goes to a time deposit or buys another Treasury from the Treasury’s online purchasing site, both of which again destroy the deposit), but if you increase her Social Security check, this raises money and income and probably induces her to spend. As I said in the original comment, you have to make an ADDITIONAL behavioral assumption to say that the creditor now with greater “money” balances spends them beyond the assumption you would make if the saver had an increase in income. These are different, but they are too often treated as if they are the same.
This is the same point JKH and RSJ are making with Nick regarding the difference between income and cash flow. Another analogy is that it’s like a business that earns more profit versus reducing accounts receivable because previous purchases are now paid in full—these aren’t the same from the perspective of the firm even though both increase cash balances.
You said:
“I agree, but the problem here is that the bank allowed the money supply to fall for a given amount of money demand, creating an excess money demand problem.”
My response:
Where’s the excess money demand? The debtor was reducing debt, which reduced deposits (as deposits used to retire debt do not exist anymore) and reduced the bank’s assets. Increasing the money supply would require someone to desire to borrow so the bank would create a loan.
Further, this “money demand” argument conflates several points. First, there is the portfolio adjustment issue of “money demand,” which is holding non-cash assets but wanting to. There is never a problem here if the person desiring “money” is holding a liquid asset. There may be a capital loss selling the asset, but there are market makers in every liquid market that set bid/ask rates (that’s why it’s a liquid market).
Second, “money” demand can be on the part of people without wealth. This can take the form of desired borrowing to spend—in which case an “excess demand for money” simply means the lender doesn’t deem the borrower creditworthy—or desired “money” from an increased flow of income. Everyone has an unlimited demand for the latter, always, but that’s not interesting and not related. For the former, it’s simply a demand for credit. And this is the only way the bank can “increase the money supply to meet a given money demand”—by providing “money” balances through credit. And if we’re talking about a balance sheet recession, this demand for credit is by definition reduced, not increased. Conflating demand for money with demand for credit is a big mistake, but it happens all the time.
You said:
Finally, if the debtor is defaulting then the problem is whether the debtor chooses to spend or hoard the funds they would have paid the creditor. If they spend it, no problem, If they hoard it, then the excess money demand problem arises again.
My response:
If the debtor is defaulting then they have no funds. That’s why they defaulted. The money borrowed was already spent. And when they default, they are no longer creditworthy, no matter how low you cut the interest rate, while the creditor now has reduced capital and thus reduced ability to expand the balance sheet (make loans, and thus money creation) while could also be a bit more skeptical of would-be borrowers (again, potentially reduced lending and reduced money creation).
OGT; Thanks. Yes, this has been a good discussion.
“That might be true from an accounting perspective, but from a behaviorial point of view, desired savings is not the part of income that I do not desire to spend; it is the part of income that I want to transfer to claims on future spending.”
Most economists would agree with you. Most economic models assume the desire to save is based on the desire for future consumption (oneself or one’s kids). Milton Friedman’s permanent income hypothesis, and the New Keynesian consumption-euler approach, are explicitly based on your view. I would mostly agree with you. But it’s not 100% true. If I buy antique furniture, that’s “saving”, as currently defined (because it’s not newly-produced). Sure, I will be able to consume it now and in future, or sell it to finance my consumption when I’m old. But it’s not purely a “claim” on future consumption. It’s different from a bond.
But basically yes, apart from my quibble with your quibble, your view of why people save should be built into the behavioural functions that determine desired saving. And they typically are (though they weren’t in the crude Old Keynesian model I used in the post, for illustration).
^Nick, see :).
Nick, that’s an interesting visual.
So I think you’re saying that supply and demand functions can be derived implicitly by observing actual (P,Q) changes and inferring the factors that are causing the changes.
Scott,
Thanks for the reply. I am still wrapping my brain around this, but here are some thoughts:
“There is always a virtually default risk-free asset that earns essentially the risk-free rate . . . time deposits. Further, converting to a time deposit does not affect relative asset prices, since it arbitrages with the cb’s target rate, and this ends the hot potato effect since the “cash” no longer exists but has simply been renamed a time deposit.”
