Andrea Terzi: zorra, aurrezkiak eta hazkunderako politika fiskalaren beharra (2)

1 Ikus https://www.unibertsitatea.net/blogak/heterodoxia/2016/07/16/andrea-terzi-zorra-aurrezkiak-eta-hazkunderako-politika-fiskalaren-beharra-1/.

2 Ingelesez: “As European fiscal rules were meant to provide the ‘full cost’ of the public sector, both the advocates and the detractors of “big government” have been watching the size of public debt with equal concern. While the latter consider public debt as a signal that social programs are more ambitious than what the country can afford, the former would like to see public debt downsized so as to create more room for socially useful programs rather than debt service payments.

Unfortunately, both these positions confuse the financial function of the fiscal stance in a modern monetary economy with the question of the optimal size of the public sector in any given society. It suffices to consider the fiscal positions of the US and the EA: while the public sector’s share in the US is much lower than in Europe, the American government deficit was about twice as large and helped smooth the deleveraging of the private sector after the crisis. Regrettably, understanding the financial function of government deficits has disappeared from the public policy agenda. Europe’s firmness on fiscal rules at all levels of government is evidence that this essential characteristic of a modern monetary economics is not understood by policy makers.”

3 Ingelesez: “It is well known that a monetary economy is driven by spending and that businesses are willing to produce the amount of output that they can sell. It has also been long understood that if income recipients save part of their incomes in the form of financial assets instead of spending them in goods and services, this will not allow all output to be sold, unless some other economic unit is willing to spend more than its income and thus offset the effect of these savings. This is often described as the equilibrium between savings and investment. However, this manner of framing the dilemma is misleading for two reasons: any private deficit spending (not just investment) can act as the offsetting factor to savings; and financial savings must equal debt, not investment.

Excluding, for simplicity’s sake, the option of drawing from past savings, any spending in excess of one’s income entails some form of borrowing. Thus, given people’s legitimate preference for saving a part of their income, the economy can only be stable if there is an equivalent amount of (private or public) deficit spending. Because spending in excess of income is made possible by issuing IOUs, and because savers store IOUs for future spending, it can be said that 1) by generating additional demand, any deficit spending offsets savings, and 2) by generating additional IOUs, any deficit spending offers savers the means to save.”

4 Ingelesez: This is what I called the savings-debt constraint.[1] I argue that the stock of financial assets available to meet desired private savings must be equal to the existing outstanding stock of liabilities. In other words, any increase in financial savings must be validated by the creation of an equivalent amount of new outstanding liabilities. These include a) liabilities issued by private residents (private debt), b) liabilities issued by various levels of government (public debt), and c) liabilities issued by foreign (private or public) entities, , i.e., claims on foreigners that residents hold when the country’s current account is positive.”

5 Ingelesez: “The savings-debt constraint has a corollary. If private spending depends on the saving target of the private sector, then private spending depends on the stock of debt that validates savings and is considered to be sustainable. In other words, private spending is a function of the relationship between desired savings and consented indebtedness. The “Great Recession” is an example of a slump triggered by the mismatch between desired indebtedness and desired savings.

If some private entities seek larger savings to repay debt and/or restore the desired stock of savings that they lost, while credit growth drops because other private entities have reached their target level of indebtedness or because of rising credit risk perception, then private spending falls. That is unless public debt is allowed to quickly increase to compensate for the gap between desired borrowing and desired saving. Consequently, an increasingly large stock of public debt is needed during a time of deleveraging. An increase in public debt may also be needed to prevent a downward spiral in income when private credit growth stops supporting income growth. Thus, the most important function of public debt is to supply the economy with the stock of currency and government securities that supports the structure of private debt.”

6 Ingelesez: “Chart 4 shows how deficit spending, private or public (measured by the bars below the zero line) supports the financial savings of European entities in the EA (measured by the bars above the zero line). Between 2008 and 2010, the private sector engaged in a massive balance-sheet adjustment. When the rate of income growth slows down or debt holders reassess risk, in an economy where growth is largely driven by private debt as was the case in both Europe and the U.S., the cycle may reverse violently, as private entities desire more savings and at the same time are less willing to borrow. When this occurred, the public sector deficit (to wit, the combined deficits of all EA countries) was the only support to the private savings of Europeans, thus initially preventing a deeper recession.”

7 Ingelesez: “This demonstrates the anti-cyclical function of fiscal deficits. During downturns, tax collection mechanically drops, thus offsetting the pro-cyclical effects of the recession. It ought to be noted here that fiscal rules tacitly assume that a 3% deficit/GDP ratio should suffice as an anti-cyclical protection, with this assumption being rooted in the notion that private sector’s spending is ultimately self-adjusting.

