Y = C+I+G+(X-M)

In response to my statement in a previous post that “you cannot make an economy grow through public spending” there was this touching statement of Keynesian faith:

In terms of a contribution to GDP public spending is as good as any other type of spending.

GDP=C+I+G+(X-M)

A dollar of public spending = A dollar of private spending = a dollar of net exports.

How much havoc has been caused in the world by this sweet and apparently innocuous national accounting identity. Yet our economies at the macro level are mismanaged by little else.

So much error, so little time to explain.

First, GDP when first developed was intended as a measure of value adding production. In the end there were a series of rules put in place about how to make the calculation but the problem of the public sector has never gone away. Since most of what is produced by governments has no market test, it was difficult to find a means to calculate with any accuracy the contribution of government spending. So it just went in straight. Whatever a government spent was automatically included as part of GDP, and the more that government spent, the faster an economy would appear to grow.

The result has been that GDP has become a very imperfect measure of value added. Increases in public spending turn GDP into a particularly misleading indicator. A large part of the reason our Government refuses to turn off the “stimulus” spigot is because of the effect it would have on our measured rate of GDP growth. Our economic circumstances would actually improve but the national accounts would show a fall in the level of economic activity.

Second, the Keynesian faith is indeed based on the belief that “public spending is as good as any other type of spending”. I’m not sure that anyone actually believes this any more. But the idea that our scarce resources are being used to put batts into ceilings is “as good as” (whatever “good” happens to mean) the development of some mining site or the construction of a manufacturing plant, is ridiculous. I don’t say that governments never create value, but after the first twenty percent of their total spending, let us say, it is hard to find any addition to our national productivity anywhere in it and many reasons to think it actually makes us worse off. If good means making us a wealthier community, I’m afraid that public spending is, to put it mildly, nowhere near as good as private. How ridiculous to think it is, but there appear to be many in our government who think exactly that.

Third, you cannot take this equation as a straightforward statement of how an economy works. It is, after all, merely an identity. It is true by definition but tells you nothing about the underlying dynamics inside an economy.

The supposed policy that comes from the equation is that if GDP goes down for some reason, say for example a major fall in private investment, I, and this fall in investment leads to an increase in unemployment, you can return your economy to a higher level of GDP by raising the level of government spending, G. Up goes G and therefore up goes GDP and therefore up goes employment.

We are supposedly back to where we were and if you believe that “a dollar of public spending = a dollar of private spending” everything returns to where it was. Except that we have transferred our resources from producing I to producing G. Do I really need to point out that this is not a good trade.

Finally, if you use the equation just as it is, there is no sense of the interaction amongst its various elements. If G goes up there are effects in each of the other components, and there is no reason to think those effects will be beneficial. There are no “all other things being equal” considerations that can be relied on. Crowding out of investment is just one of the many consequences so that as G goes up I goes down. There are also reasons to believe that retail sales are lagging because, with G higher the effect has been depressive on C.

Look at the equation and particularly the X-M. Is there any sense at all to state that if imports go up that GDP will go down automatically and for this reason and for no other? There is no causal connection between higher M and a lower level of GDP. You can provide an explanation but I could easily imagine a rise in imports of capital equipment being used in some investment project leading to a net rise in GDP. You cannot use the elements in the equation taken on their own and by themselves but must have some theory of their interaction.

To use this identity to tell you what to do is the error of errors in economic theory and has brought the world’s economies to the edge of catastrophe. Keynesian economics must go.

I might finally mention for those of you who made it this far that all of this is discussed in my Free Market Economics: an Introduction for the General Reader which will be available from Edward Elgar at the end of this month.

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69 Responses to Y = C+I+G+(X-M)

  1. kennedy

    you cannot take this equation as a straightforward statement of how an economy works. It is, after all, merely an identity. It is true by definition but tells you nothing about the underlying dynamics inside an economy.

    I don’t take this equation as a straight forward statement of how an economy works – you always need to dig a little deeper.

    Let’s compare two different economies – Norway and Australia – and their sectoral balances*.

    (I-S): Norway -ve (Privates sector is Net Saving), Australia -ve
    (G-T): Norway -ve (Govt Surplus), Australia +ve (Govt Deficit)
    (X-M): Norway +ve, Australia -ve

    Norway is currently running net export surpluses and private domestic surpluses (S – I) so is able to run large budget surpluses (whilst maintaining a given level of GDP).

    Because Australia typically has a net exports deficit it will either have to maintain a private deficit or a government deficit.

    Therefore, because the economy is weak at the moment and the private sector is saving (it has high levels of debt) we need to run budget deficits.

    This is not a “keyensian” statement or a political statement or a left/right statement – it is merely an expression of an accounting identity.