How does this change or nullify the non-bank creditors’s desire to rebalance their portofolio? In the scenario above they are heavy money assets and need to reallocate into higher-yield assets. This could mean buying financial assets, physical assets, or ultimately even goods. This is the essence of the portfolio channel of monetary policy. (one that existed well before Bernanke promoted it with QE2.)
“Further, this “decide whether to save or spend” conflates behavior related to “money” with that related to “income.” My mother on the verge of retirement doesn’t spend more simply because the Fed buys her Treasury and she now has a deposit..but if you increase her Social Security check, this raises money and income and probably induces her to spend.’
But your mom or any investor will want to rebalance his/her portfolio of assets after that transaction. Again, the hot potato effect.
“Where’s the excess money demand? The debtor was reducing debt, which reduced deposits (as deposits used to retire debt do not exist anymore) and reduced the bank’s assets. Increasing the money supply would require someone to desire to borrow so the bank would create a loan.
That’s a fair point that the demand for loans would need to increase for the banks to start creating more money assets. But, regardless, the destruction of money assets (i.e. deposits) through deleveraging has not been offset and for a given money demand there is now a shortage of money assets. Moreover, during an economic crisis it is fair to say money demand, if anything, has become elevated.
Yes, the excess demand for credit is different than the excess demand for money. I am focusing on the latter. Here is how I define it: given there is a determinant amount of wealth people want to hold in the form of money, it is possible for desired money balances to be less than actual money balances.
“If the debtor is defaulting then they have no funds. That’s why they defaulted. The money borrowed was already spent.
Just because one defaults does not mean they have no funds. For example, someone may decide it is a fools errand to keep paying a mortgage on a home that is underwater. They are keeping the money assets they would have paid to the creditor. Again, if they spend it no problem. If they don’t because they are say, still uncertain about the future then there an excess money demand problem.
I wonder if we focus too much on banks. They, after all, are just the intermediaries for households and firms, which in the US have been acquiring and maintaining an inordinate amount of money assets (relative to their other assets). These are the creditors I think that should be spending their money balances. On the surface they are not spending their money balances because of the dire economic outlook. At a more fundamental level, I see them not spending the money because there is first-mover, coordination problem. That is, if all started spending their money simultaneously there would be a recovery, but no one wants to be the first one to move. This where I think the Fed could assist via a price level or nominal GDP level target.
Thanks for listening.
These ideas of being accounting consistent and acknowledging supply/demand influences/functions shouldn’t be incompatible. There shouldn’t be any conflict between them at all.
I get stuck on this debtor/creditor discussion, because anybody who holds a money balance with a bank is a creditor. Has to be to make it all consistent. But that includes just about everybody at different points in time. So how do you define creditor or debtor in that context – anybody who has a gross position – or is it somebody who has a net position, net somehow defined?
“It’s a bit like being accosted at airport terminals by people with a glow in their eyes repeating “apples sold equals apples bought”.
But at least that, as Henry Kissinger would say, has the added advantage of being true. The ones to worry about are the crazy people at the train station who mumble things that are manifestly not true like, say, ”inflation is always and everywhere a monetary phenomenon.”
:o)
” On the surface they are not spending their money balances because of the dire economic outlook. At a more fundamental level, I see them not spending the money because there is first-mover, coordination problem.”
So China isn’t buying our good and services because they are afraid we won’t buy theirs?
Is this error in reasoning caused by assuming S=I, no foreign sector, no government?
I’m an amateur who’s been thinking very hard about S=I for some years. (And reading: from Kuznets — who created national accounts system — to many textbooks plus Sumner Rowe Waldman MMTers and etc.) I don’t have any pronouncements to make here, just some ongoing perplexities.
“2. S = Y – T – C This is a definition of Saving”
and
“If you start your theory with I=S as an accounting identity”
I feel like “definition” may be the key word here. An accounting identity is a definition of terms.
Kuznets decided that we would measure all the sales of real goods (explicitly excluding financial assets), and assume (reasonably, it seems) that it equals all the real production (adjusting for inventory and imports/exports). That’s Y.
If we subtract measured consumption and taxes from Y we get something that is labeled, alternately, either “savings” or “investment.”
