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

“I have been giving myself a headache thinking through that simple ‘Sectoral Balance’ equation which underpins the MMT Party’s (who are so fond of saying they are describing ‘operational reality’) assertions that Government Deficits = Private Sector Savings. The headache finally passed when I realized that for Government Deficits to equal Private Savings, the (I – S) part of the equation must net to 0, as if only Government Deficits can add to Private Savings. Sure, those Government Deficits do add to Private Savings and I do basically understand what the MMT Party is trying to say, but as the sole source of Savings (?) That’s where they go off the rails. The MMT Party is netting out the Private Sector’s ability to create money ex nihilo (‘out of nothing’) through the banking system (which can also add to Private Savings). The MMT Party maintains that bank-created money cannot add to Private Savings (and they will go to great lengths trying to prove it’s an illusion). Does anyone really believe that (I-S) must net to 0 in order to get to Government Deficits = Private Savings? If so, you are not describing the ‘operational reality’ of our capitalist economy and you do belong in the MMT party, comrade.”—Charles ‘Kondy’ Kondak

 

Agreed…Perhaps nothing has lead the MM T Party and their #FAKEMMTer followers off the cliff more than that ‘Sectoral Balances’ equation. It is another source of more deadly fraudulent innocent misinterpretations because just like the Monopoly Game (Monopoly rules state that no Player may borrow Monopoly Money from another Player), it is only talking about ‘vertical’ dollar adds (federal gov’t creation), not ‘horizontal’ dollar adds (bank creation).

 

While #FAKEMMTers are saying ‘Their deficits (their red ink) = Our savings’, Pure MMTers are asking ‘Their deficits = WHOSE savings’ (WHOSE black ink) because most of the deficits bypass the 95% (they get whacked up between the foreign sector and the 5%). Sure, IF (I – S) was equaling zero, IF all bank loans were ‘netting-to-zero’ and IF the US trade deficits were zero, Their deficits = Private Savings, but even then, those federal gov’t deficits would still eventually wind up with the 5% (in the savings bubble).

 

In addition, as per Egmont Kakarot-Handtke, creator of the AXEC New Foundations of Economics website, the sectoral balances equation is incomplete at best; or wrong, at worst. He posits that [‘G’ov’t spending – ‘T’axes] + [‘I’nvestment – ‘S’avings] + [e’X’ports – i’M’ports] DOESN’T EQUAL ZERO at all. He is saying that, albeit being an identity, the equation is useless because it ignores business profit (it deals with a neo-marxist zero-profit utopia). So to reflect reality, the sectoral balances equation should include profit (two more variables), ‘business monetary profit’ (Qm) and ‘distributed profit’ (Yd).

 

The Profit Law’ is expressed as (G – T) + (I – S) + (X – M) minus (business profit – distributed profit) = 0

 

Which reduces to Public Deficit = Private Profit.

 

Just like the Daily Treasury Statement proves that taxes are not ‘destroyed’, this Profit Law proves that deficits feed the savings bubble. Egmont is not a fan of fake ‘prescription’ MMTers. He notes (correctly) that MMTers’ (the ones pointing their fingers at ‘evil neoliberal murders-by-proxy’) policy guidance ultimately boils down to more deficit-spending / money-creation and since it is a macroeconomic fact that Public Deficit = Private Profit, “the MMT Party policy of ever-increasing public debt amounts to the permanent self-financing of the oligarchy.” In other words, they (#FAKEMMTers ‘prescriptions’) are money-makers for the one-percenters. “MMT is ALWAYS a bad deal for the ninety-nine-percent”, he adds.

 

“Investment is money that’s circulating in the economy and Savings is money which isn’t circulating in the economy, all in relation to the private sector.” —Damian Penston

 

Exactly…However, #FAKEMMTers don’t see it that way. The MM T Party fails to grasp that ‘Our Savings’ isn’t circulating in the economy; or they choose to ignore this fact that ‘Their Deficits’ detours the functional (real) economy and head to the nonfunctional (financial) economy because it doesn’t fit their virtuous marketing narrative.

 

The answer to economic problems (like wealth inequality, low wages or underemployment) is not the fake MMT ‘prescription’ fix-all of more ‘this’ and more ‘that’ (more federal deficits). As per Jim ‘MINETHIS1’ Boukis, the answer lies in organic solutions, that unlock nonproductive savings back into productive capital. “We need an eco-feedback loop that embraces human capital producing more useful output instead of continuing to increase gov’t deficits that results in just more capital producing more capital.”

 

Meanwhile, the MM T Party (pushing ideological fake ‘prescription’ MMT under the guise of promoting pure ‘description’ MMT) repeats mantras like ‘Their Deficits = Our Savings” to their choirs and call it a day (to avoid headaches).

 

Thanks for reading,

Follow Jim ‘MineThis1’ Boukis at IMMT – Investing Using Modern Monetary Theory https://www.facebook.com/InvestingMMT/

H/T Egmont Kakarot-Handtke (@AXECorg on twitter) https://axecorg.blogspot.com/2018/03/dsge-and-profit-forget-it-mmt-and.html

P.S. Why saying ‘THEIR DEFICITS = OUR SAVINGS’ (or ‘Their red ink is Our black ink’) is not entirely accurate:

For example, if Federal Gov’t Sector (G-T) + Non Federal Gov’t Domestic Sector (I-S) + Non Federal Gov’t Foreign Sector (X-M) = 0

…and in 2015 the US federal gov’t deficit (G – T) was $439B…

…and in 2015 the US trade deficit (X – M) was $500B (meaning a foreign sector SURPLUS of $500B)…

(-439) + (I-S) + (+500) = 0

So in 2015, that third component, the Non Federal Gov’t Domestic (private sector) SAVINGS WAS NEGATIVE $61B.

(-439) + (-61) + (+500) = 0

Their deficit = Whose savings?

Wait…There’s more.

$157B federal gov’t deficit in 2002:

$532B surplus to non federal gov’t / Foreign sector

(-$375B) deficit from the non federal gov’t / private sector

______________

$378B federal gov’t deficit in 2003:

$532B surplus to non federal gov’t / Foreign sector

(-$154B) deficit from the non federal gov’t / Private sector

______________

$412B federal gov’t deficit in 2004:

+$655B surplus to non federal gov’t / Foreign sector

(-$243B) deficit from the non federal gov’t / Private sector

______________

$318B federal gov’t deficit in 2005:

$772B surplus to non federal gov’t / Foreign sector

(-$454B) deficit from the non federal gov’t / Private sector

______________

$248B federal gov’t deficit in 2006:

$647B surplus to non federal gov’t / Foreign sector

(-$399B) deficit from the non federal gov’t / Private sector

_______________

$161B federal gov’t deficit in 2007:

+$931B surplus to the non federal gov’t / Foreign sector

(-$770B) deficit from the non federal gov’t / Private sector

_______________

$458B federal gov’t deficit in 2008:

+$817B surplus to the non federal gov’t / Foreign sector

(-$359B) deficit from the non federal gov’t / Private sector

 

We all remember what happened in 2008.

If you take a step back from the picture, in effect, all those years above, from the perspective of the US private sector, those years had the same debilitating consequences as if the federal gov’t, by proxy, ran sustained budget surpluses.

In other words, for seven straight years prior to the last recession, the worst economic crisis since the Great Depression, ‘Their red ink WAS NOT your black ink’.

 

 

 

 

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