The Financial Crisis From An MMT Point Of View

[Sundial]

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.

 

[uscitizen]

HUH? I thought one major factor causing this was that people were tapped out on credit?

 

[Sundial]

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.

 

[expat_panama]

...collectively Americans can never have more money than what we borrow; we must always owe more than what we have...

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.

 

[editec]

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.

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.

 

[Sundial]

...collectively Americans can never have more money than what we borrow; we must always owe more than what we have...

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.

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.

 

[editec]

...collectively Americans can never have more money than what we borrow; we must always owe more than what we have...

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.

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.

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.

 

[expat_panama]

...not sure where you got the $72 trillion figure. I don't see it in the link...

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')
​

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

-->line 16 (Treasury securities) is $1T (959.4)​

The other $8T must be held by businesses that are owned by households.

 

[Brutus]

When people (collectively) choose to save rather than spend, the result is unemployment.

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!

 

[Toro]

...collectively Americans can never have more money than what we borrow; we must always owe more than what we have...

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.

Correct.

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

 

[Sundial]

When people (collectively) choose to save rather than spend, the result is unemployment.

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!

Savings and investments are two different things. You might decide to invest your savings, but if you do, your savings are reduced by the amount of the investment.

 

[Toro]

When people (collectively) choose to save rather than spend, the result is unemployment.

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!

Savings and investments are two different things. You might decide to invest your savings, but if you do, your savings are reduced by the amount of the investment.

No. Unless you are burying your savings in your back yard, savings = investments.

 

[Sundial]

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!

Savings and investments are two different things. You might decide to invest your savings, but if you do, your savings are reduced by the amount of the investment.

No. Unless you are burying your savings in your back yard, savings = investments.

Savings = money in the bank (or currency). Investments can be real or financial, but they're not the same as setting money aside (savings). When people make investments they move money around. When people save money, they set it aside for later.

There's a common view that banks take deposits and turn them into loans. But that's not accurate. Banks create deposits by making loans. Without lending, there would be no deposits in the first place.

 

[Toro]

Savings and investments are two different things. You might decide to invest your savings, but if you do, your savings are reduced by the amount of the investment.

No. Unless you are burying your savings in your back yard, savings = investments.

Savings = money in the bank (or currency). Investments can be real or financial, but they're not the same as setting money aside (savings). When people make investments they move money around. When people save money, they set it aside for later.

There's a common view that banks take deposits and turn them into loans. But that's not accurate. Banks create deposits by making loans. Without lending, there would be no deposits in the first place.

savings = investments

You put your money in the bank, the bank loans it out.

You buy a mutual fund in your 401k. That money is invested by the mutual fund.

The only time when savings does not equal investing is when you pull your money out of the system and keep it a tin can or under you mattress.

 

[Sundial]

In economics, the definition of investment is quite strict.

Investment means an increase in the capital stock – Gross fixed capital formation.

When we buy shares or put money in the bank. This is not seen as investment, it is seen as a mere transfer of ownership – there is no increase in the productive capacity of the economy. Therefore ‘investing’ money in the bank is properly known as saving.

Definition: Investment, Investor and Savings | Economics Blog

 

[asterism]

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.

I don't think you're educated enough to understand this but here goes:

This is the classic "demand side" argument, that without public debt the entire private sector would collapse. This is a fallacy, as is your assertion that the financial collapse was caused by an "inadequate demand for debt." That's false. Access to debt was shut off. The demand is still there (diminished, but still there), the rules for assessing risks were wrong so while new approaches are being tested it's very hard to get a loan. 3 mortgages on 3 properties are virtually nonexistent these days (home, rental, vacation house).

The problem with your conclusion is that you say that the government needs to go deeper into debt to prop up demand. That by definition makes said demand artificial, and that never lasts. At some point the system runs out of other peoples' money.

We're there. We've run out of other peoples' money.

Contrary to popular belief, the relative the prosperity in the 1950s wasn't a result of some massive spending that started in 1931. The relative prosperity was primarily a function of millions of households striking a good balance between consumption and savings because they or their parents survived the Depression.

And for all those who long for the 1950s era prosperity, I say let's give it a shot and revert back to 1950s era business regulation. Deal?

 

[asterism]

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.

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.

I think you just had an epiphany.

 

[asterism]

Savings and investments are two different things. You might decide to invest your savings, but if you do, your savings are reduced by the amount of the investment.

No. Unless you are burying your savings in your back yard, savings = investments.

Savings = money in the bank (or currency). Investments can be real or financial, but they're not the same as setting money aside (savings). When people make investments they move money around. When people save money, they set it aside for later.

There's a common view that banks take deposits and turn them into loans. But that's not accurate. Banks create deposits by making loans. Without lending, there would be no deposits in the first place.

That's 100% false. Without savings there would be no lending.

 

[asterism]

In economics, the definition of investment is quite strict.

Investment means an increase in the capital stock – Gross fixed capital formation.

When we buy shares or put money in the bank. This is not seen as investment, it is seen as a mere transfer of ownership – there is no increase in the productive capacity of the economy. Therefore ‘investing’ money in the bank is properly known as saving.

Definition: Investment, Investor and Savings | Economics Blog

That's simply not true. I put money in the bank but it's still mine. They lend it out, but the money is still mine. The ownership of the load is on the borrower, the liability is on the bank, and the difference between the rate I get on my money and the rate the borrower pays is the spread.

Checking Accounts almost always have a certain designation assigned to them - DDA. Demand Deposit Account. That means I can "demand" every penny at any time. There is no transfer of ownership, I own that money. It's even got my name on it.

You (and most of this current Administration) are lacking in some basic concepts of Economics. No wonder we're still up shit creek.

 

[Toro]

In economics, the definition of investment is quite strict.

Investment means an increase in the capital stock – Gross fixed capital formation.

When we buy shares or put money in the bank. This is not seen as investment, it is seen as a mere transfer of ownership – there is no increase in the productive capacity of the economy. Therefore ‘investing’ money in the bank is properly known as saving.

Definition: Investment, Investor and Savings | Economics Blog

I guess I shouldn't have wasted all that time getting a degree in economics. Everything I need to know can be pulled off the Internet, even if the web site is wrong. For example, an increase in the capital stock is not gross fixed capital formation. It is net fixed capital formation because the capital stock includes depreciation.

If you put your money in the bank, the bank then lends that money out for both investment - commercial and industrial loans, real estate loans, mortgage loans, etc., - or consumption - credit card loans, installment debt, etc. For example, commercial and industrial loans are used by businesses to fund operations and expand, which creates wealth and is expands the capital stock of the economy.

On share capital, it is true that buying shares is usually a transfer of ownership, but this misses the point. Corporations are net issuers of capital, and that capital is used for investment. When a company wants to raise equity share capital, it uses the market to price the cost of capital, which the company then assesses against the potential return of a project. If the cost of capital is perceived to be less than the return on the project, the company will issue share capital (or debt) which is then used to fund the new project. That new project, if successful, adds to the capital stock of the country.

Hope that helps.