Forum Navigation
You need to log in to create posts and topics.

Revisiting S = I + (S – I)


Hi Cullen

I read your article and gave it some thought. I think there is an even more concise way to illustrate that the statement must is wrong or very vague.  "Usually the private sector desires to net save.."

Where is the mechanism for that desire to save if it exists, to materialise practically.  Savers can not create financial assets by there own desire and so it cannot be a desire to save it must be a lack of desire to go into debt. And so the statement can only mean there is usually not enough  private sector individuals willing to go into debt by an amount large enough to provide the economic activity and flow of money required for an economy deemed to by sufficiently vibrant. As you pointed out yourself in the article, it certainly is not an accounting tautology .




Hi Dinero,

You said:

"Savers can not create financial assets by there own desire"

This isn't quite true. Savers (households and corporations) create financial assets all the time. So what if these assets and liabilities net to zero? If I go to the bank and take out a mortgage for $100 then I can then own a $100 house. I will also have a $100 liability (the mortgage) and the bank has a $100 asset. Someone else gets a $100 deposit which is an asset for them and a liability for the bank. These finacial assets all net to zero. But we aren't worse off. Literally no one is worse off here. We are all better off. I own the house I wanted. The bank has a new income earning asset. And someone was the recipient of my spending. Who cares if these assets net to zero? We didn't need the govt to come in and spend money to make this situation better. It's an absurd statement by the MMT people and they should know better than to constantly spread this misinformation.

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche

Hi Cullen,

Isn't a problem if all assets net to zero, when you have billionaires. Jeff bezos and Elon musk with a net worth of over $300 billion. For them to be in a $300 billion positive equity somebody else must be in negative equity. This would be spread across many people. We know that individuals can't be in negative equity for long. Alot of individuals would be struggling or insolvent.


Hi @jon,

Think of a real life example. For instance, I own a company. If I decide to sell some of my company to investors then I would literally create financial assets from thin air. Those financial assets are supported by some real assets and cash flows. If you buy $100 of my company from me then who is worse off from this? The firm technically owes you the equity, but the firm is worth whatever the shareholders equity is worth. No one is really worse off because of this because there is an asset that literally didn't exist before that has presumably made us better off and the financial assets and liabilities merely reflect that. The equity is the residual of assets and liabilities.

This is even more magnified in the case of Bezos and Musk. Is the world worse off because Bezos and Musk are rich on paper? Sure, they have disproportionately high net worths relative to everyone else, but they didn't make the world worse off by becoming rich. They have a high unrealized paper net worth. And that's because they've created companies that made many people better off in real terms.

Perhaps consider the alternative world where these people don't exist. Are we better off without an Amazon? Are we better off without a Tesla? No, they're technologies that have made us better off and their owners have been rewarded for having done so.

The kicker is that the stock market (and the economy) is not a zero sum game. Bezos and Musk didn't take money from me and you as their net worths grew. They created endogenous new wealth that made the US economic better in the aggregate.

Now, you could argue that they don't need all that net worth and that they should give some of it to other people, but that's really a different story.

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche

Hello @cullen-roche,

Thanks for getting back to me, as a long time listener of the rational reminder podcast I enjoyed your guest appearance on it.

I'm not saying we would be better off without bezos or Elon. I'm talking more about the accounting. If we had no government debt and private sector assets = private sector liabilities, then those that have a positive equity would put somebody else into negative equity. The billionaires are example of the extreme positive equity means that somebody or a large group of people to be in negative equity. I thought the only way the general population could be in positive equity was for the government to add assets such as bonds to the private sector and keep the liability on their balance sheet. That way those with positive equity may not be pushing someone else into negative equity.

However you mention bezos and Elon have an unrealised paper net worth. Does that mean, in a zero government debt environment, this is not a problem? If they wanted to change their assets into dollars, would this become a problem?

Kind regards,


Hi @jon,

I don't think "negative equity" is the right way to think about this. For instance, in the case of my company I am the sole owner. I own all the equity and my firm technically owes me the equity. Does that mean my firms has negative equity? No. It has a form of liability to me in the form of the shareholders equity, but that isn't a net negative for the economy. It's actually better thought of as a net positive.

Same basic thing for a bigger firm. The equity is a contra asset for the firm that reflects what it owes to its owners.

Make sense?

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche

Hello @cullen-roche,

When you start a business you put cash into it, it also has an equal liability to yourself. A bit like a bank lending money. Balance sheet have expanded but net wealth has stayed the same. The only way to get a net positive is to obtain an asset without the liability so that your assets are more than liabilities. But it does mean that someone has hold of the liability somewhere.R

Regardless of whether the business is beneficial, just on the accounting. If private sector assets = private sector liabilities for the private sectors assets to be more than its liabilities the government have to have a debt. The only way the country could have zero government debt is to run a trade surplus. But a country with a trade deficit like US or UK couldn't operate without a government debt?

Unless I'm missing something here but I can't see how countries like the UK and US can have zero government without private individuals holding a large liability because you have other private individuals holding a large positive equity.

Equity is not a liability for a corporation. It is equity. Equity = assets - liabilities. When Cullen's company owes him equity it is essentially a net financial asset for Cullen. The government doesn't have to spend any money for Cullen to have a net financial asset.

Hello @lars-svensen,

I think Cullen meant the equity he put in is a liability to him."It has a form of liability to me in the form of the shareholders equity".

I'm not saying Cullen or anyone else can't have a net positive equity. What I'm asking is is it possible for everybody to be in net positive equity, that is their assets are more than liabilities, when a government has zero national debt or surplus?

Hi @jon,

Yes, all financial assets net to zero. The key point is understanding that we hold net financial assets WITHIN the private sector. The main way those net financial assets change is via market revaluation. When those revaluations occur your net worth increases. So, for instance, if I borrow $1,000 and go buy a $1,000 home in a neighborgood where houses are appraised at $900 then every single homeowner in that neighborhood now has about a 10% increase in their net worth. They could sell a non-financial asset for a financial asset at a 10% gain.

This is how most people's savings are accumulated. It's all housing and stock market revaluations for the most part. The fact that the financial assets net to zero in the aggregate is rather meaningless.

You don't really need govt deficits at all along this process. Sure, they can help and I am generally favorable to them, but the MMT idea that we need a deficit to improve our  financial position is really silly and misleading.

I should probably add - if you live in the USA you know what a HOA is. The govt is basically a big HOA that regulates and issues currency. They can do good stuff, but we don't need the HOA to spend money to make the neighborhood better off.

Hope that helps.

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche