Re: two currencies and Korean war

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

Hi Ted,

I just spotted your other post, and decided to add a couple of brief
comments on parts of it.

Ted wrote:
> Keynes, of course, specifically identifies a particular kind of mistaken
> thinking about money (such as the "circuitist" idea of cash balances as
> "idle savings") with irrational obsessional thinking.

Per says:
Firstly, expression that one is inspired by Circuitist ideas does not amount
to a blanket endorsement of everything that everybody working on Circuitist
ideas has said. I say this obvious thing in the hope that you will not
succumb to some sort of silly 'guilt by association' argumentation.

That said, my way of looking at the transactions circuit does not involve
the idea of 'cash balances as idle savings'. The point is moot. There may be
other Circuitist scholars who are of a different opinion, but I'll let them
answer for the own arguments. I can't be expected to defend an argument I
never made nor endorsed.

Keynes wrote:
> "I emphasise these obvious matters to clear our minds of the idea that the
> quantity of hoards depends in any way on what people are doing with their
> savings, or that there is any connection between idle balances and the
> conception (meaningless on my definitions) of idle savings.  But I have
> only a limited hope of success.  There is a deep-seated obsession
> associating idle balances, not with the action of the banks in fixing the
> supply of cash or with the attitude of the public towards the comparative
> attractions of cash and other assets, but with some aspect of current
> savings."  (XIV, p. 214)

...and so comes Ted:
> So how do you deal with these "obvious matters"?

Per says:
The simple answer is that I agree with every word of the quote. I simply
don't see what you're after?

Ted wrote:
> You claim that government borrowing from business and households creates
> "money" and that government taxing destroys it.  The amount of such money
in
> the economy, "MA", is equal to the public debt.

Per says:
Wait a minute! I did not 'claim' any of this. What you're doing here, is you
take out an excerpt (your favourite pastime it seems - I'm honoured to
appear with Keynes in that great clipbook!) from a discussion I had with
Mosler, in which I suggested a couple of different ways of defining 'money'.
The purpose of that discussion was to clarify what came across to me as a
possible conflation of concepts in Mosler's analysis. I did not at all
express my own point of view, and that is something a perceptive person like
you ought to have noticed.

Ted wrote:
> Assume three components of aggregate demand: consumption C, intended
> investment (I(i)) and government spending (G).  Assume the government
> finances its spending entirely by borrowing from households and business
and
> that aggregate demand equals aggregate supply.  Business and households
will
> add to their accumulated savings government bonds, treasury bills etc
equal
> to the amount of the government's spending.  This acquisition will be
> entirely financed by current saving i.e. by Y - C (assumed equal to I(i) +
> G).  If aggregate demand is greater than aggregate supply at the current
> level of income, intended investment will be greater than realized
> investment and outcome and income will increase until Y - C is again equal
> to I(i) + G. The increase in realized investment will be entirely financed
> by the increase in current saving.

Per says:
Obviously yes. So what?

Ted wrote:
> You substitute for this account the idea that the bonds, etc. through
which
> the borrowing to finance G is done are "money" and that this "money" has
> some link to aggregate demand other than as the means through which G is
> financed out of Y - C.  You then take excessive creation of this "money"
> rather than aggregate demand (C + I(i) + G) in excess of full employment
> aggregate supply as a source of inflation.

Per says:
This is getting weird. All of a sudden this is not your argument, but your
putting words into my mouth. The discussion you refer to is one in which I
tried to interpret or 'translate' Mosler's ideas into ordinary economic
language. Since Mosler apparently believes that 'currency' (he doesn't use
the term 'money') is injected into the economy by means of government
spending, and withdrawn by means of taxation, it follows that the quantity
of this 'currency' aggregate must be virtually identical to what ordinary
economists call 'government debt'. So what you are talking about here is not
my ideas but my attempts at understanding another person's ideas.

Having said that, I don't see anything very peculiar about the idea that an
'excessive' government debt may manifest itself in inflationary pressures.
Indeed that is bound to happen if there is a positive link between the size
of the government debt on the one and aggregate demand on the other. Such a
link is widely believed to exist. Assuming its nonexistence amounts to
saying that there is 'Ricardian Equivalence' in the system so that
government debt does not constitute wealth to the private sector.

>From an analytical point of view, excess demand and an excessive government
debt may be two manifestations of the same thing, at any rate as a partial
'ceteris paribus' type relationship. Again I fail to see your point?

Ted wrote:
> You make "the quantity of hoards," i.e. of money, depend on what people
are
> doing with their saving. The quantity increases when these savings are
used
> to finance government deficit spending.

