* 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.


Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

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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  • Dunce Cap Aficionado

    So… lets start talking about this

    (insert Cullen’s inovation initiative here, couldn’t find the link)

    and similar ideas now that we know what the government should be concentrating on and stimulating- REAL investment.

  • Dunce Cap Aficionado

    Found it-

    Remember, Public Sector injections of new NFA does equal an increase in REAL S. But successful investments become real S at maturtity. That’s how I think of it.

    (oh, and where can additional funds for more I come from? Why yes, inject NFAs, but the innovations must be made and invested in to add to readl S)

    Just my 2 cents.

  • Cullen Roche

    You can see how the policy prescriptions under an MMR platform are different because the view of the world is so different. My innovation initiative, if implemented properly, could be an incredibly development. Imagine the US Department of Innovations based on a private profit driven model (where private sector companies drive the investment). I think it could be an incredible and world changing project….Allocate a few 100 billion there each year….

  • Dunce Cap Aficionado

    The view is making all the difference. Seeing the SBE from the persepctive of the private sector as the driver and furthermore with “I as the backbone of S” and NOT the public sector is opening my eyes. There are so many nuances to “I is the backbone of S”. Can’t wait until people much smarter than me use proper language to hash them out.

    What drives GDP growth (which is where get the SBE from in the first place) is the private sector. It all sounds so simple and basic but I’ve been looking at it the wrong way for a few years now. Government provides the nice park to ride a the bike in, but the private sector has to invent the bike, make the bike and pedal the bike.

  • Octavio Richetta

    Out of topic. A great one from Shilling, even if on the bearish side.

    Lots of great analysis and facts condensed in a single article. It is like one of his letters but without the insightful backup charts.

    Take for instance his observation on the contribution to consumer spending from people who are not paying their mortgage but have not been kicked out from their (?) houses: this amounts to about 65 billion or 5% of Gross Domestic Income!

  • Cullen Roche

    Thanks OR. Good stuff.

  • Dan

    How is equity in a company any different than “debt?”… netting to zero? I can accept the act of creating REAL value could in affect be saving (like if I were to build a shed from scrap wood), but I don’t think the paper promise that results (stock ownership) is anything more than a more variable form of debt.

    Can someone set me straight here?

  • SS

    They do net to zero. And equity is always the liability of the company. But that doesn’t mean it doesn’t create real savings. Eventually, if you want to monetize your stock then the government has to supply the net financial assets, but that’s secondary.

    I don’t think MMT disagrees with this point. But I think it gets confused often. It gets further confused by the fact that they view US Treasuries as a cash equivalent, but don’t see private sector bank issued assets as anything near equivalent.

  • hangemhi

    Still need a dumbed down version of all of this…. but… if I’m reading all of this correctly…..

    Gov can create wealth by printing and spending – that is, of course, if it puts people to productive use. Idle workers put to work, for example. Development of green technology that is initially not profitable, but is later profitable (think NASA and military inventions), etc, etc.

    Also, people can create wealth in the absence of money – farmer continually milks his cow, innovator builds a robot or assembly line. But without net new financial assets (here’s the dumbed down request – I assume this is Gov printed money – yes?) there is a limit to how much wealth can be created… Gov money necessarily greases the wheels for max wealth production.

    Meanwhile, time is the ultimate form of wealth. But if the owners of time-wealth aren’t productive – they just ski and fish – and as there are more ski-only fish-only people, the wealth of that society begins to diminish. So hopefully those enjoying their time-wealth also like to work, create and innovate. Fortunately, many do.

    As for socialism…. many won’t work, create or innovate whether you attempt to force it with a carrot or a stick. Some people will be homeless no matter what, there will also always be our elders, the sick, etc. What are we to do with these people? We let them survive via socialism within a capitalist society, while the rest of us improve both our standard of living AND theirs. The only other choice is to lock them up (which we still pay for) or to let them die (which will still pay for). So we NEED some amount of socialism no matter what the haters say.

  • Dan M.

    “In this regard it is best to think of government as being an accomodating force in the wealth creation process.”

    I love this.

    Just because money appears to be valuable does not mean that government can dream up value out of thin air, but simply that when the private sector is wanting for an efficient medium of exchange, a trusted government can provide that, and all the resources of the private sector can be mobilized much, much more efficiently, where people spend their time figuring out how to make a widget better, rather than trying to barter the sale of that widget.

    I still think this equation needs more explanation though….

    1) What IS “savings” and “investment.”

    2) If they equal each other, what the hell is the purpose of the (S-I) which will obviously equal zero… I see no reason for that?

    So I guess I understand MMR’s claim about production (or as I like to think of it, REAL wealth, and REAL value) being the backbone of the value or necessary quantity of any medium of exchange, but I need a bit more help with the equation and definitions.

    I don’t think I’m alone with this.

    Is building a shed “saving”? Is the shed itself “savings”? when I buy a stock, I’m not “investing,” am I (in the context of this equation)? What about when I spend less then I take in and put money into a savings account?

  • Octavio Richetta

    Thanks. Another out of topic.

    Stuff like this makes me really angry. A government killing journalists! I am not about to compare the Sirian government to the US government, but I believe governments are just a necessary evil. No wonder people in countries they dont trust the governent, including where i am now Argentina, take refuge in gold.

  • Dunce Cap Aficionado

    The way I’m thinking of it is that the crux is ‘succesful’ investment. Speculative investment (ie equity market bets) are something different.

    If a young inovative company needs capital to develop a product/service and bring it en masse to the market place, and an invesment is needed (usually along the lines of VC/PE. If the venture is sucessful, real S has increased at maturity of the invesment.

    AND we have a new product or service that *should* progress society’s use of time, somehow.

  • Dan M.

    I don’t think the gov’t can create wealth, so much as it can give us the tools to mobilize it more efficiently (maybe that is wealth, then…. IDK??).

    Like a freeway… pretty useless and it isn’t owned by anyone, but set some rules of the road and society functions much, much more efficiently and can create much more wealth… so the FREEWAY (FIAT MONEY) is secondary to REAL WEALTH (PRODUCTIVITY) that it allows to continue to happen.

    This is just me offering my interpretation. Let the more educated here come in with some more weight on the matter.

  • Cullen Roche

    Think of portfolio investment on secondary markets as a way of allocating your savings.

  • Cullen Roche

    I think govt, if used properly, can increase wealth. For instance, let’s say we built the world’s greatest city in the middle of Texas. Entirely govt funded but pvt sector built. Would you say the wealth of Texas has stagnated? Of course not. Millions of people will move out of rural Texas into a great new city where they will experience all the amenities of modern living, etc. Silly and extreme example, but you get my point. There are lots of things govt does that don’t increase our wealth (like dropping bombs in Iraq for 10 years for seemingly no reason). It’s the details that matter.

    And no, I am not saying we should leave the elederly to fend for themselves. As you stated, some level of socialism is good and necessary. It’s all about balance, but remembering what drives the ship forward….

  • Dunce Cap Aficionado

    “Gov can create wealth by printing and spending – that is, of course, if it puts people to productive use”

    I like what Dan says, but I’ll chime in too, because… well, I can’t resist.

    No, government supplies net financial assets ($$) so that additional wealth can be created by the private sector, via investment.

    I remember having a back and forth with an Austrian Schooler here a number of months ago. He was arguing that he could create US dollars by taking a plot with trees, cutting them down and building a house, taking the value of the plot from some small number to something like $400K. He didn’t create dollars (he would have to obtaint the actual currency by bringing the land/building to market, where the currency could be traced back to being created by the gov’t) but he did create additional value.

    Private sector adds real value/wealth/savings. Public sector must supply the right amount of NFAs for it to do so at optimal levels.

  • Dunce Cap Aficionado

    Thank you for that, it filled in a blank I had been ruminating on for days.

  • delta financials

    And how would this dept of innovations allocate capital? Why would they allocate it effectively? Would the process not be politicized? Why shouldn’t investment come out of savings (normatively)? Is individual responsibility not an essential tenet of a resource constrained world? Increasingly sounds to me like your view of government is exceptionally benign. To most of us, a department of innovations is systemic cronyism. Incentive structures count. If the same institution that can print money and force people to pay taxes becomes an allocator of capital, the checks and balances that allow a free society to prevail will cease to exist. Terribly dangerous idea in my view. Unless i’m missing something, which i surely must be?

  • Dan M.

    Agreed… it seems to me you can avoid losing people on both sides by saying what you said without insisting that gov’t can create wealth… especially if they do that by simply printing dollars.

    Your insistence in focusing on production and investment first, and the fiat assets coming in to service that activity later, are starting to really clear up for me. It makes sense to come at it from that direction.

  • Dunce Cap Aficionado

    Respectfully, did you read the link?

  • Cullen Roche

    We’d form public/private partnerships with pvt equity firms. The whole thing would be publicly audited by the CBO and totally transparent. But the pvt sector would have skin in the game even though it would be largely govt funded. The kicker is understanding the points I’ve outlined over the years.

    Our govt cannot run out of money.
    Govt is a partner of ours, not a competing entity.
    Govt has extraordinary powers and CAN help!
    Investment is the backbone of savings.

    So let’s leverage investment and utilize a chronically inefficient and underutilized resource (the govt) in a more efficient and productive way.

  • Cullen Roche

    Yes. It’s a really powerful concept once it all clicks. Unfortunately, to get there, you have to first understand the operational aspects of MMR which is hard enough as it is….

  • Wantingtoretire

    There is nothing like being totally confused to learn something.

    I am not American. I have always assumed that the private sector (anything that is non-government owned) plays first fiddle to a governments second fiddle. Without the industry of the private sector, government cannot do anything.

    Is that what you are stating here in this post.

    Did you previously think that the private sector plays second fiddle to the governments first fiddle?

  • Dan M.

    Yes… Taking the freeway analogy further… imagine a government trying to build freeways as fast as society appears to need them (equivalent of running enough deficits to allow enough NFA’s to exist on our balance sheets)… sometimes the government may build TOO MUCH freeway (inflation/debasement), resulting in some wasted resources.

    However, comparing building too much freeway to allowing bottlenecks to exist all over the place (unemployment, deflation, capacity disutilization), it’s obvious that building too much freeway is a much, much smaller problem than building too little.

  • Dan M.

    I still feel like my parents are getting a divorce every time I see a big MMT/MMR fight break out.

  • Cullen Roche

    Absolutely not. The site is called Pragmatic CAPITALISM. :-)

    But I have noticed a tendency for people to overemphasize the idea of govt deficit = non-govt surplus when trying to promote certain policies. I think it’s way off base without a more in-depth understanding of what’s going on underneath the surface.

  • Dan M.

    I’m starting to envision a general rule… that at any given time, having less than X% of the total REAL wealth in an economy (houses, mfg plants, cars, etc) or maybe X% of annual GDP in NFA’s in the domestic economy starts to insert a systemic risk, much like what we saw happen in 2008, where any kind of balance-sheet shock in the absence of that proper X% of NFA’s as a ratio to total wealth or total production causes a severe recession.

    Now it may take a while for these things to manifest themselves, much like running an engine lower and lower of oil, but eventually they will unles those NFA’s are entered into the economy.

    This visualization helps me think of some of the real problems outside of the housing bubble that helped 2008 manifest itself… like watching a Porsche 911 allowing itself to slowly be drained of oil.

  • Wantingtoretire

    Well coming from a country that Americans call socialist, I think your post title needs a little revision

    “Capitalism makes Socialism Possible”

  • hangemhi

    DCA – isn’t this just semantics. “Gov can create wealth” maybe is better stated as “Gov can unleash wealth”?? If a farmer has 10 cows all producing milk, but his neighbors have no money, and nothing else of value to him, how might he gain wealth? The Gov prints new money and hires the neighbors to dig ditches and re-fill them (or pays them in milk food stamps, or in unemployment benefits), and they can now buy milk from the farmer. The farmer, needing nothing from the Gov or from his neighbors does want something from someone across the country, and uses his dollars to pay for that. The Gov wasted money on the ditch diggers, but ultimately they did “create” or “unleash” wealth by printing dollars.

  • Leverage

    It’s called defence budget, and it’s not changing the world so much…

    Anyway, money does not drive technological innovations really, knowledge and creativity does (highly educated human capital which costs decades to create and is limited too), and these can’t be printed (unfortunately). Throwing money at things does not magically fix stuff, hundreds of billions (if you include private, public or private&public partnerships) are already spent yearly at aggregate global level in research & innovation.

