* This post was written in 2011 before Mr. Roche founded Monetary Realism, which was formed due to several disagreements Mr. Roche and many other former MMT proponents had with the school of thought.  For more info on the difference in views please see here.  For more on MR’s views please see here.

The MMR conversation on savings and investment has now raged to over 600 comments.  It would be an understatement to say that the conversation has been illuminating.  To me, one of the more interesting facets of this discussion is the fact that we have MMTers, horizontalists (like Ramanan), MMRists and previously undecideds (like the mysterious JKH) all agreeing!  I think this speaks volumes about the merits of what MMR is building.  Our flexible, fact based and apolitical approach is proving agreeable to many and I hope we’ll continue to embrace even those who might disagree with much of what we say.

But the most illuminating point that came from the discussions was the point on S = I + (S-I), where S = Savings, I = Investment.  Now, for the layman, I will try to break this down as best I can so bear with me.  What we learn from the sectoral balances approach is that the government’s deficit is the non-government’s surplus.  If the government taxed all your assets at a rate of 100% then you’d have no dollar denominated assets.  That’s simple enough.   The sectoral balances is a powerful concept as it highlights the power of the government and helps explain why a sovereign currency issuer might run persistent budget deficits without running into a Greek problem (the USA for instance has pretty much always run deficits so the idea that deficits are inherently bad, is inherently wrong!).  But when we break this equation down we have to be very precise about what it means because improper explanation will lead one to put the cart before the horse.

One of the other powerful concepts I’ve been discussing in recent weeks is the MMR Law:

“We generate improving living standards through the efficient use of resources resulting in the optimization of time”

When we understand that our living standards primarily improve through the increasing efficiency of resource utilization (think of the many innovations that make our lives easier and essentially give us the ability to live fuller lives) we can then begin to see how it is the production process that helps to optimize time.  Time, as I have stated previously, is the universal form of wealth.

If we get back onto the S = I + (S-I) discussion then we can begin to connect the dots between everything here.  If you just glance at the sectoral balances equation you might conclude that the government drives wealth creation or you might be inclined to overstate the government’s role in the wealth creation process because you believe the private sector cannot save unless the government spends.  But this is a very delicate and crucial point.  Steve Waldman of the excellent blog interfluidity explains his thinking on this subject better than I can:

“It is perfectly possible to hold the international balance constant, have the government reduce debt, and have “people” save more. “People’s” financial savings consists of claims on firms and claims on government. If I perform some work for a firm that (however infinitesimally) increases the firm’s real economic value, and I accept as payment a share of that firm’s stock, I have performed the economic act of saving, and increased the net saving of “people” — of the household sector. Net private sector financial assets have not increased: my “savings” is the firms’ obligation, the household sector’s surplus is offset by the business sector’s deficit. But much of what we call saving is exchanging real resources for claims on the private business sector. And as long as the private business sector doesn’t entirely squander those real resources, that act contributes to macroeconomic S. If the private business sector does squander the resources, then while I still perceive my contribution as “saving”, the value of macroeconomic S = I does not increase, and my claim amounts to a transfer from other shareholders of the firm.”

You can think of this process as the private sector creating their own claims on wealth.  Yes, they can’t create net new financial assets, but for real world money users that’s a secondary concern.  The truth is, the state doesn’t have a coercive monopoly on money (the banks wield a HUGE amount of power) and the private sector can create its own financial assets (even though it can’t create net new financial assets).  But the kicker here is that once you understand the implications of the MMR Law you can see that S (Savings) is not truly driven just by government spending.  Rather, it is driven by I (Investment).   The always brilliant JKH has elaborated on this point thoroughly in the aforementioned discussion and has even started calling himself an MMRist (he can have the seat at the head of the MMR table any day, maybe he’s already sitting there!?!).  When you understand this, you can see that, as JKH says, “I is the backbone of S”.  In this regard it is best to think of government as being an accomodating force in the wealth creation process.

Perhaps most importantly, through this understanding we can see that capitalism makes socialism acceptable.  It is the production process that sits atop the hierarchy in our increasing trajectory of living standards.  It is the glue that binds everything.  It is the “backbone” not only of S, but I would argue, the entire monetary system.  Without the capital formation process,  the resulting production and the increase in living standards, we have nothing.  In this regard, capitalism makes socialism acceptable.  But there’s a balance between the two.  I just think it’s important to remember where each sits in terms of its importance to the future of our society and the trajectory at which we want our living standards to increase.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  1. I wanted to touch on the example given earlier in the thread of the farmer who owned ten cow and had ten neighbors who were broke and couldn’t afford to buy the milk.

    In this small, eleven family farming community you don’t tell us why the ten neighbors are broke or even what it is that they’re engaged in. Are they fellow farmers who are at least growing enough food on their farms to feed their families? Or, are they yuppies who sold their places in the cities just before the housing crash, took their profits into the country and then lived large on the excess (you know, taking family cruises, trips to European Castles… stuff like that) until it was all gone.

    If they’re farmers in their own right, then they do have something to offer the cow owner. They can offer their labor for hire to help grow his herd (presumably one of the ten ‘cows’ is a bull), make cheese and butter, which could be shipped across country for trade for other items.

    They could be paid in milk, cheese, butter. Even raise pigs on the whey left over from the cheese and butter production. Perhaps some could trade the cheese they were paid for seed corn; planting the corn to sell the excess to the cow farmer.

    Eventually you have a thriving farm community.

