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Posts Tagged ‘sectoral balances’

I just don’t have time to crush Bob Murphy over MMT again

May 9, 2011 10 comments

A few months back, I crushed Bob Murphy and the Austrian take on MMT.  Here is a quick quote:

Discussion of Murphy’s mistakes: Murphy makes two fundamental mistakes.  The first mistake results from his confusion of assets and savings. Murphy doesn’t understand the meaning of the word savings in an national accounting sense, or deliberately confuses real and monetary accountings.

He is making the same mistake today in his new post on MMT.  He just makes it more explicitly, so it is easier to see.

Truth be told, I’ve corresponded briefly over email with Mr. Murphy.  He was a nice and kind person.  He makes a serious mistake in his thinking. And frankly, I think the Austrians would knock it out of the park with a minimalist construction of MMT.  Unfortunately, they are insane because they don’t recognize any government as being legitimate.  Even kind and nice people can be insane.

Update: The always excellent Cullen Roche takes on the same topic over at the Pragmatic Capitalist.   And I’ve got a few trolls!

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Why is the Private Sector Underreporting its Savings?

February 28, 2011 Comments off

Where is the money?

Interesting article here in the FT Blog about how the Private Sector must be under reporting their Surplus.

The blog post makes a hash of it, but the UBs economist George Magnus seems to know the Balance sheet stuff cold, even if he won’t let on that he knows other ways to think about our favorite equation,  I = S + (G-T) + (N-X).  He even drops serious and repeated Minsky references – how can he not know his Randall Wray and Billy Mitchell?

Magnus points out that the private sector “must” be underreporting its savings, because they don’t add up with other known numbers:

“The data, through Q3:2010, reveal that the surge in the government deficit to 10% GDP is basically the counterpart of the continuing surplus earned by foreigners (in effect, the current account position), and the sharp turnaround from deficit to surplus in the household and non-financial corporate sectors. Put another way, private sector deleveraging has been accommodated without traumatic damage to the economy by the government’s willingness to borrow (temporarily) on its behalf.

This much is self-evident to people familiar with the balance sheet approach to booms and busts. But now it gets a bit more interesting, because the Fed’s data don’t add up properly any more. Chart 1 shows that the private sector surplus last year was running at about 5% of GDP. If we use commercial bank data to estimate the net financial investment of the sector, the private sector surplus would be about 3.5% GDP. Now go figure. Even adding in the overseas surplus, how does this square with government borrowing of 10% of GDP?

The answer is that there appears to chronic under-reporting of the private sector surplus. So, look at Chart 2, where the solid line is the private sector financial balance as reported in the Flow of Funds, but the dashed line is the private sector as a residual, calculated as the government plus the overseas balance. Mostly, these two series are in the same ballpark – until the financial crisis. To make the flow of funds data balance as they should, the private sector surplus ‘needs’ to be a lot closer to 8.5% of GDP, which is 3.5% GDP larger than officially stated, and 5% GDP larger allowing for the inclusion of financial institutions.”

This is serious stuff – what is going on?  I don’t have any good ideas yet.  MMTer’s out there – any ideas?

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