tag:blogger.com,1999:blog-17232051.post2661421347027710835..comments2024-03-28T03:16:14.104-04:00Comments on Noahpinion: Thinking out loud: Do government deficits equal private surpluses?Noah Smithhttp://www.blogger.com/profile/09093917601641588575noreply@blogger.comBlogger87125tag:blogger.com,1999:blog-17232051.post-24295346195951624812013-08-16T13:25:55.146-04:002013-08-16T13:25:55.146-04:00I infer that by "stock of I" you mean &q...I infer that by "stock of I" you mean "K" and by "stock of S" you perhaps mean net assets (A-L)?<br /><br />It's bad practice to refer to two different things by the same name. When economists refer to S and I, they refer to flows. When economists refer to K and net assets, they refer to stocks.<br /><br />Of course you'll get mixed up in your accounting if you call the capital stock "I." It's very easy to keep straight if you bother to use the names for things.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-59861796104726766342013-08-16T13:02:55.808-04:002013-08-16T13:02:55.808-04:00I am not sure I follow you. Where do you mean pri...I am not sure I follow you. Where do you mean private and where you mean economy-wide?<br /><br />Let us split government expenditures into G (government consumption) and Ig (government investment) For clarity, we will call private investment Ip<br /><br />Sp = Y-T-C and Sg = T-G, but government borrowing is (G+Ig)-T = Ig-Sg. Thus,<br /><br />Sp-Ip = (Y-C-Ip)-T = (C+I+G-C-Ip)-T = (Ig+G)-T = Ig-Sg = "government borrowing" <br /><br />Hence, your (2). But rearranging terms, we get<br /><br />(Sp+Sg)=(Ip+Ig)<br /><br />That is, saving is exactly equal to investment. So if (2) is true, then (1) must be false.<br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-70229465851044951582013-08-14T09:45:51.475-04:002013-08-14T09:45:51.475-04:00In a closed economy, net assets at the national le...In a closed economy, net assets at the national level are zero by definition. Net assets for sectors *within* that economy are not zero by definition, however. In particular, net asset acquisition by the private sector equals government borrowing.vimothyhttps://www.blogger.com/profile/03640237743360160587noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-51656105250090050072013-08-13T12:13:18.252-04:002013-08-13T12:13:18.252-04:00It may have already been said, but it seems to me ...It may have already been said, but it seems to me that the model you outlined makes the real value of the salted venison stockpile equal to zero. If I understand the model correctly, the hunters can always hunt more fresh venison than they can eat. Additionally, the hunters appear to prefer fresh vension. If the hunters can always and anywhere, hunt more deer than they can eat, there is no reason to stockpile the salted venison. It will never be eaten, because the hunters will always just get more fresh venison. If true, this means that private saving does equal zero.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-76338879111966574782013-08-13T04:21:55.965-04:002013-08-13T04:21:55.965-04:00Noah,
there is a difference between the real econ...Noah,<br /> there is a difference between the real economy and the financial economy. The accounting is talking about FINANCIAL assets (i.e. the debts of others). Real assets are another category - which may or may not be used as collateral for financial assets.reasonhttps://www.blogger.com/profile/10958786975015285323noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-62172982907810686442013-08-12T19:32:05.185-04:002013-08-12T19:32:05.185-04:00The government is utterly incapable of creating a ...The government is utterly incapable of creating a wedge between saving and investment in a closed economy. Utterly and completely.<br /><br />Any financial asset must as a matter of accounting be a financial liability for someone else. So in a closed economy, net financial assets are zero. That leaves saving in the form of non-financial assets. That is, investment.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-56053978180305310602013-08-12T16:51:53.284-04:002013-08-12T16:51:53.284-04:00Some other views here (Roche & Carney in the c...Some other views here (Roche & Carney in the comments):<br /><br />http://pragcap.com/yes-government-deficits-equal-private-surpluses/comment-page-1#comment-151152Tom Brownhttps://www.blogger.com/profile/17654184190478330946noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-27435305597882134262013-08-12T10:08:46.056-04:002013-08-12T10:08:46.056-04:00The meat-preserving fixed capital is investment. ...The meat-preserving fixed capital is investment. But the preserved meat itself is investment as well.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-51369243431203334182013-08-12T06:40:03.112-04:002013-08-12T06:40:03.112-04:00I hear a lot of people say this: "Government ...<i>I hear a lot of people say this: "Government deficits equal private-sector surpluses," or "Government deficits equal private savings." For example, Jan Hatzius says this.</i><br /><br />It's not true. This is (or should be) obvious. Moreover, the two quotes are not even equivalent. The first relates to _surplus_ saving, suggesting that private saving necessarily exceeds private investment by the value of the government's deficit, which is wrong as a universal proposition. The second equates private saving with government deficits, which is simply and straightforwardly wrong.