This is a follow-up to a recent post on the income-expenditure (IE) model. It is at a similar introductory level except that some knowledge is assumed from the earlier post. Those unfamiliar with the model might find it helpful to read the earlier post before this one. This post has two purposes. The first is to graph the IE model. The second is to relate the IE model to the sectoral financial balances (SFB) model and illustrate its applications. The SFB model has been discussed in the blogosphere by a number of modern monetary theorists, including Bill Mitchell, Robert Parenteau, Eric Tymoigne, Daniel Conceicao and Scott Fullwiler, prompted by a post of Paul Krugman's which contained a useful diagram.
Warren Mosler's contributions to the MMT Round Table in Sofia required a translator for the Bulgarian audience. As an alternative to watching the videos (see here), some might find it convenient to read transcripts of his talk and Q&A session. Repetitions of phrases due to the translation process have been edited out, and a word or two not deciphered, but apart from that the transcripts are as spoken. In the talk, Warren briefly discusses Professor Hanke's view of the currency board before explaining: (i) the basics of establishing a sovereign currency; (ii) determinants of the value of the currency; and (iii) the dynamics of the currency board. In the Q&A session, he discusses what would be involved in getting off the currency board and reviving the economy, making comparisons with Argentina's experience under similar circumstances. As always, Warren speaks with great clarity and is worth watching or reading. Unfortunately I am unable to transcribe the talks by Pavlina Tcherneva and Ryan Markov due to the language barrier.
Ryan Markov has posted a couple of excellent videos from the MMT Round Table that was held in Sofia, Bulgaria on 9 November 2013. The presenters were Warren Mosler, Pavlina Tcherneva and Ryan. The latter two spoke in Bulgarian. Warren spoke in English. The first video is of the main presentation. The part in English takes up the first 53 minutes or so. The second video is of answers to questions. The part in English comprises the first 25 minutes. The Round Table focused on fundamental aspects of sovereign currencies, the benefits of going off a currency board and the steps to take in doing so.
This is intended as an introductory post to explain the Keynesian (and Kaleckian) view of causation between desired investment and desired saving in particular, and desired injections and desired leakages in general. Initially, the argument is presented with reference to a simple two-sector income-expenditure model of a pure private economy. The model illustrates the Keynesian view that provided the economy is operating below full employment and there is idle capacity, desired investment generates desired saving via income adjustments rather than being financed by that saving. The second part of the post employs a four-sector model with government and external sectors included to draw out a couple of points emphasized by modern monetary theorists.
The previous post drew some interesting responses including a post by Cullen Roche over at Pragmatic Capitalism. (H/t to Trixie.) This response started as a comment and got too long, so I thought it would be better to turn it into a new post. First, I will respond to a question posed by Philippe. Second, I will respond to Edgaras. But there will be some overlap. The points can also be considered in relation to Cullen's argument, since the comments were motivated by his post. Finally, I'll respond to an aspect of Cullen's post that didn’t crop up in the specific responses to Philippe and Edgaras.
A common misconception is that if everybody was prepared to take awful enough jobs, unemployment would be eradicated automatically, at least eventually, irrespective of the government's fiscal stance. Embedded in this argument is a misconception that unemployment, overall, can be eliminated through lower wages or deteriorating working conditions. In a capitalist monetary economy, this is not true. To think otherwise is to succumb to a fallacy of composition.
Don't freak out. I can change back to the previous theme if this one doesn't work out. In the short term, some of the formatting in posts might be a bit iffy. This will be fixed "soon", although loyal readers will be aware that heteconomist time to world time is as human years to dog years. Apologies for being slack in responding to recent comments. As you can see, I have been "busy" with the experiment.
Modern monetary theorists have employed parables or simple teaching models to illustrate how sovereign currencies work. Usually the parables are used to drive home the most fundamental aspect of state or chartal money; namely, the manner in which a tax obligation underpins demand for the currency. It can be instructive to explore the parables in depth. For example, Bill Mitchell has provided a series of posts (here, here and here) adding layers of meaning to a 'business card model' initially due to Warren Mosler in which parents represent government and their kids represent the non-government. A similar exploration is presented in Parable of a Monetary Economy. These treatments can get fairly elaborate in terms of the numerical calculations, even though the calculations themselves are elementary. This is fine for reading purposes, but when it comes to explaining the basics to a friend or colleague in a social situation it will sometimes be better to avoid numbers and tell a simple verbal story. For this purpose, another variant of Warren's parable, which he sometimes uses as an opener in seminar presentations, seems especially suited to the purpose. It is possible to delve into the story as deeply as is likely to be necessary in most informal situations.
Imagine for a moment a society without compulsion. People are working for themselves and each other. They might share, barter or agree to use a private money or monies in exchange. If everybody could somehow agree to share land and other natural resources, respect the wishes of all, contribute voluntarily to the production of infrastructure and provision of social services, agree to the modes of production in which they personally need to engage (whether wage labor, cooperatives or communes) and address all other individual and collective needs on a voluntary basis, there would be no need for government and no need for state money. A role for government arises when members of the community cannot find amicable solutions to all conflicts without some mechanism for orchestrating their collective will. Fiat money is a highly effective tool for this purpose.
The political barriers to getting humane economic policy through Government House or Senate or Wall Street or whatever it's called in your country appear to be formidable. In confronting this reality, Mike Norman may have come up with a winning strategy when he notes that Americans have no problem with a single payer in the case of defense, so why not health care? At the very least, this observation could have legs with the bloodthirstier electorates of the world. The applications seem endless.