Re: Warren's Seminar (and ric's plea)

[bill mitchell <ECWFM@xxxxxxxxxxxxxxxxxxx>]

I have left more snippets of the thread than usual. i think that this is
an important part of the seminar (reflected by randy's own somewhat cautious
retraction - or attenuation - don't pin me down on the word - about closed
economy analysis after my email last night).

so re-read this. then go to warren's reply. and then my reaction.

>>
>> AND NOW FOR THE SEMINAR
>>
>> Warren said the following:
>>
>> >The national accounting double entry bookkeeping system is always in
>> >balance. Entries on one side of the ledger must be accounted for with
>> >offsetting entries on the other. Investment, for example, is accounted
>> >for as savings in national income accounting, so, by definition, total
>> >investment will always equal total savings. Government deficit spending
>> >is classified as government dissaving, and the offsetting accounting
>> >entry is an increase in net private sector nominal savings. Thus,
>> >whenever the government engages in deficit spending, aggregate private
>> >sector H(nfa) is increased, with H(nfa) including offshore holdings of
>> >dollar denominated assets. Furthermore, the level of government deficit
>> >spending determines private sector H(nfa). Should the private sector
>> >desire to increase its H(nfa), this desire can be satisfied only by an
>> >increase in government deficit spending.
>>
>> in terms of sectoral flows this is not entirely accurate.
>>
>> Total Inv does not have to equal total savings.
>>
>> if G minus T < 0 (deficit) this does not have to be an increase in private
>> sector nominal savings (unless you include in the private sector all entities
>> other than the sovereign govt. which would be stupid).
>>
>> For example, a deficit could be wholly financed by the sale of securities to a
>> foreign government with no change in private sector H(nfa).
>

WARREN'S REPLY

>Bill,
>
>Thanks for picking this up.  My term 'private sector' was incomplete.  At
>other times I have used 'non-government' but that too could be construed
>as leaving out foreign governments.  I need a term that includes all but
>the government that 'issues' the currency.  For this purpose, a foresgn govt
>is in the 'private sector.' Any Ideas for a one or two
>word phrase?  Meanwhile, the paper will be corrected.
>

well it did leave out foreign govts. but it is not an unimportant distinction
to make.

the sectors involved are

(1) sovereign govt who has a monopoly on money and distributes tax liabilities
to the
(2) private sector which comprises households (who save) and firms (who
invest).
(3) foreign sector - who are not subject to local tax liabilities and which
comprises private entities and foreign governments.

so we get a sectoral accounting relationship that has to add up as:

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

but we can complicate this a bit

see that

NY = C(p) + I(p) + C(g) + I(g) + X - M + F

p = private sector
g = local public sector
F = income on net foreign assets (to get away from just considering the trade
account).

So GDP is a sum of private consumption and investment, government (local public
sector) consumption and investment, net exports and net earnings on net
overseas assets.

each sector saves as:

S(p) = NY - T - C(p)
S(g) = T - C(g) - I(g)
S(foreign) = M - CX - F

in other words

I(p) = S(p) + S(g) + S(f)
S(f) = [I(p)-S(p)] - S(g)

so private investment has to be sourced in an accounting sense by savings in
some sector
the CAD (S(f)) is the sum of the two deficits (private) and public (-S(g)).

that is the actual relationships that warren has been inaccurate about.

but the point gets more complicated. warren states that the reason why the
private sector doesn't care about the -S(g) is b/c it provides a positive yield
on excess reserves held by the private sector. we don't see bond issues as
financing objects but yield guarantee objects.

yet if the they are bought exclusively by foreign governments, for example, who
have no need to acquire government money (under warren's reasoning - b/c they
are not subject to the sovereign govt's tax liabilities) then there is a clear
break b/tw the relation b/tw private H(nfa) and the -S(g).

i raised this with Warren when he had lunch at my home recently (nice time was
had by all btw), and i raised it earlier in the seminar in a broader sense than
this. i haven't been convinced yet.

so i have gone into detail to advance the theory.

so warren i dont think "I need a term that includes all but
>the government that 'issues' the currency.  For this purpose, a foresgn govt
>is in the 'private sector.'"

is capturing my concerns. there is a difference btw the implied behaviour and
constraints of the sectors you want to amalgamate. every country certainly has
a T account, but when they interact you get the sort of issues i raise here.

still musing.

kind regards
bill

--

         ####    ##       William F. Mitchell
       #######   ####     Head of Economics Department
     #################    University of Newcastle
   ####################   New South Wales, Australia
   ###################*   E-mail: ecwfm@xxxxxxxxxxxxxxxxxxx
   ###################    Phone: +61 49 215065
    #####      ## ###            +61 49 215027
                          Fax:   +61 49 216919
                  ## 	  http://econ-www.newcastle.edu.au/~bill/billyhp.html