Budget Deficits and Saving, Reserves and Interest Rates Part 2: Responses to Blog #20

Q1:  Andy. What does”wonky” mean? 

A: Think “policy wonk” someone who gets all data-heavy andinto the deep technical details to do policy analysis. So it is used to warnthe reader that only those really interested in details needs to read on.

Q2: Ryan. Let’s assume the economy already works with fullcapacity, and the government would like to maintain it without any furtherinflation or deflation. Does the government now have to make an educated guess(regarding the exogenous part of gov. deficit) what the nongovernment savingdesire might be, so that it (government) fulfills its goal (full employment andprice stability). Kind of trying to hit moving target? And in this regard, isthe ELR governmental program kind of “shoot and forget” mechanism,which automatically, always finds, or helps to find the moving target(nongov.  saving desire)?

A: No, not really. Let us say government puts in place theELR and 20 million show up for work. Before the program was in place, everyonewas worried about the future—paying bills, losing jobs, etc. Net privatefinancial saving desires were, say, $1 trillion. No one wanted to spend. Nowwith 20 million new jobs and the certainty that you can find one reduces thesesaving desires. You go shopping. You feed your family. The private sectorstarts hiring, producing. GDP starts growing. You get recruited out of the ELRprogram into a hiring paying private sector job. You pay more taxes. Federalgovernment spending on ELR falls, its budget deficit falls into line with thelower net financial saving desires. The only planning you need by government isthe “real stuff”—create jobs. Govt does not need to try to hit the net savingdesires—that is done automatically.

Q3:  Paolo. “thisalso means it is impossible for the aggregate saving of the nongovernmentsector to be less than (or greater than) the budget deficit”Take the”greater than” option. What about a nongovt. sector export surplus?Wouldn’t that add net financial assets to the nongovt. sector aggregate savingsabove the amount generated by govt deficits?

A: Yes, Americans might also save in foreign currencydenominated assets—ie UK pounds. Those can come from export surpluses. I was talkingabout domestic currency. But you are correct, in some countries the net savingdesire could largely take the form of foreign currency (ie in places where USDollars are desired).
Q4. Guest. Prof. Wray, On page 7 of “Waiting for the Next Crach: The Minskyan Lessons Wefailed to Learn”(http://www.levyinstitute.org/p…, you said Goldman Sachslet hedge fund manage Henry Paulson design sure-to-fail synthetic CDO’s. Didyou mean John Paulson? If I’m not mistaken, Henry Paulson was Sec of treasuryduring the GFC…   Just checking, causeI’m sure John Paulson wants his credit for being one of the world’s premier**s****s.

A: Yes a helpful editor added the wrong first name. I thinkit is now corrected.
Q5: MamMoth, Dale, Neil, Samuel.  Many questions and comments on exogenous vsendogenous.

A: In economics the distinction between endogand exog is used in three different senses: control, theoretical, andstatistical. Only the econometricians reading this care about the last one soI’ll leave it. In the control sense it means the govt can “control” thevariable: ie control the money supply, control the interest rate, control theprice level. MMT shares with the “endogenous money” or “horizontalist”approaches the view that the CB cannot control the money supply or bankreserves. Instead the CB must accommodate the demand for reserves. HOWEVER thesetheories were formulated back when the interest rate paid on reserves was zerobut the Fed’s target overnight interest rate was nonzero. Excess reserves drovethe market (fed funds) rate below zero so the Fed would have to drain reservesby selling Treasuries. But now the Fed has a near zero interest rate target(like Japan) and so can leave excess reserves in the system and pay 25 basispoints on them and the market rate remains near 25 basis points.  So you could say that with QE the Fed“exogenously” increases bank reserves. There is an asymmetry, though, becausethe Fed can leave banks full of excess reserves but cannot leave them shortreserves—which would drive the market rate above the target. On the other hand,the CB’s target interest rate is clearly exog in the control sense: the Fed canset its target at 25 bp, or raise it at the next meeting to 150 bp. Finally,the control sense and the theoretical sense are related but not identical. Letus say the US had a fixed exchange rate and used the interest rate policy tohit the peg. We can say the interest rate is exogenously controlled (set by theFed) but it is not theoretically exog because the overriding policy is to pegthe exchange rate.

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