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Revenge of the Savings Glut Theory?

by JakeS Wed Jun 9th, 2010 at 05:30:44 AM EST

Back when the Americans had their panic(s) a couple of years ago, European Tribune was very quick to disassemble the "Savings Glut" theory promoted by Helicopter Ben and the salmon-coloured press.

The Savings Glut theory goes something like this:

China saves more than it invests. China's excess savings must be recycled. The US is the default place to recycle excess savings. This creates a US current accounts deficit and lowers US interest rates, causing a bubble, which causes a panic.

The ET critique is that (1) China's saving is the consequence, not the cause, of American CA deficit. China pegs its currency to the US$, and in order to maintain this peg it must use open market operations to counteract any American CA deficit against it. Otherwise, the US$ would fall against the Yuan. (2) It was always in the US' power to raise interest rates and/or use the low interest rates to finance investment in real physical assets, instead of consumption. And (3) bubbles don't happen just because of low interest rates - bubbles happen in the presence of particular circumstances of collective psychology, which it is within the power of economic policymakers to abet or suppress.

front-paged by afew


A few years later, Greece is hit with a crisis. The Conventional Wisdom is that Greece's problem is profligate welfare spending, which creates an unsustainable sovereign and current accounts deficit.

European Tribune regulars were quick to point out that Germany runs a trade surplus against Greece, that Germany maintains this trade surplus by pursuing a mercantilist inflation policy.

On the face of it, this seems not a little contradictory: When Germany runs trade surpluses, it causes deficits in Greece, but when China runs trade surpluses it is caused by deficits in the US. Or, if we wish to put it a little unkindly: When a European public sector runs an unsustainable deficit, it's because of foreign manipulation, but when the American private sector runs an unsustainable deficit, it's their own damn fault.

Of course there are differences.

  • One obvious difference is that the US had more options than Greece did to avert the crisis: Greece did not have the option to raise interest rates during the boom, nor to devalue its currency now (both of which options the US enjoys).

  • The second obvious point is that the relative power of the different actors is different: Germany is much bigger and more powerful than Greece. The US and China are much more evenly matched, with most WesternTM analysts giving the advantage to the US.

  • The third difference is that Greek sovereign debt was being deliberately manipulated by actors on the financial markets. So was the American sovereign debt, of course, but in the case of Greece, the manipulation took the form of a pernicious pump-and-dump operation, whereas in the American case, the manipulation took the form of several emerging economies pegging their currency to the US$. The former sort of manipulation is apt to worsen a crisis, the latter to dampen it.

The interesting point for me is whether these differences are sufficiently significant to warrant the apparent turnabout in our conclusions, or are we simply pandering to the explanations that accord best with our pre-existing pro-public pension/anti-private banker biases?

- Jake

Display:


By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Tue Jun 8th, 2010 at 03:18:44 PM EST
Savings glut vs income shortage by Jerome a Paris on January 8th, 2009
Martin Wolf is still pushing the savings glut theory in his column yesterday and, predictably, calls for countries with large surpluses (China and Germany first and foremost) to increase their spending to save the world economy, as the debtor nations can no longer increase their debt to sustain activity, as they used to until the crisis. and he promises (should this be worth a Godwin alert?) 1930s turmoil if this does not happen:
think what will happen if, after two or more years of monstrous fiscal deficits, the US is still mired in unemployment and slow growth. People will ask why the country is exporting so much of its demand to sustain jobs abroad. They will want their demand back. The last time this sort of thing happened - in the 1930s - the outcome was a devastating round of beggar-my-neighbour devaluations, plus protectionism. Can we be confident we can avoid such dangers? On the contrary, the danger is extreme. Once the integration of the world economy starts to reverse and unemployment soars, the demons of our past - above all, nationalism - will return. Achievements of decades may collapse almost overnight.
But I think he misses the point. The problem is not one of insufficient demand (which he proposes to boost via US budget deficits and, idieally, spending by China and Germany), the problem is one of insufficient incomes. If the US spends more debt-provided money, it will only generate distortions and imbalances to the economy, which will still need to be corrected later. If Germany or China spend more, it will only mean that they will be buying their own goods instead of Americans doing so: it will not improve global welfare, as it means Americans with less junk and Germans with more (presumably making both unhappy). No, what is needed is for spending to be increased in a sustainable way, and that can only happen if incoems increase. Wages (income for workers) need to be increased, and taxes (income for govenrment) ditto. Otherwise demand will shrink.