    Your solution on the other hand does NOTHING for the ten ‘farmer’ (more likely yuppies). Giving them the paper doesn’t do anything for increasing their industry, thrift or imagination. It preserves them in their indolence.

    AND, you are forcing the cow-owner (and the far off industry) to take the paper at the barrel of a gun, as money. You are stealing the milk, and calling this innovation.

    In this world increasing your herd is more likely to have the E.P.A. down on you for pollution. Government is never the solution. It’s the problem because it full of busy bodies (like the E.P.A.) just itching to tell others exactly how to live and behave.


  2. This place hase really deteriorated. It was fine when it came to simple sector balance accounting . . .

  3. It seems to me that the great “revelation” here is simply the use of two different definitions of “savings.” To the average person, “savings” is an increase in wealth; whether or not that means an increase in that person’s number of dollars is not important to him. But in the MMT sense, “savings” means an increase in the number of dollars (and their equivalent, t-bills) held, regardless of how much those dollars are worth. Waldman was clearly describing a horizontal transaction, not a vertical one. Banks and corporations are still only leveraging HPM.

    On the issue of savings, I tend to take a simpler approach – private sector savings – the national debt, pretty much – basically sits unused. Some of the debt occoasionally changes hands, but the pile never gets any smaller – nobody is net spending those dollars. The national debt is where dollars go to die. The only dollars that count are those still moving around (i.e. those not yet in the hands of net savers, like the rich). And this is where the government really should come in – for the benefit of the economy as a whole, the government needs to (re-)distribute dollars to the low end, because dollars inexorably “trickle up” to net savers. (This is one reason for the job guarantee – we do a poor job of it now through SS, welfare and unemployment benefits.) Money injected into the low end is not immediately lost to savings – 99.9% of it gets spent. And any purist would agree that consumer spending is the most efficient allocator of dollars for growth and investment. (That is, if they could ever get past the idea of giving money to the poor in the first place.)

      • Honestly, I haven’t seen the MMT definition of savings “obscured” anywhere but on sites that (in my opinion) are trying to carve out some sort of a niche that they think sets them apart from MMT. (I just stumbled across the MMR site earlier today.) The basic tenets are really too simple to be, in and of themselves, confusing. MMT is a short story that people keep trying to stretch into a novel.

        • Well maybe it’s clear to you, but I think that’s precisely what MMTers are attempting to do when they emphasize the net new financial assets position. They want to bring everything back to the myth that the govt is a monopolist over money when the reality is that they are just a monopolist over net financial assets. The horizontal component is far more integral to our economy than the vertical level is. It wields enormous power over our economic outcome. That could change if the system is restructured….

  4. Should we consider changing the term “High Powered Money” to “Lubricating Money” or “Flexible Money” (or something better than those clumsy terms) since it can be used to do many things that other financial assets may not (settle debts, consume goods, etc)??

    The term “high powered” tends to (properly) acknowledge the fact that it’s a NFA, and has no offsetting liability, but it also, I think, tends to imply a certain “specialness” to it beyond its role as lubrication and cushion (or, as you’ve put it, a leveraging of private sector investment).

    The ultimate “power,” one could imagine, resides in the bank saying to the cold-fusion researcher, “Yes, I’ll loan you $1 Billion.” The “power” lies in the investment, the flexibility, liquidity, safety, and cushion lies in the cash/T-Bills.

    • There is a specialness to HPM. It is the only money necessary.

      If we eliminated all private banks tomorrow, transactions would continue. It wouldn’t be as smooth as it is today, but the point is that private banks are just businesses whose business it is to facilitate the leverage of government currency. But they are not essential.

      • A private banking system is not necessary, but it is what we have. We do not have a true monopolist in the form of one vertical component. This is why Mitchell wants the banking system nationalized. I don’t even think his rationale is necessarily wrong, but it’s not what we have. The banking system, as we all know now, wields a big stick over our heads. Claiming that the horizontal component is “not essential” as the system is currently constructed is entirely naive and mythical. Almost like Austrians discussing Crusoe Island….

        • The idea that “NFA’s are all that’s necessary” deserves some exploration… this is not unlike a world where we all have gold and never use leverage. Ever. Debt is so completely natural (it’s a freely-engaged contract!) that this almost implies OUTLAWING leverage…. like Cullen said this is quasi-tyrannical and appears to be what they’re suggesting, at times.

          So, if we are going to assume that MMT isn’t suggesting to outlaw private debt, what are we left with… we’re still left with the gov’t deciding how much NFA’s to inject into the economy… most MMR people would be to say “inject as many NFA’s as is necessary to keep full employment and lowish inflation.” Of course, private leverage helps us get there AS WE issue more NFA’s… quite quickly in fact.

          So the implication of MMT saying that “private debt is unnecessary” almost seems to be that people would use less and less private credit as more and more NFA’s are issued. This may be true to some degree (aka, more people putting 20% down on homes during the housing boom), but by no means could the gov’t simply spend enough NFA’s into the economy to pay off all private debt, and function going forward on NFA’s alone, and have that actually work… why? People naturally go into debt contracts as those with desired financial assets meet up with those who have ideas and time but very few financial assets. This is a completely natural type of contract and we should preted that it’s simply a result of banks and consumer advertising. Therefore, we shouldn’t assume that we can basically make debt obsolete with NFA’s… the debt is the activity savers and borrowers engage in to create REAL wealth… the NFA’s simply service, standardize, and stabilize that activity with a cushion.

          So, yes, “we don’t need” credit-money because we can just rely on NFA’s from gov’t… but we also don’t “need” cars because we could simply rely on mass transit to function. Except we like our cars for fun, freedom and flexibility… or at least enough of us do.

