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The Weekend Quiz – June 20-21, 2020 – answers and discussion

Here are the answers with discussion for this Weekend’s Quiz. The information provided should help you work out why you missed a question or three! If you haven’t already done the Quiz from yesterday then have a go at it before you read the answers. I hope this helps you develop an understanding of modern monetary theory (MMT) and its application to macroeconomic thinking. Comments as usual welcome, especially if I have made an error.

Question 1:

If the current account (on balance of payments) is in deficit and household saving increases as a proportion of disposable income then the government could still run a fiscal surplus without a decline in output and income occurring.

The answer is True.

This question tests one’s basic understanding of the sectoral balances that can be derived from the National Accounts. The secret to getting the correct answer is to realise that the household saving ratio is not the overall sectoral balance for the private domestic sector.

In other words, if you just compared the household saving ratio with the external deficit and the fiscal balance you would be leaving an essential component of the private domestic balance out – private capital formation (investment).

To refresh your memory the sectoral balances are derived as follows. The basic income-expenditure model in macroeconomics can be viewed in (at least) two ways: (a) from the perspective of the sources of spending; and (b) from the perspective of the uses of the income produced. Bringing these two perspectives (of the same thing) together generates the sectoral balances.

From the sources perspective we write:

GDP = C + I + G + (X – M)

which says that total national income (GDP) is the sum of total final consumption spending (C), total private investment (I), total government spending (G) and net exports (X – M).

Expression (1) tells us that total income in the economy per period will be exactly equal to total spending from all sources of expenditure.

We also have to acknowledge that financial balances of the sectors are impacted by net government taxes (T) which includes all taxes and transfer and interest payments (the latter are not counted independently in the expenditure Expression (1)).

Further, as noted above the trade account is only one aspect of the financial flows between the domestic economy and the external sector. we have to include net external income flows (FNI).

Adding in the net external income flows (FNI) to Expression (2) for GDP we get the familiar gross national product or gross national income measure (GNP):

(2) GNP = C + I + G + (X – M) + FNI

To render this approach into the sectoral balances form, we subtract total taxes and transfers (T) from both sides of Expression (3) to get:

(3) GNP – T = C + I + G + (X – M) + FNI – T

Now we can collect the terms by arranging them according to the three sectoral balances:

(4) (GNP – C – T) – I = (G – T) + (X – M + FNI)

The the terms in Expression (4) are relatively easy to understand now.

The term (GNP – C – T) represents total income less the amount consumed less the amount paid to government in taxes (taking into account transfers coming the other way). In other words, it represents private domestic saving.

The left-hand side of Equation (4), (GNP – C – T) – I, thus is the overall saving of the private domestic sector, which is distinct from total household saving denoted by the term (GNP – C – T).

In other words, the left-hand side of Equation (4) is the private domestic financial balance and if it is positive then the sector is spending less than its total income and if it is negative the sector is spending more than it total income.

The term (G – T) is the government financial balance and is in deficit if government spending (G) is greater than government tax revenue minus transfers (T), and in surplus if the balance is negative.

Finally, the other right-hand side term (X – M + FNI) is the external financial balance, commonly known as the current account balance (CAD). It is in surplus if positive and deficit if negative.

In English we could say that:

The private financial balance equals the sum of the government financial balance plus the current account balance.

We can re-write Expression (6) in this way to get the sectoral balances equation:

(5) (S – I) = (G – T) + CAB

which is interpreted as meaning that government sector deficits (G – T > 0) and current account surpluses (CAB > 0) generate national income and net financial assets for the private domestic sector.

Conversely, government surpluses (G – T < 0) and current account deficits (CAB < 0) reduce national income and undermine the capacity of the private domestic sector to add financial assets.

Expression (5) can also be written as:

(6) [(S – I) – CAB] = (G – T)

where the term on the left-hand side [(S – I) – CAB] is the non-government sector financial balance and is of equal and opposite sign to the government financial balance.

This is the familiar MMT statement that a government sector deficit (surplus) is equal dollar-for-dollar to the non-government sector surplus (deficit).

The sectoral balances equation says that total private savings (S) minus private investment (I) has to equal the public deficit (spending, G minus taxes, T) plus net exports (exports (X) minus imports (M)) plus net income transfers.

All these relationships (equations) hold as a matter of accounting and not matters of opinion.