Kuznets gave those two words the same accounting definition. So of course they’re equal. (Worth noting: in calculation of the national accounts, Savings is a residual; it’s not measured.)
It seems like this reveals a conflation that goes to the roots of classical economics: between real investment and financial “investment,” between real capital (from plants and equipment to ideas, knowledge, and skills) and financial “capital.” “Investment” and “capital” are used, constantly, without the modifiers “real” and “financial.” But buying government bonds or even stock in a company has very different effects on the economy than building a house or a factory or training your workers.
Underlying that seems to be an assumption that any financial “investment” — money used to purchase financial assets (including newly-created financial assets) — recycles instantly, within the period or at least by the next period, into real investment (or at least consumption). That there’s no financial “holding pool” where it just circulates, without being spent on real goods. That that pool does not expand and contract based on inflows and outflows, plus “animal spirits.”
Related: the widely-bruited notion that one can “spend” out of “income” (except metaphorically). One can only spend out of a stock. (cf. Godley on Stock-Flow consistent modeling, and Steve Keen’s downloadable and runnable stock-flow consistent model.)
It’s also related to the failure of national accounts to include capital gains as part of income. Financial assets, and their changes in value, are basically ignored in the national accounts, as if the financial system was nothing more than a tally sheet that’s external and unrelated to the real economy — like the bank in Monopoly — with no motive force of its own beyond the push and pull of interest rates. As if we really did live in a barter economy. (I know, I know — neutrality of money — but…)
This may be related to Steve Keen’s key points about static vs. dynamic modeling — how static equilibrium modeling (maybe showing period 1 and period 2, but not the endless iterations of dynamic modeling) is incapable of representing how a money economy actually works.
On a completely different note: under MMT thinking, it seems to me there is no such thing as government “saving,” any more than a bowling alley or United Airlines can “save” points. This makes me even more confused about S=I.
Take this thinking far enough, and you might get to the crazy notion that S=I is essentially a political statement, a statement of economic world view, a definition by Kuznets and company (unconsciously?) designed to maintain the status quo of the financial system, i.e. to maintain the wealth of creditors.
The national accounts are an economic model. How accurate/representative/useful are the fundamental underpinnings of that model? I’m not sure they are, very.
I may just be displaying deep ignorance here, and the last is perhaps wild-eyed. But I thought it worth delving below the “given” (given by Kuznets on stone tablets) that S=I.
These equations
1. Y = C + I + G + X – M
2. S = Y – T – C
They are stock equations and do not tell us anything about flow. What causes Y to rise or fall? What causes S to rise or fall? We cannot infer flows from these equations and will need completely new ones to tell about flow and causation. Take for example: Nick: “if you like, you could define S as “national saving” to include both private saving plus government saving”
How did we know that national saving is government plus private saving? Doesn’t a flow from one lead to an increase in stock of the other? I.e., ‘Private saving’ increases with more government spending, and ‘government saving’ increases with private dis-saving (greater taxation), and at an extreme (forgetting foreigners) adding both together results in zero.
The equations also do not tell us anything about what makes people desire more consumption or investment. All we know is what cleared, i.e., what goods were bought/sold.
Re: Y = Cd + Id and Sd = Y – Cd
I can tell you my Sd is a lot greater than my Y – Cd. My Sd and Cd alone is greater than my Y. For example, I desire to buy a fleet of Ferraris, and I desire to save a million dollars a year. But who cares about that? All that matters is how many Ferraris I actually bought (zero) and how much savings I set aside ( a little). So my non-consumption of Ferraris does not lead to added Y for Ferrari, though my savings does contribute to increased funds for my bank, which as Scott F says, does not necessarily lead my bank to lend it to someone like Ferrari (since Ferrari doesn’t expect to increase Y anytime soon, and doesn’t need the funds for expansion).
wh10: Yup!
JKH: “So I think you’re saying that supply and demand functions can be derived implicitly by observing actual (P,Q) changes and inferring the factors that are causing the changes.”
That’s close. If you observe actual P and Q changes, and if you also observe changes in two other variables, X and Y, and if you can assume that X affects demand and not supply, and that Y affects supply and not demand, then you can empirically estimate (infer the shape of) the supply curve and the demand curve. (Well, Stephen could; I couldn’t.)
