The ticking time bomb of debt... Still ticking 80 years later - Page 2 - Politics Forum.org | PoFo

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Everything from personal credit card debt to government borrowing debt.

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#15119021
SueDeNîmes wrote:What does "next period" mean and how does I increase without depleting S unless either G or (X-M) change positively?


Err yeah, but it can't increase the money supply without either net govt spending or a trade surplus. If the population increases and the money supply doesn't increase through either G or X-M, households and firms must either cut spending or dis-save, i.e. either spend savings or go into debt.


First of all, those are all flow variables, not stock variables. It's also worth recalling the definition of GDP (Y):
"the monetary value of all finished goods and services made within a country during a specific period."

If G increases, the effect depends on where Y stands relative to its potential. If there is an output gap, Y will simply increase with G. What is also possible is that inventory investment will decrease (goods that are not consumed are counted as inventory investment). If there is no gap, the price level will rise and increase Y, but not in real terms (other variables will be smaller relative go G than before, commonly called crowding out). Growth of the capital stock, population or productivity increases potential Y.
#15119616
Rugoz wrote:First of all, those are all flow variables, not stock variables. It's also worth recalling the definition of GDP (Y):
"the monetary value of all finished goods and services made within a country during a specific period."

But it doesn't necessarily increase the money supply, which is a stock variable and not commensurable.

If G increases, the effect depends on where Y stands relative to its potential. If there is an output gap, Y will simply increase with G. What is also possible is that inventory investment will decrease (goods that are not consumed are counted as inventory investment). If there is no gap, the price level will rise and increase Y, but not in real terms (other variables will be smaller relative go G than before, commonly called crowding out). Growth of the capital stock, population or productivity increases potential Y.

I don't disagree with any of that but, if G=T, it doesn't address the issue AFAICT, i.e. scenario where the population increases but the money supply doesn't via either net govt spending or increased imports.
#15119879
SueDeNîmes wrote:But it doesn't necessarily increase the money supply, which is a stock variable and not commensurable.

I don't disagree with any of that but, if G=T, it doesn't address the issue AFAICT, i.e. scenario where the population increases but the money supply doesn't via either net govt spending or increased imports.


The money supply can affect the variables, but the equation doesn't really tell you anything about how that happens.

A constant money supply doesn't mean Y cannot grow in real terms. What it potentially affects is the price level respectively its change. In a deflationary environment it's harder to react to negative shocks to Y, that's why it's not desirable (unless you buy into the real business-cycle theory). Besides, it's central banks that increase the money supply. It can enter the economy through a (nominal) increase in I, G or C.
#15120372
SueDeNîmes wrote:But it doesn't necessarily increase the money supply, which is a stock variable and not commensurable.

I don't disagree with any of that but, if G=T, it doesn't address the issue AFAICT, i.e. scenario where the population increases but the money supply doesn't via either net govt spending or increased imports.


Rugoz wrote:The money supply can affect the variables, but the equation doesn't really tell you anything about how that happens.

But the conditions G=T and constant (X-M) do tell you something about the money supply; namely that it doesn't increase by those means.

A constant money supply doesn't mean Y cannot grow in real terms. What it potentially affects is the price level respectively its change. In a deflationary environment it's harder to react to negative shocks to Y, that's why it's not desirable (unless you buy into the real business-cycle theory).

But Y doesn't increase the money supply under the specified conditions. The issue was the effect of that with population growth on wages, not Y. Are you claiming that deflation would maintain real wages?

Besides, it's central banks that increase the money supply. It can enter the economy through a (nominal) increase in I, G or C.

But only through G do households and firms receive it without having to borrow it at interest from commercial banks.
#15120999
quetzalcoatl wrote:
A little macro food for thought:

National Accounting relationship between aggregate spending and income:

Y = C + I + G + (X – M), where Y is GDP (income), C is consumption spending, I is investment spending, G is government spending, X is exports and M is imports (so X – M = net exports).

GDP (Y) is also subject to another set of identities, as follows:
Y = C + S + T, where S is total saving and T is total taxation (other variables as previously defined).

If you rearrange the factors, you can separate out these accounting identities into a sectoral balances relationship between these three sectors: private sector (S – I), government budget sector (G – T), and external sector AKA net exports (X – M):

(S – I) = (G – T) + (X – M), or alternately:

OK, I can easily see this. You simply moved I to the left and T to the right.
And you cancelled out C.
quetzalcoatl wrote:Net Private Spending = Net Govt Spending + Net Exports

This I don't understand.
When you cancelled out C, you cancelled out most family income because C is spent and not saved.