You can then manipulate these balances to tell stories about what is going on in a country.

For example, when an external deficit (X – M < 0) and a public surplus (G – T < 0) coincide, there must be a private domestic deficit.

So if X = 10 and M = 20, (X – M) = -10 (an external deficit assuming the invisibles are zero).

Also if G = 20 and T = 30, G – T = -10 (a fiscal surplus).

So the right-hand side of the sectoral balances equation will equal (20 – 30) + (10 – 20) = -20.

As a matter of accounting then (S – I) = -20 which means that the domestic private sector is spending more than they are earning because I > S by 20 (whatever $ units we like).

So the fiscal drag from the public sector is coinciding with an influx of net savings from the external sector.

While private spending can persist for a time under these conditions using the net savings of the external sector, the private sector becomes increasingly indebted in the process. It is an unsustainable growth path.

So if a nation usually has a current account deficit (X – M < 0) then if the private domestic sector is to net save (S – I) > 0, then the public fiscal deficit has to be large enough to offset the external deficit.

Say, (X – M) = -20 (as above).

Then a balanced fiscal position (G – T = 0) will force the domestic private sector to spend more than they are earning (S – I) = -20. But a government deficit of 25 (for example, G = 55 and T = 30) will give a right-hand solution of (55 – 30) + (10 – 20) = 15. The domestic private sector can net save.

But if the external deficit is say -20 and the private domestic balance (S – I) is -20 then the government balance at that level of income would be zerop.

So if households increased their saving and business investment increased by more than that, the income level could remain unchanged yet the government balance would go into surplus.

So in focusing on the household saving ratio, the question was only referring to one component of the private domestic balance.

Clearly in the case of the question, if private investment is strong enough to offset the household desire to increase saving (and withdraw from consumption) then no spending gap arises as households save more.

In the present situation in most countries, households have reduced the growth in consumption at the same time that private investment has fallen dramatically.

As a consequence a major spending gap emerged that could only be filled in the short- to medium-term by government deficits if output growth was to remain intact.

The following blog posts may be of further interest to you:

Question 2:

Politics aside, the central bank can still increase interest rates even if it was legislatively required to directly purchase treasury debt to match the national government’s fiscal deficit.

The answer is True.

The question hinges on an unstated condition which relates to whether the central bank is offering a support rate on overnight reserves held with it by the private banks.

So what is the explanation?

The central bank conducts what are called liquidity management operations for two reasons. First, it has to ensure that all private cheques (that are funded) clear and other interbank transactions occur smoothly as part of its role of maintaining financial stability. Second, it must maintain aggregate bank reserves at a level that is consistent with its target policy setting given the relationship between the two.

So operating factors link the level of reserves to the monetary policy setting under certain circumstances. These circumstances require that the return on “excess” reserves held by the banks is below the monetary policy target rate. In addition to setting a lending rate (discount rate), the central bank also sets a support rate which is paid on commercial bank reserves held by the central bank.

Commercial banks maintain accounts with the central bank which permit reserves to be managed and also the clearing system to operate smoothly. In addition to setting a lending rate (discount rate), the central bank also can set a support rate which is paid on commercial bank reserves held by the central bank (which might be zero).

Many countries (such as Australia, Canada and zones such as the European Monetary Union) maintain a default return on surplus reserve accounts (for example, the Reserve Bank of Australia pays a default return equal to 25 basis points less than the overnight rate on surplus Exchange Settlement accounts). Other countries like Japan and the US have typically not offered a return on reserves until the onset of the current crisis.

If the support rate is zero then persistent excess liquidity in the cash system (excess reserves) will instigate dynamic forces which would drive the short-term interest rate to zero unless the government sells bonds (or raises taxes). This support rate becomes the interest-rate floor for the economy.

The short-run or operational target interest rate, which represents the current monetary policy stance, is set by the central bank between the discount and support rate. This effectively creates a corridor or a spread within which the short-term interest rates can fluctuate with liquidity variability. It is this spread that the central bank manages in its daily operations.

In most nations, commercial banks by law have to maintain positive reserve balances at the central bank, accumulated over some specified period. At the end of each day commercial banks have to appraise the status of their reserve accounts. Those that are in deficit can borrow the required funds from the central bank at the discount rate.