Simple econometrics estimates one equation at a time. Plot Y against X, and fit a curve to the data. But that (usually) won’t work for supply and demand, because there are two equations, and you have to estimate both equations at the same time. So econometricians figured out how to do simultaneous equation estimation.
JKH: “These ideas of being accounting consistent and acknowledging supply/demand influences/functions shouldn’t be incompatible. There shouldn’t be any conflict between them at all.”
Agreed. And if they were inconsistent, something would be terribly wrong. Like if your equilibrium condition were: apples + bananas demanded = apples supplied.
JKH: “But that includes just about everybody at different points in time. So how do you define creditor or debtor in that context – anybody who has a gross position – or is it somebody who has a net position, net somehow defined?”
Dunno. Good question. It might depend what you wanted it for. If you are just looking at an individual’s wealth, then net does the job. But if there’s risk, and you are leveraged, net doesn’t tell the whole story. (As of course you understand better than me, because just take that same statement and apply it to banks, instead of people).
Of course, it’s not always possible; there are usually pretty thorny identification issues with simultaneous systems.
Steve: “I feel like “definition” may be the key word here. An accounting identity is a definition of terms.”
Absolutely. Which means you have to define “saving” in a very special way, to make it true.
“Related: the widely-bruited notion that one can “spend” out of “income” (except metaphorically). One can only spend out of a stock. (cf. Godley on Stock-Flow consistent modeling, and Steve Keen’s downloadable and runnable stock-flow consistent model.)”
That doesn’t seem right to me. One can have a flow of money coming in, and a flow of money going out, as you spend it. Now, it is true, we very rarely have perfectly smooth flows in and out in practice, if you are looking at a very fine-grained time intervals. Our flows in and flows out tend to bunch up. On annual data they look like flows. On hourly data they look like stocks. We hold fluctuating inventories of stocks of money precisely because it is so difficult to arrange our buying and selling so that everything is a perfectly smooth flow, minute by minute.
“On a completely different note: under MMT thinking, it seems to me there is no such thing as government “saving,” any more than a bowling alley or United Airlines can “save” points. This makes me even more confused about S=I.”
I don’t get that. Just define government “saving” as its income (from taxes) minus its spending on newly-produced goods (G). Now, you might object that doing so is stretching the metaphor a bit. OK. But private “saving” is a bit of a metaphor too.
“Take this thinking far enough, and you might get to the crazy notion that S=I is essentially a political statement, a statement of economic world view, a definition by Kuznets and company (unconsciously?) designed to maintain the status quo of the financial system, i.e. to maintain the wealth of creditors.”
Nope. Too far there. A statement of an economic view, yep. Different models would have different ways of categorising the world. (Example: Y=F+M national income accounting by a radical feminist who wants to divide everything into expenditure by males M, and females F. It makes just as much sense as Y=C+I+G+X-M.)
rogue: “These equations
1. Y = C + I + G + X – M
2. S = Y – T – C
They are stock equations and do not tell us anything about flow. What causes Y to rise or fall?”
They are flow equations, not stocks.
But agreed, they tell us nothing about what causes Y (or S, or anything) to rise or fall.
“I don’t get that. Just define government “saving” as …”
MMT derives sector balance equations from the national income accounts.
Those equations are net of I, so the result is an equation of net financial balances (as flows, which can be accumulated to stocks).
(Nick, I think you’ve taken issue a few times that this is a fairly trivial exercise from a “mainstream” perspective, and have been critical of MMT followers who think they’ve stumbled on something “new’ here.)
E.g.
Government balance + private sector balance + foreign sector balance = 0
as in for the US:
government deficit + private surplus + foreign surplus = 0
(where foreign surplus is the inward looking reverse of the current account deficit)
Or, government balance + non government balance = 0.
Or, government deficit = non government surplus
MMT defines the right hand side of that as non government “net financial assets” or “net saving”, as a flow, which can be accumulated to a stock.
So, basically the government delivers “net saving” to the non government sector by running deficits.