    Research & knowledge also has diminishing returns driven by complexity. I’m not saying we have reached a limit, but breakthroughs and world-changing things take time, and are uncertain things. You don’t know about such things, but for example the combined time research in the last decades and used human resources in advancing physics knowledge has been greater than the whole combined time since the start of the humanity and yet we have failed to produce an empirical experimental which can falsify these theories, very funny.

    As knowledge gets more complex is more difficult to advance in both theoretical and practical applications, and that’s something money by itself won’t solve (never did).

  • freemarketeer

    Hell, I think just the fact that public companies don’t act in their own best interests (shareholder interests doesn’t necessary mean company interests) would make a huge difference in the development of the country.

  • Ramanan

    Didn’t realize that the number of comments beats “Marshall’s Longest” here

  • Dunce Cap Aficionado

    I don’t disagree with anything that you except that it is not semantics.

    Yes, we all agree the gov’t must provide a proper (btw, love Dan M.’s highway analogy and agree with it fully) amount of NFAs, but I think that there is a lot of concentration on the government providing NFAs in the current BSR environment. HOWEVER, if the private sector exports demand at a growing rate (through the CA) away from domesitc ‘I’, than providing additional NFA underwrites the leakage.

    Regardless of the economic environment, government action (along with providing enough NFAs) comes after the private secotr innovates.

    I personally would not say that one is necessarily more *important* (I would say they are symbiotic in our current system) than the other, but one does come first in my hierarchy…

  • joe

    Interesting… I’ve always viewed capitalism and socialism as complementary, not in opposition to each other. Pure capitalism would be a disaster, you need the relief valves.

    But it does seem that historically govt plays first fiddle. Govt funded columbus, Govt does basic research, govt builds infrastructure, govt developed computers and internet, satellites, gps, the entire airline industry is heavily reliant on govt.

  • Dan M.

    I think semantics are half the issue at times. If you go to someone and start trying to convince them that printing money is literally creating wealth (the term NFA’s would imply this, almost, but saying it first and foremost is something else) you are going to loose people on a cognitive level right away.

    It’s best to think of gov’t as “the gov’t can facilitate the creation of wealth.”

    PS, full disclosure, I’m voting for Obama in November so I’m not trying to unleash some kind of anti-gov’t tirade here. I’m really trying more to use the proper language to describe things so you can 1) be as accurate in your assertions as humanly possible, 2) help yourself visualize the mechanics of everything, and 3) help the dang-nabbit deficit hawks more easily jump on board.

    The language we use is much more important than we sometimes give it credit for.

  • Dunce Cap Aficionado

    I now realize the error in one of my above comments where I said ‘No’ to ‘Gov’t can creat wealth’. (D)ARPA- or whatever they’re calling themselves now, is a glaring example.

    But Columbus had the idea first, before beign funded, government funds the building of infrastructure because the private sector is expanding.

    I think the airline industry is reliant on the gov’t because the governemnt has a history of allowing the airlines to be monopolies. David Einhorn wrote his thesis on the airline industry about this and I’ve wanted to get my hands on it for years, his point was that he would probably never invest in an airline.

    Obviously the government can create wealth. But the examples of satellies, GPS, arguably the internet, and the other big ones, they simply bring the tech into existence, then release it to the private sector to continue to innovate and get to the public at an acceptable cost to the end user.

    Its symbiotic.

  • Dan M.

    This isan excellent example, kind of existing as the exception that proves the rule.

    One could say that for all the innovation of NASA, it’s not wealth until it hits the private sector… but that would get us into a chicken/egg argument that underlies your “symbiotic” observation.

    That said, I really think MMR (and MMT) have to approach the act of printing NFA’s as FACILITATING wealth creation (unlike the satalite, which could be said to be wealth in and of itself), which is hard because you’ve just referred to them as NET assets with no liability involved. This is why I’m liking MMR’s description more and more of production first and NFA’s coming in later to service the demand for “lubricating financial assets”…. these things aren’t assets but for all the contracts that would tighten up like a dry engine without that lubrication in there to keep the motor running.

    Presented this way, even a die hard captialist would have to appreciate the mechanics of properly-managed fiat money.

  • Cullen Roche

    Yeah, hell of a good discussion. Thanks for contributing Ramanan.

  • Cullen Roche

    I’ve been using the word accommodate, but I really like facilitates. Great way to think about all of this.

  • Dan M.

    Either one works. It just helps that we “hold our horses” when using the term NFA’s, because there are implications to that term that might imply that we can simply print up wealth that will give people a bad taste in their mouths before you can even get MMR off the ground.

    You want raving fans, not confused quasi-supporters.

    I know I’m preaching to the choir, though… as this was exactly why you founded MMR in the first place… to soften some of the ways MMTers pose the whole arrangement of fiat money to our society.

  • Cullen Roche

    You’re dead right Dan. If we’re going to get this mainstream we need people to understand that the underpinnings of our monetary system are things they can relate to. Fairness, hard work, etc. We want to explain the system in a way that doesn’t muddy the waters and obviously, I think MMT does that. Thanks for contributing these last few weeks. I feel like I’m finally getting to the point where we have a specific trajectory so that’s nice. I think we’re in for a long and important battle now so I hope MMTers and MMRists will realize we’re more or less on the same team and that the bad guys are still out there influencing policy.

  • Mountaineer

    “I is the backbone of S”

    I not only drives S, it drives the entire capitalist business cycle.

  • BT

    Credit & matching debt creation for investment increases the size of bank balance sheets (both the asset side and the liability side). The increase in credit = I

    Government deficits also create both credit (in the account of the recipient of spending) and debt (bonds).

    Now, changing the level of these stocks of credit/debt has some influence on the flow of credit in circulation. When government deficits are spent (either by the government or by the person who gets a tax cut), that adds to the flow of transactions (GDP). But the big part of GDP is just people transfering credit between their bank accounts (Consumption, C) and governments transfering credit between accounts by ordinary taxing and spending (G).

    “Saving” is just people not transfering credit to other people’s accounts because they don’t buy anything or they are not taxed enough. “Saving” is just a failure of credit to circulate.

    “Net saving” (as in MMT sectoral balances) is completely different and is just the credit growth (the increase on the liability side of bank balance sheets) caused by government deficits (or current account surpluses). “Net saving” should be re-named “credit growth”.

    So GDP = I + C + G + (X-M)


    Net pvt surplus (S) = (G-T) + (X-M) + I

    The whole ‘savings’ and ‘net savings’ confusion (plus S=I nonsense) leads the public to actually believe that saving is good for the economy when it actually just stops transactions. Loans create deposits, so borrowing (I) drives most credit growth (S).

  • Cullen Roche

    For those wanting to take the equation further,

    S – I = (G – T) + (X – M)
    S = I + (G – T) + (X – M)


    S = I + (S – I)

    That’s where the meat is for me. It’s beautifully simple.

  • Tim Ayles

    Very helpful Cullen. Keep it up!

  • Dan M.

    I still don’t get why we put that (S-I) in there… is that to show that savings can be higher than investment, or vice versa, if there are changes in the fiscal or trade deficit?

  • Cullen Roche

    Others might interpret it differently, but to me it’s about emphasizing Investment. MMT sometimes obscures this point and gives the impression that the govt drives savings (I don’t think intentionally, but it’s easy to interpret the sectoral balances equation that way). But if you rearrange the thinking and actually apply it to the way our economy works, then you realize that it’s I that drives savings. It really is the backbone. The equation is just arranged to highlight this point. It’s not like E = MC2 or something. It’s a simple rearrangement, but it’s illuminating for the reasons mentioned in the piece. And from a policy perspective, I think it’s a total game changer. Wasteful spending just looks infinitely worse when you connect all these dots.

  • Dan M.

    And how is I equivalent to going into debt?

    I haven’t had the “click” on this equation, yet, I guess… in fact it’s the part of the “Understanding the Modern Monetary System” post that I just gave up on.

    I think I’m missing something basica that’s screwing up my whole thought process.

  • Dan M.

    Sorry to keep blasting in with random questions… I’m forming this as we go… so I is not necessarily “building a shed,” but is instead literally issuing credit?

    I always thought of I in this equation as building a long-lived asset or something… but maybe I’m trying to put a physical activity where a monetary flow belongs.

    Please clarify for me… I swear I’m almost there.

  • Adam1

    Actually I think under the proper accounting rules taking an in-kind transfer of stock equity under this example is still income! Therefore if it is and Investment by the company (capital I) and the earner “saves” it (Capital S) then it’s still S=I.

  • Adam1

    Remember S=I is a flow identity, the identity doesn’t indicated where the flow values came from. A company can readily “dis-saves” its equity to finance and investment.

  • jt26

    I like the view that deficits provides working capital for the private sector to succeed. But, the “private sector” could just be government controlled (e.g. SOE’s in China), so that in and of itself is not sufficient. (Free market as opposed to state) Capitalism works because of freedom, laws, private person and property rights etc. Capitalism (with the above attributes) has only been proven to be the least bad option, and (state) socialism was added because, we are, well humans. For most of human existence there has been no capitalism or socialism, but at best feudelism and tribalism.

  • Adam1

    Cullen, can I make a suggestion for MMR… My guess is that it wont be easy because the data may not be available in a “non-standard” way but,…

    You need to stop talking about Y=C+I+G+(X-M).

    While that is the “standard” formula and it is accurate it is highly mis-leading. I completely agree that Investment drives savings. Anyone who has a grasp of how banking actually works understand this; however S=I does not really explain what is going on from a layman’s perspective. ANY borrowing in the economy allows for someone else to save – at least in the short run. One injection off-sets a leakage. Is the off-set sustainable or is it only pulling demand forward? You can’t tell from S=I (from a standard accounting definition).

    From 2003 to 2007 we had LOTS of INVESTMENT. All those homes that are now empty and abandon; all those home equity loans funding additions with no real future income to support them… According to current accounting standards were INVESTMENT.

    Y needs to be re-written to Y = Household Consumption + Household Borrowing + Business Consumption + Business Borrowing + General Government Spending + Government/Public Investment + Net Exports.

    Now you can have a real conversation about investment SUSTAINABLLY driving savings .

  • jt26

    ““Saving” is just a failure of credit to circulate.”
    “The whole ‘savings’ and ‘net savings’ confusion (plus S=I nonsense) leads the public to actually believe that saving is good for the economy when it actually just stops transactions”

    It seems savings via buying a MMF, I just transformed it back into credit. Or am I missing something?

  • Dunce Cap Aficionado

    I’m starting to see the whole thing as almost wholly circular. Desire for jncreased S is the driver of NFAs into I which adds to S at maturity…. So on, so forth. Government (mostly) just provides environment/conditions.

  • Cullen Roche


    Can you elaborate on your point there? I guess I am not totally following your thinking and how to phrase this precisely. Are you just saying that the equatino needs to reflect for the horizontal level more fully?


  • hangemhi

    DCA – I’m going to respectfully disagree that the Gov can’t create wealth. Firstly, the Gov is made up of people, the same sorts who are in the private sector. A scientist may innovate on the Gov dole. And the Gov building a highway, in my opinion, is creating wealth. Isn’t a country with national highway system more wealthy than one without? And the building of that highway put people to work, and dug up resources out of the ground, etc. I am most certainly not saying the Gov can do a better job of innovating. But that they can, they do, and they have, innovated and created wealth.

    Secondly, if they print, and it gets distributed where there are idle people or resources, and those people get off their rumps and start to work, how is that not the Gov creating wealth? We could call this “monetizing wealth” or something – but without the printing, things sit idle. Could this idea lead others to think MMRers or MMTers are nuts for stating “Gov can create wealth”? Sure, I suppose, but that’s not exactly what I’d be leading with.

  • Cullen Roche

    MMTers often argue that our most underutilized resource is labor. I think it might actually be govt. I think my innovation initiative could change the future of this country.

  • jown

    Kalecki Profit Equation:

    profit = investment – saving of wage earners + fiscal deficit + net exports

    Minsky hearts the Kalecki Profit Equation and so do i.

    (just throwin’ it out there; maybe you have already assessed it somewhere; apologies if i have missed that or am off)

    Thank you, Mr. Roche

  • Steve Roth

    Just a drive-by here, haven’t read the comments.

    I’d go (far) father than your headline: socialism is necessary to capitalism.