Alternatively banks with excess reserves are faced with earning the support rate which is below the current market rate of interest on overnight funds if they do nothing. Clearly it is profitable for banks with excess funds to lend to banks with deficits at market rates. Competition between banks with excess reserves for custom puts downward pressure on the short-term interest rate (overnight funds rate) and depending on the state of overall liquidity may drive the interbank rate down below the operational target interest rate. When the system is in surplus overall this competition would drive the rate down to the support rate.

The main instrument of this liquidity management is through open market operations, that is, buying and selling government debt. When the competitive pressures in the overnight funds market drives the interbank rate below the desired target rate, the central bank drains liquidity by selling government debt. This open market intervention therefore will result in a higher value for the overnight rate. Importantly, we characterise the debt-issuance as a monetary policy operation designed to provide interest-rate maintenance. This is in stark contrast to orthodox theory which asserts that debt-issuance is an aspect of fiscal policy and is required to finance deficit spending.

So the fundamental principles that arise in a fiat monetary system which are relevant here are as follows.

  • The central bank sets the short-term interest rate based on its policy aspirations.
  • Government spending is independent of borrowing which the latter best thought of as coming after spending.
  • Government spending provides the net financial assets (bank reserves) which ultimately represent the funds used by the non-government agents to purchase the debt.
  • Budget deficits put downward pressure on interest rates contrary to the myths that appear in macroeconomic textbooks about ‘crowding out’.
  • The “penalty for not borrowing” is that the interest rate will fall to the bottom of the “corridor” prevailing in the country which may be zero if the central bank does not offer a return on reserves.
  • Government debt-issuance is a “monetary policy” operation rather than being intrinsic to fiscal policy, although in a modern monetary paradigm the distinctions between monetary and fiscal policy as traditionally defined are moot.

Accordingly, debt is issued as an interest-maintenance strategy by the central bank. It has no correspondence with any need to fund government spending. Debt might also be issued if the government wants the private sector to have less purchasing power.

Further, the idea that governments would simply get the central bank to “monetise” treasury debt (which is seen orthodox economists as the alternative “financing” method for government spending) is highly misleading. Debt monetisation is usually referred to as a process whereby the central bank buys government bonds directly from the treasury.

In other words, the federal government borrows money from the central bank rather than the public. Debt monetisation is the process usually implied when a government is said to be printing money. Debt monetisation, all else equal, is said to increase the money supply and can lead to severe inflation.

However, as long as the central bank has a mandate to maintain a target short-term interest rate, the size of its purchases and sales of government debt are not discretionary unless it is prepared to offer a support rate to the banks for excess reserves held. In the absence of that offer, once the central bank sets a short-term interest rate target, its portfolio of government securities changes only because of the transactions that are required to support the target interest rate.

The central bank’s lack of control over the quantity of reserves underscores the impossibility of debt monetisation under these circumstances (no support rate). The central bank is unable to monetise the federal debt by purchasing government securities at will because to do so would cause the short-term target rate to fall to zero or to the support rate. If the central bank purchased securities directly from the treasury and the treasury then spent the money, its expenditures would be excess reserves in the banking system. The central bank would be forced to sell an equal amount of securities to support the target interest rate.

The central bank would act only as an intermediary. The central bank would be buying securities from the treasury and selling them to the public. No monetisation would occur.

However, the central bank may agree to pay the short-term interest rate to banks who hold excess overnight reserves. This would eliminate the need by the commercial banks to access the interbank market to get rid of any excess reserves and would allow the central bank to maintain its target interest rate without issuing debt.

The following blog posts may be of further interest to you:

Question 3:

Domestic deflation (reducing domestic wages and prices relative to other nations), which Eurozone nations are prone to pursue because they have no exchange rate flexibility, may not increase export competitiveness.

The answer is True.

The temptation is to accept the rhetoric after understanding the constraints that the EMU places on member countries and conclude that the only way that competitiveness can be restored is to cut wages and prices. That is what the dominant theme emerging from the public debate is telling us.

However, deflating an economy under these circumstance is only part of the story and does not guarantee that a nations competitiveness will be increased.

We have to differentiate several concepts: (a) the nominal exchange rate; (b) domestic price levels; (c) unit labour costs; and (d) the real or effective exchange rate.

It is the last of these concepts that determines the “competitiveness” of a nation. This Bank of Japan explanation of the real effective exchange rate is informative. Their English-language services are becoming better by the year.

Nominal exchange rate (e)

The nominal exchange rate (e) is the number of units of one currency that can be purchased with one unit of another currency. There are two ways in which we can quote a bi-lateral exchange rate. Consider the relationship between the $A and the $US.

  • The amount of Australian currency that is necessary to purchase one unit of the US currency ($US1) can be expressed. In this case, the $US is the (one unit) reference currency and the other currency is expressed in terms of how much of it is required to buy one unit of the reference currency. So $A1.60 = $US1 means that it takes $1.60 Australian to buy one $US.
  • Alternatively, e can be defined as the amount of US dollars that one unit of Australian currency will buy ($A1). In this case, the $A is the reference currency. So, in the example above, this is written as $US0.625= $A1. Thus if it takes $1.60 Australian to buy one $US, then 62.5 cents US buys one $A. (i) is just the inverse of (ii), and vice-versa.

So to understand exchange rate quotations you must know which is the reference currency. In the remaining I use the first convention so e is the amount of $A which is required to buy one unit of the foreign currency.

International competitiveness

Are Australian goods and services becoming more or less competitive with respect to goods and services produced overseas? To answer the question we need to know about:

  • movements in the exchange rate, ee; and
  • relative inflation rates (domestic and foreign).

Clearly within the EMU, the nominal exchange rate is fixed between nations so the changes in competitiveness all come down to the second source and here foreign means other nations within the EMU as well as nations beyond the EMU.

There are also non-price dimensions to competitiveness, including quality and reliability of supply, which are assumed to be constant.

We can define the ratio of domestic prices (P) to the rest of the world (Pw) as Pw/P.

For a nation running a flexible exchange rate, and domestic prices of goods, say in the USA and Australia remaining unchanged, a depreciation in Australia’s exchange means that our goods have become relatively cheaper than US goods. So our imports should fall and exports rise. An exchange rate appreciation has the opposite effect.

But this option is not available to an EMU nation so the only way goods in say Greece can become cheaper relative to goods in say, Germany is for the relative price ratio (Pw/P) to change:

  • If Pw is rising faster than P, then Greek goods are becoming relatively cheaper within the EMU; and
  • If Pw is rising slower than P, then Greek goods are becoming relatively more expensive within the EMU.

The inverse of the relative price ratio, namely (P/Pw) measures the ratio of export prices to import prices and is known as the terms of trade.

The real exchange rate

Movements in the nominal exchange rate and the relative price level (Pw/P) need to be combined to tell us about movements in relative competitiveness. The real exchange rate captures the overall impact of these variables and is used to measure our competitiveness in international trade.

The real exchange rate (R) is defined as:

R = (e.Pw/P)

where P is the domestic price level specified in $A, and Pw is the foreign price level specified in foreign currency units, say $US.

The real exchange rate is the ratio of prices of goods abroad measured in $A (ePw) to the $A prices of goods at home (P). So the real exchange rate, R adjusts the nominal exchange rate, e for the relative price levels.

For example, assume P = $A10 and Pw = $US8, and e = 1.60. In this case R = (8×1.6)/10 = 1.28. The $US8 translates into $A12.80 and the US produced goods are more expensive than those in Australia by a ratio of 1.28, ie 28%.

A rise in the real exchange rate can occur if:

  • the nominal e depreciates; and/or
  • Pw rises more than P, other things equal.

A rise in the real exchange rate should increase our exports and reduce our imports.

A fall in the real exchange rate can occur if:

  • the nominal e appreciates; and/or
  • Pw rises less than P, other things equal.

A fall in the real exchange rate should reduce our exports and increase our imports.

In the case of the EMU nation we have to consider what factors will drive Pw/P up and increase the competitive of a particular nation.

If prices are set on unit labour costs, then the way to decrease the price level relative to the rest of the world is to reduce unit labour costs faster than everywhere else.

Unit labour costs are defined as cost per unit of output and are thus ratios of wage (and other costs) to output. If labour costs are dominant (we can ignore other costs for the moment) so total labour costs are the wage rate times total employment = w.L. Real output is Y.

So unit labour costs (ULC) = w.L/Y.

L/Y is the inverse of labour productivity(LP) so ULCs can be expressed as the w/(Y/L) = w/LP.