        • Another thing I’ll add…. the “obsolescence of debt” implies that all the bright-idead entrepreneurs out there will have all the NFA’s they need to begin with to make their amazing ideas a reality.

          Otherwise, how do they get the funds without literally asking an old man with money to “employ” him?

          Further, if the Steve Jobs of the world have all the NFA’s they need to start a computer company, they also have all the NFA’s they need to sit on their duff and play video games for years without working.

          Without credit, where’s the fire hose that gets funds into the hands of those who dream up Facebook and Apple, and away from those who won’t?

          The fact is, we only need NFA’s until we don’t need them anymore because private debt/equity/futures contracts have put everyone to the most productive work possible.

          What is the proper NFA-to-private-money Ratio? I don’t know, but it certainly isn’t 1/0. Our society would never naturally function that way. Somehow great entreprenurial ideas have to be a magnet to capital, and that won’t happen if NFA’s are the only money in existence with no credit.

        • I wasn’t suggesting we abolish banks, of course. Banks are handy. I was merely responding to the suggestion that HPM was not far more important than bank money. So for the sake of illustration, you remove banks (and bank money) from the equation and see what you have left over – in this case, you still have a functioning economy.

          There are other ways to accumulate capital, and other ways to go into debt. I could, for example, finance a home purchase with the help of a number of other people and some contracts. Businesses can raise money in the same way (and do). Banks are merely facilitators, nothing special.

          • John,

            Any contract involving $$’s is a financial asset & liability to its holders, whether it’s the banks, family or private equity. Equity is simply debt with funky contractual terms.

            The point is, to imagine a monetary system without its NFA base, or it’s credit-based fire hose, is ridiculous, because we’ll always have those with skill, time, and work ethic who are too young and poor to pay for their ideas, and the elderly who’d love to earn 5-7% on their savings. Is there really much “power” to HPM if you can’t even enter an equity/debt/financial contract with it (all of which are leverage)?

            So we don’t contract out to the government to give us a currency so we never need to go into debt again… in fact if we had that kind of contractual rigidity put on our NFA’s they wouldn’t have much value at all… its their usability and stability that makes them valuable, we contract it out to them so we have a cushion, or lubrication, upon which to build the real contracts that build our economy. Those contracts may net to zero, but it’s the REAL wealtht that gets created that we’re really after… and that real wealth would never get created to the degree we want it to if we have the contractual rigidity of a NFA-only credit-free economy.

  5. I think we should be careful about the use of the word “create” in connection with the role of banks in the growth of financial assets and liabilities in the economy.

    Desired growth in private sector consumption and investment leads to rising demand for dollars, as consumers and producers seek the additional dollars they need to finance their additional consumption and production. Banks respond to this demand by expanding their balance sheets. What the private sector can thus create freely are promises of dollars – not dollars. A bank can create such a promise by giving a person or business a loan and creating a deposit in the process. The deposit is a promise, and the borrower exchanges a somewhat different and larger promise in exchange for the bank’s promise. In some sense, any one of us can create a legally binding promise for a dollars. Banks just make these promises in a more organized and routine and profit-maximizing way, as part of an ongoing business concern.

    Some promises are redeemed with other promises, and balance sheets can grow as debts are rolled over and leveraged into the creation of more debt, even without the supply of additional reserves. But there are limits, and the government must continue to inject bank reserves into the economy so that people can monetize the expanded volume of goods and transactions without a price deflation. All of those bank promises generate a substantial number of payments moving from one bank to another, as depositors frequently make payments for goods and services that require the debiting of their own accounts and crediting of another bank’s accounts. These payments are cleared through the banks’ reserve accounts, and net additions to the stock of reserves come only from the government. Also, the established system of reserve requirements means that even though banks can expand their balance sheets prior to obtaining the additional reserves they will need to back their expanded deposits, they do need to acquire those additional reserves in relatively short order. An individual bank can get those reserves from other banks without expanding the net stocks of reserves, but if the total volume of bank deposits is expanding, then stock of reserves will need to expand as well.

    The government often plays a very accommodating role in all this, because it does not want to cause a breakdown in the payments system or overly-stifle the private sector growth drive. In normal times not at the zero bound, it can spur or dampen credit creation by doing some nmanagement of short-term interest rates. But if the government suddenly said, “no more reserves,” and initiated a monetary policy to that effect, then the ability of banks to expand their balance sheets would grind to a halt.

    Modern capitalist economies have experience frequent financial crises, and in hindsight, we see that the government has often been too accommodating in accepting and following along with the growth of credit, and should have imposed more stringent requirements.

    If private sector banks could actually create dollars the way the government can, then the banks would possess seignorage power. A bank in need of more office furniture, or a new fleet of company cars, could just create the money needed to purchase them, and take that money to a car dealer or furniture store and make a payment with it. Banks clearly can’t do this in our system. The national government can actually do this, although it has to preform a little intra-departmental dance first between the treasury and the central bank to create the additional dollars.

    I think the sytem is in fact a public monopoly. It’s as though there were a single publicly operated electric company in the country running the national grid, but with an expansive network of electrical distribution centers. People who want to build a new home or office building or factory go to a distribution center and say, “Can I have some electricity?” The distributor says “Sure, for a price,” and then gives the applicant a commitment for a certain quantity of electricity, and a promise that the user can beginning drawing down the promised supply of electricity as soon as they want. It’s up to the distributor then to make sure it has sufficient electricity coming into its station. It can scrounge up some of the electricity by better efficiencies and timing with the distribution of the supply it is already getting, and by trading supplies with other local distribution centers. But if the nation’s need for electricity is rising overall, the the public monopoly feeding the grid will need to boost the overall production of electricity.

