I've been studying economics for at least 54 years, but learned most of what you write hear in the last 20 years via the MMT school. Your focus on wealth and assets is a useful extension to MMT, IMO.
Very true, MMT and PostK def lead the way on these accounting-based understandings. But even there, and even from the old warhorses of MMT, you find glaring errors that persist from mainstream. eg that "Saving" = ∆NW, which isn't even vaguely close to correct.
Marvellous! Tremendously concise the fundamentals for an real understanding of our economy. I wish we – particularly also journalists – would check the statements from politicians, ‹experts› etc. concerning these fundamentals. IMO, whoever does not apply what you laid out in these 10 points will – inevitably – talk gibberish.
This said, I would like to point out that we use (or put out) a definition of what we consider as «assets» (or «wealth») which is – IMO – too narrow and in that sense even wrong as it is to our all demise. I am talking about this: Whenever we produce something a part or all of it gets added to our assets accounting sheet. Hurrah!
But we do not or hardly take (or want to take) into account (= our accounting) the ‹wealth/assets› which get depleted or destroyed (i.e.. resources in the ground, fish stock in the oceans, pollution of water, air, fertile land).
What are the reasons not to account for these assets? If a person – at least nowadays – does not hold a title of possession on something it is to a large degree of no interest (= value) to him. And even when he holds a title on it: The way we are taught to think and the way our economy (and accounting methods) are structured makes it «sensible» to exploit that asset, meaning: make short term monetary/accounting gains and do not take into consideration (= do not account for) the depletion/losses in the long run and the – over human kind (an the biosphere over all) ‹finely disbursed› – negative externalities.
> whoever does not apply what you laid out in these 10 points will – inevitably – talk gibberish
Well *I* certainly agree... 😁 These understandings need to be (baked) in(to) the Econ 101 textbooks.
> definition of what we consider as «assets» (or «wealth») which is – IMO – too narrow
Totally agree but there are huge impediments (both conceptual and empirical) to extending the current *numeric* tally to include eg human and natural capital. I won't get into those issues here. Huge rabbit hole...
Wealth untethered from owned-asset dollar accounting is kind of like utility: a truly excellent *concept* in the abstract but...you'll notice that this graph for instance is (unavoidably) dimensionless, no numbers on the axes. https://x.com/asymptosis/status/1794047390930092188
There is no "true," "real" numeric, monetary measure of wealth besides accounted wealth. Units of account are *pure* accounting concepts, so...there ya go. Using accounted wealth means that your very term, wealth, is precisely defined by a perfectly coherent web of accounting identities.
I'm thinking I should add that as #11. (Or #1?)
"The only *true* wealth is…the love of friends and family." I totally agree, but...
> extending the current *numeric* tally to include eg human and natural capital. I won't get into those issues here. Huge rabbit hole…
Good to know that I am not the only one who gets the feeling that it is a «huge rabbit hole» … and then opts for the real thing: "The only *true* wealth is…the love of friends and family."
But even if I stay away from the rabbit hole there still some question on the numeric side I would be happy to have your take on it.
In a recent comment you mentioned that the wealth of US(-residents) households is about $175T. My questions:
- Wealth is here (about) the same as net worth?
- Are the «nonprofits» of any significance? Am I right to assume that we talk here mainly of trusts (like the one of the Gates)?
- Corporations (including banks) are not mentioned because they are ultimately owned by households/nonprofits. Therefore $175T is all the wealth there is on the non-state side, or not?
- If so, is there a number floating around about the wealth (net worth) of the state (federal, state and local government, various agencies, FED)? (I assume we are talking here mainly about infrastructure/buildings, power plants, equipment, land property, licences on resource extraction; some financial wealth minus the debt (which is partly held by the FED).)
Check the popup menu upper-left here. (And play with the other options/menus!) You can see Assets, Liabilities, and subcategories of each. As minus Ls = NW.
- Are the «nonprofits» of any significance? Am I right to assume that we talk here mainly of trusts (like the one of the Gates)?
NPISHes hold about 6% of combined "personal"-sector assets.
- Corporations (including banks) are not mentioned because they are ultimately owned by households/nonprofits. Therefore $175T is all the wealth there is on the non-state side, or not?
Right. HH wealth is the only measure there is of "national wealth." In the Table B.1 they try to measure just "real" nonfinancial assets. But for the corporate and foreign sectors, they have no choice: they punt, and show show the value of outstanding equity shares at market prices. So kind of a weird Frankenstein monster of a methodology.
B.1 wealth is basically just household wealth minus the U.S. Net International Investment Position (US holdings of foreign assets minus foreign holdings of US assets).
