"we carry death out of the village"

Month: July, 2011

Real banking

More econ-geekery–this from an Austrian blog post on the terrors of the fractional reserve system. The article itself is somewhat flawed, but the following passage is an excellent description of the relationship between financial intermediation and intertemporal trade:

By fulfilling the role of an intermediary, banks are an important factor in the process of real wealth formation. Banks facilitate the flow of real funding by introducing ‘suppliers’ of real funding to ‘demanders’. When a saver lends money, what he in fact lends to borrowers is final consumer goods he has not consumed. Credit then means that unconsumed goods are loaned by one productive individual to another, to be repaid out of future production.


Relativism is not the relativity of truth but the truth of relation.

–Gilles Deleuze

Mr Mosler and the Moderns

No, it’s not the name of my new band, and no, you’re not the first person to tell me just how handsome/charming/witty I am.

Warren Mosler, leader of the Modern Monetary Theorists, has a post up at his site, “The Centre of the Universe”, accompanied by some animated discussion, that puts forward what you might call an MMT theory of deficits. I shall attempt to say something interesting about this theory, but bear with me, dear reader, for I am at heart a very boring individual, and we are cut adrift upon what might be some very boring econ-nerd seas. We will return you to your regularly scheduled aphorisms as soon as we are able.

The theory basically states that the reason we have deficits is that people save in financial assets, and without the deficit, this saving could not take place. (Actually, Mosler is trying to explain the magnitude of the current US fiscal deficit via tax advantages for savings, but the particular argument need not concern us here; instead, the particular argument allows us to examine some of the the underlying theory). It relies on the identity that equates spending with income at the aggregate level. In other words, if I am to save, then someone must borrow my unspent income and use it to purchase goodies–otherwise our collective income will fall, since, by definition, our collective income is just the sum of our individual transactions.

Of course, the government is not the sole borrower in the economy–although at times, reading MMT blogs, one might come away with precisely the opposite impression–and so the government need not borrow all of our current saving, merely the quantity that exceeds the amount that everyone else wants to borrow and spend, because whatever is not spent cannot be earnt. Thus we arrive, with a small bump, at Mr Mosler’s favourite accounting identity:

S – I = G – T + X – M

The identity tells us that, for a given level of economic activity (that is, the identity is ex post), if the amount saved is greater that the amount invested, either the government is running a deficit (G > T) or the country is running a current account surplus (X > M), or both. Since even I go glassy-eyed when international economics is mentioned I will ignore the balance of payments, despite its relevance here, and through the miracle of imaginative power, pretend that the rest of the world does not exist. Sock that, Rest of the World!

Then we are left with simply the equation of, for a given level of activity, the amount of saving net of investment (i.e., the number S – I), and the government deficit (i.e., the number G – T). So it is obviously not quite true to say that all the money that is sitting in your pension funds and your savings accounts is doing nothing and is stuffed under a figurative mattress, as Warren Mosler does. If the government borrowed and spent all of the income saved, that would imply that S = G – T, and that I = 0; which is to say, that investment for the period was non-existent, that no new capital was formed. Even the most postest of the post Keynesians, I feel, would agree that such a situation is not entirely optimal, regardless of the unemployment rate that then obtained.

In short (okay, okay–it was somewhat less than short), what the accounting actually tells you is that, in a closed economy, aggregate income that is saved must have either been invested, or borrowed by the government and spent.

Memories of a Naturalist

Something very important transpires at the level of relationships. For natural history conceives of the relationships between animals in two ways: series and structure. In the case of series I say a resembles bb resembles c, etc… This is exactly what theologians used to call an analogy of proportion. In the case of structure, I say a is to b as c is to d… This is an analogy of proportionality.

–Deleuze and Guattari, A Thousand Plateaus


The savage bows down to idols of wood and stone; the civilised man to idols of flesh and blood.

–George Bernard Shaw


I knew no harm of Bonaparte, and plenty of the squire,
And for to fight the Frenchies, I did not much desire,
But I did bash their baggonets because they came arrayed,
To straighten out the rolling road the English drunkard made.

–G.K. Chesterton


The well bred contradict other people. The wise contradict themselves.

–Oscar Wilde

Elder Wisdom

One can always observe Mom’s advice—If you don’t have anything nice to say, drown your hatemongering words and yourself in your acidic spittle, you fascist bigot.

–Dennis Dale

Econometric haiku

T-stat looks too good
Try clustered standard errors–
Significance gone

–Keisuke Hirano, quoted in Mostly Harmless Econometrics

The Complete Dabbler

If one becomes a master in one thing, one has generally remained, precisely thereby, a complete dabbler in most other things; but one forms the very reverse opinion, as was already experienced by Socrates. This is the annoyance which makes association with masters disagreeable.

–Nietzsche, Human, All-Too-Human