MMT’ers tend to get used to speaking in terms of “net saving”, and then drop the “net” out of habit, which gets confusing.
But once they derive the sector financial balances model, they never aggregate government with non government again. Because that would be counterproductive to the interpretation of government being the productive supplier of net saving. It would serve no purpose in telling the story of the government role in running deficits.
And because of this, they also don’t like and in fact reject the term “national saving”, where the government deficit would be aggregated up as a negative.
It’s a different view of the world, where government/non government aggregation serves no purpose.
It is a government-centric view, which happens to be very much in synch with Chartalism as a government centric view of taxation driving the acceptance of currency.
If I’ve inadvertently trivialized the approach by trying to summarize it, that’s not something I mean to do.
P.S.
“where foreign surplus is the inward looking reverse of the current account deficit”
i.e. it’s the US capital account surplus that corresponds to the US current account deficit
(which happens to be the “rest of the world” capital account deficit with the US, as a source of funds for the US – terminology and perspective gets slightly mind bending here)
Steve wrote:”Take this thinking far enough, and you might get to the crazy notion that S=I is essentially a political statement, a statement of economic world view, a definition by Kuznets and company (unconsciously?) designed to maintain the status quo of the financial system, i.e. to maintain the wealth of creditors.”
Nick wrote:Nope. Too far there. A statement of an economic view, yep. Different models would have different ways of categorising the world. (Example: Y=F+M national income accounting by a radical feminist who wants to divide everything into expenditure by males M, and females F. It makes just as much sense as Y=C+I+G+X-M.)”
I don’t understand your response. You haven’t just divided up the economy in different ways, you’ve abolished the government and foreign sector affects on the money supply.
Steve R.’s point had to do with S=I, a special case where G-T+X-M = 0 your assumptions in eq. 4,5,6.
I’m thoroughly confused.
Isn’t it obvious your special case relies on banks generating all money horizontally and therefore all the profits? How does Steve get a response of ‘Nope’? Shorter Nick, ‘for simplicity’s sake, lets accrue all the profits of seigniorage to the banks.
There are a few people (20 or 30?) that won’t take seriously (or at least sufficiently confused by) a profession that insists on waving away the government and foreign sectors.
Nick
Thanks for the response and I definitely understand that the federal debt is not the totality of non govt saving.
It seems that it is certainly fair to say then that the national debt represents the minimum level that the non govt sector is saving. Its never lower than that although it is likely higher.
tom: “I don’t understand your response. You haven’t just divided up the economy in different ways, you’ve abolished the government and foreign sector affects on the money supply.”
First off, none of this has anything to do with the money supply. Y=C+I+G+X-M would still be true in a barter economy, with no money at all. And none of these variables determines the supply of money, even in a monetary economy.
Second. All I was trying to illustrate with my (daft) Y=M+F example is that there are many possible ways to divide up sales of newly-produced goods Y into different categories. Here are some more (daft) examples:
Y = goods + services
Y = apples + bananas + carrots + dates + eggs etc.
Y = food + non-food goods
Third: when I assumed away the government and foreigners in the post that was purely for simplicity. It is simpler to explain the meaning of S=I under those simplifying assumptions than to explain S+T+M=I+G+X in the more general case. The explanation is exactly the same, but it uses a lot more words, and it’s harder to understand.
Damn! You mean government and foreigners do exist??? Wow! I thought us Canadian anarchists were here all alone! (Sorry, couldn’t resist).
Gizzard: yep. Unless the government borrowed from foreigners.
JKH: “It’s a different view of the world, where government/non government aggregation serves no purpose.”
Understood. One of the main reasons we divide Y up into the particular categories C+I+G+(X-M) is because we think they are determined in different ways. That the things that determine consumption are different from the things that determine investment, for example. (It would make no sense to distinguish goods bought by right-handed people from goods bought by left-handed people, unless we thought that righties and lefties had totally different behaviour).
And we separate out G precisely because we want to keep it separate as a policy lever.
Nick wrote: “First off, none of this has anything to do with the money supply. Y=C+I+G+X-M would still be true in a barter economy, with no money at all.And none of these variables determines the supply of money, even in a monetary economy.”