    If you decide to cut government spending (G-T) when we have Private Domestic Sector Saving and Net Export Deficit you will never achieve a Budget surplus – it is not mathematically possible.

    The automatic stabilisers will ensure the government fiscal position continues to deteriorate.

    Conclusion:

    If we had a large export surplus (like China, Germany, Norway etc.) it would be more likely possible to run budget surplus.

    * Both Sinlcair and Steve Yates have agreed that this accounting identity stands

  2. Sinclair Davidson

    Kennedy – everyone agrees on the accounting identity where we disagree is on the causation you attach to the identity.

  3. kennedy

    Derivation of the Sectoral Balances

    Y = C+I+G+(X-M)
    Y = C+S+T

    I+G+(X-M)=S+T

    rearranging

    (I-S)+(G-T)+(X-M)=0

  4. JC

    Kennedy is back.
    Scrawling useless equations that have no meaning to real life economics other than in his silly head.

    Yesterday Kennedy was suggesting hyperinflation was okay. Perfectly fine.

    Kennedy, don’t you fucking dare deny this. Don’t even try.

  5. .

    Kennedy answer some questions:

    http://catallaxyfiles.com/2011/06/08/thats-what-we-did/#comment-230454

    Do you have a degree in economics, Kennedy?

    What dubious statistical techniques did Conley and Dupor use?

    Where are the interregional spillover effects from the stimulus?

    Why don’t you know that the US, seven years after the British recognised their sovereignty with the treaty of Paris, abolished the continental and State currencies when they finally considered them unsalvagable?

    Why can’t you admit that you don’t even understand the BOP equation? (You insisted that the trade balance was the BOP and you also stuffed up the full form of the BOP equation – at least admit you can’t get this right).

    Why can’t you understand that national income determination is simply an aggregation of results, not a conclusive theory about how to maximise GDP?

    Do you realise the theory of MMT is countermanded by many examples? We’ve mentioned them here, why don’t you recognise them?

    Why don’t you recognise the role of prices? Any seignorage is devalued by the floating exchange rate suffering from foreign appreciation. We tried to explain to you how this is where bondholders lose their capital even if the US has low rates and high bond prices. Their realised return is worth less.

    Why don’t you recognise the severe monetary disequilibria that seignorage causes?

    Why don’t you recognise it is limited in use and always ends in tears?

    Why don’t you know about the deleterious effects of high and persistent inflation, recognised by various schools of economic thoght?

    Why don’t you think the bank credit multiplier is real?

  6. .

    Come on Steve. My list of questions to kennedy was wholly pertinent…

  7. .

    Because Australia typically has a net exports deficit it will either have to maintain a private deficit or a government deficit.

    No. We have a floating exchange rate. In other news, please get an education.

  8. kennedy

    I don’t say that governments never create value, but after the first twenty percent of their total spending, let us say, it is hard to find any addition to our national productivity anywhere in it and many reasons to think it actually makes us worse off

    Government spending can be broken down (very roughly) as follows based on the 2011 budget figures*:

    Security/Welfare: 32%
    Health: 16%
    Other: 19%
    Defense: 6%
    Education: 9.3%
    General Public Services: 6.6%

    Which categories fit into the “first 20% which add value”?
    Which categories “make us worse off”?

    Since most of what is produced by governments has no market test, it was difficult to find a means to calculate with any accuracy the contribution of government spending

    If what is produced by government has no “market test” how do you then calculate its “addition to our national productivity”?

    * total does not add to 100 because I have left off many of the smaller expenditure items

  9. chris

    That is a very narrow description of the Keynesian identity- and as the previous post says “nice straw man”.

    I do agree with one point – So much error, so little time to explain.

    Firstly I don’t think anyone will argue Government spending can crowed out private enterprise when an economy is at or near full capacity. Much of your commentary assumes this to be the case.

    In the USA, the economy is running materially below its productive potential. The idea that US Government spending on critical infrastructure while improving the employment situation “adds nothing to national output and performance” is a nonsense (that’s my strawman).

    Further, this notion that Government spending tends to be less productive that private spending is a furphy. Can I remind you of just SOME US Government initiatives over the past 100 years?
    – The defeat of Nazi Germany
    – The defeat of Imperial Japan
    – The Manhatten project
    – Space exploration
    – The Internet
    – the US Federal Highways System (Eisenhower)

    How about the “productive” private sector
    – Yes, there has been great innovation by private technology companies like Apple, Facebook, Microsoft (oh wait, the all rely on the Government produced internet)
    – How about America Institutions like McDonalds, KFC, Pizza hut (oh yeh, they all rely on Federal Hwy system to locate stores)
    – What about the US Giant GE (oh yeh, most of their consumer related products came from technology associated with the Space race)
    – Errr Lehman? Another Private sector triumph?
    – Ummm Enron? Privatising power – Gee that went well
    – Long Term Capital – oh that right, they needed to be bailed out by….ummmm….oh yeh the government.