Therefore, everything below is in question until you explain how S-I = Net Private spending.

Or more likely to me (the non expert), your claim that Y= C+S+T is likely false or at least not relevant. Relevant to changes in family income and which IMHO family income = C+S. Or at least, C+part of S.
quetzalcoatl wrote:If you examine this sectoral relationship in detail, you can see a few interesting tidbits:

* If you increase net exports, you can increase net private spending without changing net govt spending (this is the post war Asian miracle, in macro terms).
* If net imports remain steady and net government spending remains constant, then net private spending will remain constant. That sounds okay at first glance, but it has a big problem: it doesn't allow for family income to remain constant as population grows. Net private spending must increase in proportion to population growth, or else families will suffer reduced incomes.
* Either net govt spending or exports must increase as population increases, or else per capita incomes will fall.
* If net exports are steady, net government spending must increase over time to match population growth. Notice that net government spending is defined as G - T (gross govt spending minus taxes).
* Net government spending can only grow if the deficit grows. That is to say government spending must exceed taxes on a consistent basis, which is exactly the same as saying there must be a deficit.
* This is reflected in the historical record, where the relatively small number of budget surpluses are followed by sharp recessions as private net income falls.

NOTE: accounting identities are not causal factors, they simply reflect the underlying structural relationships in monetary economies.

I actually like all those conclusions.
____________________ ______________________________ _____________

Rugoz wrote:
Not sure what to elaborate.

Investment (I) increases the capital stock, hereby increasing next period output (Y) and with it C,T,G,I,S. Part of G can also be seen as investment (e.g. infrastructure, education).


IMHO, if I was large enough to start with then, corp. part of Private Income will increase, but the family part of Private Income will usually increase much less.
Therefore, your claim that output (Y) and with it C,T,G,I,S will all increase together fails because the income of the corps. must be transferred to the workers and their families for C to be maintained. [BTW -- this may have been so before 1978, but after 1980 wages have been flat, while investment has continued to increase productivity and therefore corp. incomes.]
Either that, or you are saying that the economy will be fine if corporate incomes keep going up, while family incomes keep going down.
IMHO, this will not work out well in the long term.
IMHO, that is what has happened and now we see a million people in the streets protesting.
IMHO, their economically poor situation is a big part of why you see a million in the street protesting.

Rugoz wrote:

Galbraith died in 2006, he's excused.
#15121391
SueDeNîmes wrote:But the conditions G=T and constant (X-M) do tell you something about the money supply; namely that it doesn't increase by those means.


I suppose.

SueDeNîmes wrote:But Y doesn't increase the money supply under the specified conditions. The issue was the effect of that with population growth on wages, not Y. Are you claiming that deflation would maintain real wages?


Sure, in theory. Imagine an economy where nominal prices and wages decrease by 10% every year. That's 10% deflation and doesn't affect the real economy in any way, including real wages.

Of course in practice there's wage and price rigidity, hence such a scenario is rather unlikely.

SueDeNîmes wrote:But only through G do households and firms receive it without having to borrow it at interest from commercial banks.


And commercial banks have to borrow it from the central bank, because they need reserves. Naturally the reserve requirements are smaller, but if they were larger, central bank would adjust interest rates downwards to have the same effect on lending (not now because they're at zero).

In any case, it's true that households and firms have to borrow from commercial banks, but that's the case regardless of whether the money enters through a government deficit or bank lending. I think the question is: What interest would banks have to pay if they had to attract deposits instead of getting the money "for free" (i.e. paying zero interest on reserves)? I think in the current situation it might still be zero.

Could governments run a larger deficit if the central bank handed over the money directly to the government? Not sure actually. Thing is, as long as the FED expands its balance sheet at the same pace as the government's deficit, the government can borrow at no cost, because the FED transfers its interest income to the treasury. Debt monetization is already a reality.
#15121397
SueDeNîmes wrote:But Y doesn't increase the money supply under the specified conditions. The issue was the effect of that with population growth on wages, not Y. Are you claiming that deflation would maintain real wages?

Rugoz wrote:Sure, in theory. Imagine an economy where nominal prices and wages decrease by 10% every year. That's 10% deflation and doesn't affect the real economy in any way, including real wages.