Thanks for your response, I must have missed a lecture since now I’m even more confused.
In your framework, government spending (G) doesn’t help determine the supply of money, even in a monetary economy?
Nick and JKH . . . for me, the most important reason for separating out the sector balances as is done is for analysis from a Minskyan perspective. The identity arranged as “national saving” is a non-starter for me since it gets the causality wrong. But rearranged as the “sector financial balances” we can have some indicator of how things are functioning within the context of Minskyan analysis. Granted, it’s not the only measure you would look at for that, but it’s an important one, and it helped us make accurate assessments and predictions since the late 1990s. Some MMT’ers also use it to refute financial crowding out–and this is seen better when one goes to the actual NIPAs and Flow of Funds to build the balances relative to other sectors for households, firms, govt, current account separately. The identity used in the post here is not entirely the same thing, actually, and I think does come across a quit a bit more trivial than doing the real world calculations for the sectors (this is not a criticism of Nick’s post–MMT’ers do the same thing all the time for simplicity).
tom: “In your framework, government spending (G) doesn’t help determine the supply of money, even in a monetary economy?”
I can imagine a world where it does. But it’s not a country anything like Canada. Suppose the government pays for all spending with freshly-printed dollar bills, and when it collects taxes it does so in those same dollar bills, which it burns. And suppose there is no central bank, or banks of any kind. And so those dollar bills were the only form of money people used. In that case, G-T would tell us how much the stock supply of money increased each year (or decreased if T is bigger than G).
But in a country like Canada, the annual revenue the government gets from printing money (the profits of the Bank of Canada, which it owns) are about $2billion per year. Which is much smaller than the typical government deficit or surplus. Most deficits are financed by selling bonds, not money. And surpluses are used to buy back (pay off) those bonds. So there’s no direct link between G-T and the printing of government money (which is controlled by the quasi-independent Bank of Canada anyway).
Plus, some money is also created by commercial banks (depends on exactly how narrowly or broadly you define “money”, but most would include chequeing accounts as money).
So, unless the government (like Zimbabwe) cannot borrow (can’t sell bonds) there really isn’t any link between G-T and the change in the (stock) supply of money.
Scott: “The identity arranged as “national saving” is a non-starter for me since it gets the causality wrong.”
Understood. Since you guys think of “government saving” (T-G) as one of the main determinants of private saving, you wouldn’t want to simply add the two together.
In a different model (the New Keynesian for example), where monetary policy is used to adjust the rate of interest to keep output at potential and inflation on target, it would make sense to add private plus government saving together to get national saving. Desired national saving and desired investment (assuming closed economy) together determine the natural rate of interest. And the central bank would need to keep the actual rate of interest equal to that natural rate to keep output at potential and inflation at target.
An aggregation that works well for one theory does not work for another. We need to make our accounting categories fit our models, not vice versa. (Pax JKH, because this doesn’t mean you can make up any sort of accounts you like; things still have to add up right, it’s just you can add them together or split them apart differently.)
The big problem is that saying I is investment makes people think that I is how much money was converted into capital goods that might improve productivity or demand. It isn’t. There are all sorts of investments that are simply ways of removing money from the economy so that Y = C + I simply results in a smaller C and falling living standards.
“So, unless the government (like Zimbabwe) cannot borrow (can’t sell bonds) there really isn’t any link between G-T and the change in the (stock) supply of money.”
Woah, Nelly.
There is not only a link, but this is one of the strongest correlations we can observe in the macro data.
//research.stlouisfed.org/fred2/graph/?g=1HI
rsj: Wow! I have just learned how to do St Louis Fed graphs! (I think) I am VERY proud of myself.
I’m really a bit concerned about this MZM stuff, but since you chose it, I thought I would compare your MZM with NGDP, as opposed to your debt in public hands. NGDP works much better. Velocity looks much more stable:
https://research.stlouisfed.org//fred2/graph/?id=GDP,#
(Yes, look, what I should have said is that there is no accounting link between stock of money and G-T. But all you are picking up in your graph is that everything has been increasing over time. Money and debt. NGDP works much better.)
I’m off for a day or so.
Have fun, play nice.