So if the rate of growth in wages is faster than labour productivity growth then ULCs rise and vice-versa. So one way of cutting ULCs is to cut wage levels which is what the austerity programs in the EMU nations (Ireland, Greece, Portugal etc) are attempting to do.

But LP is not constant. If morale falls, sabotage rises, absenteeism rises and overall investment falls in reaction to the extended period of recession and wage cuts then productivity is likely to fall as well. Thus there is no guarantee that ULCs will fall by any significant amount.

That is enough for today!

(c) Copyright 2020 William Mitchell. All Rights Reserved.

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    This Post Has 26 Comments
    1. Several mainstream economists have worried that MMT might cause the people to demand too much deficit spending.
      This made me think.
      If I assume that all the deficit spending is matched by a bond sold. Just to keep track of things easier,
      and that the bond means that that money has been “saved”. Is at least part of the total savings for the year.
      Then if this year the deficit is $4T (say),
      and that next year the deficit should be enough to make up for the “savings” of last year;
      then next year the deficit must be at least $4T.
      So, the deficit should almost never go down.
      IMHO, almost all the money use to import stuff goes into a bond eventually in that year.
      That is it is saved somewhere. [Note, before, I wanted to add the savings and the imports to get next years deficit.]
      When I started writing this I was worried that the deficit would double every year. Good thing I was wrong.

    2. Bill, your sectoral balances equations don’t seem to add up (in Answer 1). You say:

      GNP = C + I + G + (X – M) + FNI

      To render this approach into the sectoral balances form, we subtract total taxes and transfers (T) from both sides of Expression (3) to get:

      (3) GNP – T = C + I + G + (X – M) + FNI – T

      Now we can collect the terms by arranging them according to the three sectoral balances:

      (4) (GNP – C – T) – I = (G – T) + (X – M + FNI)

      But expressions 3 and 4 are only correct if you assume that all tax receipts to the government (T) come from the household sector, which of course they don’t.

      In “real world” applications, how do you handle this apparent flaw in the model?

      Apologies in advance if I’ve got it wrong.

    3. Steve, how could a federal government, which issues (creates) its own currency by decisions to invest in this or that public project/program, ever incur anything that could be meaningfully described as a “deficit” or engage in “deficit spending?” Don’t such terms apply only to currency users instead of currency issuers (creators)? Why do we need “accounting procedures,” in the complex and misleading forms of taxes and bonds, to keep track of an inherently inexhaustible resource like sovereign currency? “Inflation” is the standard response, but wouldn’t inflation be more effectively kept under control by the maintenance of accurate inventories of exhaustible natural or physical resources in which inexhaustible currency can be invested?

    4. Norman,

      This question tests one’s basic understanding of the sectoral balances that can be derived from the National Accounts. The secret to getting the correct answer is to realise that the household saving ratio is not the overall sectoral balance for the private domestic sector.

      In other words, if you just compared the household saving ratio with the external deficit and the fiscal balance you would be leaving an essential component of the private domestic balance out – private capital formation (investment).

      There is no flaw in the model. If there is a “quibble” it would be in the way the question was asked.
      IF…. we replace “still” with “possibly”, THEN…. other conditions are in play, THEREFORE….the answer could be, YES ,,,,,,,,Yes?

    5. PhilipO, I was questioning what T stands for.

      In one paragraph, it’s described as “total taxes and transfers”.

      Further down, we’re told that the term (GNP-C-T) represents “total household saving”, which implies that households are the source of total taxes.

      The equations add up in the sense that they are perfectly consistent. But, in the real world, households don’t pay all the taxes, so I’m wondering whether there’s a way around this apparent problem when dealing with actual numbers.

      (I may still be wrong, in which case apologies).

    6. Norman, First off, right or wrong, there is no need to apologise. I don`t at all see that implication. Does the following clear it up?

      The left-hand side of Equation (4), (GNP – C – T) – I, thus is the overall saving of the private domestic sector, which is distinct from total household saving denoted by the term (GNP – C – T).

      The ( I ) represents capital investment and inventories.

    7. “ deficit spending”

      There is no such thing. There is just spending.

      Whether there is too much or too little is a political question – because the legislature has first dibs at the resources of the nation.

      The private sector gets to play with what is left.

      And that’s one of the key Philosophical differences of MMT. People first. Business second.

      Neoliberals believe business should have complete control of all resources and politics should have to ask permission before it uses anything.

    8. Yes, Neil. I would go a step further and maintain that a currency-sovereign government never “spends” in the usual sense of the term (with its connotation of an action that draws down, leaves less than before), but rather that such a government should be spoken of only in terms of whether it “invests” in one economic activity or another. In similar manner, such a government IMHO does not have a “budget” in the usual sense of the term (with its connotation of allocation of limited resources) but instead has only something akin to an economic “portfolio.” Words matter, and as I’ve said before, I think a huge problem in getting MMT across to even open minds is that it continues to use mainstream economic language, which inevitably carries connotative baggage, to attempt to describe how MMT differs from the mainstream.

    9. People,
      I’m almost always talking to people who do not grok MMT.
      I use words they can understand. Using pure MMT phrases makes their eyes glaze over, OR
      we wonder off into the weeds of definitions and never get back to the point.
      I think that it’s better to half way change their mind and then throw the full MMT lens at them.

      You understood me, right? So, why not respond as if you did?

      The fight we are in is to seize power in the govs. of the US, Europe, etc. form the 1% and put into the hands Pres. Lincoln wanted it in, the people’s hands. BLM are fighting this fight now in that the police are tools of the 1%.
      I think we are falling for the 1% trick that lets them divide and conquer us. We must not fall or this. For example, in WWII the US, UK, and USSR all united to fight for victory over Hitler. They did not squabble over the evils of colonies or capitalism. They put those fights on hold to win the fight they were in. We need to do the same.
      IMHO, the 1% have bots they they send against us to divide us. They stir up trouble between groups on the left. We need to decide on a very few core positions that we must demand loyalty on and put all others on hold. The main one I see is this, “Blacks and Whites are equal, and Asians, etc. are also equal”. How many more you want to add is up to you, but too many and we will lose. If we lose then ACC will destroy your life, if not kill you. IT IS THAT IMPORTANT.!

      So, please stop with the virtue signaling. Don’t let the 1%’s bots divide us, stay united.
      You, as much as possible, need to go out into the streets now and march with the BLM people.
      Talk to them. Try to expand their demands to allow deficit spending to help all the people and not have it weighted 85-15 in favor of the 1%, like the CARES Act was.
      Try to keep them marching until we win the basic fight (see above). We also need to *all* vote.
      I can’t because I live in Thailand and I can’t march here because I’m not a citizen here.
      Chris Hedges has a new youtube video about how only demonstrations in the street have ever won these kinds of fights. Even in E. Germany and Poland, it was demonstrators in the streets that kicked the communist govs. out.
      “Chris Hedges: Seeing Through Faux-Solidarity Performance Stunts Of Police, Politicians, & Corps.”

    10. PS
      Please listen to Stephanie Kelton’s new podcast that was mentioned on this blog.
      There she uses the word “deficits” when talking to non-MMTers.
      did you-all attack her for that, why not?

    11. PhilipO,

      That might be the answer if T represents the total amount paid to the government in taxes by everyone – households (h), businesses (b) and foreigners (f).

      T = Th + Tb + Tf

      But the second half of that sentence implies that T only refers to taxes paid by households.

      T = Th

      Hence my confusion. Bill, Help!

    12. Maybe the simple answer is that household savings are by definition an after-tax concept, while business investment (I) is always made with pretax dollars.

    13. Norman, I am not sure here, but businesses are ultimately owned by either households or the foreign sector. Taxes businesses pay will eventually be paid by either the final consumers or the owners which are both generally part of the household sector. Taxes paid by foreign businesses will end up in the (X-M) +FNI category if they are not ultimately paid by domestic household consumers or domestic household owners of foreign businesses.

      Actually, this is mostly a guess on my part- so keep that in mind :)
      Hopefully Bill might answer your question more accurately.

