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

[Warren Mosler <mosler@xxxxxxxx>]

Bill,

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

Yes, I fully agree.

>
> 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.

Of course, not all of (2) incur tax liabilities.  (cont. below)



>
> 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

Right, and I would even say 'accounted for' rather than 'sourced in an accounting sense'
to avoid even a remote unintended reference to causation.


 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.

Yes, exactly.  I tend to look at the 'big $ T account' and not ignore
geographical boundaries, forgetting that most are trained to assume such
boundaries unless otherwise specified.
>
> 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.

I don't know if you had a typo, but let me restate and say that the US govt
must offset a reserve excess, generally by offering to sell secs, to avoid
fed funds dropping below target.  (I like call this imperative 'interest
rate support' as opposed to 'funding.').   A reserve excess that results
from deficit spending will persist regardless of the foreign sector, with
a technical exception.  Foreign govts that have accounts at the Fed can
drain reserves from the commercial banking system by the transfer of $ from
an account at a commercial bank to their account at the Fed.  To the extent
that this type of activity combines with all other operating factors to produce
a reserve excess or shortage, the Fed will intervene in the money markets to
offset net operating factors and maintain reserve balance.  Since usually
foreign govs that increase their $ holdings at the Fed desire T bills, the
Fed intervention is usually seen as something like
'the Fed buying bills for the account of a customer.'  This intervention tends
to immediately add back the $ to the commercial banking system (T account) that
were sent to the Fed in the first place, and the customer of the Fed is left
with secs at the Fed.

So again, for operating purposes, it is no big deal who does what with non-
US govetnment H(nfa).  It is when the view that govt secs are for funding
expenditures is taken that the holder of the debt has added significance.
If the govt needed to sell secs IN ORDER to spend, it would be dependent on
the market to carry on fiscal policy.  This is true for the US States,
municipalities, Europe after EMU, and what I call 'external' debt in general.
However, with 'internal' debt, where the govt is the issuer of the currency,
borrowing is not for funding, but for interest rate support, despite all
appearances to the contrary.  I think this understanding is necessary to
get the electorate beyond the notion of 'balancing the budget' as it currently
understands the concept.




>
> 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).

Let me give it a go here.  H(nfa) can be accumulated by those without tax liabilities
'if they want to.'  'Desired H(nfa)' doesn't care about motive.  If the Bank of Japan
decides to engage in what I call 'govt. off balance sheet deficit spending' and
sells yen and buys dollars, it is increasing its $ H(nfa) and and increasing actual
yen H(nfa) of the private sector, which for this example includes foreign govts.
The motive of the BOJ may have been only to increase actual private sector H(nfa),
or the motive might have been to increase its $ reserves.  Or both.  If the Disney
corp decides to sell its 'Disney Dollars (coupons)' that transaction increases
its $H(nfa) and increases the 'non-Disney sector's actual 'Disney Dollar' H(nfa)
while decreasing the non-Disney sector's $ H(nfa).



>
> 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.

I hope this helps,

Warren

>
> 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

--
Warren B. Mosler
Director of Economic Analysis
III Finance

See:

"Soft Currency Economics"
=========================
And related documents:

http://www.gate.net/~mosler/softecon.htm