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Saturday Quiz – January 9, 2010

Welcome to the billy blog Saturday quiz. The quiz tests whether you have been paying attention over the last seven days. See how you go with the following five questions. Your results are only known to you and no records are retained.

1. With the EMU creating a fixed nominal exchange rate system across member states and monetary policy fixed by the ECB, fiscal policy is the only policy left to a member country to deal with a crisis. The problem then is that its ability to use fiscal policy is constrained by the Maastricht Treaty.

2. The Euro monetary system could not possibly be an Optimal Currency Area because wages are not flexible across the member states.

3. It is often argued that the central bank sets the short-run interest rates but the private market demand and supply sets the long-term interest rate. This is particularly important in the current debate that bond markets will close a government down if it senses the deficit is too large. However the reality is that the central bank can control interest rates at all yields by issuing debt at different maturities on a fixed yield basis. The only reason that private market forces have any influence is because the government voluntarily constrains itself to issue debt $-for-$ on an auction basis to match net spending.

4. If the government manages to balance its budget over a business cycle then the private domestic sector balance (I - S) will on average be in deficit exactly equal to the average current account deficit over the same period. In other words, if a nation has a current account deficit, then a balanced budget over the business cycle will force the private domestic sector overall to be building debt over that same cycle.

5. The private domestic sector can save overall even if the government deficit is in surplus as long as net exports are positive. This is the Norwegian situation. But typically with net exports negative, the government has to run deficits to enable to private domestic sector to save.

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    This Post Has 8 Comments
    1. JKH,

      I think you comment is too hifi for SK. :-)

      I have tried many times to get SK on track. He refuses to listen. But its fun nontheless

      He does not understand that the act of lending creates two entries for the bank – an L in the assets side and an L in the liabilities. He may have it in some places, though not all. Some places he calls L an income. He thinks that when the interest/principal is paid by the borrower, the assets increase or some such thing. It is precisely for this reason that when a principal is paid, it seems to increase bank assets in his logic. This is confirmed by his logic that when a bank is paid by cash, he thinks that banks assets increase whereas in reality the bank just erases the L from the assets and has an increase in reserves. He probably found out from a banker that when a loan is repaid with cash, it increases bank reserves, but he generalizes to a non-cash payment (say using another bank’s account) saying it goes into reserves (of the whole banking system!)

      So its a case of too many wrongs making a wrong. His money/assets/liabilities is never a piece of paper – its bank deposits. Since borrowers have to make loan payments sometime in the future, and the “debt” is higher than the “money” he predicts a huge crash till the point that the “debt is equal to the money”.

      His accounting is more like a bunch of school kids going dutch to a restaurant and then scribbling here and there and struggling with settlements.

    2. Yes, well said, JKH. It’s accounting, so of course there’s no dispute. And anything that’s correct accounting is by definition consistent with MMT, as it’s just how you keep score.

      And where Steve got the idea that MMT or SFC modeling “treats debt and money as empirically equivalent and negative in sign” is absolutely beyond me (comment 245). Can’t bring myself to respond there and waste time trying to correct such obviously mistaken interpretations (by virtually everyone there) of MMT . . . already tried once for a few solid weeks and it obviously did no good.

    3. too hi fi – made me laugh, Ramanan

      as well as “scribbling here and there and struggling with settlements”

      somewhat lost at sea for someone trying to change the ocean

    4. I don’t really understand where SK is coming from. First, he stated that debt defaults demonstrate that NFA does not equal 0 (comment 245), and then I think I convinced him that this is not the case, but he didn’t see this as conflicting with his earlier statement (or at least he wouldn’t make the connection, and instead went off on a tangent about what constitutes a ‘conservation law’).

      I think he shares some of the attributes of the neoclassicals, in that he seems unwilling to review some of his assumptions on which his economic models are grounded. And he has some wacky preconceived notions regarding MMT, which he seems to view as ‘static’ and hence of little value in a dynamic world. He doesn’t seem to get that, if sum(NFA)=0, then d/dt (sum(NFA))=0 also. Or perhaps we are all just misinterpreting each other?

    5. Yay! I got the last three right without having read the blog entries. As a fan of Steve Keene i shouldn’t qualify as a neoliberal esp. since I am seriously Debt shy by nature. I really think I am becoming a soldier of the modern monetary army. I’m happy with that since I’ve never had great leadership aspirations.

      Anyway I’ve only really been following economic thought generated in America or China and am unfamiliar with the details of the EU. Hopefully that will change now that I’ve found this blog.

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