    So your sweeping statements based on a Straw man do not stand up to scrutiny.

    The reality is, a faltering economy like the USA and UK, which are experiencing a balance sheet recession, the Keynesian model still works. This is because Government spending is needed to replace the collapse of private lending (check out the stats).

    In Greece, Austerity has been a complete failure. The deficit is now worse that projected.
    http://www.bbc.co.uk/news/business-13194344

    In the UK, the model for the Austrians and that lunatic Niall Fergusen, it is now clear the budget is going the same way as Greece – Worse!
    http://www.telegraph.co.uk/finance/economics/8532733/UK-public-finances-suffer-worst-April-on-record.html

    Keynesian economics has its limitations for sure – but for many Western economies struggling under the weight of PRIVATE DEBT, government spending is needed to offset the required deleveraging.

    The only thing stopping more stimulus in these countries is lack of common sense.

  10. .

    Kennedy,

    Julie Novak has calculated if welfare was given directly to recipients, they could get almost $41k p.a.

    Federal education is basically a whole heap of duplication. Administering the now defunct journal rankings etc – what a waste of time and money. Have you seen the Fed. Education Dept – whom the States operate independently of? It is a massive complex.

  11. JC

    In the USA, the economy is running materially below its productive potential.

    How so Chris? The US is currently running at potential seeing the federal government has a deficit of 11% of GDP.

    You suggest it should be higher?

    Whenever this question is asked of a Keynesian cultist they always skulk off and you don’t hear from them.

    So, can any of you take the bait and answer the question. Should the US budget deficit be raised from 11% of GDP to (insert your own number)?

    Anyone?

  12. .

    Can I remind you of just SOME US Government initiatives over the past 100 years?

    Funded by the private sector you moron.

    How about the “productive” private sector

    Sure, let’s nationalise the economy because you glorify what the Government does and trivialise the private sector which funds it.

    USA and UK, which are experiencing a balance sheet recession

    This is bullshit. Corporate America has cash up the wazoo.

    Firstly I don’t think anyone will argue Government spending can crowed out private enterprise when an economy is at or near full capacity. Much of your commentary assumes this to be the case.

    Crowding out happens regardless of capacity. Read the Richmond Fed paper.

    In Greece, Austerity has been a complete failure. The deficit is now worse that projected.

    No.

    Keynesian economics has its limitations for sure – but for many Western economies struggling under the weight of PRIVATE DEBT, government spending is needed to offset the required deleveraging.

    Yeah, when the private sector is weighed down, crowd it out and it will grow.

    The only ideas which are lunatic are yours.

    Do you even have an economics degree?

  13. .

    Many economists point to the vicious circle Greece is caught in, whereby government austerity is worsening the recession, which in turn is increasing the government deficit.

    Yeah, that makes so much sense…if only they spent more money which they didn’t have in the first place.

    The Greek debt crisis is a public, not private affair.

  14. chris

    Should the US budget deficit be raised from 11% of GDP to (insert your own number)?

    Yes. Remember the US government can never run out of the currency that it soley has the power to issue. It’s only constraint is inflation.

    In answer to your question (how much), I will ask another.

    How much do you want the private sector to save? As you know the sectorial balances are such that Government deficit = private savings + CAD.

    Now, when you think about how much the private sector needs to save (or government deficit), I want you to contemplate this chart….
    http://cdn.debtdeflation.com/blogs/wp-content/uploads/2010/09/092010_0121_Deleveragin15.png

  15. JC

    USA and UK, which are experiencing a balance sheet recession

    Umm okay
    Dunno about the UK.
    For the US
    $1.4 trillion in cash held at the bank doing nothing because firms are too worried about what Obozo will propose next.

    (Recently he wanted to stop Boeing from building planes in another state other than Washington).

    Despite all this earnings will be around 94 bucks for for the S&P this year.. a record.

    Some balance sheet recession.

    Kennedy, you’ve been told not to use this lie again and yet you persist in doing so.

    Why Kennedy. Why did you lie again? Why?

  16. kennedy

    Dot

    Please recognise that the Greek situation is entirely different to the US situation.

    The Greeks are currency users and the US is a currency issuers. The Greek government needs to borrow before it can spend.

    I agree with you

    – the greek debt situation is a public affair
    – the US recession is a private debt affair (they will never have a public debt problem becuase they are sovereign wrt their currency and only borrow in USD)

  17. .

    It’s only constraint is inflation.