    14. Stephen, I agree with much of what you say, that the only significant action happening right now is in the streets, and that “overwhelm” coming from that direction offers the only possibility for meaningful change. My concern about the language we use to explain MMT comes from my conviction that this new understanding of federal money–that once the gold standard was eliminated, it became fiat money, an inexhaustible public resource–must be brought home to the radicalized many in the streets, and the best way to do this IMHO is to talk about federal money in terms that do not contradict by connotation its inexhaustible nature. The essential point we MMTers must get across is that money is itself unlimited, and that economic limitations come into play only in the area of the existing resources in which that money can be invested. But given the massive amount of untapped resources yet to be invested in by the American federal government, for example, including uplifting and making productive the millions of wasted or diminished lives resulting from centuries of racism and oppression, MMT should be a source of hope and empowerment for those in the streets demanding that black lives matter. Same for the many millions deeply concerned about preserving what’s left of Mother Nature and demanding that we begin to reverse the extensive and ominous damage we’ve done to her. It’s fiat money and only fiat money that gives us the agency to address such pressing issues, and thus the language we use to get across this threshold concept must avoid connotative confusion and implicit contradiction. Accordingly, we MMTers should talk about federal investment, not federal spending, and federal portfolios of such investments, not federal budgets. The very use of words or terms like spending and budgets and deficits have absolutely no meaning for currency issuers in a fiat money world and inherently blur the key distinction between such issuers (currency-sovereign federal governments) and currency uses (all the rest of us), who DO have to deal with spending and budgets and deficits. Only when this fundamental distinction is grasped at the outset by the use of appropriate language will the question evaporate which has haunted and thwarted all demands for social and environmental justice; i.e., how will you pay for it? The direct and simple answer is “by investing federal fiat money.” If, however, we first talk about “spending,” the question becomes where we will get the money to spend, which then leads to where we will make “budget” cuts to free up that money, which then leads to questions about “deficits” if enough money cannot be freed up, etc. This failure to speak in appropriate MMT language AT THE OUTSET and instead to frame or justify socioeconomic demands in mainstream economic terminology–what my father used to call “playing the other man’s game”–has fatal consequences, was largely responsible for the deconstruction of Bernie Sander’s campaign. And, yes, Stephen, one of the principal reasons that MMT has yet to make the connection with the street that it should make and MUST make is that even its strongest champions continue to use mainstream economic language to describe the insights of their new discipline, language which “plays the other man’s game.”

    15. Norman,

      The equation in question is the private sector balance, it is not the household saving balance.

      Anyway, I think BIll’s discussion treads on very shaky ground.

      Accounting equations can’t be used to make causal statements.

      Any wanted conclusion can be drawn from and “if” statement.

    16. Dear Norman, PhilipO, and Jerry,

      Thank you for the interesting thread of discussions. It was a captivating and mind exercising read.

      I am pleased the sectoral balances equation gets to be balanced at the end again (in my mind any way, as the discussions guide me to appraise/see the issue from the bigger perspective).

      Thanks, and best regards!
      vorapot

    17. Newton,
      I disagree with you and agree with Stephanie.
      When I talk to non-MMTers, I speak at length and do put in the “caveats.”
      Stephanie defined what a Gov. “deficit is, and that it is money that the Gov. gave to someone in the economy.
      If you are going to invent a new set of words for all the concepts and not use a 5 word phase every time you refer to them, then [b]you need to do it, to make the list[/b]. Until you have the list you are stuck using 5 or more word explanations every time you talk.
      This may be why I can’t understand Neal. He assumes everyone knows “economic speak” or jargon. I don’t so what he says goes over my head. I strongly think that when you want to convince someone of something it is useless to use words he does not use/know the same definition as you mean. You may as well be using Martian to talk to them.
      So, I agree that it is and will be a growing necessity to use proper language in the future. But, now here among us MMTers attacking me for sloppy language just pisses me off. It does nothing to further my understanding of MMT. I asked a question and 2 of the 3 replies ignored the answer and just attacked me for doing the same thing Stephanie does (and she does it in public).
      . . . From your long answer I deduce that you have never sent a message in any way to Dr. Stephanie Kelton to stop doing that. You really need to do that (and convince her) and stop attacking me. I am not 1/1000th of the problem that Dr. Kelton is (if your are right).