Of course in practice there's wage and price rigidity,

along with disincentive to invest, incentive to defer consumption etc in a vicious circle.

rugoz wrote:hence such a scenario is rather unlikely.

so, barring the "rather unlikely" scenario of continuous orderly deflation, Queztalcoatl was right.

SueDeNîmes wrote:But only through G do households and firms receive it without having to borrow it at interest from commercial banks.

rugoz wrote:And commercial banks have to borrow it from the central bank, because they need reserves.

Only a small enough fraction to settle net interbank transactions on an average Tuesday. The rest - i.e. nearly all - is created from nothing by commercial banks as "double entries" against borrowers' incomes and assets.

rugoz wrote:Naturally the reserve requirements are smaller, but if they were larger, central bank would adjust interest rates downwards to have the same effect on lending (not now because they're at zero).

In any case, it's true that households and firms have to borrow from commercial banks, but that's the case regardless of whether the money enters through a government deficit or bank lending.

But the quantity they have to borrow at interest from commercial banks will, in aggregate, be inversely proportional to net govt spending. Otherwise the money supply will shrink per capita as the population grows.

rugoz wrote:I think the question is: What interest would banks have to pay if they had to attract deposits instead of getting the money "for free" (i.e. paying zero interest on reserves)? I think in the current situation it might still be zero.

Even if so, firms and households must repay the principal, unlike (G) which the recipients own free and clear.

rugoz wrote:Could governments run a larger deficit if the central bank handed over the money directly to the government? Not sure actually. Thing is, as long as the FED expands its balance sheet at the same pace as the government's deficit, the government can borrow at no cost, because the FED transfers its interest income to the treasury. Debt monetization is already a reality.

True. That way, the supposed "ticking time bomb" continues to tick, obscuring the reality that govt deficits stabilise the economy. That way, any gains in the real economy are funneled through the banks along with asset price inflation. All very convenient for certain interests.
#15121560
quetzalcoatl wrote:
(S – I) = (G – T) + (X – M), or alternately:

I, Steve, wrote:
OK, I can easily see this. You simply moved I to the left and T to the right.
And you cancelled out C.

quetzalcoatl wrote:
... or alternately:
Net Private Spending = Net Govt Spending + Net Exports

OK, now I see what confused me.

The terms in the 1st equation are not what he said they are.

They are not "Spending", they are deficits or surpluses.

"S – I" is the Private Sector's surplus or deficit of income.
"G – T" is the Gov. Sector's deficit or surplus.
"X – M" is actually the net exports as he said.

Therefore, like I said, this equation tells us *nothing* about the level of "family income" as population increases.
.
#15121854
Above, I wrote:
[q]"S – I" is the Private Sector's surplus or deficit of income.[/q]

If "S – I" is really the Private Sector's surplus or deficit of income, the why is it S – I.

Is it because most economic theories assume that all loans come from private savings?
But, this is not true, as has been proven by an experiment in 2014 with a German bank making a 200,000 euro loan.
I understand the S part. It seems to me, that the I part is sort of how corps. "save".
So, it seems like S+I would be better.

OTOH, investments are still someone's income, when all is said and done. So, why are they grouped with savings as part of the Private Sector's surplus or deficit?
.
#15121962
SueDeNîmes wrote:along with disincentive to invest, incentive to defer consumption etc in a vicious circle.


Not if you abolish physical cash.

SueDeNîmes wrote:so, barring the "rather unlikely" scenario of continuous orderly deflation, Queztalcoatl was right.


No, new money can also enter through an increase of I,C.

SueDeNîmes wrote:Only a small enough fraction to settle net interbank transactions on an average Tuesday. The rest - i.e. nearly all - is created from nothing by commercial banks as "double entries" against borrowers' incomes and assets.


Sure, but I don't see how the size of the fraction matters, as long as banks cannot do without. The central bank is motivated (primarily) by price stability. Increasing the fraction would increase the cost of lending, at which point the central bank would decrease it by other means to achieve the same goal.

SueDeNîmes wrote:But the quantity they have to borrow at interest from commercial banks will, in aggregate, be inversely proportional to net govt spending. Otherwise the money supply will shrink per capita as the population grows.


I don't think "inversely proportional" is the right term here, but sounds about right.