Please take this as respectfully feedback and an invitation to discussion. I enjoy thinking about these things. I hope my note here is interesting to you.
A couple thoughts about #1 Money.
1. Money's most important role is as a form of settlement. Society is organized by an interconnecting web of obligations. These obligations are quantified as credit and discounted based on timing and risk. Money is the highest form of credit because It's not discount as a promise to pay, but accepted as settlement itself.
2. Dollars are not fixed price. Par value is defended by the Fed. There is a public cost and benefit to doing it. But it's not natural.
>1. Money's most important role is as a form of settlement.
Fer sure. First off, rather than "money," which is used to mean so many different things (e.g. "How much "money" do you have, Mr. Trump?", which is actually asking about total assets/NW), I prefer to talk about "M assets" or M2 — bank deposits plus a v small, ignorable amount of physical cash. So I'll just say "bank deposits." From there:
~Every seller of ~anything demands bank deposits in payment. Very few exceptions. They're what's transferred to "settle" those exchanges. (Both sellers *and exchange networks* require these fixed-price assets, whose $-designated value doesn't change between payment initiation and receipt.)
Interestingly Nathan Tankus prefers to call bank "reserves" – *banks'* deposit holdings at the Fed — "settlement balances." A little unwieldy but I like it. The full pyramid of consolidated M transfers is ultimately "settled" every night at the Fed.
So sure: non-bank actors settle ~all purchase transactions by transferring bank deposits, M2. Ditto banks, using "reserves."
>Par value is defended by the Fed. There is a public cost and benefit to doing it. But it's not natural.
I'm sorry I don't understand this. "Par value" designated in what unit? Baskets of goods? That's what's implied, right? Defense against inflation? Different issue.
What the Fed and innumerable other institutions (FDIC being a big one, but also even your corner store) defend in this context is bank deposits' equality with the unit of account. Here a footnote from an as-yet-unfinished book of mine...
That price-pegging is guaranteed and enforced by multiple private and public institutions, notably including but not limited to deposit insurance for bank accounts. When the $65-billion money market Reserve Fund/Primary Fund (not insured by the FDIC/FSLIC or any private bank-insurance institutions) “broke the buck” on September 15, 2008, only offering 97 cents in commercial-bank deposits for $1 in money-market deposits, the U.S. Treasury stepped in within 48 hours to guarantee and prop up the $1 share price of all money market funds. (The funds paid a fee for this temporary but mandatory insurance, dissolved in September 2009.) In practice, in normal times and even extraordinary ones, $1 in M assets always sells for $1 — by definition here, but more importantly by institutional enforcement. Fixed-price is M assets’ sine qua non — the thing that makes them what they are.
Thanks for your comments. Love to hear more thoughts.
don't disagree with anything you said. However, I think a summary of what money is that doesn't reference credit and settlement is incomplete.
A “Settlement balance" is an IOU from the CB to a charter bank.
A demand deposit is an IOU from the bank to the depositor.
There's a hierarchy of credit here where the CB is on top, and charter bank deposit under them. This hierarchy is usually invisible but it becomes visible in systemic crisis. In moments before a CB steps in as a lender of last resort the moneyness of bank deposits become uncertain. That uncertainty can cause bank deposits to be discounted, to break par. Your example of money market deposits selling for $.97/$ is a perfect example of a deposit being discounted.
Before the Federal Reserve, US banks did not necessarily exchange dollar denominated deposit at 1:1 par. A given bank would likely discount deposits from other banks. For example a $100 check written from the First Bank of Ohio and deposited in San Francisco Trust: SF Trust might only swap for $86 in demand deposit. We accept that dollars are fungible, but banks aren't.
When you look at how the economy actually arranges payments, you'll see that the system is full of IOUs: credit denominated in dollars, extended by market makers who set prices and create systemic liquidity. These market makers are essentially doing banking: swapping IOUs.
This is just one important aspect of a global shadow banking system. Importantly the shadow banking system is using short term deposit to fund long term investments. These are financial services that are providing liquidity and swapping dollar denominated IOUs and doing it outside the umbrella of a charter bank, or even money market account. All of these IOU swaps are part of the expanding and contracting supply money supply.
Excellent post!
I've been studying economics for at least 54 years, but learned most of what you write hear in the last 20 years via the MMT school. Your focus on wealth and assets is a useful extension to MMT, IMO.
This falls within the Post-Keynesian school (highlighting accounting & sectoral balances) according to my view of the academic economic world. -- http://1stuu.org/Communications/EvolutionOfSelectedEconomicSchools.pdf.