<br /><br />What _is_ true is the following:<br /><br />1, In a closed economy, the government can make the difference between nominal saving and nominal investment arbitrarily large or small;<br /><br />2, In a closed economy, the difference between the real value of private saving net of private investment is the real value of government borrowing.vimothyhttps://www.blogger.com/profile/03640237743360160587noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-10584376500129183652013-08-11T22:49:15.088-04:002013-08-11T22:49:15.088-04:00"What about a share in general electric? who&..."What about a share in general electric? who's liability is it?"<br /><br />It is General Electric's liability because General Electric has to pay any dividends or returns of capital that may occur in the future. General Electric also has debt liabilties, and many real and financial assets, the present value of which is often uncertain due to the inability to predict the future revenue streams associated with them. <br />Unanimousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-12233040950791983872013-08-11T22:28:49.098-04:002013-08-11T22:28:49.098-04:00I agree, the investment is the means to preserve a...I agree, the investment is the means to preserve and store the meat. The meat that has been preserved is the savings.Anonymoushttps://www.blogger.com/profile/02681526348633581059noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-80681126655097559292013-08-11T20:04:15.728-04:002013-08-11T20:04:15.728-04:00I don't get why people forget about the change...I don't get why people forget about the change in money supply in this equation. It clearly must be true, and very important, but left out of descriptions of "accounting identities".<br /><br />The another problem here is that nobody seems to want to give much attention to dimensional analysis. (However, wikipedia seems ahead of the curve here, http://en.wikipedia.org/wiki/Dimension_of_a_physical_quantity#Finance.2C_economics.2C_and_accounting)<br /><br />This is why many people get confused between what's often called "stocks and flows" and then get themselves in huge tangles trying to argue for dimensionally wrong equations. There are other problems such as quoting debt/gdp as a percentage (which is wrong) and having additional terms in these accounting equations which don't have the same dimensions as all the other terms.Austinhttps://www.blogger.com/profile/01464734296901197429noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-40088898105754714212013-08-11T19:01:08.438-04:002013-08-11T19:01:08.438-04:00Tel, changes in inventories should and do count to...Tel, changes in inventories should and do count toward investment. An increase in inventories *obviously* enables future consumption.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-6975813065386860792013-08-11T18:51:37.870-04:002013-08-11T18:51:37.870-04:00Benjamin,
Not consuming a newly-produced consumpt...Benjamin,<br /><br />Not consuming a newly-produced consumption good which does not fully depreciate in the current period by definition enables future consumption. Hence, we do count inventory increases as adding to investment.<br /><br />When the inventory is later consumed, it counts against investment but adds to consumption, leaving the later-period output unchanged.<br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-31459687017643610692013-08-11T13:04:07.129-04:002013-08-11T13:04:07.129-04:00I don't know why but discussions like this rem...I don't know why but discussions like this remind me of the Hebrew Bible discussion of rivers running full the the sea but the sea never fills up.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-89608714590581869142013-08-11T09:10:01.943-04:002013-08-11T09:10:01.943-04:00Well, real accounting needs three "reports&qu...Well, real accounting needs three "reports" to be complete. Cash Flows, Balance Sheet, Income Statement. You can theoretically find the third if two are defined. <br /><br />GDP or Y is a flow variable. However, there is a huge impact from the stock of S or I out there in the world. Not only that, when wading into the weeds of Noahs' questions, it gets easy to get confused between stock and flow S and I. <br /><br />It's not easy to keep it straight, as Ramanan Iver and Gunnar Mydrals point out. <br /><br />When you hear the words "balance sheet recession" It's all about the constraints associated with the stock and not flow. Monetary Policy more easily addresses flow problems, but there are gigantic problems associated with the stock of S and I. Specifically, valuation problems. There are trillions of $$ of savings out there which are infrequently valued, but still vary with changes in interest rates, and can also be loosely arbitraged through creation of new savings/investment. <br /><br />Anonymoushttps://www.blogger.com/profile/05819776376553445235noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-64813292489012996972013-08-11T00:17:08.302-04:002013-08-11T00:17:08.302-04:00Bleh, I was being sloppy.