  • Cullen Roche


    I don’t disagree with that statement, but I think the emphasis that capitalism makes socialism acceptable shows that we only allow socialism because capitalism is the primary driver….No?

  • AK

    Hold on a moment everyone – maybe I am missing something – but why am I suddenly reading these enormous discussions on the savings/investment relationship like it is something new, or, something that exposes flaws in MMT? Don’t get me wrong, any discussion on this topic is great to have – but I think you’ll find that the main MMT theorists (Mosler & Mitchell, for example) have already had this discussion many times over. What’s more, I think you’ll find that MMT agreed with all of these “revelations” a long time ago.

    It was with interest I read Cullen’s comments on the blog saying:

    “Your thought experiment highlights a flaw in the MMT thinking. S = I + (S-I) shows that the non-govt can save without govt spending. That’s a huge step in highlighting what our focus should be (production). I is the core of improved living standards, because, in my opinion, it is through I that we create things that make us more productive and therefore give us more time. (G-T) helps/accommodates, but I is the main driver here. But it’s only one piece of the puzzle here differentiating MMR from MMT.”

    I don’t see how the above “differs” within MMT – MMT has always said that NET saving of the private sector AS A WHOLE is impossible without government debt. No serious MMT theorist ever said household saving was impossible without government debt – in fact, Mitchell’s weekly quizzes have raised this exact point many many times (although I fully recognise that Mitchells blogs are overly long and don’t appeal to everyone). In any case, Mitchell, Mosler agree – INVESTMENT IS A BEAUTIFUL THING. MMT does not disagree with you! Rather, MMT recognises that at all times, there is a desire for risk-free savings which cannot be satiated by private sector investment, and at other times, widespread deleveraging requires the aid of government NFA. Apart from that – we ALL agree that productive investment is a fantastic thing!

    The second comment from Cullen which I read with some interest

    “The other piece that I find interesting (Ramanan where you at??) is the foreign sector. If we take your thought experiment and just balance the budget we arrive at a similar position of (I-S) = (X-M). Now, MMT says we should just spend to offset the leakage from the CAD. But let’s take Warren at his word on “the bigger the trade deficit the better”. Bill Mitchell has made similar comments in an article about how we don’t need to produce that which we can just consume from abroad (downplaying production). So what happens in this environment where we don’t produce domestically and just consume from abroad (taking the MMT examples to their logical extreme)? Well, I craters. S can remain bolstered by (G-T), but is that a sustainable trend? Well, working from our above understanding that it is really I that causes the improvement in living standards, NO!”

    Perhaps I am being an apologist here – but here goes: Warren can make some flippant comments that are often the cause for much MMT criticism if read in isolation – but if you read the material behind it, I don’t think his, or Mitchell’s body of work in any way says what you imply it is saying in the above paragraph. What Mitchell is saying (at least the way I interpret it) is: why should we produce that which we can consume from abroad for more cheaply? Why don’t we focus on getting better at the more difficult things to produce – the things that take intelligence, require us to become more efficient and push technology/efficiency/productivity forward? If we are all competing with south east asia to inefficiently produce textiles and plastic at the cheapest rate possible, how is that fulfilling Cullen’s aim of “generating improving living standards through the efficient use of resources???” Why don’t we buy all of that stuff from China, and get on with producing particle accelerators, electric cars and nanocomputers?

    I think discussion around these things is great – the more we discuss, the more we realise that there is no difference between MMT and MMR. Group hug. :)

  • dgc

    Sorry, your math is incorrect. The correct math would be the following:

    S-I = (G-T) + (X-M) so

    S = I + (G-T) + (x-M) or

    (I + (G-T) + (X-M)) = I + (G-T) + (X-M) or

    I + (G-T) + (X-M) = I + (G-T) + (X-M)

  • Dunce Cap Aficionado


    See all my comments here and you’ll see I’ve change my tune slightly.

    Best Regards,


  • Cullen Roche

    I think this is more MMT obfuscation. Mitchell has specifically stated that we don’t need to produce that which we can consume from abroad. Warren has also said bigger trade deficits are better because they allow bigger deficits. Regarding investment, I don’t think anyone in their right mind would say investment is bad and MMTers certainly don’t say that. But what both of these positions are intended to communicate is that deficits are always good. MMT uses the state theory and the monopolist idea to always emphasize the power of the state. The reality is that the real power resides with the non-govt. The way one communicates and understands these ideas makes all the difference and in the end MMT uses this misconstrued perspective to push a political perspective that gives the appearance that the govt has the control.

    Mitchell says there are going to be parts in his textbook on nationalizing the banking system and the job guarantee. What else do you really need to know about MMT? And they rip Mankiw for bringing politics into his class room. Ha.

  • hangemhi

    Sorry if I’m stuck on this point, but I think it’s important not to give in to a logical point, even if you don’t like it. We MUST agree that even a country entirely run by the government can innovate and create wealth. How can that point be denied?

    Meanwhile, I read about the British empire counterfeiting Constitutional dollars – they printed up 4x what the constitutional gov had printed up. Instead of ruining the economy, it led to wealth creation (or facilitation).

    There is most certainly a point of diminishing returns – but isn’t China proving that with a massive output gap printing can “facilitate” wealth, or unleash it?

  • Cullen Roche

    Actually it’s not wrong. See the conversation at MMR.

  • Dan Kervick

    Cullen, I’m not trying to be disagreeable, but I am still very perplexed by MMR’s strange eureka moment over S = I + (S-I).

    Consider a one-sector economy: no government, no external sector, just one big private sector. In that economy, S = I and S-I = 0

    It is still true in that economy that S = I + (S-I) = 0. Does that mean that I is the backbone of S in that economy? Well sure in one sense, since by hypothesis S = I, and thus the quantity of investment is exactly equal in quantity to savings. But you could then just as equally say S is the backbone of I. Every dollar lent out in investment is someone else’s dollar received as savings. Every promise of a dollar to one person is a dollar promised by some other person. But there is nothing new here.

    The fact still remains that in a two-sector economy, if one sector is net accumulating financial assets, then the other sector must be net accumulating financial liabilities.

    The statement “S = I + (S-I)” is not just an economic identity. It is a logical tautology. How could one possibly conclude from it anything about one element of the equation being particularly important? It’s like looking at “12 = 5 + (12-5)” and concluding that this shows 5 is the backbone of 12.

    Now these are just financial assets and liabilities: promises of a portion of the monetary stock and claims on a portion of the monetary stock. Real value in the economy is created by the application of work and intelligence to the real products and human capacities that already exist. But everyone has always known this; everyone continues to know this. It’s been a foundation of economic thinking, in all schools of thought, from time immemorial.

  • Cullen Roche

    It’s simple Dan. Investment is what generates production, innovation and ultimately time. You just have to connect the dots. Our lives don’t become better because people collect net financial assets from the govt. They become better because people produce goods and services that make our lives better. Consumption and production are two sides of the same coin, but production makes the coin bigger. It’s through innovation and production that we can consume more in the future.

    It’s not really a eureka moment. We’re just able to more accurately show how the pieces all come together using the sectoral balances.

  • FDO15

    Nice. This makes the job guarantee look even dumber. Why should we hire 20-30 million ditch diggers when we know that won’t result in superior investment?

  • dgc


    If S = I + (S-I) then

    S = S

    So what is the point?

  • Dan Kervick

    It’s simple Dan. Investment is what generates production, innovation and ultimately time. You just have to connect the dots.

    Cullen, I think those those dots were connected long ago. Who has ever disconnected them? It’s the common heritage of economics. Even Marx said that value is created by investing time and effort in production. That’s the labor theory of value.

  • Cullen Roche

    MMT and MMR both agree that investment causes savings. There’s no enlightenment there. No MMTer in his/her right mind would say investment is no incredibly important. But the kicker is that when you bring the MMR Law into the picture you understand that investment can ultimately allow more future consumption. This doesn’t claim that deficit spending can’t increase aggregate demand, but it shows that there are two sides to the coin and that production grows the coin. The rather simple equation just helps to communicate this point by breaking down the SBE further.

  • Colin, S.Toe

    Many of the comments resonate, including Dan M’s “I still feel like my parents are getting a divorce every time I see a big MMT/MMR fight break out”, as well as Steve Roth’s and AK’s above.

    And Cullen’s last comment at the MMR site, that he had tried to bring diversity to MMT but now felt it was just for far left democrats was particularly painful.

    Community is an essential human principle, that in my view, has been undervalued and undermined in our society, particularly by elements on the political ‘right’.

    But the capacity to make things work is an equally essential principle, and I am drawn to those who possess this capacity, which in areas such as economic productivity often seem to include many who are politically conservative.

    It is not a matter of either/or but of both/and – these represent ‘orthogonal’ principles that are each indispensable and which cannot cannot replace each other. If ‘capitalism’ and ‘socialism’ are rough proxies for these principles. which takes precedence feels like a ‘chicken and egg’ debate.

    I have declared myself as ‘left-leaning’, because I want to be up front about where I stand, but I am not really comfortable with the conventional labeling. I tend to find ‘preaching to the choir’ quickly boring, and diversity more stimulating and more informative.

    More importantly, I have a strong gut feeling that real progress beyond the current polarized gridlock is going to require some kind of decisive breakthrough/realignment. I’ve been drawn to MMT/R precisely because it has seemed to hold that kind of potential.

  • Cullen Roche

    Dan, this is why I get frustrated with your comments. You are insistent on creating your own set of claims so you can try to tear them down. I NEVER said these dots were “disconnected” or that we were recreating the wheel. You seem to think we’ve wandered on some “aha” moment here or something when the simple reality is that we’re just explaining the SBE and taking it further than most MMTers do (or just don’t explain very clearly). It’s an important explanation (very), but not something new and I have no idea why you think we think it’s new. MMT doesn’t emphasize production in my opinion. I am just trying to show readers that production matters just as much as or more than demand. Trying to provide a broader perspective. Maybe you think MMT emphasizes production just fine, but I don’t agree. That’s not some “aha” moment. It’s just my way of explaining things.

    As I’ve always said, all I am doing is explaining the system to readers. I don’t know what bone you’re trying to pick here, but there’s no meat on it… You guys get so defensive with EVERYONE. It’s really tiresome. I am so sick of being attacked by MMTers for things that aren’t even threats to them. But as usual, MMTers are getting snippy over something that they shouldn’t be getting snippy about….You guys need to learn how to work with other people. If you can’t win over the people who are essentially on your side then you’re totally screwed with everyone else. Just some friendly advice to keep in mind if you want MMT to go mainstream. Maybe all this time spent arguing with me (over nothing) is better spent on Scott Sumner’s website?

  • AK

    Cullen, thank you for your quick reply. I’ll try reply in sequence:

    1) External sector: I don’t think there’s obfuscation in any part of the MMT “opinion” around the external sector. I’ll take your word for it that Mitchell has said “we don’t need to produce that which we can consume from abroad”. I don’t see why this is particularly at odds with “Cullen’s Law” re productivity and time. As I said in my above post – why should we compete with production for the sake of production? If we can produce, for example, plastic and textiles more efficiently than the factory in China, then we would, and prices would reflect that. But we can’t do it better, primarily (or perhaps entirely) because we consider our labour more valuable, and hence more expensive (in a purchasing-power sense), than the Chinaman’s. So, why don’t we use that more valuable labour in order to find ways to become more productive, more efficient and ultimately, win more time? I would say that is in direct agreement with your law.

    2) Government deficits: If the private sector ALWAYS desires some level of risk-free saving, then I cannot see why some level of government deficits AREN’T always a good/necessary thing. How would this savings desire be satiated otherwise (apart from physical hoarding of goods, which I believe is inefficient and wasteful)?

    3) Ideology: I think it’s premature to comment on a textbook that I haven’t read. But there is a main difference between Mitchell and Mankiw which goes to the core of economics and modern society itself. Mankiw has not described the basic facts of the current monetary system correctly. He instead decides to describe a monetary system which does not currently exist, with government budget constraints etc., which then agrees with his ideological preferences. Perhaps Mankiw’s imaginary monetary system would actually work better and more efficiently than our current one – I don’t know! But what Mitchell & Mosler are doing is describing the current monetary system in place which, whether we like it or not, gives the state enormous power, by granting a central authority exclusive control over money, and therefore the exclusive right to claim resources. Mitchell and Mosler point out that WITHIN such a system of enormous state power, the best way of achieving certain aims (full employement, full capacity utlisation, GDP growth etc) is (unsurprisingly) through centralised action by the most powerful actor – the government. That is why all of their policies trend so much towards state power – job guarantee, centralised banking etc etc – it is simply a RESULT of the current monetary system, rather than a result of some law of nature.

