Friday, April 12, 2013

Help Requested!

If you're like me, concepts stay fuzzy until you make a concrete example out of of them. There are still a couple of important MR concepts that I'm having a hard time understanding fully. One has to do with the "Corporate Profits Breakdown" chart on this post and the related Kalacki equations:

Cullen has an explanation in his "Understanding the Modern Monetary System" paper/posts, but there's also this more detailed explanation here by JKH:

Right there at the top of JKH's post he also covers the other concept I'm still having a hard time with (because I still can't fully think of simple concrete examples for it), and that's the S = I + (S - I) and related formulas/identities.

I'm wondering if it's possible to create a tiny-Macro world to illustrate these concepts on balance sheets, similar to the way I've done it elsewhere in this blog. In particular, I'd love to be able to populate a world with a minimal set of entities with which to illustrate each concept. Perhaps that's a fools errand and I should quit now!! I don't know.

What I'm imagining I'd need is (at least one of each):

1. central bank (CB)
2. Treasury (gov)
3. domestic commercial bank
4. person
5. foreign CB with an account at the CB
6. foreign commercial bank with an account at the CB
7. foreign person
8. Some kind of physical asset(s)? (not sure if I need this)

Ideally I'd like to start off with everyone's balance sheets absolutely clear, except perhaps for ownership of some physical asset (perhaps a bull and a cow that can reproduce and create more), by a person say. Perhaps a bank loan could kick start the economy into gear. The goal would be to demonstrate in a concrete way on each entity's balance sheet, all the concepts/flows that JKH and Cullen cover in their posts on this subject. In particular I mean:

GDP = C + I + G + (X – M)

GDP = C + S + T

S = HS + FS

Business gross profit = undistributed gross profit + distributed profit

Business gross profit
= I – (HS + (T – G) + (M – X)) + DIV       
= investment – household saving – government saving – foreign saving + dividends

I'd also like to demonstrate, in a concrete way, exactly how JKH explains where MMT goes wrong (read JKH's entire post to see what I'm talking about). My level of understanding at this point isn't great enough that I could confidently dig in and start to populate balance sheets to demonstrate these concepts! To see how I struggle sometimes, take a look at this post which I put together after multiple comments exchanged with commentator "Joe in Accounting" here at pragcap:

Here's the thread:

Anyway, the point of this post is to let people know about this project and ask for your help! I guess I could start with exactly which kind and quantity of entities I'd need to populate my world with. Or perhaps somebody has already done exactly what I'm looking for and I can save myself a whole lot of trouble by just looking at what they've already done!

Any ideas?? Please contact me or leave a comment. Thanks!


  1. Regarding Kalecki and the profits equation, here are some things on the subject which might be of use:


    Threat to corporate profits

    Ratings agencies threaten to downgrade uncle sam

    Investment and profits

    Introducing economic dynamics

    Budget deficits and private profit

    Where profits come from

    Profits: The Views of Jerome Levy and Michal Kalecki

    Profits in a capitalist economy - where do they come from

  2. "S = I + (S - I) "

    My understanding of this (I'm not an economist!) is that this is the sectoral balances equation in a slightly different form.

    What S = I + (S - I) means is:

    private savings = private investment + (private net savings)

    (private net savings = public deficit + net exports)

    This is the sectoral balances equation.

    "The sectoral balances equation says that total private savings (S) minus private investment (I) has to equal the public deficit (spending, G minus taxes, T) plus net exports (exports (X) minus imports (M)), where net exports represent the net savings of non-residents.

    Another way of saying this is that total private savings (S) is equal to private investment (I) plus the public deficit (spending, G minus taxes, T) plus net exports (exports (X) minus imports (M)), where net exports represent the net savings of non-residents.

    All these relationships (equations) hold as a matter of accounting and not matters of opinion."

  3. The purpose of S = I + (S-I) is to demonstrate how the private sector actually accumulates its savings and the balance from which these savings occur. In the USA, the private sector balance sheet is roughly $60T in net worth. Of this, only about $16T is govt issued financial assets. The rest is all privately owned assets. So, the private sector's savings is dominated by claims against itself, not against the govt. MMT nets out the private sector and focuses on the govt's financial assets.

    You can see a similar flaw in many of the MMT predictions from the last few years. In particular, many MMTers have predicted economic downturn as the sequester hit. What they missed was the fact that private investment has surged. I said private investment would keep the US economy afloat as housing recovered and the private sector levered up as the balance sheet recession ended.

    It's all about balance. MMT is decidedly narrow in their descriptions and focuses way too much on the impact of govt spending. In doing so, they miss important points along the way.