NOTHING TO SUBTRACT

Dear Colleagues,
 
I have read a fair cross section of the traffic on money and public debt through this site in the last 20 days. I refer here to one of the contributions, which makes a substantive point -- Prof Wray's communication of 30/01/03, concerning portfolio preferences and what the private sector can and cannot do with excess holdings of outside money holdings resulting from government expenditure.
 
I doubt whether progress is possible in these kind of discussions, without recourse to formal treatments of the relevant arguments -- which would have the effect of "disciplining" discussion, literally. I am unaware of the advocates of the Mitchell/Wray position having anywhere so formalised their reasoning. I myself in an earlier communication have suggested a basis for such formal argument (Panico's modelling). [I attach a simplified version of that modelling, as used by me in a paper (yet unpublished) on "'The Functionless Investor': Keynes's euthanasia of the rentier revisited". I've just attached the relevant Section 4 of the paper, and the opening paragraphs. It presents the special case of a zero interest rate, but is easily generalizable. It might give a better sense of what I am getting at, in terms of formal argument.]
 
I can add this, in relation to the reasoning in my ROPE review. Any particular government deficit as a proportion of GDP entails a particular injection (and growth rate) of SOME combination of outside money balances (OM) and government securities (GS). On the other hand, in the aggregate the private sector will have certain desired quantities, growth rates and proportions in which they wish to hold OM and GS -- a function of a variety of variables (activity levels, inflation, absolute and relative yields, and so on). What guarantee is there that the supplies over time of OM+GS, independently entailed by the deficit, will conform to portfolio preferences? None. [An interest-setting monetary policy mechanism enables the private sector as a whole to alter the quantities and proportions in which it holds OM or GS, but NOT the quantities and proportions in which it holds the SUM of the two.] Therefore, the variables determining portfolio choice must somehow alter endogenously to bring this about -- e.g., by higher activity levels and inflation, and by monetary policy yielding to higher interest rates. These consequences MAY be benign or desirable -- but that is something to be demonstrated not merely asserted. If, as Prof Wray suggests in a later communication, a deficit will be self-correcting in some measure or manner, via impacts on activity/growth, I would like to see some formal demonstration of this.
 
Regards,
 
Tony Aspromourgos