    There may well be a better way of doing things. There may well be an alternate monetary and economic system in which the job guarantee and centralised banking and all those other things you dislike are actually NOT the best way of doing things, and there exist better alternative. But I don’t see that as a disagreement with MMT. I see that as a disagreement with the current economic and monetary system which exists. As far as I can see, in the CURRENT system – a system of enormous state power which derives entirely from the right of the government to claim whatever resource it pleases – based on THAT system, MMT simply describes the best way of doing things (at least, the best way I’ve read so far).

  • Ted

    Absolutely Dunce, in fact GPS and the Internet were practically handed to the private sector for free. I might go a step further and say that Government is capable of making those investments that are too large, too risky, or not practical from a cost/benefit perspective for the private industry to do and thereby provides a benefit. Maybe cancer research and cars that drive themselves will fall into this category also. Maybe we should find ways to unleash this type of government spending versus propping up various rentiers.

  • belegoster

    Cullen, by S= I + (S-I) do you mean to say that investment can generate savings over and above what was initially invested? I concur with the others in that the revelation that is “+(S-I)” is not very clear.

    I thought another derivation was particularly illuminating on the mmr thread:

    I = S + (M-X) + (T-G)

    Both capital inflows (CADs) and govt surpluses should be marshalled towards investment. Such is the proper place for these ‘sins’ of MMR/MMT respectively.

  • Cullen Roche

    1) I’m not saying we can necessarily compete with China or Vietnam or Malaysia. Obviously we can’t. But I don’t understand why that position is used to justify lower taxes or more govt spending. It’s not a resolution to what could become a very big problem over time (and already is in my opinion). MMT doesn’t think it’s a problem though because we can just fill in the blank with deficit spending. That’s not a fix. It’s the definition of papering over the problem. But MMTers don’t think it’s a problem to begin with so….

    2) The pvt sector can save without deficit spending. But again, all roads in MMT lead back to govt spending in order to rationalize the monopolist argument….

    3) I disagree that the state is as powerful as MMT implies (it could be but it’s not in the system we have). The banks wield enormous more power in this system. And that’s the power of a private horizontal level. The power is fragmented (as it is across our entire system – it’s designed that way for a reason). The state does not have a coercive monopoly on money. But MMT builds this myth that the state is a coercive monopolist and they build the story out from there to justify their political preferences. The reason Mitchell wants a nationalized banking system is because he hates the fact that the power is fragmented and handed over to private actors. There’s some sense to his thinking, but the coercive monopolist myth is just a myth. It is not the world in which we live. The banks almost crashed this whole system in 2008. Do we need more evidence of the power they wield?

  • Ted

    This is a great discussion and I’m interested in learning more regarding this focus on investment. I wonder if it helps to draw a distinction between the type of investment where:

    A) Grandma buys a nice, safe dividend-paying utility stock, vs.
    B) the type of venture capital investment where Peter Thiel invests in Paypal, Apple, or Facebook which change how we live.

    I’m guessing the latter has more impact than the former on “quality of life” and that the strength of venture capital (and entrepreneurship!) in this country is the reason why America drives innovation while having a lower savings rate than other countries in the world.

  • Delta Financials

    Kudos leverage – I oscillate between optimism and dire frustration with the MMT crowd. Descriptively, this is certainly a place that gets the basics – but, the prescriptive side is too often fantasy land naivete. One level short of Krugman’s fighting mythical aliens plan to stimulate the economy – but, it’s as if this economic toy created with funny money doesn’t require morality or fairness in its operation. Why should anyone get a free $50 billion to toy around with? In the real world, moral hazard is very real. Cronyism is very real. Income inequality IS a by-product of a system where the govt controls a large share of the resources and hands them out to their favorite bidder. A govt that controls resources is lobbied for those resources. The little guy loses out. Real reform is deeply political in this system, because it fundamentally involves a return to Jeffersonian ideals. You can create a lot of money in a fiat money world, but that neither justifies the existence of fiat money, nor suggests that money will solve our problems. The old fashioned gold standard based ideas of savings leading to investment is virtuous. The modern ideal of money pumping ultimately ignores the fact that we are resource constrained. Funny money would be fine in a world which wasn’t constrained – but, in this world – it has negative consequences. It simply encourages a current account deficit and shipping jobs overseas. So if you want jobs in this country, it’ll have to be the old fashioned away: encourage savings over consumption (higher rates), encourage a smaller deficit. I appreciate the complexity in getting to that goal, but the notion that you can run massive deficits without any consequence is deeply flawed. Productivity will suffer. All that money won’t buy you love. And the poor will get poorer, while the rich get richer. Income inequality has increased in the fiat money world. Always does. While fiat money could be virtuous, it’s too prone to cronyism. Sectors that have been left alone have done a lot better than sectors with govt involvement – across the board. In there, somewhere, is a message.

  • Cullen Roche

    Maybe we can also think of this from the National Income accounting equation?

    C + I + G + (X – M) = C + S + T

    which rearranges to

    (S-I) + (T-G) + (M-X) = 0

    which rearranges to

    I = S + (T-G) + (M-X)

    Better way to explain it you think? Readers please let me know. I want to make this mundane stuff as easy to understand as possible so the feedback is really helpful.

  • Cullen Roche

    Think of buying stocks as a form of savings allocation and not real investment. So yes, I am talking about the latter.

  • belegoster

    I think we understand the derivation from NIA equation, just the interpretation of what the rearrangements mean.

    I = S + (T-G) + (M-X) or

    I = S – (S-I)

    to me is prescriptive, and reflects what the proper function of running trade deficits or budget surpluses should be.

    Bearing the S=I identity in mind,

    S = I + (S-I)

    seems to indicate that a positive return accrues from the initial investment. Start with any I and the goal is to create S that is larger than the initial I (such that a CA surplus is possible).

  • Cullen Roche

    I like that. Thanks for the feedback.

  • Cullen Roche

    You might also like this comment from JKH the other day. It shows how MMTers skew the emphasis to give the impression that the govt is the one wielding the big stick here (rationalizing their coercive monopolist argument and politics) when the truth is that the private sector wields the big stick (a point most MMTers are well aware of, but quick to obscure):

    Try this:

    S = I + (S – I) always

    Take the current account out of the picture for a moment; i.e. assumed it’s balanced.

    Moreover, assume the cumulative current account is perfectly in balance and the “net international investment position” is net zero.

    Now consider the government’s role

    The government provides NFA injections through budget deficits

    But the budget deficit = (S – I), when the current account is balanced

    So S = I + budget deficit (in this case)

    And what that says is that for a given I, the government is leveraging up the private sector’s saving by running a deficit and injecting NFA.

    When you translate that from flows to stocks (cumulative flows), it says the government is leveraging up the existing private sector equity base (savingS required to support outstanding stock of cumulative “I”), by adding more private sector equity created by the government’s NFA injections.

    So there you have the idea that the government is performing a useful leverage function in augmenting the existing private sector equity base – a base that supports a given level of cumulative “I” as an outstanding stock.

    And you just have to consider household net worth to get a rough feel for the proportionate dollars involved here.

    The total is about $ 60 trillion (I tend to round to the nearest $ 10 trillion when making points of concept).

    The government debt (reserves, currency, and bonds, really), net of internally held stuff like social security, is about $ 10 trillion (= NFA of non government with government).

    Because we’ve assumed the cumulative current account is in balance, the household sector’s NFA balance with the government is $ 10 trillion (some of that could be indirect through household financial claims on businesses that hold NFA with government).

    The rest of the household sector’s net worth is $ 50 trillion, and that consists of a combination of directly held physical investment (e.g. real estate) and financial claims on what is in effect the ultimate physical investment held by the business sector.

    So that says that the value of cumulative “I” is $ 50 trillion as per that representation.

    So there you have $ 10 trillion leveraging $ 50 trillion into $ 60 trillion.

    I.e. the government is issuing $ 10 trillion in debt (reserves, currency, and bonds really, but analogous to debt) in order to leverage $ 50 trillion of private sector equity into $ 60 trillion.

    That’s the way I think about it.

    Adding in current account complications is a relatively minor adjustment from there.

    Now, the deficit dynamic I described above is standard MMT stuff, but their explanation tends to obscure this sort of expression directly involving “I”.

    Moreover, as I said earlier, Mosler has a currency model in which he views NFA as the cash market and horizontal money as the futures market, with the horizontal leveraging the vertical. That’s opposite to the way I view it. His version positions NFA as the thing being leveraged, instead of vice versa as mine. I think my version puts the whole thing on a parallel plane with corporate sector equity as the thing that is leveraged in that case and in the usual meaning of leverage.

  • AK

    1) If imports rise while all else remains equal, then an output gap opens by definition. The way I visualise it: the labour and capital that used to produce those goods in your country is now lying idle, because everyone is buying the same good from overseas. MMT concludes that we should do one of two things (i) lower taxes, which places more money in the hands of the private sector, which can then use this money to purchase the labour and capital that is now lying idle, and find new, better uses for it; or (ii)the government can directly purchase the idle labour and capital and put it to use in the way that it sees fit. Whether you choose (i) or (ii) probably depends on your views on how large you would like government to be, and also how efficient you think the government will be with those resources.

    2) I’m not sure I entirely understand your second point – where else will the private sector find risk-free savings assets?

    3) I agree with you that the commercial banks wield enormous power. They wield that power directly as a result of their role as a vital conduit of the state’s monopoly power over money. The Fed and the commercial banking system are integral levers in the monetary system that MMT describes. That is why I ultimately agree with Mitchell: private, unelected actors should not be allowed to exercise direct influence over such a powerful monopoly, especially one that is integral to our day-to-day lives.

  • Cullen Roche

    1) Yes, I understand the MMT thinking here. But as Godley said, larger budget deficits lead to larger CAD and the problem grows increasingly unstable. MMT doesn’t see this as unsustainable or even really as a problem. I do. And I think policy should be geared towards fixing it and not papering it over (though the right kind of papering might actually help).

    2) This whole discussion is about the private sector saving outside of deficit spending. Are you saying the only way we can save is if the govt spends?

    3) I know Mitchell’s point and I don’t think it’s without merit, but we don’t live in the fully vertical world that MMTers often imply. We live in a world where the govt does not have a coercive monopoly on money. The banks wield enormous power over money. Either way, the MMT world is not the one we currently exist in. The horizontal level wields huge control over the world, the money supply and our monetary system. You might not agree with it, but that doesn’t change it. MMT’s foundation is based on a fully vertical level with nationalized banking. That’s their true base case. BUt that’s not our world.

  • BT

    Just to clarify:

    S = total credit growth
    I = credit growth due to private borrowing
    G-T = credit growth due to government borrowing
    X-M = credit growth due to current account surplus

    S-I = “Net saving” = credit growth not due to private borrowing.

  • FDO15

    I’ve been thinking about this a lot. The USA is not really the monopoly supplier of US Dollars. The banking system also issues money. So it’s really a duopoly. The government might be the monopoly supplier of net financial assets, but they’re not the monopoly supplier of dollars.

    Any MMTer want to take a swing at that?

  • AK

    1) I don’t understand why it necessarily must become “unstable”. If your economy is at full production, and on top of that you are receiving a whole bunch of goods from overseas – then by and large that sounds like a great country to live in. Sure your budget deficit has expanded – but this simply represents the fact that a bunch of foreigners wish to own some of your currency too. It doesn’t necessarily represent an “instability” of any sort that I can see.
    I will say this though: if you allow your internal economy to stagnate whilst relying on the (temporary) desire of a foreigner to give you cheap goods in exchange for your currency, then you may find yourself in enormous trouble in the future, once the foreigner decides to use that currency to claim your products! You may find that years of underinvestment mean that your production facilities don’t allow you to create much that other nations want; the foreigner may then lose interest in your currency; you may find that inelastic imports that you rely on (i.e. oil) suddenly become very expensive as your currency collapses; finally, you may find yourself wishing you had encouraged investment years ago – perhaps through a tax cut or a spending increase…

    2) Definitely NOT saying that we cannot save individually without government debt. What I AM saying is that the private sector as a whole cannot net save without government debt; and also, we cannot save “risk-free” without government debt.