    Yes, and how did that work out at the end of the revolutionary war where they were recognised as sovereign?

    In answer to your question (how much), I will ask another.

    As you know the sectorial balances are such that Government deficit = private savings + CAD.

    You’re a crank. You want to “infinitely” boost GDP by “infinitely” spending and financing this through seignorage.

  18. .

    The Greeks are currency users and the US is a currency issuers. The Greek government needs to borrow before it can spend.

    Anyone who isn’t issuing currency is borrowing? This truly is a crackpot theory.

  19. JC

    Yes. Remember the US government can never run out of the currency that it soley has the power to issue. It’s only constraint is inflation.

    Okay, you think the US ought to raise the defcit… Do you think 20% is an okay number?

    In answer to your question (how much), I will ask another.

    How much do you want the private sector to save? As you know the sectorial balances are such that Government deficit = private savings + CAD.

    That’s entirely up to the managers, Chris. It’s not up to me or you to tell firms how much they can save.

    What a fucking impertinent question. As if I or anyone else can tell them how much to save.

    You think the capital markets would accept the deficit going to an historic level of say 20% without any problem whatsoever.

    Meanwhile the currency would hold on and bond rates would remain the okay.

    I told Kennedy, your associate cult member, this shit has been tried before, Chris, you ignoramus.

    South America was trying this shit throughout the 70’s and 80’s and all they ended up with were closed economies, hyperinflation and poverty.

    There is nothing new in what you are proposing, you fool.

  20. JC

    You’re a crank. You want to “infinitely” boost GDP by “infinitely” spending and financing this through seignorage.

    It’s a cult.

  21. Infidel Tiger

    How much do you want the private sector to save? As you know the sectorial balances are such that Government deficit = private savings + CAD.

    Why do you think they are savingrather than spending? Wouldn’t have anything to do with the profligate whores running the show would it?

  22. kennedy

    $1.4 trillion in cash held at the bank doing nothing because firms are too worried about what Obozo will propose next.

    There is a very simple narrative for the US which is much simpler:

    1. The US had an $8 trillion Housing Bubble and the biggest financial crisis since the great depression

    2. Becuase of this US Households are saving and US Demand is supressed.

    3. The US has a constant net export deficit which is also a drag on demand

    4. For the US to recover households have to recapitalise.

    5. Based on the sectoral balance the only way for households to recapitalise is for the US to run deficits

    6. The only constraint on deficit spending is inflation

    7. With inflation at c. 1% and 9% unemployment there is plenty of excess capacity

    I would also add:

    i. the narrative is different for Australia – we don;t need as large budget deficits because we are closer to our productive capacity (only 5% unemployment)

    ii. For Greece they can;t continue to run deficits unless the ECB will lend to them beucase they canl;t issue their currency

    iii. For China, because they have surpluses and strong consumption (not yet high private debt), they need to run SURPLUSES or they will risk generating inflation (already starting)

  23. .

    The stupid bloody maths of this crackpot theory posits with a floating exchange rate that we don’t have external balances balancing the rest of the economy.

  24. kennedy

    iii. For China, because they have trade surpluses and strong consumption (not yet high private debt), they need to run BUDGET SURPLUSES or they will risk generating inflation (already starting)

  25. chris

    JC,

    Why so defensive?

    The US has run deficits for 190 out of 230 years of its existence. Your claim that capital markets will not allow deficits to go on forever has already been proven wrong.

    Bill Gross has been proven wrong.

    All of the hyperinflation commentary surrounding QE2 last year has been proven wrong.

    The USA ran total debt / GDP to +120% during WW2. Where was the hyperinfaltion?

    South America is not relevant to the discussion of the US because it borrowed foreign currency. this is not the case in USA. Surely you understand the difference or maybe you should borrow some yen to fund an Aussie home (i hear the yen cost is as high a 1% due to Government crowding out (lol lol lol lol).

  26. chris

    Why do you think they are savingrather than spending? Wouldn’t have anything to do with the profligate whores running the show would it?

    No – its an accounting identity. Already accepted by the Author.

  27. .

    Based on the sectoral balance the only way for households to recapitalise is for the US to run deficits

    This is so fucking wrong. Do you even know how algebra works?

  28. chris

    $1.4 trillion in cash held at the bank doing nothing because firms are too worried about what Obozo will propose next.

    Just for fun, please answer where you think this cash comes from.

  29. kennedy

    Why do you think they are savingrather than spending? Wouldn’t have anything to do with the profligate whores running the show would it?

    Because the US had record level of private debt due to the US$8 trillion housing bubble. Everyone was borrowing against the equity in their house which no longer exists.

    You can’t understand the current situation in the US unless you have the proper context – a housing bubble and a financial crisis.