    The government will have to adopt a generally accommodating stance toward supply if they allow the local distributors to drive the decision-making. Because if not, people would go ahead and build homes and factories, expecting their promised electricity, but then the electricity wouldn’t arrive. A tremendous wast. On the other hand, if the governing board of the monopoly attempted to micromanage all of the electricity distribution decisions, the process of building more electricity-using buildings could bog down in bureaucracy.

    It’s interesting to think about why there is a natural need for a monopoly over fiat money creation. Unlike other monopolies, it’s not because money-creation is too costly and resource intensive. It’s because creating money is so inexpensive and easy. If we just let anyone do it, we would likely see a kind of erratic chaos that would make our recent problems look like child’s play. Even in our more managed system, the creators and distributors of credit seem prone to going hog-wild and creating bubbles, instability and collapses.

  6. When you understand this, you can see that, as JKH says, “I is the backbone of S”.

    Sheer curiosity, Cullen: have you read the General Theory? This is really straight out of Keynes.

    • Years ago. It’s an obvious point, obviously, but requires emphasis. An understanding of MMT through the SBE might give one the impression that the horizontal level does not matter as much as the vertical level. I am now realizing that MMR is probably more horizontalist than verticalist.

      • Years ago. It’s an obvious point, obviously, but requires emphasis.

        True. Almost none of the public seems to understand it, though, and only a minority of the economics profession, as evidenced by growth models that show savings driving investment rather than investment allowing and facilitating meaningful saving. Like when people complain that the social security trust fund consists of Treasurys – as if the government “sitting” on their social security contributions is saving.

  7. The car analogy is good, however where the gov’t/FED/FIRE industry fit is in the fuel, they are the OPEC of your system where they have a monopoly on the fuel production and pricing. The regulators could be viewed as the brakes, but also the governor on the engine — all necessary to prevent positive (pro-cyclical) feedback to prevent run away behavior that ultimately destroys the system (engine, transmission, car).

    You may be able to create a hybrid, such that there is an alternate fuel – but not really, because to charge the battery you have still have to access the Monopoly fuel supply (coal, nat gas, solar etc) to convert to electrical power (which is more expensive than the hydrocarbons, which is why 100′s of volts sell, while millions of internal combustion sell).

    Being able to create $ from thin-air, whether vertical by the Treasury/FED creature or horizontal by the private banks as part of the same cartel (the banks are granted a license to the virtual ‘printing press’ by the FED/Treasury monopoly).
    Calling the FED independent is a facade that makes everyone feel good thinking the monetary system is not in the hands of the political process.

    A couple of thoughts – Investments create value not wealth, the exchange of productive results for financial assets which can be saved creates wealth. The discussion regarding the application of NFA and credit (investment) to produce value is an vitally important, otherwise the thought of gov’t deficits are non-gov’t savings misses a bunch of value creating processes resulting in value to exchange into savings.

    Gov’t intervention into the private sector can be good or bad, if the financial assets (investment) supports value creation then we have a growing pie (or growing coin) with a positive ROI, however when so much money and control is placed into a political process controlled by so few then the free market devolves into a plutocracy, oligarchy or whatever you want to label you prefer. Once the money and control is concentrated then wealth distribution, picking winners and loser and a bastardization of a free market occurs.

    Your site and this tread is great in continuing a very thought provoking and ongoing discussion. Adding more reality into the equation constrained discussion is very much needed as the system is much more complicated than an algebraic equation.

  8. Isn’t this a bit like State Capitalism?

    i.e. Singapore, where the State owns something like 60% of GDP (but they have low taxes!), or Saudi Arabia where the state owns all the oil (really low taxes!), or Hong Kong, where the state owns all the real estate (again, really low taxes but super high property prices!)…?

  9. I’ve been watching this discussion unfold for a couple of days but wanted to wait until I had something constructive to say about the various issues that have come up. Hopefully I’m not too late to the party.

    First let me start with what I think are positives in what you’re doing. Although I wouldn’t say that MMT ignores investment I think it’s fair to say that it isn’t any sort of lynchpin in the current theory. They would argue that investment is driven by demand and then worry about how to generate demand. Although that’s more or less true for private sector investment, the government can invest as well and it’s worth considering how that sort of investment (which is not directly demand-driven) affects the economy. I think that’s what you are trying to do.

    I like that you factor in time into the notion of wealth, but I’ll have more to say about that a bit later in this posting.

    I like that you challenge the job guarantee because there are lots of questions that are yet to be addressed by MMT in that area.

    I think you are right that there is more to the money story than “taxes create demand for the currency”.

    Now let me make some comments and suggestions about what is being said.

    First as to the S = I + (S – I) equation. I think you’re falling into a trap that many mainstream economists have fallen into, which is trying to take an equation that says something about the equilibrium relationship between variables and make it say something about causality, which it is fundamentally unable to do. I think it’s perfectly ok to talk about causal chains, but you just can’t use the equation to “prove’ or even “emphasize” causality. The economy is a complex adaptive system with feedback loops. The variables in the national account equations are not independent of each other, so in general you can’t change the value of any one of them and know with certainty the resulting value of any other. Often you see people put a variable on the left side of an equation and then treat it as if it were a simple function of the terms on the right side and it just doesn’t work that way. Personally, I’d lose this equation and take a different approach because you’ll never convince people with much math background that it provides anything useful. That’s not the same as saying that emphasizing the role of investment isn’t useful, just that this isn’t the way to make that point.