    3) I definitely can’t agree that MMT ignores the power of the commercial banking system. A central tenet of MMT is the horizontal creation of deposit-money which occurs during the loan creation process in the commercial banking system, clearly illustrating commercial bank power over the money supply (as well as being an excellent introduction into credit dynamics). Similarly, MMT discusses the role of the interbank market in setting interest rates – if MMTers truly believed in a base case of one nationalised bank, there would be no need to discuss the interbank market.

  • JKH

    Dan Kervick might make some progress if he were just to forget about that equation for a moment.

    The equation reflects the logic of Steve Waldman’s comments as documented at MMR, which Dan saw, one quote from which is included in the post here.

    That wasn’t the only reason for highlighting the equation, but Waldman has affirmed that particular application of it with considerable enthusiasm.

    So if Dan is having difficulty getting the relevance of the equation, then he’s having difficulty with Waldman’s corresponding interpretation.

    So forget the equation, and respond directly to Waldman’s interpretation. There are two full quotes from him provided at MMR. Why is Waldman wrong in your view, Dan? Answering that might be more productive than continuing a recurring fretful objection about an equation. And it may illustrate whether or not the problem here is one of the equation, or of your proximity to MMT. The equation itself is simple and stark, because when understood, it reflects a simple and obvious analytical bias in MMT. And Waldman has documented that bias in words quite beautifully, regardless of whether or not you understand what the equation means in exactly the same context. If you can respond to his observations effectively, you can forget about the equation forever, and I’m sure you’re certainly free to do that, rather than dog Cullen on it. Given Cullen’s last response to you, maybe I should even suggest you take this on as a private project. Forget about the equation, and ask yourself – why is Waldman wrong? How could he be wrong? And when doing so, remember that your task is actually to disprove a strongly held perception. He wouldn’t have documented the same point twice at quite different points in time otherwise.

  • JKH

    important observation, goes deep, IMO

  • AK

    I’ve attempted to do that above in my discussion with Cullen.

    Basically, my opinion is that MMT delineates this “duopoly” very clearly in its discussions on vertical transactions (NFAs created and issued by government sector) and horizontal creation of deposit money via credit issuance.

    It is important to note that the loan/deposit creation process is only possible if the bank receives financial assets as capital in the first place. Those financial assets come from the government.

  • Adam1


    You’re trying to speak to a wider audience then just economist, right?

    Y=C+I+G+(X-M) is probably not the way to reach a wider lay audience without introducing more confusion.

    Here’s my reasoning:
    A) It’s an “economists” equation. It gives no weight to borrowing. It doesn’t even care who is borrowing and why.
    B) Intuitively “I” mean investment in plant and equipment that can be used to generate new future income. But as I pointed out “I” includes things that a layperson probably wouldn’t consider investment.

    The suggestion I put out there was just kind of thrown together, but I think it’s important to find an equation that can be spoken to by a wide audience that also incorporates the important differences of MMT/MMR versus standard economics.

    If we want to grow savings we need to grow PRODUCTIVE private and public investments. C+I+G+(X-M) does not convey that. As a matter of fact it completely disregards public investment and assumes/hides/conveys that building McMansions is productive investment.

  • vimothy

    That thread has been a lot of fun. Epic in every sense of the word.

    Props to all at MMR :-)

  • Dan M.

    Wow. It has clicked!

  • vimothy

    Dan M,

    1) What IS “savings” and “investment.”

    “Saving” (verb) and “investment” are flows that occur over time. Think of them as being the time derivative of an underlying stock. Investment is the rate of change of fixed assets, and saving is the rate of change in net worth / net wealth due to not consuming income.

    2) If they equal each other, what the hell is the purpose of the (S-I) which will obviously equal zero… I see no reason for that?

    They are equal to each other if we consider one sector or aggregate as a closed unit.

    It get’s a little bit more complicated when we introduce different sectors and the outside world.

    If we consider the private sector in isolation, then S = I. But if we add a government sector, then private saving can also finance net government expenditure, and we can have S = I + (S – I), where (S – I) = (G – T). Adding a foreign sector into the mix is a straightforward extension of this.

  • Dunce Cap Aficionado

    I like it arranged for I = ….. because it seems that’s where the viewpoint is settling- “What effects I” or “how does X affect I”.

    I look at it in terms of (S-I) = ….. sometimes beceause I’m constantly looking at ‘I as the backbone of S’ so arranging them on the same side of the equation also fits for me with my ‘circular’ view of S and I.

    I’d like anyone’s thoughts on this- desire for increased real S is a driver of NFAs from S to I. When ‘succesful’ investment (having produced real returns) I reaches maturity it becomes an increased real S. So on, so forth. Not saying this is the only way NFAs end up driven into I.

  • Dan M.

    But isn’t MMT resting (perhaps too much) on the fact that any private sector credit creates an offsetting liability (loan) to the asset (deposit)?

    Just like any other contract or deed COULD act as money in a society, gov’t-supplied currency can be treated the same way by building a contract around it that nets to zero value but allows productive activity to take place.

    Maybe I’m answering my own question here but that’s where I see MMT coming from when they say that only the govt can issue currency.

  • belegoster

    Thanks Cullen. Its very revealing. It all seems to start with S=I, but a small factor (S-I)–coming from govt or trade– provides the growth momentum of S on I.

  • belegoster

    Thanks Cullen. Its very revealing. It all seems to start with S=I, but a small factor (S-I)–coming from govt or trade– provides the growth momentum of S on I.

  • InvestorX

    I would say that there are 2 issues mentioned here by Adam1.

    1) GDP = Income + Increase in Borrowing (e.g. look at Steve Keen)

    2) Y = C + I + G + X-M is a spending view, but it does not care if spending is wasteful or productive

  • Dan M.

    So question here:

    I is a capital flow… it occurs when I (me) loan money to a friend (cutting out the bank for a second). This creates an asset and a liability, but is it assumed (based on the term “investment”) that the reason my friend is borrowing money is to build a long-lived productive asset (such as a small business?)… correct? Otherwise, why would they use the term “investment.”

    This is where I’m slightly confused, because if people take out loans to CONSUME (say, to buy a flat screen TV), isn’t this going to show up as part of “I”?

    Thanks to anyone who can clarify this for me… it just seems odd to label private sector credit as investment and then credit it necessarily with productive activity, when often it’s just consumption.

  • Sergio

    Sorry, I think that not only are you barking up the wrong tree your in the wrong forest. Remember the preable, government is there to provide for the common defence, promote the general welfare and secure the blessings of liberty ( laws to protect the people is what helps to promote and secure). If they would have stuck with that we would have a much better country. The government is like too many cooks in the kitchen, tring to fix problems that they should not be involved in but are because they helped to creat it (promoting economic good). Taxation is the method to help the government perform its duty. On one end it destroys wealth of the individual and then replaces it collectively for society….giving back to the individual.It would be nice if government enforced equal taxation. Creation of government is like creation of unions….out of neccessity. If the unions like the government had stuck to the process of protecting the people instead of becomeing a business to promote (some)of the people we wouldn’t even be having this conversation or the debt which is poor budgeting if not used effectively destroyes wealth. Like too much fat in a persons diet destroys health. It appears to me that too many individuals think that we have to have perpetual defect to promote growth or investment….I don’t see history bearing this out. The Government should not be there to promote economeic good….just to protect it so it can grow in a true free market economy. If the government had done there job along with the Fed and the SEC with the laws that where in place we wouldn’t be talking deficets or savings or investments. I see people tring to justify government intervention in the economy as somehting that is neccessary for savings or investments. I think that is a reserve banking conversation with personal and business debt…. IE savings and investments and economy.

    SAVINGS=INVESTMENT=INCOME=TIME but don’t forget debt ( the destroyer of time,because that debt must be serviced ) and inflation the by product of debt, the great equalizer…now you are no richer than when you first started. All of society has to get paid more because that debt is tacked on to the service or product. True savings invested in growth that produces income gives you the money to buy free time. A true investor is someone who pays someone else to work for them so they can have free time. The investor has debt slaves and is only better off if the return is greater than the inflation being created. As is government debt that must be tided to something productive over a longer period of time (MMT)that ads to GDP so that debt can be paid back with interest….but I assure you it will not be greater than inflation. Because I don’t view government as being productive. Plus I think that inflation should be measured more by the increase in cost of things that are a true neccessities in life that 80% of the population uses. (I) not CPI went back to 1950 on a basket of goods and dicovered that inflation ran at 4% to 8% per year on most products. In 1981 my private high school eduction cost my parents $800. and now it is $8,000. That is 8% per year. Income and increased cost of goods go hand in hand. Just like (most) investments end up at par do to inflation….the cost to service that debt. Remember the return on investment can only be measured when you turn it into cash and pay taxes on it….over a specific period of time….now you will know what your return was over that period. Don’t forget to back out inflation. Money is only worth what it will buy accrding to what you value.

    People are paying government for protection and for the services that make it easier for society to go about there business (taxes). They are investing in government debt not for a return (on) their money. But for a return (of) their money. Investing for free time or a better life is not something that society owes individuals. I’m not going to work today so my nieghbor can stay home. I’m going to work and save and invest so that when I get too old to work I can stay home. The more that the government is trying to help society by being invloved in all aspects of it …. the less freedom and liberty I’m feeling.
    I know we aren’t going any where fast and we don’t need a government bridge to no-where so we can get there. Remember every asset is also a liability. That includes Govt. and debt.

    Just My Opinion.

  • vimothy


    Cullen, by S= I + (S-I) do you mean to say that investment can generate savings over and above what was initially invested? I concur with the others in that the revelation that is “+(S-I)” is not very clear.

    I thought another derivation was particularly illuminating on the mmr thread:

    I = S + (M-X) + (T-G)

    Perhaps I can help (perhaps not), since I brought up the second identity over at MMR and happen to think that the first is useful and illuminating for similar reasons.

    When we write,

    I = S + (T-G) + (M-X)

    We are relating the flow of investment to the sources of finance for that flow.

    When we write,

    S = I + (S – I)

    We relating the flow of saving to the uses of that saving in terms of the assets we’ve acquired with it. We have

    [S] = [I] + [(S - I)]

    Or in words,

    [Saving] can be used to finance [investment] and [some other stuff]


    [Some other stuff] equals [acquisition of net claims against other sectors]

    which equals [net claims against the government] and [net claims against the foreign sector]

    More simply it’s just,

    [Source of finance] equals [assets acquired with it]

    The issue raised by SRW and explained very cogently by Mike in the OP is that sometimes MMTers make it seem as though there can be no saving without government deficits. JKH’s saving flow identity gives you an intuitive picture of why that’s the wrong impression to give–because the uses of saving is first and foremost to finance investment, plus and/or minus some other stuff at the margin, inclusive of net lending to the government.

    Caveat: I’m an economics student and not an accountant or national accountant or whatever–hopefully I’m not misusing any terminology here–and I’m obviously not any of the other people who commented on the thread at MMR, but I think that’s the general gist of the thing.

  • Colin, S.Toe

    Your reference to the CAD is dead on, and in line with comments by AK. This area has seemed a prime place for MMR to make a contribution complementary to MMT.

    When the discussion at the MMR site had raised the value of further breaking down the sectoral balances, I suggested dividing iMports (as in X – M) into ‘M:C’ and ‘M:I’ to distinguish between importing for direct Consumption and importing for Investment in further production.

    The role of behavior/psychology was also raised. In this respect, the reliance on cheap consumer imports (and cheap labor) may have undermined a mental orientation toward productivity, and encouraged the diversion of human and financial resources into the ‘FIRE’ economy within our society. Such impacts are not easily captured within a narrow focus on accounting measures.

  • Pierce Inverarity

    To echo DCA, did you read the link?

  • Dunce Cap Aficionado

    I actually agree hangemhi, the China example (more specifically Apple/Foxconn) is one where we would want the gap to be filled. But what Mitchell implies is that we could export our productivity in its entirety, I don’t think that’s a healthy economic goal.

    I think that the concentration on I works IN TANDEM with this reality. Like I’ve said elsewhere here, its symbiotic. The government could be doing more to affect he ‘environment’ for domestic ‘I’ growth WHILE filling in the gap…

  • InvestorX


    I have to admit that I am surprised that you have really taken a turn (which I think is for the better) and have developed further.

    In the beginning, when I was discussing macro topics here, I had the feeling that you are blindly following the MMT “dogma” (if you allow me to call it this way), and now I see that you have developed your own thinking in a feedback with reality process.

    In the beginning you would always say “MMT just describes the world as it is” and blindly defend it against any criticism. Now you see how addressing some points in MMT feels for the one doing the criticizing. I congratulate you on your pursuit of a more truthful economic model and understanding, without prejudices and biases.

    I think all the points you address are in the right direction.


  • Dunce Cap Aficionado

    You’re saying a lot of things I’ve beent hinking but am not smart enough to piece the english language together to describe.

    “I suggested dividing iMports (as in X – M) into ‘M:C’ and ‘M:I’ to distinguish between importing for direct Consumption and importing for Investment in further production.”

    I like this idea because I think it would be helpful to be able to quanitfy/outline the trade off of NFAs flowing to foreign I and domestic I. There’s an obvious opp. cost benefit to the US private sector to have iPhones made in China. But that doesn’t mean all $$ rushing out through CA are best allocated to you M:I instead of domestic I.

  • Cullen Roche

    1) The second part of your comment is pertinent to my thinking here. A persistent CAD doesn’t have to be a problem. I am merely pointing out that it could develop into a problem. I personally think the USA already has an issue here, but that’s obviously up for debate….

    2) Agreed. I think it’s important to note the discussion in the MMR thread here and understand that deficits facilitate wealth creation. They don’t induce it.

    3) I don’t think MMT ignores the power of the banking system. But I think they shrug it off with “they don’t create net new financial assets” and move back to the vertical level. This might just be my perception, but that’s the tendency I notice. They’ve latched onto my balance sheet recession analysis because it molds with their thinking well. But once we’re outside of the BSR the horizontal level will take the reigns again and MMT will have to change its story a bit….

  • Cullen Roche

    I need to email you on this. I agree with your point. Maybe you can communicate it better than I can though?

  • Cullen Roche


  • Cullen Roche

    I don’t think MMT is saying the pvt sector can’t create money, but they definitely use the state theory to overemphasize the importance of deficit spending. Don’t get me wrong, it’s really important, but the banking system wields this massive stick in our world. They’re incredibly powerful. I think the duopoly point is a potential game changer in the way we explain this appropriately….Without one vertical level the govt is not the monopoly supplier of US Dollars. They’re the monopolist on net new financial assets, but that’s not even necessarily the most important point as JKH’s supber comment highlights….

  • Cullen Roche

    That’s nicely explained Vimothy. Not sure it’s for the layman, but good nonetheless.

  • juan

    So, my hypothetical organization that can create paper money identical to government fiat money (or hack into government computers undetected and create a few millions with the click of a mouse) is not so far fetched after all. I ask Cullen again, what would be wrong with this IF it facilitate wealth building?
    and don’t give me that crap about ‘This’ being a government of Law. It’s not, it’s a government of Crony socialism. Otherwise Corazine/M.F.Global would be in jail along with Madoff.


  • Cullen Roche

    The good news for the future of America is that we can fix the problem in the FIRE economy. Unfortunately, that takes someone with guts in Congress. I think it could very well be the #1 reason why the US economy is suffering from a lack of PRODUCTIVE output. Think of all the waste that’s gone into building financial models, hedge funds and what not.

    It ties into my conversation on time, money and wealth perfectly. In the pursuit to protect money we’ve lost site of what wealth is! If you want to know why the CAD is becoming an issue then look no further than Wall Street and the incessant demand for their services (which is the result of consumer ignorance). It all blends perfectly. I just don’t know if I am explaining it well….

  • Cullen Roche


  • Cullen Roche

    I am excited about the new direction. I think it will resonate with the public and provide an even better understanding. Glad to see people are enjoying the new work and are able to make use of it.

  • Dan M.

    Ok well here’s how I see it… chew on this and let me know where it fits in with how you think.

    The horizontal money piece is extremely important, because this is where real wealth is created. Vertical money is a tool to service/expand the horizontal process, and the horizontal process is a tool to create REAL wealth.

    While vertical money may be the real NFA-creating portion, the horizontal piece, while it directly creates no net-asset, it indirectly leads to real wealth creation (think of a business taking out a loan to expand a factory). Hopefully, this asset will be worth more in a year, two years, five years… than the horizontal expansion that occured.

    Both real assets and financial assets end up on our balance sheets… so even when most growth is happening as a result of horizontal, private-sector debt, as long as the private sector is adding plenty of real wealth, our balance sheets should stay healthy. The vertical process, at this point, simply has to feed the domestic private sector with enough NFA’s to lubricate the system I’ve just described.

    Sound about right?

  • jt26

    Got it thanks. Most lay people (like me) can’t comprehend “savings” from “net savings”. We put (short term savings) money in a bond fund, or MMF, or a CD, … and whether additional credit is created or not is unknown. Assuming most people aren’t stuffing money in a mattress, it seems that “net savings” is really a function of private intermediaries and regulatory issues rather than the behaviour of individual “savers”.

  • Cullen Roche

    Yes Dan. That’s precisely the thinking. What I am now struggling with is the MMT use of the word “monopoly” in its descriptions. Clearly, the US govt has a monopoly on net new financial assets. But it doesn’t have a monopoly on financial assets. This is an enormously important point. Any thoughts on communicating that point more clearly because I think the MMT use of the word “monopolist” is misleading. Thanks for helping out. The feedback is great and will help with future understanding.

  • Colin, S.Toe

    Based on the discussion over at MMR, the TV purchase would be accounted as Consumption (and your loan as a Saving that would be subsumed under ‘Saving net of Investment': S-I; but with your friend’s liability being a negative S, the two netting to zero).

    Accounting can be pretty arbitrary and not capture ambiguities. As an example, I think a commodity purchased and stored presumably for future production would be accounted as I at the time of purchase. However, the Chinese situation of copper apparently being stockpiled and used as collateral for loans outside the regular banking system (and thus functioning more as a ‘Saving net of Investment’) would be an example of such an ambiguity.

    Any correction or further clarification of this would be welcome.

  • jt26

    My comment … “Assuming most people aren’t stuffing money in a mattress” … is wrong. I forgot the detail in your post about *private* borrowing, so buying federal government debt is also a no-no for “net saving”. (For which I’ve been critical about China … if they want to peg at least they should buy private assets as well.) Thanks.

  • juan

    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.


  • InvestorX


    thanks for the trust, but I am not very outspoken either. Plus I am a bit overstressed recently. Anyway it would be best if you figure it out on your own.

  • Dan M.


    Well the “monopoly” on NFA’s refers to their ability to create the liquid lubrication that makes the rest of money work.

    The most natural form of money in years past, besides gold, was always two-sided contracts that “netted to zero,”…. the problem was with these was 1) their inefficiency, and 2) their instability. The important thing that resulted from these contracts wasn’t the net-to-zero asset, but the real productive asset (ie, a factory).

    So now these forms of “contract money” manifest themselves as loans, contracts and equity all denominated in dollars… this IS the meat of the economy, as it is similar to how people operated back in the 1800’s to use financial assets/liabs that net to zero to create REAL wealth that nets to $+,+++.

    I’d say if the gov’t has a monopoly on something, it’s the NFA lubrication that allows the system to run smoothly. If someone has a monopoly on one crucial aspect of a broader activity, it is smart to point that out as a potentially controlling force, but it doesn’t mean they truly have a monopoly on the entire broader activity (creation of money in general, even if offset by liabilities).

    Proper management of the horizontal sector helps decide if debt gets used for great things or for unsustainable things, and that’s what drives our economy, so while the gov’t provides the lubrication for that process, they don’t have control over the properly-allocated capital coming out of the banks, and if you don’t have control over real production, the very driver of money in the first place, do you really have a monopoly on money itself? It wouldn’t seem so.

    I’d liken it to the federal gov’ts freeway system… once you’re off of their system, they no longer hold the reigns on your driving or what you do there(yes, it’s state & local gov’ts now, so it’s probably better to imagine a private highway system exiting off the interstate freeways). Someone could say, “gov’t has a monopoly on auto transportation,” because if roads don’t connect to the interstate they are pretty useless, but that’s ignoring the fact that it’s the private-sector activity off of the interstate that drives the demand for the interstate, and the acceptance of its rules. And in a democracy, the people have a monopoly on deciding how the gov’t is run (kinda). The best way to describe it is probably to call it “symbiotic,” with the gov’t providing the NFA lubrication that allows for growth, stability and efficiency of private sector money, and (more importantly) wealth creation.

  • JKH

    I haven’t thought this area through, but several quick and dirty points:

    – In the case of the Euro zone, the ECB is commonly characterized as being THE currency issuer of the Euro (by MMT’s Marshall Auerback for example)

    – In the case of the Euro zone, Greece is commonly characterized as not being a currency issuer

    – In the case of the US, the United States is commonly characterized as being THE currency issuer of the dollar

    – In the case of the US, it is less common to refer to the Fed as the currency issuer, although it is the central bank of the US just as the ECB is the central bank of the Euro zone

    – In the case of the US, the first view does manifest through the Fed being a creature of Congress; it’s not clear to me how to think of the ECB as a creature in a parallel sense

    – In the case of the US, as a rather plain vanilla example of a fiat currency issuer, THE currency issuer (however identified) is identified as THE MONOPOLY currency issuer, it seems

    – Yet all endogenous bank deposits in the US are convertible into Fed notes, and it is clear than endogenous money can always be used to pay taxes for example


    – It strikes me that the convertibility option is sufficient to suggest that the US/Fed should not be considered a monopoly dollar supplier. The fact is that endogenous money is created under private sector steam, while being convertible to central bank money. And the fact that the private sector banking system is regulated or that the Fed controls interest rates at the short end does not seem to me to be a strong enough reason to suggest that the currency issuance function of the US/Fed is an effective monopoly money creation function.

    That said, I haven’t spent much time on this. And one might be leery in the sense that “a foolish consistency is the hobgoblin of small minds”. Still, I think it helps to be clear on this stuff as much as possible for ongoing discussion etc. I’m quite open on this at the present time.

    My own natural way of thinking about this is less general and more specific – i.e. the Fed is the monopoly issue of reserves and Fed notes, working under the auspices of the Congress. Treasury is the monopoly issuer of Treasury debt. Etc. (Beowulf must have some insight as to how those two stack up by comparison.) In other words, avoid the tendency to lofty generalization in this area and get down and dirty with the accounting and the specific asset categories. So in the case of Europe, I’d say that the ECB, working through the set of NCB’s, is the monopoly issuer of Euro notes (as far as I know) and Euro bank reserves. Interestingly, it’s also the monopoly issuer on its own account of TARGET liabilities, which is quite a unique accounting excursion on its own.

    Bottom line: I’m not entirely clear on all this right now. But given some aspects of the monopoly pricing control issue that MMR is not very comfortable with, it’s worth sorting this one out over time.

  • JKH


    The Kelton (Minsky?) hierarchy of money thing also suggests the monopoly issuer aspect needs more fleshing out.

  • Adam1

    The government is still the monopolist. Banks are just some type of reseller.

    Here is how I would think about it. The local phone company (local LEC) owns the copper lines running from a central office all the way to your home. It can lease those lines to other companies who can even have their own switching equipment and technology, but they still need that last mile of copper owned by the local LEC. The competitor companies can deploy technology to allow them to service multiple phone numbers over each copper line multiplying overall service to the community and to their bottom line. However, the LEC still holds all the cards because it owns that last mile which is a necessity for any reselling competitor to make any money on. As a matter of fact the LEC still controls the pricing within the market just by controlling the cost of that last mile (at least in setting a floor).

    Without reserves, you can’t use any of your otehr financial assets – short of pushing them around the balance sheet of the institution they reside on. Take away the reserves and your other financial assets are worthless. Isn’t that how a bank run works? The first ones in the door drain the institution of cash on hand and reserves and everyone else looses everything?!

  • Colin, S.Toe

    Other than trying to educate myself on the macro picture and make small contributions to discussion like this one, my main focus at present is in the area of ‘community banking’.

    I live in a low-income area that has a sizable population of retired and part-time residents who control significant financial assets, which I suspect are largely in the hands of TBTF institutions that lately have been delivering poor returns, if not outright losses.

    My basic idea is not only to persuade these people to put funds into something like a ‘community credit union’, but to serve as volunteer consultants/mentors to help entrepreneurs develop a business plan, provide ongoing support, and serve on committees, such as for loan application review and status monitoring.

    Other areas could be providing mortgage for modest ‘green built’ residences (eg limited in size to something like 3 times median inomce); and to fund ongoing renewal of a rundown downtown area (Burnsville, less than 1 hour from Asheville, NC with a new four-lane connection under construction, could take Abingdon, VA as a model).

    Federal deposit Insurance would be a plus, but might place limits on such activities. However, partnering with something like a ‘Low Profit Limited Liability Corporation (L-3C, which represents a relatively new IRS designation) might enable such activities and provide a wider range of risk/return options for investors.

    Restoring much of the banking function including mortgages to local accountability – and to people with ‘skin’ in the game, could be an alternative to ‘big government’ oversight.

    After investing much time and effort, with entrenched vested interests and practices constituting active and passive resistance, I am starting to feel like real progress may be possible.

    (I recently met with representatives of the NC State Employees Credit Union, to discuss their problem of what to do with all the deposits that have been flowing in – presumably because anyone with a relative who works for the state is wanting to transfer their funds out of Bank of America – which started life as NCNB, serving the piedmont-Research Triangle area.)

    I also find promise in possibilities for devolving power, including that arising from the ‘currency issuer’ role, from the federal, to state and local levels, as reflected in some of Warren Mosler’s proposals.

  • Dan M.

    Another thing…. the NFA “lubrication” is only contributing to the net worth of the country to the degree that they are needed to keep things humming smoothly… otehrwise it’s like putting too much oil in an engine (and will result in debasement).

    The need for this NFA lubrication, or, more importantly, whether it will result in more productivity and real wealth creation than if it had NOT entered the economy, is related to the future productivity of the economy. Throw dollars at an economy that can’t grow, and you’ll be debasing other peoples’ dollars.

    Since private investment is what drives future production, and future production is what drives the value of the NFA lubrication, the logical conclusion would be that the degree to which private investment is properly allocated to result in future productivity, you have just driven the “usefulness” of the NFA “lubrication.” Or put more simply, private sector credit drives the demand for NFA lubrication… it decides whether NFA’s are a useful stock, or simply debasing other peoples’ savings.

    It’s appearing quite circular to me between private lending, entreprenurial productivity, and gov’t-supplied NFA “lubrication.” So to call one a “monopoly” is trying to find the starting point of a circle… is it not?

  • Cullen Roche

    Yes Dan. That’s what’s bothering me about this whole thing. You’ve explained it extremely well in these comments. The word “monopoly” is bothering me enormously. It’s just not an accurate portrayal of the way things work and it implies that the state controls the system which is not really accurate. Maybe it’s best to drop the monopolist terminology, describe the govt as an autonomous currency issuer and think of the monetary system like a machine rather than different pieces….A car comes to mind with the engine being production, users being the wheels/steering wheel/gas pedal, govt regulations being the brakes (?) and the Fed/Tsy/Congress being the oil? You need all the pieces to run, but you wouldn’t describe any of them as being a monopolist….


  • Dismayed

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

  • Cullen Roche

    I don’t know Adam. That word monopolist is misleading to me. The more I think about it the more I dislike it. It implies a central control that isn’t necessarily there. The monetary system is not a group of separate dealers. It’s a machine. And a machine doesn’t have a monopolist.

  • Cullen Roche


    I think the term monopolist should be dropped all together the more I think about this. “Autonomous currency issuer” is perfectly accurate. But the word monopolist implies centralized control or a market of dealers working together. But the monetary system is not just a marketplace. It’s more akin to a machine and machines don’t have monopolist parts. Calling the govt the monopolist is like saying that oil has a monopoly in the operation of cars. But that’s not true. Cars are complex machines with many pieces that all come together to create an end result.

    I don’t know. Still digesting these thoughts, but as you know, the whole state theory is misleading to me for reasons we’ve hashed out and I think it’s a somewhat misleading description.


  • Cullen Roche

    We’re actually working through some big developments. It’s a temporary detour.

  • JKH

    It’s definitely a slippery slope to wrong head thinking if used in too loose a fashion. So if not dropped, it needs to be used more carefully.

  • Dan M.

    First off, these analogies are wonderful visualizations. You can’t get the layman with Y=OMFG+ROTFLMAO*(LOL/FYI). In fact I’m still wrapping my head around whether taking out a loan to buy a consumer product falls into Investment or not (is any privately-issued credit “investment”?) So my ability to visualize these things is FAR beyond my ability to express it mathmatically.

    The freeway analogy has worked well for me trying to describe gov’t-run fiat money to people.. stating that a larger economy needs more freeway, and any distortion from creating too wide of a freeway is usually undeniably less of a problem than allowing bottlenecks to form all over the place because of too little.

    I think you’re on the right track with helping people view production/investment as the backbone of the economy, private-sector-issed debt as a general tool to achieve a productive economy (that has existed for centuries in the form of contracts & debt), and gov’t issued NFA “lubrication” as a tool to keep the private debt system 1) efficient (all under one medium), 2) stable (stock of NFA’s gives the public enough liquidity), and 3) growing (not relying on a fixed-supply of a yellow metal for a growing real economy).

    MMT somewhat acknowledges this when they say “Banks aren’t reserve constrained, instead they’re constrained by willing, responsible borrowers” but they quickly divert into the monopolist speak you mention, and it leaves the reader confused as to how to visualize the whole thing.

  • Dunce Cap Aficionado


    That’s going on the back of the S = I + (S-I) coffee mugs.

  • beowulf

    The funniest part about that thread was it being about a Marshall Auerback piece and he never showed up to comment! It was like Waiting for Godot. :o)

  • beowulf

    “they simply bring the tech into existence”.

    There are airmen braving the wilds of suburban Colorado Springs day and night so you can get driving directions to your next blind date. Be appreciative man.

    By the way, the Air Force has the worst marketing team in the world. If, say, Intel were providing “the world’s only global utility”, they would not let you forget that fact.

  • BT

    Tsy/Fed has monopoly on reserves/cash

    Banks compete to issue credit

    Credit is 95% of money. Cash/reserves is 5%.

    Covertability of bank credit for cash/reserves is what makes it widely acceptable as means of exchange. Banks are licenced by the government.

    Government borrowing creates both credit (bank deposits) and debt (bonds), just like private borrowing.

    Withdrawing cash reduces deposits and reserves, but leaves the asset side of the bank balance sheet intact. That’s why central bank bond purchases from banks lower the asset side (to restore balance between assets and liabilities) and replenish the reserves.

    Central bank bond purchases from private individuals create credit (deposits) and reserves but does not change the bank’s assets – again increasing the liability side of the bank balance sheet to restore balance with the asset side (again making up for the imbalance caused by deposits withdrawn as cash).

    Thus, central bank bond purchases really do equate to ‘printing cash’ but in an economy where credit/debt growth is healthy enough to lead to rising withdrawals of cash.

  • Cullen Roche

    My personal preference for an analogy is a hybrid car. If we think of the monetary system as a hybrid car then we can describe how all of its parts interact to generate a result. For instance, we can think of the structure of the car as the laws, regulations and infrastructure of the monetary system. The car needs bumpers, air bags, break pads, it needs to be sturdy, it needs durable tires. These things all help to keep the car operating smoothly and safely. We can think of the banking system and government issuance of NFA’s as the power system in the car. The car needs fuel to operate, but it can also run on the alternate power source if the NFA’s aren’t supplied (banks can issue financial assets to help operate the vehicle). We can think of the quality of production as the efficiency of the engine. Ultimately, the engine powers the vehicle and its the engine’s power and efficiency that will generate the trajectory and rate of our progress. And of course, we need competent and talented drivers who have the motivation, drive (no pun intended) and perseverance to be willing to sit behind the wheel and take control of the vehicle. We can use government to make the car operate more efficiently, hit the govt turbo boosters when going uphill (recession and countercyclical spending giving the engine more gas), and make the car more comfortable and fancy looking. But there’s no “monopoly” part to the car.

    Needs development, but I think that can work to describe the system we have….It’s more akin to a machine than a marketplace where monopolists wield their will over other actors….

  • beowulf

    Well, it is monopoly in the sense that the power to coin money is given to Congress, which delegated it to the Fed (and the Mint!). Ater which, the Fed (in true contractor fashion) subbed it out to banks. The Fed always has the authority to impose capital controls. Of course, its a textbook case of regulatory capture, so that’s not very likely.
    Congress won’t act either, as Senator Durbin said, the banks own the place.
    However sooner or later, a President is going to chloroform the Fed and toss it in his trunk, clown-style. When that happens (and it should, the present arrangement is almost surely unconstitutional), the monopoly-ness of it all will become apparent.

  • Dan M.


    I like that… I’d liken the NFA’s to the electric portion, and the bank-credit to the gas engine, the gas engine is really what makes things go 90% of the time, but if the battery gets to low and the engine is shut off, we’ll quickly learn how important having plenty of battery was, even if it’s relatively low in power compared to all the gas-fuel.

    Further, since it’s a hybrid, the electric powertrain isn’t just for starting the engine and running the lights, but at the right times can actually step in to drive the car more than it usually does.

    Good stuff.

  • Cullen Roche

    You’d need nationalized banking to complete the monopoly. I don’t think that’s ever happening here….Unless we become another country…. :-)

  • JohnfrmCleveland

    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.)

  • Cullen Roche

    It’s not a revelation, but a clarification which we feel MMT sometimes obscures.

  • Dan M.

    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.

  • JohnfrmCleveland

    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.

  • JohnfrmCleveland

    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.

  • Cullen Roche

    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….

  • Cullen Roche

    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….

  • AK

    1) If you are pointing out that it COULD be a problem, then I agree and I think MMT agrees (and has agreed for some time). But notice that the problem in my scenario is not the imports – that’s a gain for us. The problem is rather our own lack of production/investment in our capital and labour. Both of those things are much more the result of bad policy and political ignorance, rather than the CAD.

    2) Of course, it only facilitates wealth creation. The mere existence of government debt is never a surefire path to wealth.

    3) It’s understandable that you’ve gained these types of impressions about MMT. MMT has been “at it alone” for so long, that the discussion has, in places, become rather esoteric. In other words – because we all agreed with each other, we stopped trying to figure out the best and clearest way to explain MMT and got rather caught up in the detail. That’s where pragcap has been (and still is) really great.

    On this specific topic (horizontal vs vertical transactions) I think the MMT statement that “they don’t create net new financial assets” is not indicative of MMT downplaying the horizontal. Rather, it reveals a crucial difference between the vertical and the horizontal: the horizontal can only really greatly affect the deposit-money supply in times of credit boom (and credit crunch). During times of “stable credit” the horizontal effect on the money supply is muted, since the issuance of new “deposit-money” via new loans is counteracted by the destruction of deposit-money via the paying down of old loans. The vertical has no such constraints – it can issue new money as it pleases. THAT, in my mind, is why the vertical is the infinitely more powerful actor.

  • Dan Kervick

    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.

  • Dan M.

    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.

  • AK

    Hi Cullen, thanks for the question. It definitely has got the brain cells going!

    I wouldn’t say it’s a duopoly, because in my mind, a duopoly implies two relatively equal actors that have control over a market. It’s tempting to think of the horizontal and the vertical as these two equal actors, but (for reasons that I’ve stated in our discussion above) I don’t think the power is equal. I’ll copy-paste my discussion from above:

    “On this specific topic (horizontal vs vertical transactions) I think the MMT statement that “they don’t create net new financial assets” is not indicative of MMT downplaying the horizontal. Rather, it reveals a crucial difference between the vertical and the horizontal: the horizontal can only really greatly affect the deposit-money supply in times of credit boom (and credit crunch). During times of “stable credit” the horizontal effect on the money supply is muted, since the issuance of new “deposit-money” via new loans is counteracted by the destruction of deposit-money via the paying down of old loans. The vertical has no such constraints – it can issue new money as it pleases. THAT, in my mind, is why the vertical is the infinitely more powerful actor.”

    Since we are on the topic of bank nationalisation – one of the reasons why I agree with Mitchell on bank nationalisation is because it provides a way to avoid the credit boom/crunch dynamics associated with private banking, which arises as a result of private bank competition for asset creation (i.e. loan issuance). A nationalised banking system could avoid this problem (although I am sure there are other solutions, such as a highly-regulated private commercial banking system with deposits backed by the Fed).

