Tuesday, January 10, 2012

An Interesting Summary


In his abandonment post, PeterC offered an interesting summary of MMT:

MMT = (1) an understanding of monetary operations + (2) stock-flow consistency + (3) Minsky + (4) Functional Finance + (5) Job Guarantee

"Stock-flow consistency". I've heard the phrase a few times, but never caught the importance of it to MMT until I read Peter's post.

After reading it, I had a thought.

If you care about "stock-flow consistency" you should object to graphs comparing debt to income. You should want to compare debt to M1 -- to the stock that, when if flows, becomes income.

4 comments:

Greg said...

Stock flow consistency means a couple off things to me.
1) not confusing a stock and a flow (like saving AND savings)

2) Not comparing stocks and flows which arise from each other like Govt debt / GDP. Increasing govt spending results in increased GDP ,increasing govt spending by law must be *offset* with govt debt. Thus it is not proper to use high debt/ GDP ratios as an argument to lower debt. One can simply raise GDP which requires (at times) a raising of govt debt.
If you are going to use debt/GDP undersatnd that it is the denominator which is the most variable in this equation and therefore likely the culprit in changes of this varaiable.

3).................. I cant remember the third

Greg said...

The thing about debt to income is that it is out of income that we service our debt. When you go to a bank for a loan they want your INCOME statements. There is a limit to the amount of debt we can take on and that limit is the income that we earn.

The Arthurian said...

Greg: "3).................. I cant remember the third"

Well you caught me by surprise with that one, Mr. Perry.

//

Greg: "Stock flow consistency means a couple off things to me... 2) Not comparing stocks and flows which arise from each other"

Yeah. I was thinking of #1, not #2. But you have a point. So let's move on to the next item:

Greg: "The thing about debt to income is that it is out of income that we service our debt."

Private sector debt is used to generate the spending that becomes income. So the debt-to-income ratio compares a stock to a flow that is generated from that stock.

Don't look at how we service our debt; look at how we generate our income.

Greg said...

A lot of the way we generate our income is with increasing govt debt.

If I remember correctly, the G part of our spending has been a pretty consistent 25% for the last 6 decades. So on a macro level, G accounts for 25% of our income.... no small apples. All that spending eventually gets accounted for as govt debt.

So thats how we generate our income.