    Australia had a mild financial crisis and does not have much of a housing bubble so the analysis is different for us.

    I don’t see Sinclair or Steve Yates pointing out the subtle differences between Norway (large external surpluses), US, Australia and Greece.

    They conflate the issues.

  30. .

    No – its an accounting identity.

    Exactly. That’s all it is. The “balancing” made by MMT cranks is utterly spurious.

    The US has run deficits for 190 out of 230 years of its existence. Your claim that capital markets will not allow deficits to go on forever has already been proven wrong.

    They’ve been paid off.

    The USA ran total debt / GDP to +120% during WW2. Where was the hyperinfaltion?

    They didn’t listen to the likes of you and engage in seignorage.

    South America is not relevant to the discussion of the US because it borrowed foreign currency

    No this is really frigging dopey. A peg isn’t borrowing. They can abandon the peg as soon as they wish.

  31. .

    How to “manage” an economy:

    http://mises.org/daily/2533

    http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/LACEXT/PANAMAEXTN/0,,contentMDK:21045664~menuPK:343569~pagePK:1497618~piPK:217854~theSitePK:343561,00.html

    In recent years Panama’s economy has experienced a boom, with growth in real gross domestic product (GDP) averaging over 8% from 2006-2008. The Panamanian economy has been among the fastest growing and best managed in Latin America.

    Like most countries in the region, Panama felt the impact of the global financial crisis, with a 3.2% growth registered in 2009 in comparison to 10.1% in 2008. However, in 2010 the economy resumed its growth rate, registering an increase of 7.5%.

  32. .

    Just for fun, please answer where you think this cash comes from.

    You’re saying these firms were given seignorage money as a gift? What value did it create?

    Because the US had record level of private debt due to the US$8 trillion housing bubble.

    Caused by loose monetary policy in the US and globally. Yet you’re saying inflation has no costs.

  33. .

    From the Mises piece:

    The absence of a central bank in Panama has created a completely market-driven money supply. Panama’s market has also chosen the US dollar as its de facto currency. The country must buy or obtain their dollars by producing or exporting real goods or services; it cannot create money out of thin air. In this way, at least, the system is similar to the old gold standard. Annual inflation in the past 20 years has averaged 1% and there have been years with price deflation, as well: 1986, 1989, and 2003.

    Panamanian inflation is usually between 1 and 3 points lower than US inflation; it is caused mostly by the Federal Reserve’s effect on world prices. This market-driven system has created an extremely stable macroeconomic environment. Panama is the only country in Latin America that has not experienced a financial collapse or a currency crisis since its independence.

  34. kennedy

    Caused by loose monetary policy in the US and globally. Yet you’re saying inflation has no costs.

    I have never said that inflation had no costs. I have consistently maintained that the limit to all spending (private and public) is the productive capacity of the economy.

    Demand in excess of productive capacity produces inflation. The US has 9% unemployment and is not near its productive capacity.

    The US will not have inflation until unemployment falls.

  35. chris

    Just for fun, please answer where you think this cash comes from.

    Bear in mind the only legal entity which can issue USD is the US government….

    Someone…anyone….

  36. JC

    Why so defensive?

    I generally don’t take well to stupidity, Chris. It’s a failing of mine.

    The US has run deficits for 190 out of 230 years of its existence. Your claim that capital markets will not allow deficits to go on forever has already been proven wrong.

    At 20% of GDP? At 10% of GDP even? Are you partially retarded? A country like the US could run a deficit of around 1% to 2% of GDP for a long time if it was growing, but you’re talking about upping the ante upwards of 11% of GDP and remaining silent about 20%. You’re an imbecile. They would be shout out of the cap markets and if they tried to print that stuff they would end up like South America in the 70’s and 80’s with poverty and hyperinflation in addition to closing down their economy.

    Bill Gross has been proven wrong.

    So what. I don’t give a shit about what Gross says as he has also lost the most amount of money in the bond markets too.

    All of the hyperinflation commentary surrounding QE2 last year has been proven wrong.

    Doesn’t mean a thing. And you also misunderstand the Fed strategy. Money supply and V were falling in the US as deflation was taking hold. The fed moved policy towards unofficially targeting NGP over 5%. This was a good thing.

    It’s entirely 100% different to what you are suggesting you dope.

    You’re suggesting the government should run over the top deficits and if they can’t fund it they just essentially print more money. That’s entirely different to the Fed’s intentions and what you’re advocating, you dolt

    The USA ran total debt / GDP to +120% during WW2. Where was the hyperinfaltion?

    No and they began serious retrenched in 46. I might also add that the US standard of living was lower after the war than before.

    South America is not relevant to the discussion of the US because it borrowed foreign currency. this is not the case in USA. Surely you understand the difference or maybe you should borrow some yen to fund an Aussie home (i hear the yen cost is as high a 1% due to Government crowding out (lol lol lol lol).

    Doofus, what do you think the US is doing. You think foreigners are not buying US assets like they were in South America. But go ahead run the deficit to 20% of GDP and then tell the markets that if they don’t fund you will print and see how far that gets you, you dope. Argentina here we come.

    As for the Yen…there will be a Japanese funding crisis. You can bet on it.

  37. chris

    Just for fun, please answer where you think this cash comes from.

    Bear in mind the only legal entity which can issue USD is the US government….

    Someone…anyone….

  38. JC

    Kennedy, you should be banned for lying because we dealt with this yesterday.

    Demand in excess of productive capacity produces inflation. The US has 9% unemployment and is not near its productive capacity.

    The US will not have inflation until unemployment falls.

    1. the US is at its potential even with unemployment at 16% because no one is willing to expand their capacity for the long term.

    2. I told you the US had stagflation in the 70’s because of the very same shit you proposing now.

    You can’t fool people with fools gold, you dolt.

  39. chris

    As for the Yen…there will be a Japanese funding crisis. You can bet on it.

    How can Japan run out of Yen? I am intrigued.

  40. chris

    Doesn’t mean a thing. And you also misunderstand the Fed strategy. Money supply and V were falling in the US as deflation was taking hold.

    but but but all this evil spending from O’loser is supposed to be inflationary?

    C’mon boys, stay on script…

  41. JC

    How can Japan run out of Yen? I am intrigued.

    They can’t. The problem is always the potential of oversupply of currency when governments get into serious trouble.

    You don’t even understadn the problem. The problem isn’t that the can’t run out of money, you idiot. The problem IS that they will prove they can’t run out.

    Okay here’s proposition for you.

    Offer one example where any government or state governing entity in the history of humanity has run an out of control budget deficit and then either printed their way out or added copper to gold coins to fool people and then its citizens prospered.

    One Example Chris, you moron.
    Go!

  42. .

    but but but all this evil spending from O’loser is supposed to be inflationary?

    I have said this consistently:

    The stimulus depressed America. U/e rose and deflation took hold. Then when it was wound back there was less capacity to handle the demand. So it basically destroyed capital formation and reset the economy at a lower natural unemployment rate.

  43. kennedy

    US is WAAAAY below potential output.

    See this chart.

    1970s stagflation was due to supply shocks – you do understand the difference between cost push and demand pull inflation?

  44. chris

    Doofus, what do you think the US is doing

    If you cared to look, you will find all of US’s debt is USD denominated. this is why the are called US Bonds, and US Treasuries.

    Totally different to South America. Your analogy is wrong, and not supported by any facts.

  45. Andrew Reynolds

    kennedy,
    Yes – there is a difference. One exists and the other does not. Clear enough?

  46. JC

    US is WAAAAY below potential output.

    Nope. The US is at potential with the current policy mix. This is why the economy is slowing and doing so pretty quickly. The days of 5% growth rates in the US are gone. Obozo and his seriously demented supporters fucked the economy by making it worse.

    1970s stagflation was due to supply shocks – you do understand the difference between cost push and demand pull inflation?

    Ummm , you mean the oil price went up? Seen the oil price now, you moron and what it was in 2008.

    Look, you idiot, the US suffered serious stagflation in the 70’s. They are exact same symptoms we would expect with the toxic shit you and your cult members are suggesting now.

    “11% deficit doesn’t work.. lets go to 20% and if the bond market won’t take it we’ll just print more momey and fool the people that way”

    Yep that’ll work.

    You should be sent to abu gharib, Kennedy. You along with you cult member Chris for being economic AQ sympathizers by trying to destroy the economy with your swill.

  47. chris

    moron

    idiot

    Your insults take away from your already very weak argument. You are coming across as hysterical.

    Anyway back to your question

    Offer one example where any government or state governing entity in the history of humanity has run an out of control budget deficit and then either printed their way out or added copper to gold coins to fool people and then its citizens prospered.

    It depends how you define “out of control”. If you mean ever increasing debt, I will give you two examples
    1. USA
    2. UK

    Now for my question.

    Just for fun, please answer where you think this $1.4T corporate cash comes from?

  48. .

    Corporate profits. Now shut the hell up.

  49. JC

    If you cared to look, you will find all of US’s debt is USD denominated. this is why the are called US Bonds, and US Treasuries.

    Totally different to South America. Your analogy is wrong, and not supported by any facts.

    There have always been domestic bond markets in south America you clown and pretty big ones too.

