* This post was written in 2011 before Mr. Roche founded Monetary Realism, which was formed due to several disagreements Mr. Roche and many other former MMT proponents had with the school of thought. For more info on the difference in views please see here. For more on MR’s views please see here.
The MMR conversation on savings and investment has now raged to over 600 comments. It would be an understatement to say that the conversation has been illuminating. To me, one of the more interesting facets of this discussion is the fact that we have MMTers, horizontalists (like Ramanan), MMRists and previously undecideds (like the mysterious JKH) all agreeing! I think this speaks volumes about the merits of what MMR is building. Our flexible, fact based and apolitical approach is proving agreeable to many and I hope we’ll continue to embrace even those who might disagree with much of what we say.
But the most illuminating point that came from the discussions was the point on S = I + (S-I), where S = Savings, I = Investment. Now, for the layman, I will try to break this down as best I can so bear with me. What we learn from the sectoral balances approach is that the government’s deficit is the non-government’s surplus. If the government taxed all your assets at a rate of 100% then you’d have no dollar denominated assets. That’s simple enough. The sectoral balances is a powerful concept as it highlights the power of the government and helps explain why a sovereign currency issuer might run persistent budget deficits without running into a Greek problem (the USA for instance has pretty much always run deficits so the idea that deficits are inherently bad, is inherently wrong!). But when we break this equation down we have to be very precise about what it means because improper explanation will lead one to put the cart before the horse.
One of the other powerful concepts I’ve been discussing in recent weeks is the MMR Law:
“We generate improving living standards through the efficient use of resources resulting in the optimization of time”
When we understand that our living standards primarily improve through the increasing efficiency of resource utilization (think of the many innovations that make our lives easier and essentially give us the ability to live fuller lives) we can then begin to see how it is the production process that helps to optimize time. Time, as I have stated previously, is the universal form of wealth.
If we get back onto the S = I + (S-I) discussion then we can begin to connect the dots between everything here. If you just glance at the sectoral balances equation you might conclude that the government drives wealth creation or you might be inclined to overstate the government’s role in the wealth creation process because you believe the private sector cannot save unless the government spends. But this is a very delicate and crucial point. Steve Waldman of the excellent blog interfluidity explains his thinking on this subject better than I can:
“It is perfectly possible to hold the international balance constant, have the government reduce debt, and have “people” save more. “People’s” financial savings consists of claims on firms and claims on government. If I perform some work for a firm that (however infinitesimally) increases the firm’s real economic value, and I accept as payment a share of that firm’s stock, I have performed the economic act of saving, and increased the net saving of “people” — of the household sector. Net private sector financial assets have not increased: my “savings” is the firms’ obligation, the household sector’s surplus is offset by the business sector’s deficit. But much of what we call saving is exchanging real resources for claims on the private business sector. And as long as the private business sector doesn’t entirely squander those real resources, that act contributes to macroeconomic S. If the private business sector does squander the resources, then while I still perceive my contribution as “saving”, the value of macroeconomic S = I does not increase, and my claim amounts to a transfer from other shareholders of the firm.”
You can think of this process as the private sector creating their own claims on wealth. Yes, they can’t create net new financial assets, but for real world money users that’s a secondary concern. The truth is, the state doesn’t have a coercive monopoly on money (the banks wield a HUGE amount of power) and the private sector can create its own financial assets (even though it can’t create net new financial assets). But the kicker here is that once you understand the implications of the MMR Law you can see that S (Savings) is not truly driven just by government spending. Rather, it is driven by I (Investment). The always brilliant JKH has elaborated on this point thoroughly in the aforementioned discussion and has even started calling himself an MMRist (he can have the seat at the head of the MMR table any day, maybe he’s already sitting there!?!). When you understand this, you can see that, as JKH says, “I is the backbone of S”. In this regard it is best to think of government as being an accomodating force in the wealth creation process.
Perhaps most importantly, through this understanding we can see that capitalism makes socialism acceptable. It is the production process that sits atop the hierarchy in our increasing trajectory of living standards. It is the glue that binds everything. It is the “backbone” not only of S, but I would argue, the entire monetary system. Without the capital formation process, the resulting production and the increase in living standards, we have nothing. In this regard, capitalism makes socialism acceptable. But there’s a balance between the two. I just think it’s important to remember where each sits in terms of its importance to the future of our society and the trajectory at which we want our living standards to increase.