Re: sos-qfl

[<mosler@xxxxxxxx>]

However, the growth in the monetary aggregates I was able to gain was
greater than the current account deficit, and there was a very close
correlation.

IF A COUNTRY HAS A CURRENT ACCOUNT DEFICIT,
IT IS BECAUSE THE REST OF THE WORLD HAS AN
EQUAL DESIRE TO NET HOLD THAT MANY OF ITS FINANCIAL ASSETS.  (otherwise the non
residents would spend those assets and there
wouldn't be a trade deficit) AND THOSE ASSETS, ONE WAY OR ANOTHER, ARE LIKELY TO
BE INCLUDED IN ONE AGGREGATE OR ANOTHER.
MORE BELOW.

> As to interpretation, it would seem that bank credit has not financed
> net capital formation in Australia, but has effectively financed capital
> formation in the rest of the world that is exporting to Australia.

WHAT DOES 'FINANCED CAPITAL FORMATION IN THE
REST OF THE WORLD' MEAN?  ARE YOU POINTING TOWARDS THEIR ACCUMULATED OZ FINANCIAL ASSETS
OR THEIR REAL CAPITAL FORMATION/MEANS OF PRODUCTION?

The bank credit did finance capital formation or new cars and housing in
Australia.  The way you could think about it is something like this.

THE BIG POOL
Lets say that there is a pool of goods in the economy out of which people
with money are entitle to draw out.  To earn money, you must first provide
goods into the economic pool, and the money you earn entitles
I WOULD SAY 'ALLOWS' RATHER THAN 'ENTITLES.'

 you to take
goods out goods to the same value.
 So provided the amount of money in
circulation stays the same,
 no-one can draw out more goods then they have
put in.
OK, NO 'CREDIT' ALLOWED.

 In that case there cannot be any excess demand or shortage of goods
relative to money.

BUT THERE CAN BE A SHORTAGE OF DEMAND IF
AGENTS DECIDE NOT TO SPEND.  ESPECIALLY IF
GOVT PROVIDES TAX INCENTIVES FOR SAID NON
SPENDING.  A DOWNWARD SPIRAL FOLLOWS,UNEMPLOYMENT
RISES, ETC.

But imagine if someone were to print money to entitle people to take goods
out of the pool without putting anything in.  That would cause the pool of
products to be depleted.  It would be depleted by the amount of new money.
POTENTIALLY, IF IT WERE ALL SPENT.  AND YOU
ARE ASSUMING A RESIDUAL INVENTORY OF SORTS?
I THOUGHT ALL THE WAGES AND PROFITS CLEARED
THE POOL OF PRODUCED GOODS AND SERVICES?

Once that new money was incirculation, it would not cause excess demand.

NOT EXACTLY TRUE UNLESS YOU ARE BEGINNING
WITH EXCESS INVENTORY OF SOME KIND. OTHERWISE,IF THERE WAS NEVER ANY DESIRE TO NET SAVE THAT 'EXTRA MONEY' PRICES WOULD CONTINUALLY TRADE UP.

BEFORE 'PRINTED MONEY' WAS INTRODUCED, FIRMS ADVANCED MONEY
FOR WAGES AND THEN GOT IT ALL BACK AS PAYMENT,
AND WAGE EARNERS HAD NONE LEFT,PROFITS SPENT,
ENDING THAT CYCLE.  IT THEN REPEATS.
BUT WITH THAT 'EXTRA' UNLESS THERE IS A DESIRE
TO NET SAVE THOSE NET FINANCIAL ASSETS (SEE
FULL EMPLOYMENT AND PRICE STABILITY AT MOSLER.ORG)
THEIR 'VALUE' FALLS CONTINUOUSLY.



Everyone who subsequently uses it would have contributed to the pool of
goods before they could earn the money.  It is only the initial expenditure
of that money that causes the shortage.

I'M NOT SURE ABOUT THIS, THE WAY I SEE THE
ACCOUNTING IN YOUR MODEL, IF IT IS ALL USED IN THE FIRST ROUND, OWNERS OF THE FIRMS NOW HAVE THAT NET MONEY IN THEIR POCKETS AND NO DESIRE TO SAVE IT?  SO THEY CONTINUE TO TRY TO SPEND IT AND COMPETE WITH THE OTHERS TO BUY THE AVAILABLE GOODS AND SERVICES.  THESE NET FUNDS CAN NEVER 'VANISH' SO VALUE DROPS UNTIL THERE IS A NET DESIRE TO SAVE, RIGHT?  HOW ELSE CAN THE
FIRST ROUND END OTHER THAN WITH NET SAVINGS HELD BY SOMEONE?



LENDING AND SAVINGS
In our economies, bank lending can create more money and enable people to
deplete the pool of goods and services.
YES, CREDIT ENHANCES PURCHASING POWER.

 Not all bank lending causes this
problem.

WHY WOULD ANYONE NET BORROW OTHER THAN TO SPEND?
IN MOST CASES, BORROWING FOLLOWS A DECISION
TO PURCHASE SOMETHING.  DESIRE TO SPEND CAUSES
BORROWING WHICH 'CREATES' THE LIABILITY(DEPOSIT
MONEY).