Per says:
Again you're putting words in my mouth. I did not say this. If I were to
define 'money', I would probably follow William Hummel's lines and include
cash and sight deposits but no longer maturities. The quantity of 'money' in
that sense (MB, as I called it in the discussion with Mosler) has nothing to
do with the 'what people are doing with their saving'. If you cared to
actually read what I said there, you will find that I made this very point.
I said that 'hoarding' is a different thing than 'saving', and that MB is
related to the former, and MA to the latter.

Ted again:
> By the way, when you say that the "core point" arising from circuitist
> theory

...now quoting Per:
> "is to recognise that businesses and households are 'functionally
opposite'
> in the economic scheme, in that the former are always (net) debtor while
the
> latter sector taken as a whole must be a net creditor providing businesses
> with their financial means. We should make a distinction between the
State's
> financial relations with businesses on the one hand, and its financial
> relations with households on the other. I am confident that building up a
> conceptual apparatus along these lines will prove worthwhile and useful
for
> a more complete understanding of the functioning of a monetary economy."

...and back to Ted himself:
> what, other than the circuitist ideas we were discussing, do you have in
> mind?

Per says:
Well, Ted, as you certainly would have noticed, I granted you the point
about Graziani's article, namely that businesses can issue IOUs other than
bank loans to recoup the advanced funds and repay the loans. You called it a
'mistake' on Graziani's part, and I think you may be right.

What Graziani perhaps should have done is to establish a conceptual
correspondence between, on the one hand, the 'bipolar' entities of producers
and consumers, and, on the other, the equally 'bipolar' entities of net
creditors and net debtors. If we were to define 'firms' such that they are
always net debtors and always producers; and 'households' such that they are
always net creditors (taken as a collective, that is) and always consumers,
we would gain a lot analytically.

It is not too far from the truth to say that this kind categorisation was
attempted when the modern system of national accounts was set up. For
example, in order to 'purify' the consumer role of households,
owner-occupied dwellings were being reallocated to the business sector which
serves as a pure producer and does not consume.

Now, financial relations of debt and credit have the pecuiliarity that when
a net debtor makes a payment to another net debtor, the consolidated net
debt of all net debtors ('firms') does not change. Similarly, any payment
between net creditors will also leave the consolidated net credit position
of all net creditors ('households') unaltered. These transactions may be
described as 'neutral' in that respect. However, whenever a net debtor
('firm') makes a payment to a net creditor ('household'), the consolidated
net debt of all net debtors will grow by the amount of the transaction, as
will the consolidated net credit of all net creditors. In other words,
payments from net debtors to net creditors will necessarily increase the
'extent', for want of a better word off the top of my head, of the financial
relations between net debtors and net creditors. Conversely, whenever a net
creditor makes a payment to a net debtor, this peculiar aggregate of the net
credit position of all net creditors taken together (mirrored, of course, by
the net debt of all net debtors taken together) will be reduced by the
amount of the transaction.

As the foregoing paragraph suggests, it may be convenient to invoke a
shorthand term for this concept of the 'consolidated net debt of all net
debtors', etc. I have sometimes used the term 'money' for it (and used
'liquidity' or 'liquid financial assets' for what I called MB above). To
avoid conflation, we may use MC ('Monnaie Circuitiste'?) to designate this
concept. At this point, I had better point out the obvious, just to make
sure: The employment of the concept MC does not rule out the employment of
the concept MB in monetary analysis. No doubt, MC must be analysed along
Circuitist lines; MB, however, may very well be dealt with along Keynesian
lines. I think both concepts and models of analysis may be very fruitful,
and complementary. What I feel particularly excited about, however, is the
interface between the two, and that is what I meant when I was talking about
a possible 'synthesis' between Keynesian and Circuitist theories of money.

Had Graziani chosen to work on the basis of a broader set of financial
instruments rather than just bank money, then this slip of his would have
never occurred. I don't like making a big deal out of little slips, but find
it unfortunate that a this generally very promising approach leaves itself
open to criticism on relatively simple accounting matters. A comprehensive
understanding of the concept of 'money' along the MC lines would remedy the
situation, since (abstracting from revaluation items) it is logically
impossible for its quantity to change by any other means than transactions
between polar units (households and firms). It is tailor-made for Circuitist
analysis and logic.

This post is already too long, and I shall stop here, hoping it will satisfy
Ted's appetite for my point of view. I might also express my sincere hopes
that it will not stir up too much irritation in our good man.

All best,
Per

_____________________________________________
Per Gunnar Berglund
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Tel: (212)229-5901, ext.327    Fax: (212)229-5903