    Some of the discussion about money and wealth and time seems a bit confused to me. I’m not an economist; my personal expertise is in the creation of models of complex systems and it is with that background that I started to look at economics a few years ago. The underlying model used by MMT is fundamentally sound, which is primarily why I was drawn to it, but it’s not complete either. It doesn’t include other factors that we might like to say something about. I have a bare-bones start on my own model which defines wealth as a personal, rather than absolute measure where a person becomes relatively more wealthy if they come to possess more highly valued assets. The value of an asset is also a completely personal decision. In part that is what makes it possible for two people to make a trade of assets which makes both of them wealthier.

    Time is the one asset that we each possess and we each value that asset differently than someone else will. That value can change over time as well. Time is an asset that can be exchanged as part of economic transactions just like any other asset. When we work for a wage, we obviously trade our time for money, but there are other sorts of transactions where we also use time. For example, we can invest it in order to improve our skills which can make our time asset more valuable to others in the future. I have a longer exposition of this model at if you’re really curious.

    With regard to money, as I said above, I agree that there is more to the story than the fact that government acceptance of it for payment of taxes gives it value. But that said, there are too many historical examples of currency being given value in exactly that manor to dismiss it as irrelevant. I think there is a way to build a more complete theory. It starts with the notion that money is an asset much like any other, and like any other, its value is a personal matter. So although it is most certainly valued by many people because they need it to pay taxes, there are other reasons why those same people or others may value it in different ways. In spite of the objections from MMT theorists that the reasoning is circular, there is certainly something to be said for the fact that I value money in large part because of the expectation I have that I will be able to use it as part of future economic exchanges. It doesn’t really matter to me why other parties value money, it is sufficient that they do.

    The government obviously plays a role in the value that people place on money. MMT would say (I think) that this role is limited to the imposition of taxes. I am of the opinion that their are other ways in which the government affects the perceived value of money. One obvious way is just by virtue of how much of it is created. There are more subtle ways as well. Part of my perception of the value of money is what I can exchange it for. To the extent that the economy is more prosperous I can get relatively more for a given amount of money. So the government can influence the value of money by how it stimulates or retards the economy. I personally think this may be the biggest factor of all in the determination of how money is valued generally.

    So one thing I’d change about what has been said about money is that I’d say the government is the monopoly supplier of monetary assets (I think Dan Kervick’s post about this was really good), but that’s not the same thing as saying that the government creates wealth when it does that since wealth depends upon how those assets are valued by people. Like any other asset, the value is in large part determined by supply and demand. As the supply of money drops, the value becomes high relative to other assets and we have a deflationary economy. As the supply increases, the value becomes relatively lower than other assets and you can get an inflationary economy. The demand for money changes with the state of the economy, so supply and demand are constantly in flux.

    Like you, I have all sorts of questions and concerns about the Job Guarantee (JG). I’m still collecting all my thoughts about that into a paper, but there are more than one or two things that I wonder about. I wonder about whether the motivations for it (which are assumed by the MMT’ers) are really the correct goals to pursue. I wonder about how good the particular plans for its implementation are. I wonder if people that it is supposed to employ will react to it in the way that they expect. I wonder about how the general public will react to it. I wonder whether there are any moral hazard issues here. In short, I thing there are lots of questions to be considered. But I also think you can look at JG as a form of government investment that is not that dissimilar to some of the sorts of investments that I think you might be happier about. It’s seems entirely possible to me that with some modification a JG of some sort might fit into a broader theory of government investment that seems to be what you’re after.

    As a final observation I’ll say that I think most all of what you’re trying to do could be done within the context of MMT theory. I know that the academic side of MMT can be forceful about what they believe and why, but they are fundamentally scientists and all scientists know that their current state of knowledge is incomplete and can be improved. If your arguments are framed in a precise way, I fully expect that they will engage in a dialogue about them. That doesn’t mean that they won’t defend their own point of view and attack yours, but if you’re going to play in that world, then you need to be prepared to do the same as dispassionately as possible.

    • The meaning of S = I + (S – I) isn’t driven by causality in the first order of things.

      It’s driven by logical decomposition of the MMT net saving bias.

      Your comment about math sophistication is ironic. I doubt I would have landed at this expression, if I didn’t have a degree in pure mathematics.

      There’s definitely causality in the secondary interpretation in the sense that investment enables saving, which is well established by people like Andy Harless. Cullen is also riffing off that type of very legitimate interpretation here.

      So I’d say there’s more than meets the eye here, but the fact is that it’s a reflection (in part) of the Waldman observation, which is the verbal version of the interpretation of the same net saving bias. I haven’t seen a single critical comment yet that actually addresses that aspect of it effectively, quite apart from the equation. So I’d advise the same as I did with Kervick. Respond to the Waldman version of the observation, and then return to the equation and reconsider it in the context of its first order purpose.

      • JKH,

        Your analysis is even more eye opening than we first believed. As you rightly state, the details here matter tremendously. What I’ve realized is the crux of this entire issue is that the state does not have a monopoly on “currency”. Currency of course is the medium of exchange. But we reside in a credit system where the primary medium of exchange is a bank issued credit. So the details matter! The state has a monopoly on SOME forms of currency – reserves, notes, govt bonds, etc. But not credit! And in a credit system, that’s the key takeaway. It all blends together to create a real world understanding of the system we have (a primarily horizontal system) and not the one MMT emphasizes (a largely vertical system).

