Re: fiscal deficit - Mosler addendum

["Per Gunnar Berglund" <pgberglund@xxxxxxxxxxx>]

In response to Warren Mosler:

Per had written:
> > Let's for the sake of the argument call the 'spending only' concept MA,
and
> > the 'spending and lending' concept MB. The change by transaction in the
> > amount of money will be given by
> >
> > \delta MA = Govt Spending - Taxation

Warren replied:
> I call this the change in net nominal wealth.

Per says:
Okay, although in ordinary economic language it is usually called 'net
government debt' in nominal terms (add 'dollar-denominated' if you want to
restrict it to that part).

The term 'net nominal wealth' means something totally different in ordinary
economic language. For example, the net nominal wealth of the government
sector consists of its nonfinancial assets valued at current prices minus
the net government debt, similarly valued. The net nominal wealth of a
closed economy as a whole consists of its nonfinancial assets valued at
current prices.

Per had written:
> > \delta MB = (Govt Spending + Govt Lending) - (Taxation + Govt Borrowing)

Warren replied:
> Your delta MB is the change in 'cash plus reserves.'  That 'aggregate'
> doesn't really tell me a lot given a floating exchange rate.
> Adding 'govt. securities' to it gets us back to net
> nominal wealth, which I find useful.  On a practical level, the mix of the
3 is
> 'fluid'
> as the CB readily accommodates the private sector's desired mix as the CB
> supports the interest rate it has targeted.
>
> But hey, if you want to carve out 'cash plus reserves' in a floating
exchange
> rate
> discussion, fine.

Per says:
What I want to do, is to understand whether you are working on the basis of
MA or MB, which makes a considerable difference. Now you're saying it's MA,
although of course you will not accept any other term than your own for it.

Per wrote before:
> > Cumulating (integrating) these over time, and adjusting for any
valuation
> > changes in the outstanding stock of instruments, we get the stock of MA
and
> > MB respectively.
> >
> > MA corresponds to what is normally called 'government debt', so if this
is
> > the concept you have in mind, I'd urge you to call it 'government debt'
> > instead of 'net nominal $$' or something like that.

Warren replied:
> As above.  I think I have made my aggregates clear from the beginning;
> Net nominal wealth is the sum of the three components, as taught in Macro
> 30+ years ago.  I suspect modern day 'monetarists' don't focus on that one
> anymore.

Per says:
I would note that the usual terminology would call it dollar-denominated net
government debt. The economic significance of this aggregate remains unclear
though. The macro literature rarely makes a distinction between the
dollar-denominated part and the part denominated in foreign currencies.

Warren wrote:
> It I wish to discuss 'cash' or 'reserves' I simply use those words.  I see
no
> point in
> adding an additional word that at best could lead to confusion.  That
being
> said,
> if I was using the aggregate 'cash plus reserves' I might then use the
term HPM
> to
> describe it.  But I have rarely (though not never) used that aggregate in
any
> analysis.

Per says:
Well the point I was making, to repeat, is that if you include in the
'injection' mechanism both spending and lending (and, symmetrically, in the
'drainage' mechanism, both taxation and borrowing) then you are in fact
dealing with cash.

Now that you made it clear that you are not talking about cash (or MB), then
you cannot also argue that the government 'spends and lends' this thing into
existence. You will have to confine yourself to the 'spending' part and
exclude the 'lending'. Okay?

Per wrote before:
> > Well this is the point. If 'net nominal wealth' is the concept, then you
are
> > working with MA.

Warren replied:
> Yes, as above, recognizing that MA as above is incomplete.  It doesn't
allow for
>
> the fact that the CB allows the private sector to select the mix of the
stuff it
> (ultimately)
> receives from the government- cash, reserves, and/or tsy secs.

Per says:
Which is adjusted for by invoking the 'dollar-denominated' adjective, as I
said. Consolidated government accounts including the central bank would
yield this.

On this note, incidentally but importantly, how would you treat state and
local government? Is your 'government' only central government including the
central bank, or does it correspond to what is usually called 'general
government', which includes all levels of government? This is an important
point since the 'macro 30+ years ago' you are referring to does in fact work
on the basis of the consolidated 'general government' concept. If you don't,
then how do state and local figure in?

Per wrote before:
> Another question, which was debated extensively in the economic literature
> > some decades ago, is whether it is right from an accounting point of
view to
> > regard government debt as 'net wealth' for society as a whole. The usual
> > accounting convention is to add government debt to private wealth, and
> > subtract it from government wealth, so that in the aggregate, it adds
> > nothing. It sounds like you're making the point that the subtraction
part
> > should not be made. Fine with me - in fact I am in the same business
myself.