    They got bigger each year by running 70% inflation rates and 3000% at times when they really put the foot to the accelerator at the printing press.

    What you and your cult members are proposing is what any Al Queda lackey would propose to destroy a western economy.

    Is your name kaf, ra, ya, sin…? That’s Christoper in Arabic.

  50. JC

    Just for fun, please answer where you think this $1.4T corporate cash comes from?

    From profits and positive cash flow strategies I would guess. Where do you think it comes from Kaf ra ya sin?

  51. chris

    Now for my question.

    Just for fun, please answer where you think this $1.4T corporate cash comes from?

  52. JC

    Dot and I both answered your question Kafrayasin.

  53. chris

    From profits and positive cash flow strategies I would guess. Where do you think it comes from Kaf ra ya sin?

    Yes – corporate profits. But this is an accounting concept. Cashflow from customers is a better answer but not yet complete. Where do the customers get the $1.4T in Cash?

    Outer space? Do we dig it up out of the ground?

    Where?

  54. JC

    moron

    idiot

    Your insults take away from your already very weak argument. You are coming across as hysterical.

    I know. But thanks for pointing it out. I have a serious issue dealing with stupidity, generalized lying and ignorance. It’s a intolerance similar to say intolerance to peanuts.

  55. JC

    Yes – corporate profits. But this is an accounting concept. Cashflow from customers is a better answer but not yet complete. Where do the customers get the $1.4T in Cash?

    Same thing, profits and wages.

    Outer space? Do we dig it up out of the ground?

    Where?

    Through exchange. Money merely disguises the concept of bartering and puts it in the modern context where people exchange through a medium of exchange called money.

    I don’t know what you’re getting at Kaf.

  56. chris

    JC

    In the one hand you suggest there is no balance sheet recession because US corporates are holding onto $1.4T in cash. I suppose this is an example of US corporate strength.

    Yet you know the US dollars can only be brought into existence by the US government. This is done via deficit spending or US Bank loan creation.

    So if you ignore house hold debt, the cash can only exist if the US government spent it into existence.

    In other words, US corporate strength only exists because of US deficit spending.

  57. JC

    In the one hand you suggest there is no balance sheet recession because US corporates are holding onto $1.4T in cash. I suppose this is an example of US corporate strength.

    Yep, it is Kaf. You should listen to the gov of the Dallas Fed pretty much making the same comments referring to the strength of US corp balance sheet at the moment.

    You do realize that a balance sheet is different to the income statement right?

    Yet you know the US dollars can only be brought into existence by the US government. This is done via deficit spending or US Bank loan creation.

    Umm no, it not. You’re wrong other than QE.

    So if you ignore house hold debt, the cash can only exist if the US government spent it into existence.

    Not true. Money does is not created that way. You’re wrong again.

    In other words, US corporate strength only exists because of US deficit spending.

    lol. Yep . all the US would have to do is spend 100% of GDP each year and Americans would all be billionaires.

    They would be billionaires but not in the present context we use the term.
    Kafrayasin is dying to see the first $1,000 tomato being sold.

  58. .

    In other words, US corporate strength only exists because of US deficit spending.

    This is an utterly spurious causative relationship.

  59. chris

    JC,

    You do not understand QE – I tried to explain it to you last week – you obviously didn’t listen.

    At the risk of you not listening again I will help you understand the nature of deficit spending.

    Deficit spending happens first – bond issuance occurs after. Bonds to not fund the deficit – they simply drain the private sector of savings as a consequence of the deficit.

    Go find the bond issuance in Australia to match the underlying deficit? It doesn’t match. Why? Because the spending happens first. Money is created as it is spent into existence.

    Below is the link to the AOFM. All public auctions are announced and published. The volume of debt issuance bear no relationship to monthly cash deficits.
    http://www.aofm.gov.au/content/statistics/transactional_data.asp

    If you want to learn something new, you can read this
    http://bilbo.economicoutlook.net/blog/?p=332

  60. chris

    JC,

    I must go.

    Despite all of your hysterical insults, I have found the debate fun…

    Catch you next time….

  61. Infidel Tiger

    JC,

    I must go.

    Hopefully not to lecture students or to advise Treasury.

  62. .

    You do not understand QE – I tried to explain it to you last week – you obviously didn’t listen.

    This is rich. You MMT nuts think the credit multiplier doesn’t exist.

    Money is created as it is spent into existence.

    How is it spent if it doesn’t yet exist?

  63. JC

    You do not understand QE – I tried to explain it to you last week – you obviously didn’t listen.

    I do understand QE, Chris. better than you think.

    At the risk of you not listening again I will help you understand the nature of deficit spending.

    Oh the effort must be enormous seeing you’re basically trying to explain how a cult works in a logical format and getting nowhere.