By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Tue Jun 8th, 2010 at 03:19:02 PM EST
[ Parent ]
The "savings glut" theory rears its ugly head again by Jerome a Paris  on October 9th, 2008
Martin Wolf is back (see this earlier article which I discussed back in June) with his theory that the imbalances that led to the current crisis were caused to a significant extent by Asia's saving glut:
Any country that receives a huge and sustained inflow of foreign lending runs the risk of a subsequent financial crisis, because external and domestic financial fragility will grow. Precisely such a crisis is now happening to the US and a number of other high-income countries including the UK. These latest crises are also related to those that preceded them - particularly the Asian crisis of 1997-98. Only after this shock did emerging economies become massive capital exporters. This pattern was reinforced by China's choice of an export-oriented development path, partly influenced by fear of what had happened to its neighbours during the Asian crisis. It was further entrenched by the recent jumps in the oil price and the consequent explosion in the current account surpluses of oil exporting countries.
While there is truth to the fact that Asian countries sought to protect themselves from capital deficits, the reason for their capital surpluses comes from our deficits, which were themselves the result of coordinated policy choices - what I have dubbed the Anglo Disease: the ideological choice to favor the income of the rich, by a combination of deregulation of corporations and finance, downwards pressure on wages, lower taxes, and the idolisation of financial investment and financial valuation of everything.


By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Tue Jun 8th, 2010 at 03:20:38 PM EST
[ Parent ]
Musings on the savings-glut theory by Migeru on October 17th, 2008
To paraphrase, Wolf takes a cue form a 2005 speech by Bernanke and blames East Asia's (and especially China's) mercantilist policies for the credit crunch. Jerome replies that wealth capture is not wealth creation. I guess part of my problem is that the two positions are not incompatible, and Jerome 1) doesn't refute that East Asia has been mercantilist; 2) doesn't refute the argument that this is the root cause of the asset bubble now deflating. Even if Wolf were to accept Jerome's contention that the bubble was a Western policy choice, Wolf's argument seems to be that there was no good policy path out of the situation created by China's dollar peg and that deflation and recession were inevitable and Jerome doesn't address that.

...

So, the question which Wolf skirts is, without risky monetary policy, lax regulation and irresponsible finance (which, together with finance's oversized share of GDP, is what Jerome calls the Anglo Disease) would the global imbalances have led to a different outcome? Wolf is trying to argue that the Anglo Disease was incidental. Jerome, that it was fundamental.

...

In other words, to the best of my understanding, because China was hoarding US dollar reserves (and also as a result of the popping of the dot-com bubble), the US economy was in danger of monetary deflation and therefore the Fed had to run an expansionary monetary policy of real negative interest rates which kicked off the credit bubble. That is, because China was draining money out of the US economy the Fed had to keep printing more. And this would have depressed the US exchange rate with the Yuan until the trade balance became zero except that China had a dollar peg. So we have a situation in which the Chinese dollar peg causes runaway debasement of the dollar as China and the US run to stay in place relative to each other. My problem with this is that I don't find it intuitive at all, and Wolf assumes that it's either well known or bleedingly obvious. But on this hinges the whole argument.

In the comments, Jerome ends up not disagreeing with Wolf on the deflationary effect on the US economy of the Chinese dollar peg.
I wrote again to Martin Wolf, after the initial exchange and after receiving Mig's initial comments on the fact that we did not need to borrow the Chinese surplus. Martin Wolf replied that there would then have been a nasty recession in the US.
I agree with him, but my point is that inflating a bigger bubble to avoid the effects of the previous one only pushes the problem a little further down the road (ie now) and makes it even worse wehn it hits (as we now see).

The problem was not the defict of the US - its was its growing deficit over the past few years. A stable deficit over the years is possible, especially when you own the world currency, but a growing one becomes a Ponzi scheme at some point.

Also, BruceMcF wrote
If the US is engaged in the borrowing, clearly the role of the Chinese here is in accommodating, not in causing, the long term unsustainable GDP growth model. And that accommodating entails finding a mechanism for providing the external finance so that the US could continue to purchase Chinese exports, even though the US was on a growth path that is unsustainable in the long term.