 It is only when bank lending is greater than savings.
LOANS CREATE DEPOSITS AS A MATTER OF ACCOUNTING.

YOU MIGHT BE NOW INCLUDING THE CONCEPT OF A
DESIRE TO NET SAVE FINANCIAL ASSETS I INTRODUCED EARLIER?  IF SO, YOU HAVE MADE A CHANGE IN
YOUR MODEL WITHOUT NOTICE.

  Savings are
in two forms:
*    repayment of loans (which reduces bank deposits);
YES, BUT THE FUNDS FOR REPAYMENT OF LOANS
COME FROM OTHER LOANS.  THERE CAN BE NO NET
FIANCIAL SAVINGS AT THE MACRO LEVEL, WHEN
YOU INCLUDE GOVT ALL THE SECTORS NET TO 0.
IT'S OUR FIRST MACRO EQUATION THAT ALL OTHERS
ARE DERIVED FROM.

 and
*    increases in foreign reserves (from increased exports).

IF YOU ARE STICKING TO THE ANALYSIS OF SAVINGS OF ANY ONE CURRENCY IN A
FLOATING EXCHANGE RATE WORLD NET SAVINGS
CANT COME FROM EXPORTS.  ONLY NET DOMESTIC
SAVINGS.  AGAIN, THE SECTORS NET TO 0
FOR ANY GIVEN CURRENCY.

When bank lending is greater than these forms of savings, then they finance
more entitlements to draw upon products in the pool than have been put into
the pool.
IN YOUR MODEL, ANY NET BANK LENDING DOES THIS
AS IT FINANCES NEW PURCHASING POWER.

  The only way that the pool of products can be replenished is by a
country importing more than it exports.

MEANING NON RESIDENTS MUST DESIRE TO NET SAVE THOSE EXTRA FUNDS CREATED BY THE BANKS.

EXPORTERS AND IMPORTS
Look at it this way.  Exporters earn entitlements to the domestic pool of
products greater than they have contribute to that domestic pool when they
convert their foreign earnings into domestic currency.  They deplete the
domestic stock of products when they spend their earnings.   The economy
imports products to replenishes its pool or depleted stock .  That is not a
problem as the country would have earned foreign entitlments (foreign
reserves) from the exports to pay for those imports.
UNDERSTOOD.
The economy does not distinguish between money from exports and money from
credit.
RIGHT.
When people spend the additional money they gain from the growth of bank
credit, they deplete the domestic stock of goods just like the exporters do.

YES.

But when the economy goes to pay for them, it does not have additional
foreign reseves to pay for them.  It must run down existing foreign reserves
or go into debt.  This is what causes the current account deficit.

SORT OF.  NOTE THAT, FOR EXAMPLE, IF OZ
BUYS IMPORTS WITH $A, AND NON RESIDENTS HAVE
A NET DESIRE TO HOLD THAT MANY $A, THERE IS
A CURRENT ACCOUNT DEFICIT BUT NO CHANGE IN
$US RESERVES FOR EITHER PARTY.

You wrote:

> I don't see how exchange rate policy has much to do with this

FLOATING EXCHANGE RATE SYSTEM AND CREDIT
Countries using the pure floating exchange rate system don't have the
savings from increases in foreign reserves.  So in these countries the only
savings is loan repayments.

AGAIN, LOAN REPAYMENT DOESN'T ALTER NON
GOVT NET SAVINGS.  IT MAY ONLY MOVES THEM FROM SECTOR TO SECTOR.

If bank lending equals loan repayments, then there is no growth in bank
credit.
RIGHT.

When lending is greater than loan repayments, then there is an
increase in bank credit.
RIGHT.
The amount that lending exceeds savings is equal to the growth of bank
credit.
??? YOUR MIXING SECTOR ANALYSIS INTO IT AGAIN
WITHOUT EXPLICITLY SAYING SO.

 When lending exceeds savings it depletes the pool of products by
that same amount.
MIXING METAPHORS AGAIN.

 The amount of additional imports required to make up for
the stock depleted is exactly equal to the growth of bank credit.

Hence, as we have found, the current account deficit is equal to the growth
of bank credit.

This theory fits the facts.  If you have another one that fits the facts, I
would be happy to hear its.

HOW ABOUT THE IDEA THAT NET IMPORTS ARE CAUSED
BY NON RESIDENTS DESIRING TO HOLD $A NET FINANCIAL ASSETS, WHICH ONE WAY OR ANOTHER LINKED TO OR ACTUALLY ARE BANK LIABILITIES.

IN OTHER WORDS, DESIRES ARE SATISFIED AS
AUSTRALIANS BORROW TO BUY THE IMPORTS, AND THOSE LIABILITIES THUS CREATED WIND UP IN THE HANDS OF NON RESIDENTS.

Note that the problem here is not the variable exchange rate part of the
floating exchange rate system.  The problem with the system is that it
requires international receipts and payment to be continuously equal.

THAT LAST BIT IS TRUE, BUT NOT A PROBLEM WITH THE SYSTEM AS I SEE IT.  SEEMS TO WORK JUST FINE TO
ME.  POLICY RESPONSE AT ALL LEVELS IS MORE OFTEN 'THE PROBLEM.'

www.mosler.org
Regards

Leigh