    18. Might I offer a few comments concerning this interesting and important discussion?

      1, This is Bill’s blog, and Bill is first and foremost a teacher; we readers of his blog (and especially the responders to his weekend quizzes) are the pupils.
      2. It’s open to any pupil to take issue with the a teacher’s instruction but to do so s/he must be able to command not less than equal mastery of the theoretical foundations of the discipline being taught/learned (including the correct application of any its specialised technical terms).
      3. Otherwise they must either defer to the teacher’s superior mastery or quit.
      4. When it comes to the students seeking to spread their new-found knowledge, of the theory’s possible application to real-world socio-economic policy-making, to people who have no such knowledge (or who reject its theoretical basis outright) – ie to the public in general and politicians in particular – “political”/communication skills *of a high order* are essential for success.
      5. In effect, it’s back to teaching again albeit this time not subject to any polite conventions of respect for and deference to anyone’s claim to superior knowledge; this time it’s a matter of *persuasion*.
      6. Moreover it requires the use of whatever communications “tricks” are necessary to get the basic essentials across.
      7. However in so doing *none* of the theory’s fundamental postulates may be fudged, obscured or compromised in any way because – if any are – its whole theoretical basis is laid open to doubt.
      8, The originators/developers of those theoretical foundations are the final arbiters of their correct interpretation and *valid* real-world application. (This extends to those they themselves have taught and/or duly accredited).
      9. If you balk at that caveat, choose a different theory. (It’s a free country!).

      If any or all of that is already obvious/accepted, I apologise for wasting anyone’s time spent reading it.

    19. robertH.

      Is it a free country or is it Bill’s blog? I’m sure they can coexist.

      “However in so doing *none* of the theory’s fundamental postulates may be fudged, obscured or compromised in any way because – if any are – its whole theoretical basis is laid open to doubt.:”

      Why? Are you sure about that?

      ” The originators/developers of those theoretical foundations are the final arbiters of their correct interpretation and *valid* real-world application. (This extends to those they themselves have taught and/or duly accredited).”

      I suppose we can now scrub the whole of Post Keynesian economics, for instance.

    20. “I suppose we can now scrub the whole of Post Keynesian economics, for instance” (Henry Rech)

      I don’t see that that follows from what I wrote. I certainly wasn’t anticipating that so I must have overlooked something (or more likely it was clumsily worded).

      I’m flummoxed. Why must the advent of MMT be incompatible with the continued existence of “the whole of Post Keynesian economics”? Why can’t the two amicably coexist, whilst remaining distinct in important respects?

    21. Stephen, never meant to attack you. Just was trying to make an essential point about the language which IMHO we should be using in talking about MMT. Sorry if I was clumsy in my communication to cause you to think I was attacking you…or anyone. I love what Bill and Stephanie are doing, think their work and that of other MMT economists is among the most important going on right now. But I think I also see a way in which their vital work might be more effective in reaching the public, from the average citizen to the enraged young person in the street. When any of us thinks he or she sees how to make such an improvement in advancing the MMT cause–in my case, an alteration in the language initially used to introduce MMT concepts–shouldn’t they come on blogs like this one and try to make their case?

    22. robertH,

      There was an element of sarcasm in my comment. Naughty me.

      You outlined a bunch of statements about critiquing someone’s theory – which all seemed well over the top.

      The statement about PKE was not directly in reference to MMT.

      As far as I am concerned, anybody, no matter who they are, who poses a theory, is fair game for anybody else.

    23. Newton,
      Apology accepted.
      If I may give you a pointer, you should have responded to my point or answered the question I asked as well as correcting my wording. This may be more fore the general case, you might also take a moment to remember what you already know about who you are responding to.
      To do one [attack] without the other [respond], makes it much more of an attack.
      Steve_American

    24. @ Henry Rech
      “As far as I am concerned, anybody, no matter who they are, who poses a theory, is fair game for anybody else”.

      Agree completely.

      To any extent that what I suggested clashes – in your opinion – with that sentiment I would unhesitatingly retract (or re-phrase) it.

      I don’t think any of it does (it certainly wasn’t meant-to). Which leads me to think we’re talking past each other. My fault without a doubt. But that’s water under the bridge now anyway.

      Cheers!

    25. Dear Newton Finn and Steve_American,

      I just have a chance to read the interesting ideas proposed, and later the insightful comments regarding the choice of terminologies to use for communication.

      I think both of you have very very good points.

      I now, suddenly, become indecisive, and not sure what to do, too, on this issue, when it comes to my own communication. I shall ponder more.

      Thank you for proposing an alternative strategy, that led to the very valid discussions and debates.

      Best regards,
      vorapot

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