Now, is this recessionary? Compared to what alternative? The Chinese have simply been in no position over the past two decades to dictate to the United States that is must adopt a sustainable GDP growth path. The only choices that it has had have been to either accommodate the growth path, putting off the day of reckoning, or refusing to accommodate the growth path, bringing forward the day of reckoning.

Given their own position of riding a massive demographic transition from the insanely unsustainable  pro-population-explosion policies of Mao to the population-control policies of Deng, instituted in 1979, the Chinese really had no choice but to accommodate.

The only side with actual freedom of action in the bilateral relationship was the United States, and our political elite choose to pursue a financially unsustainable GDP growth path.

(Bruce's argument is much longer and more technical, and well worth a read in full, but that's the conclusion)

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Tue Jun 8th, 2010 at 03:31:17 PM EST
[ Parent ]
Paulson pushes to blame "savings glut" by Jerome a Paris on January 3rd, 2009
We now see the second part of the strategy to push the blame somewhere else, ie on China and Germany: it's not the borrowers, and it's not the financiers either who are to blame: they were "forced" to deal with the surpluses of the countries that save more than they should, and so much money put in their highly competitive hands brought financial returns down and pushed them to seek riskier pastures to use that money. So they misallocated funds, and blew them, only because they had too much because the stupid Chinene and Saudis just have too much money!

Seriously.

This not only pushes the blame away from the policies of the neolibs (income concentration for the very rich, leading to income stagnation for everybody else, hidden from view by cheap and plentiful debt allowing consumption to continue), it also provides a convenient reason not to re-regulate the financial world. It's NOt the financier' fault, don't blame them! (*)

Sweet.

I expect this concept to be massively pushed in the coming months, with all the accompanying China- and Germany-bashing. The Germany-bashing is already in ful swing, as it includes the added bonus of an Europe.Is.Doomed angle... see all the articles about how Germany is pushing the whole world into a depression by refusing to be bamboozled into a massive spending spree - how Germany diplomacy is failing, and how Merkel's star is fading, and the mocking, snickering tones about the Germans who thought they were being prudent by not joining the fun and now are suffering as much as those that had fun while it lasted.



By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Tue Jun 8th, 2010 at 03:22:33 PM EST
[ Parent ]
It seems that you are jumping from the critique of the false savings glut argument to a conclusion about whether or not China's neo-mercantalist policy played a role in the imbalance.

That is, the reason that China is not "responsible for the imbalance because it saves too much", is that "saving too much" cannot cause an imbalance. If there is such a thing as "saving too much" causing anything. It is a symptom, not a cause.

Evidently, China is in part responsible for the imbalance because of its discounted exchange rate policy, just as the US is in part responsible for the imbalance because of the same discounted exchange rate policy.

After all, China could not discount the ¥RMB/US$ exchange rate on its own without the US electing to tolerate the discount. All the US need do is to discount back, and the originally discounted exchange rate nation will be under proportionally more imported inflationary pressure than the originally overvalued exchange rate nation. Its a game of chicken race to the cliff with the Chinese car starting out closer to the cliff.

Greece and Germany are a different case because they have an exchange rate pegged at €1:€1. Under a fixed exchange rate system, the surplus country has more power to determine policy stance than the deficit country.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Tue Jun 8th, 2010 at 07:35:45 PM EST
All the US need do is to discount back, and the originally discounted exchange rate nation will be under proportionally more imported inflationary pressure than the originally overvalued exchange rate nation.

Why?

And doesn't that depend on the relative mix of structural imports from third parties? If the US has to import more, say, oil than China does, then the US would be the first to have to back out of a competitive devaluation in the face of cost-push inflation, no? (Yes, I know that oil is priced in dollars, but presumably the oil producing states would not keep doing that in the face of a serious competitive devaluation. Or maybe they would because the US has more control over them than commonly imagined, in which case they would count as domestic production for the purpose of this analysis.)

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Jun 8th, 2010 at 07:52:25 PM EST
[ Parent ]
And, incidentally, is this fact:

Under a fixed exchange rate system, the surplus country has more power to determine policy stance than the deficit country.

a part of the reason that the Bretton Woods system collapsed? That the US was no longer willing to play ball in a system that favoured surplus countries when it went from being a surplus to a deficit country due to its colonial adventure in Indochina?

