tag:blogger.com,1999:blog-5908830827135060852.post2453593996329548199..comments2024-03-29T02:54:56.523-04:00Comments on Bond Economics: Nick Rowe's Question Is Silly Because It Ignores Stock-Flow NormsBrian Romanchukhttp://www.blogger.com/profile/02699198289421951151noreply@blogger.comBlogger13125tag:blogger.com,1999:blog-5908830827135060852.post-42916633426832447542015-03-11T18:26:07.713-04:002015-03-11T18:26:07.713-04:00Thanks!Thanks!Brian Romanchukhttps://www.blogger.com/profile/02699198289421951151noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-65165646595760320922015-03-11T17:48:45.966-04:002015-03-11T17:48:45.966-04:00Lerner, A.P. (1943), ‘Functional finance and the f...Lerner, A.P. (1943), ‘Functional finance and the federal debt’, Social Research, 10: 38–57.circuithttps://www.blogger.com/profile/08565443970730261572noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-37120164124122826212015-03-10T20:22:49.575-04:002015-03-10T20:22:49.575-04:00Where was that quote from? It's been awhile si...Where was that quote from? It's been awhile since I read Lerner, and I do not recall that logic.<br /><br />The closed economy assumption is probably weaker than an implicit price level stability assumption. If the economy keeps growing in nominal terms, a steady state would imply a deficit. But if we grant that assumption about nominal growth, the logic for the external sector is similar for the domestic private sector. At some point, the desired holdings of domestic financial assets will be reached, and the trade account should move towards being balanced.Brian Romanchukhttps://www.blogger.com/profile/02699198289421951151noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-81542256143722756882015-03-10T19:24:08.569-04:002015-03-10T19:24:08.569-04:00I hear you, the assumptions we make form the found...I hear you, the assumptions we make form the foundation of any analysis. I was simply trying to emphasize that context matters for the deficit (flow) just as much as you wrote about context being critical to the "debt" (stock) in your article.Anonymoushttps://www.blogger.com/profile/15433129947896088098noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-26367415292719237462015-03-10T19:22:12.129-04:002015-03-10T19:22:12.129-04:00The more Lerner I read, the more I find him to be ...The more Lerner I read, the more I find him to be one of the most clear - headed economists we've ever had. Those words are so eminently reasonable, its a crime that he has never gotten the credit and following he so richly deserves.Anonymoushttps://www.blogger.com/profile/15433129947896088098noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-80669615514727841142015-03-10T18:38:05.107-04:002015-03-10T18:38:05.107-04:00I'm aware there is a strong closed economy ass...I'm aware there is a strong closed economy assumption here but I let the statement stand, as it's so thorough and succinct.<br /><br />circuithttps://www.blogger.com/profile/08565443970730261572noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-26311719204566559032015-03-10T18:36:26.834-04:002015-03-10T18:36:26.834-04:00One of the reasons I often side with MMT is becaus...One of the reasons I often side with MMT is because some of their ideas are grounded in the work of Abba Lerner, who once said:<br /><br />"...as the national debt increases it acts as a self-equilibrating force, gradually diminishing the further need for its growth and finally reaching an equilibrium level where its tendency to grow comes completely to an end. The greater the national debt the greater is the quantity of private wealth. The reason for this is simply that for every dollar of debt owed by the government there is a private creditor who owns the government obligations (possibly through a corporation in which he has shares), and who regards these obligations as part of his private fortune. The greater the private fortunes the less is the incentive to add to them by saving out of current income. As current saving is thus discouraged by the great accumulation of past savings, spending out of current income increases (since spending is the only alternative to saving income). This increase in private spending makes it less necessary for the government to undertake deficit financing to keep total spending at the level which provides full employment. When the government debt has become so great that private spending is enough to provide the total spending needed for full employment, there is no need for any deficit financing by the government, the budget is balanced and the national debt automatically stops growing." (my emphasis)circuithttps://www.blogger.com/profile/08565443970730261572noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-31869092293391626482015-03-10T17:28:02.898-04:002015-03-10T17:28:02.898-04:00Thanks. Luckily I have attentive readers pointing ...Thanks. Luckily I have attentive readers pointing out that all my generalisations are wrong. I will take a look at how to tighten up the wording.<br /><br />I implicitly assumed "normal" fiscal policy, and in conditions that we are seeing around 1990-2015 for the major developed countries. Yes, it would be possible to construct policies that augment the fiscal deficit that have no effect on final demand. And to a certain extent, we already have a lot of such policies in place. But it is unlikely that such policies would be ramped up by the 5-6% of GDP needed to hit a deficit of 10% of GDP.<br /><br />If countries ran sustained trade deficits of 7% of GDP, it seems possible, as you suggest. But the major countries generally do not have such a large deficit, and it is unclear that foreign central banks would be willing to support such a deficit. This is a theoretical possibility, but I have my doubts that we would see it in practice.<br /><br />As for your point about changing regulations about liability issuance, yes that would change things. I implicitly assumed that there were no major structural breaks in the economy. If we somehow replaced private sector liabilities with government sector liabilities, behaviour would change. But that might require structural changes on the order of what was done in World War II. (During the war, the U.S. Government ran deficits of at least 20% of GDP, but inflation was controlled by rationing.)Brian Romanchukhttps://www.blogger.com/profile/02699198289421951151noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-17246986738782857072015-03-10T11:19:55.517-04:002015-03-10T11:19:55.517-04:00Great post as usual Brian.