Then, from 2010 onwards, contractionary deficit-reducing policies (aka ‘austerity’) removed support for private financial savings. The 2010-2012 recession is proof that in the midst of the deleveraging process the private sector was aiming at saving more than the actual flow of financial savings allowed, thus forcing cuts in private spending. Luckily, after 2013, at a time when public deficits were being downsized in an attempt to comply with fiscal rules, foreigners’ deficit spending on EA output played the compensating factor, thus providing temporary support to output sales and preventing further declines in output so far.”

8 Ingelesez: “Savings and Debt, not Money Supply, ‘Matter’

The notion that private spending hinges on the relationship between desired savings and sustainable indebtedness can be associated with both the leakages-injections (Keynesian) model and the quantity (Monetarist) theory. Like the Keynesian model, financial savings are considered leakages from the flow of spending. Unlike the traditional Keynesian model, however, savings are offset by debt, not by investment, and the dynamics of debt matter in determining demand conditions and the sustainability of growth. Because the theory of spending based on the savings-debt constraint is a quantity theory where spending decisions depend on the difference between an aggregate stock of financial assets and the desired level of that stock, it also resembles the Monetarist model. However, unlike the Monetarist model the stock that matters are the private financial savings, not the ‘money supply.’”

9 Leakage: ikus https://en.wikipedia.org/wiki/Leakage_(economics). “In economics, a leakage is a diversion of funds from some iterative process. For example, in the Keynesian depiction of the circular flow of income and expenditure, leakages are the non-consumption uses of income, including saving, taxes, and imports.”

10 Ingelesez: “This is the chief reason why I believe that the Monetarist transmission theory has serious faults. Monetarist quantity theory explains private spending with reference to money holdings: when economic entities have more money than they desire, they will spend it. However, this definition of “money” only includes currency in circulation and bank deposits (the ‘money supply’), and thus provides only a partial measure of the forms in which financial assets can be owned by the private sector. It is much more reasonable to explain private spending as triggered by an overall assessment of the total of financial assets owned by the private sector, and not simply of the most liquid component on the asset side of balance sheets. Narrowing the basis of private-spending decisions to one single type of asset (i.e., money balances) is misguided and unrealistic.”

11 Ingelesez: “This belief, that the central bank can always spur greater private spending by creating excess money balances, was one of the assumptions underpinning the policy of large-scale asset purchases better known and Quantitative Easing (QE). Proponents argued that QE could spur private spending in the aftermath of the Great Recession. Yet, if my analysis is correct, an increase in currency or money balances is neither a sufficient nor a necessary condition for triggering greater private spending. What matters is the relation between desired indebtedness and desired savings. The fundamental question about the effectiveness of central bank policy then becomes: does monetary policy affect the relation between desired indebtedness and desired savings?”

12 Ingelesez: “From the above analysis, we can begin to assess its three main transmission channels. The first depends on the efficacy of monetary policy in boosting credit growth. This is the channel that was mostly dead during the crisis. The second, is the effectiveness of monetary policy in boosting net exports via currency depreciation. In spite of its popularity, and even assuming that the central bank can engineer a currency depreciation, this channel does not produce a net increase in spending in the world economy, but only redistributes spending from one country to another.

The third transmission channel depends on the central bank’s effectiveness in directly supplying additional financial assets and deserves greater discussion. Neither ‘conventional’ nor ‘unconventional’ monetary policies have proved to be valuable tools in this respect. Cutting interest rates redistributes financial assets between borrowers and lenders. Rate cuts lower the flow of debt service paid by the government to private holders of public debt, thus reducing the supply of financial assets available to the private sector. When central banks purchase private or public debt, they modify the composition but not the overall level, of privately owned financial assets, and they also become the recipients of any cash flows from debt issuers. This implies that when the central bank is the holder of more bonds and securities, financial assets get transferred from the private sector to the public sector in the form of debt service payments, thus further reducing the supply of financial assets. Finally, negative rates on reserves work as a tax, and only negative lending rates can work as a subsidy to banks.”

13 Ingelesez: “In contrast to central bank policy, net government spending always provides a direct flow of financial assets to the private sector. This is because the difference between what the public sector spends on the private sector and what the public sector collects from the private sector (taxes) is a net addition to the stock of financial assets (currency and other liabilities of the public sector) that the private sector owns. This becomes the best option in times of deleveraging, on condition that the central bank faces no constraints in keeping public debt fully liquid by letting the currency float, and by standing ready to be an unlimited buyer of public debt if need be.