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Jun 8th, 2010 at 07:54:39 PM EST
[ Parent ]
Up to the creation of the euro and arguably beyond - let's say up to some arbitrary psychological point where the euro looked (not any more) like it was ready to be "the new reserve currency" (2007 perhaps?) then there was no serious option for oil producers to price in anything but dollars.

Further, the Chinese economy, as a prime manufacturing site currently organised around importing large volumes of raw materials to feed the factories is (% wise) much more vulnerable than the US to cost-push.

Of course this gets complicated because how much of the "cost-push" in China gets passed on to the US because you can't change the mix of US-China trade that quickly (lots of trade internal to companies).

by Metatone (metatone [a|t] gmail (dot) com) on Wed Jun 9th, 2010 at 04:25:23 AM EST
[ Parent ]
Abstractly if one nation was dependent and the other nation was not, there would be a different ... but China is dependent on imported materials - maybe less oil, but of course more coal, and given rapid urbanization more iron ore and steel.

China is already striking a balance between capture of export markets and cost of essential imports. If it fights to maintain a stable US$ exchange rate while the US counter by discounting the US$ against the ROW, the ¥RMB drops against the ROW.

With the Chinese about where they want to be and the US above where we would want to be under a neo-mercentalist stance, they'd be experiencing problems while we were still experiencing gains.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Wed Jun 9th, 2010 at 04:11:27 PM EST
[ Parent ]
ROW?

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se
by A swedish kind of death on Thu Jun 10th, 2010 at 07:49:17 AM EST
[ Parent ]
Rest Of the World
by Metatone (metatone [a|t] gmail (dot) com) on Thu Jun 10th, 2010 at 07:51:58 AM EST
[ Parent ]
BruceMcF:
the reason that China is not "responsible for the imbalance because it saves too much", is that "saving too much" cannot cause an imbalance. If there is such a thing as "saving too much" causing anything. It is a symptom, not a cause.
The issue here is the causal interpretation of the accounting identity savings = investment.

I suspect that supply-side economics is consistent with the view that savings causes investment. This is inconsistent with Keynes' paradox of thrift. Therefore in a Keynesian view saving doesn't cause investment. It is either that investment causes saving or that there's a third common cause of both.

Causal relationships are extremely difficult to infer from data. You run into correlation is not causation, as well as the problem of what direction causation runs in (post hoc ergo propter hoc being a possible problem here). And since economics is not experimental but historical, one would have to do a thorough historical study and then ensure that no external factors have been overlooked that can introduce a spurious apparent direction of causation.

Is economics ultimately a collection of just-so stories? Do we like the paradox of thrift because it is consistent with solidarity politics?

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Migeru (migeru at eurotrib dot com) on Wed Jun 9th, 2010 at 04:43:00 AM EST
[ Parent ]
In a way I have to admit that the "Paradox of Thrift" is a "just so story," because much of Keynes work is a set of stories, rather than a full model.

However, I like the Paradox of Thrift because it appears to match the reality of what happened in the Great Depression and indeed in previous episodes of deflation...

by Metatone (metatone [a|t] gmail (dot) com) on Wed Jun 9th, 2010 at 05:39:39 AM EST
[ Parent ]
Is economics ultimately a collection of just-so stories? Do we like the paradox of thrift because it is consistent with solidarity politics?

I think economics, done properly (rare, I know), lends itself more to our way of thinking than is commonly thought because of what passes for economics on television.

What it should be is a combination of sociology, political science, logic, and statistics.  What it winds up being in too many cases is mathematics' retarded brother.

Simon Johnson's blog had a post up on this the other day that made a point I've -- clumsily -- tried to make in the past, noting differences in opinion between PhD economists and undergraduates (the former being quite a bit more liberal than the latter): Studying economics as an undergraduate tends to correlate with becoming a Republican, but going on to a PhD tends to swing the person back to the left.

A little bit of economics can be a dangerous thing.

You have to get fairly deep into the subject, or you wind up believing crazy shit because your Macro 101 textbook had a pretty graph and your professor was more interested in writing papers than teaching properly.  You get people believing that RATEX is actually true rather than simply a tool for isolating other variables, which leads to all kinds of other absurdities.