Id like to submit this...Great post as usual Brian.<br /><br />Id like to submit this line for analysis:<br /><br />"But in practice, sustained fiscal deficits of 10% of GDP will most likely be inflationary, at least under peace time conditions."<br /><br />I dont think that we can make a definitive claim like this. Because without context, the fiscal position observation is meaningless. If the trade deficit was 7% of GDP, there is no reason for 10% deficits to be inflationary. And the Govt is not the only source of money domestically, during mid-recession aught years (02-07), the private sector created an average of $1.51 trillion in financial assets per year and the Govt created $278 billion on average. <br /><br />https://research.stlouisfed.org/fred2/graph/?graph_id=223204&category_id=<br /><br />http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=200<br /><br />Thats a 2.27% of GDP average Govt contribution and a 12.32% of GDP average private sector contribution to total financial asset creation. And this resulted in just a modest average CPI of 2.67%<br /><br />http://www.usinflationcalculator.com/inflation/historical-inflation-rates/<br /><br />There is no reason to believe that if the roles were reversed and we had reasonable private debt regulations that prevented out of control securitization and debt creation by the private sector, and instead relied on Govt deficits to provide the financial asset creation necessary to fuel economic growth domestically, that this would be any more inflationary than letting the private sector do the financial asset creation.<br /><br />And none of this says anything about distribution and how it impacts savings, if 10% Govt deficits were funneled to the already wealthy, they would save and not spend the money which would not cause any significant inflation. IN other words, just like how we cant say that there is a magic number of the stock (100% debt to GDP) that becomes problematic, we cant say there is a magic number of the flow (10% of GDP deficits) that would become problematic.Anonymoushttps://www.blogger.com/profile/15433129947896088098noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-38722743115223870672015-03-09T08:49:18.265-04:002015-03-09T08:49:18.265-04:00Agreed. This is why it is often best to discuss hi...Agreed. This is why it is often best to discuss historical or current examples, as at least you start off with plausible starting conditions.Brian Romanchukhttps://www.blogger.com/profile/02699198289421951151noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-5443681243753781812015-03-09T08:47:08.219-04:002015-03-09T08:47:08.219-04:00Thanks. I spent a lot of time looking at the data ...Thanks. I spent a lot of time looking at the data before studying the theory, and so I was not easily convinced by fiscal conservatism. <br /><br />It's somewhat hard to make the statement without dragging in a mathematical model. (The one I have in mind is the Godley & Lavoie paper "Fiscal Policy in a Stock-Flow Consistent Model".) Japan appears to have "relatively high" deficits and debt levels, at least when compared to contemporary welfare states. So someone might argue that too strong a version of the statement is wrong. However, Japan's deficits are "low" when compared to wartime command economies or various hyperinflations (Weimar Germany, Zimbabwe). Japan is also the poster child of finding policies that augment its gross debt-to-GDP ratio without having any growth impact on its economy. Brian Romanchukhttps://www.blogger.com/profile/02699198289421951151noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-23800982425675169452015-03-09T02:47:00.754-04:002015-03-09T02:47:00.754-04:00Whenever you get these stupid starting conditions ...Whenever you get these stupid starting conditions I always ask whether the individual constantly wears a space helmet - because there is a non-zero probability of all the oxygen molecules in the room spontaneously moving to the top corner and staying there long enough to suffocate them. <br /><br />High deficits are caused by people saving and not borrowing. You stop getting high deficits when people have enough savings or start to borrow more. Since private debt is unstable you don't really want to encourage private borrowing beyond what is necessary for capital improvements. That means accommodating whatever net savings the private sector requires, and there is no need to pay them to do that. They will do it anyway.<br /><br />Just deal with the cycle in current time preferably via strong automatic tax and spend stabilisers so that nobody has to think about it, and that eliminates unemployment permanently. That is a much more stable control arrangement than trying to force people to borrow money. NeilWhttps://www.blogger.com/profile/11565959939525324309noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-73249706123562935182015-03-09T00:21:25.337-04:002015-03-09T00:21:25.337-04:00This is a very good post. The point that high defi...This is a very good post. The point that high deficits are in practice associated with low debt-GDP ratios is not one I'd thought of before.JW Masonhttps://www.blogger.com/profile/10664452827447313845noreply@blogger.com