  • Dan M.

    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’llHaveADouble

    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.

  • wildebeest

    Wouldn’t this be another layer of bureacracy given that there is already the NSF and other funding bodies that serve this purpose — given them a larger budget if needed. Also, while not immune from criticism bodies like the NSF at least have some processes in place to try and ensure objective outcomes. Having a government department for innovation strikes me as the government picking winners and that would be a disaster IMO.

  • Cullen Roche

    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.

  • JohnfrmCleveland

    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.

  • Adam1

    I had to think about it a bit more. The US government (consolidated Treasury/Fed view) is a monopolist of the US currency. It is a price setter. While other entities can create financial assets they can not do anything to change the governments ability to manipulate the price of reserves, its treasuries or the physical currency and coin.

  • Cullen Roche

    Yeah, so I think it’s best to be very descriptive as JKH notes. The govt is NOT the monopoly supplier of money. The Fed is the monopoly supplier of reserves while the Tsy is monopoly supplier of govt bonds. Banks can and do issue their own form of money though. In this regard, I would say we’re a primarily horizontalist economy with a small verticalist component. I think this is where MMR is really coming down. We’re more horizontalist than verticalist while an ideal MMT environment is purely verticalist.

  • Dan M.


    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.

  • Ben Wolf

    I’m not aware of any product our semi-private banks can produce which have the liquidity of Treasurys, unless I’m missing something. MMTers usually consider them money not because they’re a product of the state, but because they can be used as a medium of exchange almost as efficiently as the dollar itself.

  • Ben Wolf

    The government creates facilitational wealth for the private sector: money, roads, bridges, scientific research, etc. It’s up to the private sector to leverage that facilitating wealth to create what we can arguably refer to as “real” wealth by producing, creating and laboring.

    At least that’s how I see it.

  • Dan M.


    Except indirectly if banks make good loans that will grow the economy, it will create more demand for the NFA “lubrication,” and therefore affect the price, all things being equal.

    So no individual bank has teh ability to set the price, but as a whole, as part of the link in finding productive investment (what drives the demand for the NFA lubrication in the first place), they DO have control over that value.

  • Obsvr-1

    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.

  • Cullen Roche

    I’m not so sure your position on the CAD is a universal one in MMT circles. Mitchell goes out of his way to downplay a CAD here and his concerns are not yours.

    I guess we just disagree on the balance of power between vertical and horizontal. It’s really the center peice of my position with MMR….

    But hey, we agree on a lot more than we probably agree with most other people in this field so let’s chalk it up as a win and fight the real bad guys.

  • Dennis

    I have to agree. The NIH, NSF, etc. that primarily fund University research is an amazingly powerful driver of innovation in this country. CR says would his idea be wonderful and he is right. But we have it already! It’s regulated via peer review, and although criticized year in and year out by individual Congressmen, it is simply one of the most important engines of innovation in the world. I know about this from personnel experience having gotten my Ph.D. and been paid for two Post Doc at MIT and Harvard, then helped start a company with technology I help develop as a student. Now our system is being copied by country after country. And what are we doing, cutting back. How stupid could we be? Oh yes, and let’s refuse resident visas for a huge percentage of American trained PhDs.

  • Cullen Roche

    How large are those programs? The NSF is 7B a year? NIH is much larger at 30B a year. But I am talking about a much larger centralized agency whose only goal is to promote and develop innovation. And we’re not talking 30 or 40 billion a year (2% of GDP!). Let’s make a real investment in this country (not just healthcare related either). Let’s pour some real cash into this program. It’s not like we don’t have it and it’s not like the money is being used any more wisely in other departments. I say we cut the fat elsewhere and make room for something else because what we have right now clearly isn’t working that well….

  • Dennis

    (i.e. two Post Doctoral fellowships). BTW I was one of the first two scientist working a Genentech in 1978 and retired not long after Roche finished buying our $100 billion company entirely with debt dollars.

  • Dennis

    It would be Solyndra over and over again. We need a lot more money for basic research not commercialization and development. I think how the world’s private investors and venture capitalist fund start-ups is OK. I participated in selling a lot of projects and business plans over the years. There is enough out there for that — I think. But basic research on such things as fruit flies and dinosaur DNA can be turn out to be more useful than you can understand. It is way under funded and NIH NSF etc. could use the 2% your talking about easily.

  • Cullen Roche

    Come on. Solyndra was one bad decision in many. Besides, the process through which they go through right now is utterly ridiculous. There was no due diligence there. I’d have the CBO streamline this whole thing. And it would be a public/private partnership with private equity firms running the program with govt oversight and approval. We’d get a bull dog in there to oversee the program. I have more faith in these sorts of programs than most I guess….I think we could do really great things if we unleashed the monetary powers of our govt and leveraged the innovative powers of the pvt sector. But maybe I am naive….But hey, if you had to pick this or a govt job guarantee, which one would you go for? :-)

  • phil

    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!)…?

  • Colin, S.Toe

    Consistent with NSF and NIH funding for advanced training as well as research, would be more direct support for education at the post-secondary level: what I tend to view as investment in social infrastructure.

    We already have the model: Sputnik inspired the National Defense Education Act, providing direct student loans om very favorable terms – viewed as contributing directly to national defense. How did our government become so broke and powerless that, no longer able to provide in this way for the common defense, it now allows students to take on crushing debt loads, while banks profit at their expense?

    The most dramatic examples of the federal government playing a major role that directly fostered innovation were the post-Sputnik though Apollo space program and the development of nuclear technology. However, these cases (with World War II a broader example) involved highly focused objectives, with government playing a dominant role, in a position to expect and enforce performance and results from corporate collaborators/

    A comparable task that might justify such a role would be an intensive program to alleviate energy dependence on fossil fuels. But that would require broad political support for a prominent assertion of federal power.

  • AK

    I agree that we agree on a lot – and I feel that our ‘disagreement’ about who wields more power out of the horizontal and the vertical is really a question of perspective and definition, rather than a difference in theory.

    In any case, I am much less worried than you about which particular word we should apply to describe the situation. Your car analogy is apt – I don’t think engineers really sit there and argue about whether the engine/gearbox/diff/wheels have a monopoly on making the car move. And neither do I.

    Of course, I still believe the most accurate and appropriate term to describe the government’s control on currency is “monopoly” for reasons I’ve already stated – but I’m much more interested in understanding how the government/commercial banking system interacts in pragmatic terms, rather than worrying too much about how we’re going to define our words.

  • I’llHaveADouble

    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.

  • Cullen Roche

    Who’s talking about the state owning anything? No one here.

  • Cullen Roche

    Well, I think what MMT essentially does is say “the engine will run best because of the electric power component so we should maximize that input to achieve this goal”. Plug in the job guarantee and you get to point B in an optimal way. Or so they believe….I just can’t believe MMTers drew a line in the sand based on a policy proposal. But now it all makes sense. They think the engine depends on it to run smoothly….

  • Dennis

    Solyndra was NOT a bad idea. It was a good idea. It just didn’t work economically and therefore has been rejected by everyone. That is what happens. Solyndra’s idea was based on research that turned out to be a bit too expensive for successful commercialization. They tried and spent an enormous amount of public funds to no end. They knew better, but what the heck, “let’s spend like bureaucrats do”, e.g. make sure the funds we asked for last year were spent otherwise next years budget will be less. So everyone said, never again! Look, when you want Uncle Sam to help somebody develop and commercialize, you are asking help for the copycats. If you have a great idea that involves real innovation and a game-changing product, you don’t need Uncle Sam’s help. You will get it from the existing infrastructure. If you want to make an existing product cheaper then improved development procedures may make that product cheaper and even better. With mooola from Uncle Sam, you are enabling the copycats. You are asking the innovator to put up some moola via taxes to support his copycat competitor. NO What you want is to support basic game changing research that has no product tied to it at this time. In the pharma world this is called “a product that solves unmet needs”. If you come up with something like that what you need is “protection” from the copycats for a time. You do not need Uncle Sam enabling copycats with development and commercialization. The NIH, NFS, DOE, etc. have thousand and thousands of projects that should be funded but are not. If we could have Uncle Sam do this, that would be fantastic! CR, this is what you want to have happen and will accomplish what you are talking about. I read AAAS Science and the Economist, and you of course (every day), and I get it. You are able to ask great questions and propose great ideas. They are not always spot on, but that is why I love all the comments this site gets.

  • Dennis

    Why o’ why did Congress decide that the Banks needed in on the student loans business. Uncle Sam could have done this all from the start with brand new fiat currency and with an interest rate that would make sense for all. The money went to support higher education after all! What better the use could our the money be for? It would be a major support for college and university education and now it’s the number two burden on middle American families. What a stupid idea letting banks involved!

  • wildebeest

    this is a good discussion. Something else not mentioned yet but highly relevant, is show you get the talented people to do innovation. By which I mean how do you stop good engineers and scientists from taking wall street jobs to create algorithms so banks can trade against each other in a zero sum game, instead of them taking science and technology jobs. Our doubt that sufficient money would be thrown at these sort of programs to be able to offer wages that compete with parasitic banks.

  • Adam1

    “Yeah, so I think it’s best to be very descriptive as JKH notes. The govt is NOT the monopoly supplier of money.”

    Absolutely! The devil is in the details so you need to speak specifically. “Money” is to general to describe anything operationally useful. It doesn’t even specify which monetary unit of measure you’re describing – Japanese Yen, US Dollars, UK Pounds, etc… Because while the FED is the monopoly supplier of US Dollar reserves, it is not the monopoly supplier of any other nations reserves.

  • Adam1

    Specifically though, the US government (Treasury and FED) can always SET the price of US Treasuries and US Reserves. The financial system as a whole can produce “other” types of financial assets, but it can not produce treasuries or reserves and therefore has no ability to out leverage the combined actions of the FED and the Treasury in setting the prices of US dollar reserves or US Treasury Bonds.

  • Paul Krueger

    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.

  • phil

    Aren’t you ignoring the floating exchange rate part of MMT? A country will only be able to keep running a CAD sustainably if foreigners want to accumulate the country’s currency. Once they stop wanting to do that, the exchange rate begins to change. If foreigners wanted to accumulate less dollars, for example, the external value of the dollar would fall. If this kept happening, at a certain point US exports could begin to grow again as they became more price competitive, meaning that the CAD could sort itself out

  • phil

    Sorry, irrelevant comment. Comment withdrawn.

  • phil

    Strictly speaking, banks don’t issue dollars. They issue credit, which is a promise to deliver dollars.

  • Obsvr-1

    Just another cylinder of the ‘privatize gain, socialize loss’ engine.

  • phil

    “Yet all endogenous bank deposits in the US are convertible into Fed notes, and it is clear than endogenous money can always be used to pay taxes for example”

    Only reserves can be converted into Fed notes. Bank deposits are credit, which is a promise to deliver notes or reserves on request.

    Endogenous (horizontal) money can not be used to pay taxes, only state money can be used to pay taxes. However, banks need only hand over the quantity of reserves needed to settle the difference between what the bank (or the bank’s customers) owes the government and what the government owes to it (or to the bank’s customers).

  • phil

    “Mitchell says there are going to be parts in his textbook on nationalizing the banking system and the job guarantee. What else do you really need to know about MMT? And they rip Mankiw for bringing politics into his class room. Ha.”

    You’re assuming that bank nationalization and the job guarantee are inherently political, which they aren’t necessarily. You’ve done this before: you describe analysis and policy suggestions which you disagree with as ‘political’ whereas your views are presented as being ‘apolitical’. It can be grating at times. Keep up the good work though.

  • JKH

    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.

  • Cullen Roche


    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!

  • JKH

    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.


  • Cullen Roche

    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.

  • Dennis

    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?

  • Dan M.

    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?

  • JKH

    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.

  • Dennis

    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”.

  • jake wood

    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.

  • Cullen Roche

    Yes, the guy who writes pragmatic capitalism is a raging socialist. That makes sense.

  • Paul Krueger

    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.

  • JKH

    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).

  • Scott

    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).

  • Colin, S.Toe

    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.

  • Cullen Roche

    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….

  • JK

    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.

  • Cullen Roche

    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.

  • JK

    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.

  • Cullen Roche

    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?

  • JK

    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?

  • Cullen Roche

    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.

  • JK

    Thanks for the responses

  • Cullen Roche

    No need to thank me. Thanks for participating!