Part of it is a time problem, I think.  It's difficult to fit the basic concepts of the different areas into a semester, let alone really dig into information asymmetries, price and wage adjustment, etc.  At best they'll tend to be covered to some extent in the intermediate-level classes.  And I'd guess most students aren't really interested in diving that deep into the field.  They just want the degree.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Wed Jun 9th, 2010 at 06:56:51 AM EST
[ Parent ]
Drew J Jones:

A little bit of economics can be a dangerous thing.

You have to get fairly deep into the subject, or you wind up believing crazy shit because your Macro 101 textbook had a pretty graph and your professor was more interested in writing papers than teaching properly.  You get people believing that RATEX is actually true rather than simply a tool for isolating other variables, which leads to all kinds of other absurdities.

Maybe it's time to rewrite first-year economics textbooks.

If you only take a first-year physics course you may end up believing in a clockwork universe, but at least planets and billiard balls and boxes on slopes will behave as advertised in your textbook... And any misconceptions you may take away don't have toxic sociopolitical consequences.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Migeru (migeru at eurotrib dot com) on Wed Jun 9th, 2010 at 08:32:24 AM EST
[ Parent ]
I suspect the textbook market is too fractured and polluted by competing views on teaching and political agendas for that to do much good.  Everybody writes textbooks these days, because that's where the money is, and obviously professors are going to want their students to buy their textbooks.

I'm sure it's always been that way to some extent, but it used to be that Samuelson's textbook was quite common.

Although Krugman's intro texts are gaining some steam, as I understand it.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Wed Jun 9th, 2010 at 08:40:42 AM EST
[ Parent ]
If you want to change economics you do what the neo-libs did - find promising students, pay their way through college, give them privileged access to movers and shakers, and guide them until they're installed as the next generation of professors.

This is rather more expensive than producing a textbook, but it would be very much more effective.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Jun 9th, 2010 at 08:51:26 AM EST
[ Parent ]
I am under the impression that the portions of the macro economics that are thought to future MBAs are there to install the ideologically correct view of the world. "Greed is good, thus the company I work for does right in being greedy."

Bureaucrats work better if the believe in their organizations cause, and multi-nationals are no exception.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Thu Jun 10th, 2010 at 07:57:21 AM EST
[ Parent ]
Here the post at Baseline Scenario.  Judging by the comments, other people's experiences seem to be much the same.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Wed Jun 9th, 2010 at 07:14:43 AM EST
[ Parent ]
"accounting identity savings = investment"

That's not a GAAP. GAAP records spending. Spending amounts (values) are classified either asset or liability.

Balance sheet asset category, "investment activity," refers to both cash equivalent value of securities held for sale (of which guidance boards permit a variety of valuation methodologies including purchase price applicable to this asset type) and income, if any, from interest- and dividend-earning securities.

"savings = investment" is a finance supposition; it's not even a mathematical identity.


Diversity is the key to economic and political evolution.

by Cat on Wed Jun 9th, 2010 at 04:29:28 PM EST
[ Parent ]
I hope you're not being deliberately obtuse here
Savings identity or the savings investment identity is a concept in National Income Accounting stating that the amount saved (S) in an economy will be amount invested (I). More specifically, in an open economy (an economy with foreign trade and capital flows), governmental borrowing plus private investment must equal private savings plus foreign investment. In other words, investment must be financed by some combination of private domestic savings, government savings (surplus), and foreign savings (foreign capital inflows).

Note that this is an "identity", meaning it is true by definition. This identity only holds true because investment here is defined as including inventories. Thus, should consumers decide to save more, and spend less, the fall in demand would lead to an increase in business inventories. The change in inventories brings savings and investment into balance without any intention by business to increase investment.



By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Wed Jun 9th, 2010 at 04:43:17 PM EST
[ Parent ]
I'm not being obtuse at all.

savings investment identity is a concept in National Income Accounting

"National income accounting" is what it is, a model to estimate GNP/GDP.

Diversity is the key to economic and political evolution.

by Cat on Wed Jun 9th, 2010 at 07:14:32 PM EST
[ Parent ]
It is, indeed, "accounting", though not in the sense of "accounting" as in "GAAP".

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Thu Jun 10th, 2010 at 04:23:31 AM EST
[ Parent ]
I think you're a bit confused here.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Wed Jun 9th, 2010 at 06:28:23 PM EST
[ Parent ]
I meant to demonstrate a distinction between the meaning of "savings" according to generally accepted accounting principles (GAAP) and the meaning of "savings" according to whatever economic or finance nomenclature being repeated here.

