The Financial Crisis From An MMT Point Of View

Discussion in 'Economy' started by Sundial, Aug 31, 2011.

  1. Sundial
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    Sundial Class Warrior

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    When the financial crisis happened, Americans, collectively, decided to save more and spend less.

    The problem with that is that collectively Americans can never have more money than what we borrow; we must always owe more than what we have; and people are able to save only to the extent that other people go into debt.

    That is, except for the government. While private sector balances always net to zero (or less than that, when bank capital is taken into account), the private sector can have a positive net balance when the government spends more than what it has. In fact, that is the only way the private sector can, collectively, either pay down its debt, or increase its savings. (Leaving aside a trade surplus.)

    The financial crisis, in other words, created a situation where there was inadequate demand for debt, coupled with an unmet demand for savings.

    When people (collectively) choose to save rather than spend, the result is unemployment. Unemployment, however, does nothing to resolve the problem The only way to resolve it is for people to decide to save less, or for the demand for additional savings to be met.

    The only way to meet the demand for additional savings is for the government to go deeper into debt.
     
  2. uscitizen
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    uscitizen Senior Member

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    HUH? I thought one major factor causing this was that people were tapped out on credit?
     
  3. Sundial
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    Sundial Class Warrior

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    The reaction to the crisis was to save more and spend less.

    Why the crisis happened is another matter. My view is that it was caused by corruption among investment bankers, mortgage salespeople, and ratings agencies.

    The crisis caused the recession, but they're two different things.
     
  4. expat_panama
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    expat_panama Silver Member

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    You may be talking about some other United States. The US that most of us think of has 300M+ people with $72T in the bank and only owe $14T. Anyone wanting more info on private holdings is welcome to check out FRB: Z.1 Release-- Flow of Funds Accounts of the United States, Release Dates.
     
  5. editec
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    editec Mr. Forgot-it-All

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    I don't know if I agree that that is the ONLY WAY to change the direction of this vicious cycle, SD.

    But I agree that that might be one approach we might have taken IF WE;D DESIGNED it correctly.

    Clearly that was NOT done.

    Now I am basically convinced that even keynesian policies are going to fail.

    Nothing that anybody in government can do is truly going to solve the problem.

    I think we went over some kind of event horizon a couple year back and we pissed away our only chance to correct the course our Republic is on.

    I sincerely hope I am wrong, but nothing I'm seeing on the political front leads me to think I am.

    Our problem is POLITICAL, though.

    It really is a question of the mindset of the American people.

    And as we are NOT of a unified mind in where we want to go, I doubt that we are going anywhere until we decide where we want to go.
     
  6. Sundial
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    Sundial Class Warrior

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    I'm not sure where you got the $72 trillion figure. I don't see it in the link. It could be the value of all assets in the US (including stocks, real estate, etc.). But it's not money in the bank. The value of US commercial bank deposits is $8.3 trillion. Fed, 3rd chart, top row.
     
  7. editec
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    editec Mr. Forgot-it-All

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    One also wonders how much of that theoretical liquidity is actually in the form of GOVERNMENT BONDS?


    Of course as ALL money is now a kind of bond, perhaps it really doesn't matter.
     
  8. expat_panama
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    expat_panama Silver Member

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    It's there with a number paths. You didn't ask so I'm not sure if you want help finding it, but just in case here's one way to get it:

    -->click on the latest release @ FRB: Z.1 Release--Flow of Funds Accounts of the United States--June 9, 2011
    -->click on the complete pdf http://www.federalreserve.gov/releases/Z1/Current/z1.pdf and save
    -->open the pdf & go to p. 111 (p. 104 in the book)
    -->line 1 Assets for 2011 q1 (first quarter) is $72T (71932.4 in 'Billions of dollars')
    -->line 16 (Treasury securities) is $1T (959.4)​
    The other $8T must be held by businesses that are owned by households.
     
  9. Brutus
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    Brutus Senior Member

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    why on earth would that be true???????????? Savings= Investment at least in Econ 101. Investment causes an econmy to grow and unemployment to decline. Sorry!
     
  10. Toro
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    Toro Diamond Member

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    Correct.

    Debt isn't the only security in the nation's balance sheet.
     

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