The accounting perspective really helps and should be (but isn't) at the heart of economics, in my view.
Very true, MMT and PostK def lead the way on these accounting-based understandings. But even there, and even from the old warhorses of MMT, you find glaring errors that persist from mainstream. eg that "Saving" = ∆NW, which isn't even vaguely close to correct.
Well since you put it that way this makes all the cents in the world.
<grin>
Marvellous! Tremendously concise the fundamentals for an real understanding of our economy. I wish we – particularly also journalists – would check the statements from politicians, ‹experts› etc. concerning these fundamentals. IMO, whoever does not apply what you laid out in these 10 points will – inevitably – talk gibberish.
This said, I would like to point out that we use (or put out) a definition of what we consider as «assets» (or «wealth») which is – IMO – too narrow and in that sense even wrong as it is to our all demise. I am talking about this: Whenever we produce something a part or all of it gets added to our assets accounting sheet. Hurrah!
But we do not or hardly take (or want to take) into account (= our accounting) the ‹wealth/assets› which get depleted or destroyed (i.e.. resources in the ground, fish stock in the oceans, pollution of water, air, fertile land).
What are the reasons not to account for these assets? If a person – at least nowadays – does not hold a title of possession on something it is to a large degree of no interest (= value) to him. And even when he holds a title on it: The way we are taught to think and the way our economy (and accounting methods) are structured makes it «sensible» to exploit that asset, meaning: make short term monetary/accounting gains and do not take into consideration (= do not account for) the depletion/losses in the long run and the – over human kind (an the biosphere over all) ‹finely disbursed› – negative externalities.
Thanks!
> whoever does not apply what you laid out in these 10 points will – inevitably – talk gibberish
Well *I* certainly agree... 😁 These understandings need to be (baked) in(to) the Econ 101 textbooks.
> definition of what we consider as «assets» (or «wealth») which is – IMO – too narrow
Totally agree but there are huge impediments (both conceptual and empirical) to extending the current *numeric* tally to include eg human and natural capital. I won't get into those issues here. Huge rabbit hole...
Wealth untethered from owned-asset dollar accounting is kind of like utility: a truly excellent *concept* in the abstract but...you'll notice that this graph for instance is (unavoidably) dimensionless, no numbers on the axes. https://x.com/asymptosis/status/1794047390930092188
There is no "true," "real" numeric, monetary measure of wealth besides accounted wealth. Units of account are *pure* accounting concepts, so...there ya go. Using accounted wealth means that your very term, wealth, is precisely defined by a perfectly coherent web of accounting identities.
I'm thinking I should add that as #11. (Or #1?)
"The only *true* wealth is…the love of friends and family." I totally agree, but...
> extending the current *numeric* tally to include eg human and natural capital. I won't get into those issues here. Huge rabbit hole…
Good to know that I am not the only one who gets the feeling that it is a «huge rabbit hole» … and then opts for the real thing: "The only *true* wealth is…the love of friends and family."
But even if I stay away from the rabbit hole there still some question on the numeric side I would be happy to have your take on it.
In a recent comment you mentioned that the wealth of US(-residents) households is about $175T. My questions:
- Wealth is here (about) the same as net worth?
- Are the «nonprofits» of any significance? Am I right to assume that we talk here mainly of trusts (like the one of the Gates)?
- Corporations (including banks) are not mentioned because they are ultimately owned by households/nonprofits. Therefore $175T is all the wealth there is on the non-state side, or not?
- If so, is there a number floating around about the wealth (net worth) of the state (federal, state and local government, various agencies, FED)? (I assume we are talking here mainly about infrastructure/buildings, power plants, equipment, land property, licences on resource extraction; some financial wealth minus the debt (which is partly held by the FED).)
>Wealth is here (about) the same as net worth?
Check the popup menu upper-left here. (And play with the other options/menus!) You can see Assets, Liabilities, and subcategories of each. As minus Ls = NW.
https://www.federalreserve.gov/releases/z1/dataviz/dfa/distribute/chart/#quarter:138;series:Liabilities;demographic:networth;population:1,3,5,7,9;units:levels
- Are the «nonprofits» of any significance? Am I right to assume that we talk here mainly of trusts (like the one of the Gates)?
NPISHes hold about 6% of combined "personal"-sector assets.
- Corporations (including banks) are not mentioned because they are ultimately owned by households/nonprofits. Therefore $175T is all the wealth there is on the non-state side, or not?