"savings = investment" is not an "accounting identity" because, according to GAAP, savings is money (or cash equivalent) not spent or otherwise disposed --even for a productive purpose such as "investment." Savings is an amount of retained income. The only "savings" recorded in a financial statement, according to GAAP, is the market value of cash. Currency is an asset type recorded on a balance sheet; the value fluctuates from reporting period to reporting period.

Value terminology employed for national income accounting purposes remotely resemble those standardized by GAAP. That annoys me.

I apologize for commenting on the subject. Again.

Diversity is the key to economic and political evolution.

by Cat on Wed Jun 9th, 2010 at 08:27:55 PM EST
[ Parent ]
Cat:
Value terminology employed for national income accounting purposes remotely resemble those standardized by GAAP. That annoys me.
If you could develop in a diary or comment what you think National Income Accounting should be like that would be interesting.

Otherwise, this is like a physicist, a chemist, and a perpetual motion machine crank getting annoyed at each other for using different meanings of the words "free energy"

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Migeru (migeru at eurotrib dot com) on Thu Jun 10th, 2010 at 04:26:00 AM EST
[ Parent ]
Being a little bit more constructive, one can picture the economy as a network with a balance sheet at each node and cash flows on the links. The net of the cash flows at each node gives you the income statement for that node, and the sum total of all the unsigned cash flows on the links give you "national" income.

What's wrong with that picture or how do actual accounting and actual national accounting differ from it?

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Migeru (migeru at eurotrib dot com) on Thu Jun 10th, 2010 at 04:55:23 AM EST
[ Parent ]
Is money conserved over the network?
by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Jun 10th, 2010 at 06:51:46 AM EST
[ Parent ]
Each node can be a source or sink.
by generic on Thu Jun 10th, 2010 at 07:28:01 AM EST
[ Parent ]
But the cash flow on a link contributes a positive amount to the money balance of the destination node and a negative amount to the origin node, so the total doesn't change.

Money nonconservation comes from credit in the form of intertemporal links.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Migeru (migeru at eurotrib dot com) on Thu Jun 10th, 2010 at 09:00:48 AM EST
[ Parent ]
I was thinking in terms of credit, but even without taking credit into account, what prevents a node from saving? Or more accurately: hoarding?
by generic on Thu Jun 10th, 2010 at 09:20:42 AM EST
[ Parent ]
Given that the total balance is zero, either the time-average of the money flow into each node is zero, or some nodes will have a net average loss of money. This is unsustainable and eventually these nodes will go bankrupt. Since nodes abhor negative money balances, these balances will be compensated by issuing IOUs instead of paying outright. This means that the total money mass grows in proportion to the unsigned sum of the nodes' net money flows. This is inflation.

The more volatile transaction prices and volumes are, the larger will this unsigned sum of net money flows be, and the more credit will be created to prevent parts of the network from dying (going bankrupt). This means that inflation is correlated with market volatility.

So, the freer the market the larger the inflation of the money mass. Price and volume control, be it through market power or regulation, reduces volatility and the pressure to create credit and inflation.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Migeru (migeru at eurotrib dot com) on Thu Jun 10th, 2010 at 09:35:37 AM EST
[ Parent ]
In the absence of credit, yes.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Thu Jun 10th, 2010 at 08:56:42 AM EST
[ Parent ]
That could be a problem. :)
by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Jun 10th, 2010 at 08:57:32 AM EST
[ Parent ]
Why? Money is not conserved in the real economy either.

Let's see, if there is a cash flow on an edge, the amount is subtracted from the balance of the starting node, and added to the balance of the end node. The total of the balances doesn't change.

Instead of exchanging cash along an edge, an IOU at a discount may be exchanged. Say A has to pay B 100 but instead pays B with an IOU for 105 payable a year later, with "the market" agreeing that that IOU has a present value of 100. The balance sheets of A and B still change in ±100 now, so the total balance is still conserved.