SueDeNîmes wrote:Even if so, firms and households must repay the principal, unlike (G) which the recipients own free and clear.


The central bank doesn't hand over the money to G, that's true, however it increases its assets and the return on them goes to G for as long as it holds them. I imagine one can show theoretically that the two are equivalent under certain assumptions.

The reason it's done that way is because central bank can independently sell assets when price stability demands it, they don't have to rely on the government to increase taxes.

SueDeNîmes wrote:True. That way, the supposed "ticking time bomb" continues to tick, obscuring the reality that govt deficits stabilise the economy. That way, any gains in the real economy are funneled through the banks along with asset price inflation. All very convenient for certain interests.


I would argue QE is indifferent towards how the money is being spent. Governments shouldn't engage in austerity when central banks are literally throwing money at them. You could argue central banks are not aggressive enough with buying bonds (which is what QE mostly amounts to). I don't think that necessarily applies to the FED though.
#15122020
SueDeNîmes wrote:
But the quantity they have to borrow at interest from commercial banks will, in aggregate, be inversely proportional to net govt spending. Otherwise the money supply will shrink per capita as the population grows.


Sue, I think that the mathematical function you are looking for is --- the change in private borrowing = -1 times (the change in Gov. spending).
.
#15122356
SueDeNîmes wrote:along with disincentive to invest, incentive to defer consumption etc in a vicious circle.

Rugoz wrote:Not if you abolish physical cash.

I don't see what that to do with it.

SueDeNîmes wrote:so, barring the "rather unlikely" scenario of continuous orderly deflation, Queztalcoatl was right.

No, new money can also enter through an increase of I,C.

Not unless households and firms borrow it, and then some, from commercial banks, i.e. dissave.

SueDeNîmes wrote:Only a small enough fraction to settle net interbank transactions on an average Tuesday. The rest - i.e. nearly all - is created from nothing by commercial banks as "double entries" against borrowers' incomes and assets.

Rugoz wrote:Sure, but I don't see how the size of the fraction matters, as long as banks cannot do without. The central bank is motivated (primarily) by price stability. Increasing the fraction would increase the cost of lending, at which point the central bank would decrease it by other means to achieve the same goal.

You said "and commercial banks have to borrow it from the central bank, because they need reserves". Commercial banks create nearly all of it without having to borrow from the central bank. Households and firms OTOH have to borrow all of it - and then some -from commercial banks.

What you originally said in response to quetzalcoatl was

"That makes no sense. Simple example, S=I, G=T, totally allows for all of them to grow together."

You are, by now, positing a highly unlikely scenario of continuous orderly deflation and/or escalating private debt with no reduction in real wages, and where S=I wouldn't hold because both (I) and (C) would deplete (S) . While perhaps theoretically possible, it isn't "a simple example" and in no way contradicts the sense of what quetzacoatl said.

But the quantity they have to borrow at interest from commercial banks will, in aggregate, be inversely proportional to net govt spending. Otherwise the money supply will shrink per capita as the population grows.
I don't think "inversely proportional" is the right term here, but sounds about right.
Even if so, firms and households must repay the principal, unlike (G) which the recipients own free and clear.
The central bank doesn't hand over the money to G, that's true, however it increases its assets and the return on them goes to G for as long as it holds them. I imagine one can show theoretically that the two are equivalent under certain assumptions.

The reason it's done that way is because central bank can independently sell assets when price stability demands it, they don't have to rely on the government to increase taxes.

G is govt spending, not govt. The recipients are households and firms which are payees of govt spending, e.g. teachers, defence contractors, social security recipients etc and the recipients of their spending.

SueDeNîmes wrote:True. That way, the supposed "ticking time bomb" continues to tick, obscuring the reality that govt deficits stabilise the economy. That way, any gains in the real economy are funneled through the banks along with asset price inflation. All very convenient for certain interests.
Rugoz wrote:I would argue QE is indifferent towards how the money is being spent. Governments shouldn't engage in austerity when central banks are literally throwing money at them. You could argue central banks are not aggressive enough with buying bonds (which is what QE mostly amounts to). I don't think that necessarily applies to the FED though.

I would argue what I just said without disagreeing with any of this.
#15123033
SueDeNîmes wrote:I don't see what that to do with it.


Because the disincentive to invest comes from the fact that all goods and services are getting cheaper by 10% every year while money keeps its value. However, if you can have an interest rate of -10% on money holdings, that disincentive will disappear. You can have a negative interest rate on digital money, but not on physical, unless the government manages to track it from owner to owner.