Right. HH wealth is the only measure there is of "national wealth." In the Table B.1 they try to measure just "real" nonfinancial assets. But for the corporate and foreign sectors, they have no choice: they punt, and show show the value of outstanding equity shares at market prices. So kind of a weird Frankenstein monster of a methodology.
B.1 wealth is basically just household wealth minus the U.S. Net International Investment Position (US holdings of foreign assets minus foreign holdings of US assets).
I really enjoyed reading this. Thank you.
Please take this as respectfully feedback and an invitation to discussion. I enjoy thinking about these things. I hope my note here is interesting to you.
A couple thoughts about #1 Money.
1. Money's most important role is as a form of settlement. Society is organized by an interconnecting web of obligations. These obligations are quantified as credit and discounted based on timing and risk. Money is the highest form of credit because It's not discount as a promise to pay, but accepted as settlement itself.
2. Dollars are not fixed price. Par value is defended by the Fed. There is a public cost and benefit to doing it. But it's not natural.
>1. Money's most important role is as a form of settlement.
Fer sure. First off, rather than "money," which is used to mean so many different things (e.g. "How much "money" do you have, Mr. Trump?", which is actually asking about total assets/NW), I prefer to talk about "M assets" or M2 — bank deposits plus a v small, ignorable amount of physical cash. So I'll just say "bank deposits." From there:
~Every seller of ~anything demands bank deposits in payment. Very few exceptions. They're what's transferred to "settle" those exchanges. (Both sellers *and exchange networks* require these fixed-price assets, whose $-designated value doesn't change between payment initiation and receipt.)
Interestingly Nathan Tankus prefers to call bank "reserves" – *banks'* deposit holdings at the Fed — "settlement balances." A little unwieldy but I like it. The full pyramid of consolidated M transfers is ultimately "settled" every night at the Fed.
So sure: non-bank actors settle ~all purchase transactions by transferring bank deposits, M2. Ditto banks, using "reserves."
>Par value is defended by the Fed. There is a public cost and benefit to doing it. But it's not natural.
I'm sorry I don't understand this. "Par value" designated in what unit? Baskets of goods? That's what's implied, right? Defense against inflation? Different issue.
What the Fed and innumerable other institutions (FDIC being a big one, but also even your corner store) defend in this context is bank deposits' equality with the unit of account. Here a footnote from an as-yet-unfinished book of mine...
That price-pegging is guaranteed and enforced by multiple private and public institutions, notably including but not limited to deposit insurance for bank accounts. When the $65-billion money market Reserve Fund/Primary Fund (not insured by the FDIC/FSLIC or any private bank-insurance institutions) “broke the buck” on September 15, 2008, only offering 97 cents in commercial-bank deposits for $1 in money-market deposits, the U.S. Treasury stepped in within 48 hours to guarantee and prop up the $1 share price of all money market funds. (The funds paid a fee for this temporary but mandatory insurance, dissolved in September 2009.) In practice, in normal times and even extraordinary ones, $1 in M assets always sells for $1 — by definition here, but more importantly by institutional enforcement. Fixed-price is M assets’ sine qua non — the thing that makes them what they are.
Thanks for your comments. Love to hear more thoughts.
don't disagree with anything you said. However, I think a summary of what money is that doesn't reference credit and settlement is incomplete.
A “Settlement balance" is an IOU from the CB to a charter bank.
A demand deposit is an IOU from the bank to the depositor.
There's a hierarchy of credit here where the CB is on top, and charter bank deposit under them. This hierarchy is usually invisible but it becomes visible in systemic crisis. In moments before a CB steps in as a lender of last resort the moneyness of bank deposits become uncertain. That uncertainty can cause bank deposits to be discounted, to break par. Your example of money market deposits selling for $.97/$ is a perfect example of a deposit being discounted.
Before the Federal Reserve, US banks did not necessarily exchange dollar denominated deposit at 1:1 par. A given bank would likely discount deposits from other banks. For example a $100 check written from the First Bank of Ohio and deposited in San Francisco Trust: SF Trust might only swap for $86 in demand deposit. We accept that dollars are fungible, but banks aren't.
When you look at how the economy actually arranges payments, you'll see that the system is full of IOUs: credit denominated in dollars, extended by market makers who set prices and create systemic liquidity. These market makers are essentially doing banking: swapping IOUs.
This is just one important aspect of a global shadow banking system. Importantly the shadow banking system is using short term deposit to fund long term investments. These are financial services that are providing liquidity and swapping dollar denominated IOUs and doing it outside the umbrella of a charter bank, or even money market account. All of these IOU swaps are part of the expanding and contracting supply money supply.