But the total side of the whole network's asset (or liability) side has increased because this IOU didn't use to exist.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Migeru (migeru at eurotrib dot com) on Thu Jun 10th, 2010 at 09:12:50 AM EST
[ Parent ]
The balance sheets of A and B still change in ±100 now

Gah, ±100.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Migeru (migeru at eurotrib dot com) on Thu Jun 10th, 2010 at 09:37:23 AM EST
[ Parent ]
Yes, certainly. In a model in which real factors abstracting from financial considerations determine a level of full employment output to which the economy inevitably gravitates, the act of not consuming out of income frees up resources for other uses.

Its just that that gravitation toward full employment is not based on any empirical cause and effect explanation, its based on the way the model needs to be built to use the traditional analytical toolkit.

So, yes, non-empirical mainstream economics certainly is just a series of Just So stories. If we want empirical economics, we have to abandon the idea of making the re-use of a particular analytical toolkit the defining feature of mainstream economics, and replace it with an effort to provide cause and effect explanations about the material provisioning of society.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Wed Jun 9th, 2010 at 11:11:13 PM EST
[ Parent ]
I think fixed currencies and interest rates make a huge difference to the analysis.

This is not to say that Greece has behaved perfectly, but that the removed degrees of freedom do matter - you can't use international trade analysis tools, the situation is more like analysing differences inside a country.

Of course, "we" as a community have also (rightly!) pushed back strongly on the "profligate welfare" theory because the evidence just isn't there for profligate welfare. Greek levels of welfare spending do not seem to be inherently out of line with their economy. And certainly not deserving of the narrative of "German Ants and Greek Grasshoppers."

Indeed, beyond some level of profligate military spending and some circumstantial evidence of larger than usual (but not proven huge levels) of tax evasion, it's not at all clear where the money went - at least from the discussions with talos and Upstate NY that I have seen.

by Metatone (metatone [a|t] gmail (dot) com) on Wed Jun 9th, 2010 at 04:38:11 AM EST
given that I tend to have sympathy for the German position today that too many took too much debt on and these people will have to go through lean years, I don't really see any contradiction in my position.

The problem was created by too much debt. The debate is whether trying to be virtuous today is more dangerous than trying to save the economy through yet more debt (ie is certain pain today better or worse than uncertain pain later, and how would that future pain be)

Wind power

by Jerome a Paris (etg@eurotrib.com) on Thu Jun 10th, 2010 at 09:22:25 AM EST
liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate... it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people. (Wikipedia)
Yeah, virtue. Burn down the economy, fire purifies! Let's cut long-term unemployment benefits so people don't choose to take a long vacation like in the 1930's...

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Thu Jun 10th, 2010 at 09:29:52 AM EST
[ Parent ]
What kind of pain would you favour? Social cuts, investment cuts, military cuts, VAT raises, income tax raises, business tax raises, property tax raises, other?

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Thu Jun 10th, 2010 at 09:51:01 AM EST
[ Parent ]
For the record, I wouldn't be against balancing the budget in a weak recession with taxes; and having seen how inflation is also a way to reduce pensions and social benefits and how industries dependent on imported raw materials or machines suffer from exchange rate devaluations too, I am less confortable with the inflate-out-of-debt solution.

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Thu Jun 10th, 2010 at 10:06:41 AM EST
[ Parent ]
But taxes also have a disincentive effect on economic behaviour. Taxing either wages or business profits in a slowdown nips recovery in the bud. Taxing capital appreciation realised in asset sales has fewer undesirable disincentives. Also taxing asset values (and the problem was in part an asset bubble). Immovable assets (that is, real state and straight land values) are the only ones that cannot flee in response to a tax, and also responsible for the greater part of the debt bubble in much of the OECD, so taxing them would also be a good thing.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Thu Jun 10th, 2010 at 10:13:16 AM EST
[ Parent ]
Taxing either wages or business profits in a slowdown nips recovery in the bud.

That assumes a uniform recession across all industries, and a uniform recycling of all personal income as consumption (or investment). In addition, in a country suffering from trade deficits, there could be import taxes; though those could be problematic for other reasons.

BTW, I forgot to write: beyond more debt, savings and taxes; debt restructuring and temporary capital controls might also work in a mild recession. (And in a heavy one, there is default.)

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Thu Jun 10th, 2010 at 10:22:02 AM EST
[ Parent ]
The problem with import taxes, debt restructurings and capital controls is that the serious trade imbalances are intra-EU, debtors and creditors tend to be on opposite sides of national borders, and both tariffs and capital controls are against EU internal market rules.

