Ritchie plays with identities

I make the point for a simple reason. There could be a relationship between I and S. But you have to make assumptions to make that relationship. And the fact is that if, as has been the case of late the savings ratio has been small or even negative, then investment can be financed by the government, or by government-created money or by overseas interests (to relax that condition, once more). In other words, there is nothing that says there is an immutable relationship between S and I. There is just a funding mix and it is my suggestion that the relationship is weak at best, and that other factors can be and almost certainly are more powerful, and that can and should now include government-created money to be used for this purpose.

And, of course, manages to miss the point. Savings are production in this period which are not consumed in this period, instead allocated to be consumed in a future one. Investment is the allocation of production not to be consumed in this period but to be so in a future one.

There’s a link between those two whatever MMT has to say on the subject.

5 thoughts on “Ritchie plays with identities”

  1. When I read the headline I thought you were going to say he’d been playing with the dressing up box.

  2. But the money that feeds into S was created by government in the first place, and they will have already invested it when they spent it into the economy. What? They just spent it, they just called it investment.

  3. S = I . Always and at every instant. This is also the MMT position. What MMT says however, based on Wynne Godley’s sectoral balances equation, is that they can differ when looked at for a particular sector in the economy.

    For example, and absent the external sector, if the private domestic sector decides to net save, i.e., saving in excess of investment (S > I), then the government must dissave in exactly the same amount. Here is the equation:

    (S – I) = (G – T)

    When we include the external sector, then for a given country, saving does NOT have to match investment, but saving must match investment at the global level.

    For example, the US has more investment than saving. China has more saving than investment. Thus the trade deficit the US has with China.

    So sure, the US had some production it didn’t consume, but some of the saving associated with that production belongs to China, not the US. Thus that flow of Treasuries to China. And as Mr. Worstall has pointed out in the past, the US can send Treasuries to China forever, because what it sends out in saving is only a small fraction of what it earns. Sort of like a pensioner who grows richer, despite spending a portion of portfolio returns.

    To return to the original point, the makeup of the saving-investment identity matters, because it may have inflationary or deflationary consequences in the future, based on the differing marginal propensities to consume of those who hold the savings.

  4. Kester Pembroke

    All government spending works via crediting bank accounts (put number up in account.) There are unlimited intraday overdrafts that fund spending described here:
    https://publications.parliament.uk/pa/cm200102/cmselect/cmpubacc/349/349ap02.htm
    Read points 17-20 and diagram at bottom.

    If there is no saving in the spending chain you get all government spending eventually back as tax. If people spend from their savings or take out bank loans and there is no saving in the spending chain government gets all of that back as tax as well.

    Net savings desires determine the deficits level.

Leave a Reply

Your email address will not be published. Required fields are marked *