Warren replied:
> With a floating exchange rate, I count net nominal wealth (cash, reserves,
govt
> secs)
> it only as nominal wealth.  Not 'real' wealth.

Per says:
The term you are groping for, I think, is not 'nominal wealth' but
'financial wealth'. The 'net nominal wealth' you are talking about is
usually called the 'net financial assets' of the private sector (and the
rest-of-the-world sector in an open system), in nominal terms.

Per wrote before:
> > What you are arguing, I sense, is that that
> > 'currency' is somehow 'real stuff'

Warren wrote:
> No.  I'm surprised you think I have argued that.  I am careful to use the
> word nominal when I mean nominal, and real when I mean real.

Per says:
The trouble is that you're not using 'nominal' and 'real' in the same way as
economists and national accountants do.

'Nominal' usually refers to valuation at current prices, irrespective of
whether the assets to be valued are financial or nonfinancial. 'Real' on the
other hand, usually refers to a nominal magnitude deflated by an appropriate
price index. If the price index is an 'own-price deflator' such as the GDP
deflator for the flow of GDP, then the resulting 'real' magnitude is
referred to as a 'volume'. (See System of National Accounts 1993, chapter 16
for more details on this.) Unfortunately usage is not always strict on this
point. For instance, the BEA NIPA use 'real GDP' for what should be called
'GDP volume'. Another example is that people often refer to nonfinancial
assets are 'real assets', which is in line with your usage. This causes
confusion in that one will end up talking about the 'nominal value of real
assets' and if one abbreviates that to 'nominal assets' the ground is paved
for misunderstandings.

The reason I mention this is that it might help in setting up a working
terminology that connects to the literature and established practice.

As to the other point I made, and which you now tell me I have
misunderstood, I recall your talking about currency in terms of an
intangible commodity. Surely there is something 'real' about a commodity? If
the stock of currency or 'net nominal wealth' as you put it (or MA) is net
wealth to society as a whole, then one will need to explain why those
financial assets do not cancel out in the aggregate. For a fundamental
principle of financial assets is that for every creditor dollar there a
debtor dollar, so that any financial relations are 'net zero' and thus
cancel out in terms of value and wealth for a closed system taken as a
whole.

Per wrote before:
> > Saving and hoarding are not the same thing. If you work with MA you will
be
> > dealing with saving; if you work with MB you will be dealing with
hoarding.
> > A theory explaining hoarding does not explain saving, and vice versa. So
it
> > all depends on your conceptual framework.

Warren replied:
> Isn't that fixed exchange rate stuff???  This theme is recurring in this
> discussion-
> I think you are using analysis useful to fixed exchange rates when the
topic
> is floating exchange rates?

Per says:
Pegged and clean floating exchange rates are useful abstractions (neither of
which are frequently observed in the real world) but there is no difference
in 'nature' between the two. So I don't see the reason for making this sharp
distinction.

Anyway, the point I was making has nothing to do with the exchange rate
regime. Now that you made it clear that you are dealing with the MA concept,
then it is also becomes clear that you are dealing with 'saving' not
'hoarding'.

Two points with respect to this. Firstly, established theories of saving,
however, do not pertain to the net accumulation of financial assets, but to
the net accumulation of all assets, financial as well as nonfinancial. This
is a general problem from the Keynesian point of view, since Keynesians love
to talk about the financial deficit while failing to provide a proper theory
for the subdivision of saving into its financial and nonfinancial
components. The 'net zero' principle, of course, holds only for the
financial part.

Secondly, if you further subdivide the financial asset categories into
dollar-denominated and other, you will need to provide yet another
explanation of why people choose to save financially in dollar-denominated
rather than in other financial assets.

I believe clarifying both of these aspects would be a highly valuable
contributions to macroeconomic theory - but not an easy task.

Per wrote before:
> > We agree that tax liabilities (not 'taxation', which is too imprecise
since
> > it does not distinguish between accruals and disbursements) come first.
But
> > in the second step, there should be 'spending and lending', not just
> > 'spending'?

Warren replied:
> Sure!  I recall I was just adjusting your statement.

Per wrote before:
> > And 'tax collection' should read 'tax collection and government
> > borrowing'?

Warren replied:
> Right!  From inception Govt. can collect taxes or borrow only after it
spends or
> lends.

Per says:
But now we're back to the MB concept. As I said, you cannot work on the
basis of both concepts at the same time. If your concept is MA, which you
argued above, then 'lending' and 'borrowing' should be excluded. Only
'spending' and 'taxation' can bring about a change in MA (your 'net nominal
wealth').

Best,
Per

_____________________________________________
Per Gunnar Berglund
CEPA    80 Fifth Avenue, 5th floor    New York, NY 10011
Tel: (212)229-5923    Fax: (212)229-5903