Either we're in it all together, or we're not. Apparently we were in it all together only as long as the going didn't get too rough. Now tha name of the game is class war and nationalism.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Migeru (migeru at eurotrib dot com) on Thu Jun 10th, 2010 at 11:34:17 AM EST
[ Parent ]
You forgot inflation, which not so recently wasn't "pain":

Jerome a Paris:

a little bit of inflation (say 3-7% per year) is good for the poor and bad for the rich; more is the opposite.
However, apparently Jerome now prefers the Bundesbank's "virtue" of less than 2% inflation regardless of the point in the business cycle or the amount of outstanding debt...

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Thu Jun 10th, 2010 at 10:09:11 AM EST
[ Parent ]
I will just use a swear word to answer you. You are choosing each time to distort my positions and make them look like some kind of religious nuttery.

I'll just stop answering you.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Thu Jun 10th, 2010 at 10:20:21 AM EST
[ Parent ]
I don't know that swearwords are worse than your usual 'meh' or 'bah'.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Thu Jun 10th, 2010 at 11:23:47 AM EST
[ Parent ]
I though 'Gah' was the official Parisian response.

'Bah' is the Colman maneuver, occasionally TBG-ified.

'Meh' doesn't seem to be part of ISO-standard ET.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Jun 10th, 2010 at 12:15:42 PM EST
[ Parent ]
The problem was created by too much debt. The debate is whether trying to be virtuous today is more dangerous than trying to save the economy through yet more debt (ie is certain pain today better or worse than uncertain pain later

However, not all debt is created equal. Debt taken out by the sovereign to finance infrastructure development during a serious business depression (you aren't really claiming that Germany couldn't use any more railways, are you?) is not the same beast as debt taken out to maintain consumption in the face of falling real income. During the next boom, this debt has to be removed, of course, either by higher tax income, an explicit default or a quiet default through devaluation and inflation.

and how would that future pain be)

The pain of trying to deleverage the public sector is without a shadow of doubt greater when you do it at the same time that the private sector is trying to deleverage. I didn't realise that this point was controversial at all, outside certain monetarist fantasies.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Jun 10th, 2010 at 09:52:08 AM EST
[ Parent ]
  1. I've long said that public debt to fund socially useful investment was good policy today (or would have been good policy if we hadn't spent so much public debt capacity on bailing out the banksters). I've long written about how this could happen through an energy/transport reconversion plan which would have lots of other positive externalities;

  2. at some point, you can only justify more debt if it is used for investing purposes, and not just to support consumption. Consumption has to be supported by reallocation of the pie in a way which is different from today. To answer DoDo's point above, there is a need for a real reshaping of the tax system. A lot of that could only happen with significant coordination between at least the EU and the US.


Wind power
by Jerome a Paris (etg@eurotrib.com) on Thu Jun 10th, 2010 at 10:25:58 AM EST
[ Parent ]
When banks create credit they do so in one of two ways:

(a) Lending - creating interest bearing loans;

(b) Spending - to buy (say) government debt; to pay staff or other costs; and to pay dividends to shareholders.

In every case bank credit creation gives rise to a matching demand deposit, and the sum of these deposits is - with notes and coin (and now QE) - the 'fiat' money in existence. There is of course plenty of other (trade etc) credit in existence.

There is no reason at all - other than pure ideology - why Treasuries acting directly, or indirectly through Central Banks, cannot spend, as well as lend, money directly into the provision of productive assets in the public or private sectors.

This spending process would need to be managed by a service provider with a stake in the outcome, and would also need to be accountably supervised by a monetary authority.

Once productive assets are complete, then the QE/Public credit used to create them could be refinanced by existing or new long term (eg pension) investment, and the QE would be retired for recycling.

Investment in the individuals and enterprises necessary to create these assets would be taxed, and part of this tax would again retire and recycle the QE investment.

The 'Big Lie' is that public credit/QE is 'inflationary' when private credit is not. In fact both are potentially inflationary, particularly if applied to existing productive assets, but private credit is self evidently more inflationary than public credit to the extent that it includes excess management etc payments and dividends to shareholders.

Neither public nor private credit has any cost at the time of creation. Both come with a cost of service/platform provision and default costs.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Thu Jun 10th, 2010 at 02:51:34 PM EST
[ Parent ]


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