    Deficit spending happens first – bond issuance occurs after. Bonds to not fund the deficit – they simply drain the private sector of savings as a consequence of the deficit.

    So what? You’re basically discussing timing differences between the treasury account at the RBA. It doesn’t really matter if the RBA essentially credits the Treasury account first (thereby printing the money) and issuing bonds a little later. Let me remind you of grade 11 monetary theory, Kaf. Money in to the Central bank reduces the money supply. Money out increases it. Say the treasury puts a claim on the RBA and tells them they need the money quickly. The RBA will send them the money (credit their account and receive bonds. The re-arranges their cash management program to issue securities and thereby sweeps the add out of the system. Alternatively they can do a reverse repo. Big deal, you nong. Other than timing differences there is no magical pudding here champ.

    Go find the bond issuance in Australia to match the underlying deficit? It doesn’t match. Why? Because the spending happens first. Money is created as it is spent into existence.

    Yea, see my response above to this silly concept of yours. Of course the bond issuance won’t exactly always match the treasury’s claim by the day, you nimrod. However timing issues are unimportant the context of things. The punters understand this is happening but aren’t concerned in the least because they understand what timing differences mean unlike you bozos.

    Below is the link to the AOFM. All public auctions are announced and published. The volume of debt issuance bear no relationship to monthly cash deficits.

    Of course they don’t have to match. In fact anyone that thought they should match exactly is a nimord, as the RBA is managing a very active book, these days made more active by the nimbuses spending money like it’s going out of style. That’s Duck bum,. Swan and those other idiots.

    This is where I think you mutton brains are coming from with this theory of yours.

    You think a government monetary monopoly is different to a private entity say, or a Greece because they have the printing press. You think that they can do magical things with that printing press like say run the deficit up to 20% of GDP because failing to issue bonds they can simply order the central bank to credit the governments account and buy their bonds.

    Sure. This can happen and can be done. No one here is doubting that is possible. But what you egg heads don’t seem to understand is that there are serious constraints to any government being able to get away with that over and over again. Eventually there is a total and complete repudiation of such practices and you end up like South America with hyperinflation, poverty and closed economies to avoid slippage to the outside world.

    Now all this is possible, but is it optimum in the way an economy should be run. I think not and I also think most people agree with me.

    You idiots haven’t discovered anything new here, you understand. There is nothing new in MMT. It’s a rehash of what every government in serious trouble ends up doing if they can get away with it. Reflating or adding copper to gold coins.

    Now enough of this swill as you’re both annoying as hell. In fact you about as annoying as climate change alarmists.

  64. sdfc

    I have a few minutes to spare so I came on to see if there was something from last night to respond to and lo and behold I come across this doosy of a piece.

    Once again Steve ignores financial relations when analysing the impact of fiscal stimulus. During periods of financial crisis, output falls not because of some mythical labour force holiday but because of a decline in demand. In periods following a credit boom not only does the decline in prospective income weigh on the inducement to invest but it also diminishes the private sector’s ability to meet its cash flow obligations from prior financing decisions.
    This shortfall in cash flow and prospective income can be mitigated by public sector cash injections into the private sector via deficit spending.

    Remembering government spending (or tax cuts as the case may be) ends up as deposits in private sector bank accounts. The monetary effect of deficit spending is always ignored in exchange theory analysis.

    Again with the old full employment crowding out argument. There is no crowding out of investment when the economy is running well below full employment. Government borrowing certainly doesn’t cause crowding out because in a fiat money economy money demanded equals money supplied. That deals with the financial side. You need to come up with evidence of crowding out other than pointing to sluggish investment because as we know investment fell because of lower cash flow expectations and tighter financial conditions.

    Just what is it you have against trade? Imports may rise but that is a function of rising domestic demand.

    What has brought the world’s economy to the edge of catastrophe was a private sector credit boom followed by financial crisis. The sooner you understand that the better.

  65. .

    Again with the old full employment crowding out argument. There is no crowding out of investment when the economy is running well below full employment.

    This is empirically wrong.

  66. Biota

    I’m sure that this exercise has been done so to help me understand some of this stuff from first principles could someone point me there.

    Supposing by some miracle I discover a true Terra Nullius way out in the Pacific. It is rich with natural resources. I claim it as a new state (not my personal property to be borrowed against) and now want to establish an economy. Where does currency come from? No history of deficits or taxtation.

  67. Tom Valentine

    You cannot describe an economy with one identity-you need to specify the relationships between the variables.For example,how is G financed?
    On the other hand,this one equation is not “Keynesian Economics” although some people whose Economics terminated at kindergarten level seem to think so.Unfortunately,they are very common in the Australian Economics profession.

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