        There is no “monopoly supplier of currency” as MMT often states. There’s a monopoly supplier of forms of currency. But that’s a very specific point. And when you deep dive into this stuff you recognize how important the details and understanding of your equation are. I is the backbone. And I is driven primarily through private credit! But MMT wants us all to think that the state as the monopoly supplier of credit wields the big stick in the system. But the reality, as we all know after 2008, is that the banks wield the power. We might not like it, but that’s our reality!

        • good stuff!


          Re my undergrad math revelation – I (pun intended) was fully leveraged with beer and frat parties. Wasn’t an ideal mix, but did produce some fairly unique results.


          • Wait, are you sure the beer and partying wasn’t leveraging you? Because I am pretty sure that’s the way I felt a lot of the time in college. :-)

            Have a good weekend. I think this was a really productive development we’ve made here. It provides a much more realistic understanding of our monetary system.

          • I’m just trying to understand this. MMT says that Uncle Sam has a monopoly on US Dollar creation (vertical), and the debt dollars that the banks create stay totally within the banking system (horizontal). Uncle Sam’s debt spending is somewhat “covered” by the issuance of treasury bonds purchased mostly by banks, the interest due comes from Uncle Sam. The Fed has a downstream roll to play in the marketing of Uncle Sam’s bills. Note that the bank’s debt dollars are about 90% of the currency in the USA, and about 50% of the currency in the world. If somebody defaults on the bank’s debt dollars, the bank can take the collateral put up for the loan. When the bank sells that property the bank gains real dollars for that, adding to it’s capital which is now REAL dollars. They have converted bank created debt dollars into real capital, the same kind that Uncle Sam creates. Other banks (e.g. so called “investment” banks), use created debt dollars to buy corporate stock from the market then sells that for a net gain in real money from the suckers (since the bankers are by definition insiders). Does MMR finally take into account that there is some leakage in the system described by MMT or am I all mixed up?

            • I doubt you’re all mixed up.

              A few points: Banks hold a relatively small amount of the government debt. The reverse is a broad misconception. Second, the entire global financial system consists of double entry bookkeeping. All the accounts and financial instruments linked to those accounts have specific names. It’s better to stick to the language of specifics in discussion. This isn’t directed at you, but people tend to make up their own flowery definitions of financial stuff. I’d say 97 per cent of blogosphere financial discussion is muted by the impracticality of people understanding each other’s made up dictionary of terms. This is catastrophically compounded by people deliberately ignoring those groundwork definitions that have been honed over the years by the requirement for internal consistency in pervasive use. The definition of saving is a perfect example, where even seasoned economists want to change the definition without understanding the fundamental importance of internal accounting consistency.

              Sorry. That doesn’t answer your question at all. But it’s relevant generally.

              • You’re exactly right. I have quite a bit of the terminology mixed up in my mind. I’m not trying to make that worse, believe me! Do you or CR have a collection of these definitions, or know a place we can go (and even site), when we’re trying to get at what we just don’t get? For example, I thought I understood that “primary dealers” are banks and a few non-bank “investment banks”, and they put on their books Uncle Sam’s bills and then they are passed on, so they don’t actually own them in the end, they’re just part of a process. I was hoping that MMT and now MMR would finally explain to me “where did my US dollars come from?” I know where my “debt dollars” came from and where they went (happily they are all gone now). So I think I created a lot of US dollars over the years. JKH, thanks, no need to reply. Maybe someone can help with the definition link. I think “capitalism makes socialism” POSSIBLE, and we need some…but not all, in order to have a “free country”.

      • It took me a while to locate and chase down all the relevant threads referred to here, but it was a useful exercise and helped me to understand what you might be driving at although I still have reservations about the significance of all of this. So let me ask some questions and make a few comments.

        You said: “The meaning of S = I + (S – I) isn’t driven by causality in the first order of things.”

        You’ll have to explain what you mean by “the first order of things”. This equation is trivially derivable from the standard sector balance equation and as I now know (from reading some of your other blog posts) you certainly recognize that this equation is a simple identity. S and I could stand for absolutely anything and the equation would remain true. So clearly the equation itself cannot tell us anything new about the world. That said, there obviously IS some truth that you and Cullen both perceive that you are trying to convey with the equation, so I’m certainly open to understanding what that might be.

        You said: “It’s driven by logical decomposition of the MMT net saving bias.”

        Try as I could, I couldn’t find a good description of what the “MMT net saving bias” actually means to you or to Cullen or to Steve H. or how it is “logically decomposed”.

        You said: “Your comment about math sophistication is ironic. I doubt I would have landed at this expression, if I didn’t have a degree in pure mathematics.”

        You’ll have to elaborate on the irony. I also have a degree in mathematics as well as a Ph.D. in computer science. Not that any of that is relevant because manipulating the underlying equations used here requires only relatively simple algebra. I’d be interested to hear what mathematical theory or construct led you to the conclusion that this identity provides some profound new meaning. I actually don’t think it was your mathematical ability, but rather some concentrated thinking about the real meaning of the various variables used and their inter-relationships that you’re trying to convey. Since you’ve been at this longer than I have and have posted some other very clear explanations about the sector balance equations I truly do want to understand what you’re trying to say, but I’ll continue to maintain that this equation doesn’t do anything to convey or clarify your intent. More on this later.

        You said” There’s definitely causality in the secondary interpretation in the sense that investment enables saving, which is well established by people like Andy Harless. Cullen is also riffing off that type of very legitimate interpretation here.”

        I don’t have a reference for Andy H’s work so can’t judge that. I’ll reiterate some of what I tried to say in my original post. It is extremely difficult to talk about causality (or functional dependencies) between any two variables used in the sector balance equation because of the feedback in the real economy. I am fairly certain that you know this; what some actor in the economy intends to do by modifying their personal policy choices with respect to any of these variables is often not possible to achieve because of the reactions of others. That’s one of the primary reasons that mainstream economists always want to talk about equilibrium states. So causality is a very slippery thing to capture. If all you’re trying to say is that private sector investment CAN cause an increase in household saving I don’t think anyone would argue with you; that seems fairly straightforward. If you want to say that private sector investment is the predominant driver of household saving then I think you have some work to do to prove that and I expect that the exact relationship at any point in time depends greatly on several other other economic factors and there are time dependencies as well (as in the fact that an investment made today may result in future increases in income/saving). If you want to claim that MMT says that ONLY government deficits drive household saving (either nominal or real), then that’s just not correct. Bill Mitchell is constantly explaining how different policy choices result in different real outcomes.

        You said: “So I’d say there’s more than meets the eye here, but the fact is that it’s a reflection (in part) of the Waldman observation, which is the verbal version of the interpretation of the same net saving bias. I haven’t seen a single critical comment yet that actually addresses that aspect of it effectively, quite apart from the equation. So I’d advise the same as I did with Kervick. Respond to the Waldman version of the observation, and then return to the equation and reconsider it in the context of its first order purpose.”

        So without a specific reference and without a definition of what you really meant by a “net saving bias” I had to make a guess. I’m guessing that you are referring to Waldman’s comment at and your follow-up to that which introduces your equation. He asserts there that “It is a bad rhetorical trick that MMTers sometimes pull, to confuse an increase in “private sector net financial assets” with an increase in household-sector savings in order to recruit bourgeois support for the latter in the cause of promoting net issuance of government securities.” Is that what you mean by a “net saving bias”?

        If that’s the Waldman observation to which you want a response, I think the only rhetorical trick going on is Steve’s assertion that MMT would really make such a claim, which is compounded by his assertion that this is done to deliberately confuse people in order to serve some other agenda. I certainly haven’t read everything that every MMT proponent has ever written, so I can’t rule out the possibility that some MMT disciple somewhere wrongly made such an assertion, but to the best of my knowledge no mainstream academic MMT theorist has or would say anything like that.

        Neither would an MMT theorist claim that government deficits are always necessary. For example, you can find any number of Bill Mitchell blogs where he clearly discusses situations where a surplus is appropriate.

        I will grant that the term “private sector savings” is used as shorthand to refer to “private sector net financial assets”. That is, I believe, largely an artifact of their abstraction which talks in terms of a savings pool or stock for each sector, where in the case of the private sector I represents a net flow out of that pool and S represents a net flow into it. When I was first learning about MMT, that terminology certainly confused me until I finally understood their world view. Once you understand that for MMT “private sector savings” is what they call the net balance in that private sector financial assets pool/stock, then everything MMT says makes more sense.

        For some explanatory purposes it may be useful to break the private sector into business and household sectors. Perhaps that would alleviate some of the confusion. Of course I’d contend that you should probably break out the banking sector separately as well to help understand the impact of debt on the whole situation. Of course, you can get both saving and investment going on in any of those sub-sectors so that makes the exposition more complex as well. Whether that makes understanding easier or more difficult probably depends on the person who is trying to understand.

        To a large extent MMT follows the dictates of functional finance and claims that the appropriate level of government spending should be dictated by what decisions are made in non-government sectors and the consequent state of the economy. Therefore in the context of the current economic crisis where private sector investment intent (both business and household) has been very low, and where their saving intent (again both business and household) is very high, if we assume an ongoing current account deficit, then larger government deficits are functionally required to increase aggregate demand and reduce unemployment. Their claim, which I also accept, is that increased demand is the most direct route to increased private sector investment. Certainly some people believe that there are other ways to stimulate investment. Some argue that you need to reduce regulations on business and that will do it, some argue that you need to reduce government spending and by Ricardian equivalence that will stimulate private consumption which would obviously increase demand, and some argue that you can provide tax or other incentives to business that will result in increased I. None of those theories are inherently incompatible with MMT theory, although they would almost certainly quibble with at least one of those based on empirical evidence that things just don’t work that way.

        Going back to your equation, perhaps the closest I can come to understanding your intent is by considering your English translation: “Private sector saving = investment, plus the change in private sector net financial assets”. From this, it seems to me that you are trying to say something to the effect that I and S can both increase (or decrease for that matter) without the difference between them changing. That’s mathematically trivial, so that’s obviously not your point. I think you are trying to imply that since the difference between them (i.e. the net sector change) is “driven” by government and foreign sector actions, then you can conclude that the private sector is capable of pulling itself up by its bootstraps. Furthermore (I suspect) you want to argue that this is a “better” approach than government deficit spending for some definition of “better”. Please clarify and make corrections if I’ve misinterpreted your intent.

        If I got that sort of correct, then I have a couple of observations. The first is that MMT would have no argument whatsoever with the claim that if I spontaneously increased (for any reason) then S might increase as well even with no change to government deficits. The second observation is that you can’t just assume the net change in private sector assets is fixed if you change the “I” term. All of my previous comments about term interdependency and feedback apply here. New investment affects the economy in various ways that will, in general, impact both the government deficit/surplus and the current account balance. If you want to assume that those two remain the same for purposes of making some argument, that’s fine, but then for completeness and clarity you should do that explicitly and perhaps explain the conditions under which that assumption will hold.