SueDeNîmes wrote:Not unless households and firms borrow it, and then some, from commercial banks, i.e. dissave.


But the commercial banks won't have to dissave, they expand their balance sheet / lendings, as long as the reserves allow it. Money enters through the central bank (through increased reserves) and commercial banks (through increased lending), instead of G (or in addition to G).

If I build a factory with a credit provided to me by a bank, S and I increase by that amount.

SueDeNîmes wrote:"That makes no sense. Simple example, S=I, G=T, totally allows for all of them to grow together."

You are, by now, positing a highly unlikely scenario of continuous orderly deflation and/or escalating private debt with no reduction in real wages, and where S=I wouldn't hold because both (I) and (C) would deplete (S) . While perhaps theoretically possible, it isn't "a simple example" and in no way contradicts the sense of what quetzacoatl said.


The continuous orderly deflation thing was just a side story because I wanted to address a statement of yours. It's obviously not a necessity if the money supply can increase by some means.

SueDeNîmes wrote:G is govt spending, not govt. The recipients are households and firms which are payees of govt spending, e.g. teachers, defence contractors, social security recipients etc and the recipients of their spending.


I don't know what that means.
#15123078
Rugoz wrote:Because the disincentive to invest comes from the fact that all goods and services are getting cheaper by 10% every year while money keeps its value. However, if you can have an interest rate of -10% on money holdings, that disincentive will disappear. You can have a negative interest rate on digital money, but not on physical, unless the government manages to track it from owner to owner.


So, on top of continuous orderly disinflation and escalating private debt, you're now throwing in negative interest rates?

This is just silly talk.


But the commercial banks won't have to dissave, they expand their balance sheet / lendings, as long as the reserves allow it. Money enters through the central bank (through increased reserves) and commercial banks (through increased lending), instead of G (or in addition to G).

If I build a factory with a credit provided to me by a bank, S and I increase by that amount.

No, (S) decreases by that amount. If you're a firm or a household, borrowing from a bank does not increase your savings, it decreases them.

The continuous orderly deflation thing was just a side story because I wanted to address a statement of yours. It's obviously not a necessity if the money supply can increase by some means.

It obviously is a necessity because the money supply can't increase by any means you've kinda-half-suggested under the specified conditions

SueDeNîmes wrote: G is govt spending, not govt. The recipients are households and firms which are payees of govt spending, e.g. teachers, defence contractors, social security recipients etc and the recipients of their spending.

I don't know what that means.

I don't know how it could be clearer.
#15123225
Rancid wrote:Can one of you loan my like $100?

I'll pay you back, I swear!

Just think, @Rancid - if one of these suckers fine upstanding people does lend you $100, you'll have increased your savings by that amount. Pretty soon, you'll be able to retire! :excited:
#15123367
SueDeNîmes wrote:This is just silly talk.


Not so silly. Negative interest rates are a reality throughout Europe. In August 2019, 10Y Swiss bonds traded at a yield of -1.1%. I know someone who put lots of cash in a bank vault to avoid negative rates (at the recommendation of the bank).

SueDeNîmes wrote:No, (S) decreases by that amount. If you're a firm or a household, borrowing from a bank does not increase your savings, it decreases them.


Again, S is a flow variable. If you buy investment goods (the factory) with your bank credit, then, assuming there's spare capacity in the economy, I will increase by that amount, Y as well, and S along with it. You increased income across the board, hence there's no need to "dissave" (which would really mean decpreciating capital faster than replacing it).

In the next period, wealth (factory) as well as debt (credit) will have increased (they're two sides of the same coin).
#15126271
@ Rugoz

You're assuming continuous orderly deflation with growth while no increase in (G-T). Negative interest rates is a last ditch attempt to stave off deflationary contraction by monetary policy, i.e. without increased (G-T).

Silly talk.

Saving is indeed a flow variable. Savings, OTOH is a non-commensurable stock variable, like money supply. Increased saving - a flow variable - means decreased spending (C).

"In the next period", there will be unsold inventory - as abundant empirical evidence shows. Even allowing for some exceptional case where negative interest rates might stave off debt deflation, you've already answered my question several times over. What Quetzacoatl said does make sense and your supposedly "simple" counterexample is anything but.
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