DECREASE in Money Suppl...Bleh, I was being sloppy.<br /><br />DECREASE in Money Supply == Government saving minus government investmentNathanaelnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-91328209752670039542013-08-11T00:14:47.667-04:002013-08-11T00:14:47.667-04:00"So from the issuers side a share may be reco..."So from the issuers side a share may be recognised as a liability?"<br /><br />Correct. The issuer owes future profits to the shareholders.Nathanaelnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-50114762493946531202013-08-11T00:13:28.948-04:002013-08-11T00:13:28.948-04:00There is no way to meaningfully measure savings by...There is no way to meaningfully measure savings by banks and other financial intermediaries, and apart from incidentals (such as the branch buildings) they don't do investment, which means that analyzing them requires some extra work.Nathanaelnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-3797676306573300102013-08-11T00:12:01.473-04:002013-08-11T00:12:01.473-04:00The true accounting identity is a lot more subtle ...The true accounting identity is a lot more subtle than this.<br /><br />Private saving minus private investment == TOTAL CHANGE IN MONEY SUPPLY.<br /><br />Not all money is government-produced, which is why it isn't quite true to say this:<br /><br />Increase in Money Supply == Government saving minus government investment.<br /><br />It's pretty close to true, but the problem is (as usual) banks. We faced a massive reduction in the bank-manufactured money supply in 2008.<br /><br />(I'm being sloppy here. This only works over a short time period. Over longer time periods, you get into tricky stuff like velocity of money.)Nathanaelnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-52008825372871636072013-08-10T22:15:59.815-04:002013-08-10T22:15:59.815-04:00Tel,
I know but a sovereign government has a trick...Tel,<br />I know but a sovereign government has a trick how to make its liabilities widely accepted. Invented by ancient kings, works every time as long as the state's legal and law enforcement structures exist. It is called taxes. Taxes do not pay for government spending (the gove cannot tax us a platinum coin or even dollars, before it spends them because we don't have them otherwise).<br /><br />http://neweconomicperspectives.org/2011/07/mmp-blog-7-what-backs-up-currency-and.html<br />http://neweconomicperspectives.org/2011/07/mmp-blog-8-taxes-drive-money.htmlPeterPhttps://www.blogger.com/profile/02032621777697914182noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-56427894745254499872013-08-10T21:25:07.493-04:002013-08-10T21:25:07.493-04:00And then all you need to do is find some who will ...And then all you need to do is find some who will accept that platinum coin as payment.<br /><br />You can make anything add up on the books, but that's irrelevant if people just ignore your books and get on with their lives.Telhttp://lnx-bsp.net/noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-72572477943880564382013-08-10T21:20:49.088-04:002013-08-10T21:20:49.088-04:00There is no S=I identity.
Salted meat hanging in ...There is no S=I identity.<br /><br />Salted meat hanging in the shed is saving (you can eat it later) but not investment (it does not represent infrastructure, it does not make other work easier).<br /><br />Gold coins stacked in a box are a saving, but not investment.Telhttp://lnx-bsp.net/noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-55772873120120829252013-08-10T20:30:04.992-04:002013-08-10T20:30:04.992-04:00So from the issuers side a share may be recognised...So from the issuers side a share may be recognised as a liability?lxdr1f7http://cmamonetary.orgnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-56949068792974263822013-08-10T19:01:07.536-04:002013-08-10T19:01:07.536-04:00Greg - I agree with you about deficits. The accou...Greg - I agree with you about deficits. The accounting identity is the foundation of a conservative argument that deficit financed stimulus cannot work because it must necessarily divert resources from the private sector through borrowing from the public sector.<br /><br />The accounting identity must be true at each point in time. What I mean by dynamic effects is that deficit spending can change income and private sector surpluses over time. It seems to me that borrowing one dollar from the private sector does become one dollar less that the private sector spends on something (an alternate investment?) and if you want that dollar shifted from the private to the public sector to have a positive effect then you are going to need to look to second order effects. Absalonhttps://www.blogger.com/profile/09131268683451462949noreply@blogger.com