        Bottom line for me is that I still don’t see where you think MMT has it wrong with regard to this particular subject. I certainly understand Cullen’s JG and sovereign money disagreements, but those are separate topics. And sorry, but I still think your the equation is a poor representation of whatever your intent really is.

        • Thanks for your response. That’s very thorough. I’m short on time unfortunately. But I’d say that the Waldman comment is quite self-explanatory. MMT has a stylistic tendency to obscure the correct meaning of saving, confusing it for sector financial balance saving, which is marginal. It’s a major point, and Waldman has made it a few times. This bias is reinforced by the systematic eagerness with which MMT consolidates the household and business sectors, thereby eliminating from view both the S content through which households directly fund household I as well as the S content that funds corporate I. It is not the sector financial balances view that is a problem; it is the persistent conceptual binging on the sector financial balances view that is the problem. It is an unbalanced picture.

          The idea of S = I + (S – I) is simply to draw out the marginality of (S – I). It’s a conceptual decomposition. And I’ve run through numerous numerical examples showing how substantial the contrast is using US economic numbers.

          You’re free to think of it as trivial, but the stylistic bias and MMT’s intended power of suggestion is there. That includes frequent specific use of the term saving instead of net saving in describing (S – I).

  10. Here’s my problem with what I actually is…

    If someone takes $100,000 of savings and uses it to build a factory, Investment has occurred.

    If someone takes out a loan for $1,000 to buy a flat screen TV, consumption has occured.

    How will our system identify the $100,000 factory transaction?

    How will our system identify the $1,000 TV transaction?

    It seems to me measuring I with the expansion of private credit doesn’t actually get us to Investment… am I wrong?

  11. this is really the heart of what your about isn’t it? you think your so smart you can run the economy better than the free market. ‘I know it has never worked, but that’s just because I and those who think like me weren’t in charge.’ Just like any bureaucrat, you believe the only reason government programs haven’t worked to date is because the wrong people were in charge. Really socialism is your goaland puppetmaster your aim.

  12. CR – in some sense, your Dept. of Innovation already exists. It is a pure funding source and it is set up as a public/private relationship with private equity firms. It is known as the Small Business Investment Corp. (SBIC)and it is managed by the Small Business Administration (SBA). There are two principal components – the Participating Securities program and the Debenture program. The Participating Securities program is, by far, the bigger of the two. It has been tapped primarily by venture-oriented private equity managers. It is an unmitigated disaster; so much so that it is voluntarily being wound down by the government. The SBIC is actively selling off assets to try and recover as much capital as possible as soon as possible.

    The SBIC hasn’t worked for a lot of different reasons (many specific to the program, some specific to private equity), which I’d be happy to go into in more detail if anyone is interested (I don’t want to take up a lot of space if no one cares).

    • I would be interested in more detail. Developing an understanding of the principles that may underlie appropriate and effective government action is critical to many of the issues raised here, and an analysis of specific cases would go far to address this.

      However, this thread has gotten old and lengthy. Perhaps if similar issues come up in later postings, you could expand on what you say here.

    • I’d be interested as well. I do see they had only a $1B budget last year so I don’t know how serious this entity is….I mean, we’re talking about a drop in the bucket in terms of govt spending….

  13. Hi Cullen,

    I think I’m starting to understand where the MMR crew is coming from. Continuing to emphasize how much influence the horizontal component has, really drives the point: how can the federal government have “monopoly” power if banks have so much economic influence via the creation of credit.

    Keep doing what you’re doing.

    • That’s one of my main points. The govt does NOT have a monopoly on money. The govt doesn’t control either price or supply at the horizontal level. Once you eliminate the monopoly myth you’ve taken a wrecking ball to MMT’s ideas about the JG and setting prices….MMT needs a fully vertical component to have a full monopoly.

      • By extension, hypothetically… if our banking system was fully vertical, do you think that would put more stock in their “taxes drive the demand” for money argument?

        Or, do you see the demand for money as an entirely separate subject. I.E. it is unrelated to how influential the horizontal component is.

        • Well, it kind of depends. I don’t think a fully vertical banking system and our constitutional republic are compatible. The point of our style of govt is to disperse power across many entities so it does not become centralized. I don’t see how the people would allow the central govt to obtain so much power over money. The fact that it is dispersed is a good thing (though unregulated can be bad as we know!). But in a communist or socialist country or even a dictatorship I think a vertical banking system is consistent with a lack of power dispersion. But even in that kind of govt it is more the rule of law and the monopoly on power that drives money. Make sense?

          • Yep. I follow you.

            May I create a branch?…

            You’ve hinted that you sympathize with Bill Mitchell on the nationalization of banking (though clearly you don’t agree with him). Is there something about healthcare that’s different from banking, when we consider a public option? Why is a public option in healthcare (e.g. medicare for seniors) ok, but a public option in banking would not be?

            • I understand Mitchell’s rationale. But I certainly don’t agree with it. I do want to be clear on that.

              A nationalized banking system centralizes INCREDIBLE power to the govt. The govt would control all issuance of money. I mean, if you think a job guarantee is problematic then the fully vertical component would be about 100X worse….Govt agencies underwriting loans with no profit motive? Boy, we’re talking about an economic nightmare just waiting to occur….That’s too much power for the govt to have. It can never be allowed to happen.