Re: NOTHING TO SUBTRACT

In the archive, the plain text part of Tony's message was garbled.
So I send it out again, to get it correctly archived.

Trond Andresen
technical list manager

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  From: "Tony Aspromourgos" <T.Aspromourgos@econ.usyd.edu.au>

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that modelling, as used by me in a paper (yet unpublished) on "'The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
Received on Sun Feb 16 11:00:59 2003