Identity Games: Saving ≠ Saving? Whodathunkit?

April 21st, 2013

I finally figured out a simple way to explain my confusion (and that of many others, including many economists) with the whole Saving issue. I may also have figured out a useful solution to that confusion, which I present at the bottom here for my gentle readers’ delectation and denunciation.

Econ profs: I’m really curious. Do you think this post would help your intro students understand this stuff?

First: The accounting’s fine. Of course. But for some not-crazy reasons, the definition of “Saving” changes in the course of the accounting.

Thinking of the “real” sector for the moment, for simplicity and clarity. For each of the economic units at the bottom level of that sector (households and nonfinancial businesses), Saving means money saving:

(1) Saving = Income – Expenditure

But at the top, the level of “sectoral” saving, Saving means saving of real goods:

(2) Saving = Income – Consumption Expenditures

Or in words that more aptly describe what’s being depicted:

(3) Saving = Production – Consumption

(Reminder: Consumption Spending + Investment Spending = Expenditures = Income = Production)

Explanatory aside: There’s Gross or Net Saving, depending on whether Consumption just includes Consumption Spending (on goods that are bought and consumed within the period), or also includes Consumption of Fixed Assets — the very real “depreciation” of those assets. Gross is long-lived goods produced; Net is long-lived goods added, above and beyond what’s “consumed.”

Back to identities: Unlike every other measure in the national accounts, if you sum up the money Saving of all the bottom-level units, it doesn’t equal Saving for the sector. Rather:

(4) Sectoral Saving = Units’ Combined Money Saving + Investment Spending*

Investment spending, of course, causes the creation of real, long-lived goods. But this is the thing that has confused me from the get-go: Saving is (savings are) some combination of money and real goods? Aren’t financial assets supposed to be representative of, proxies for, the real assets? (Equally confusing: economists’ insistence on talking about “capital” as if it were some undifferentiated, homogeneous or vaguely contiguous lump of real and financial capital.)

Here’s what you need to know to sort that out: You know that money saving? It’s zero.

As JKH has quite rightly pointed out, if Sectoral Saving means money saving, “one stumbles upon the unhelpful conclusion that global saving…is identically zero, which is not very productive.” Income = Expenditures, right? One person’s spending is another’s income. So for the world or any closed sector (no net flow in or out), Money Saving (Income – Expenditures) must equal zero.

If you plug that zero into (4), voila, you get:

(5) Sectoral Saving = Investment Spending

This makes sense in the accepted sectoral definition; investment spending increases the stock of real, long-lived goods — Sectoral Saving. But if you don’t get confused when Spending = Saving, you’re a better soul than I.

While JKH is (identically!) correct, I completely disagree that this is “unhelpful” or not “productive.” Because in fact a money-saving approach perfectly depicts the actual situation in a way that’s easy to grasp — which is important given that so many find it so hard to grasp. If there’s no flow in from other sectors (Government and Foreign, ignoring the financial sector for the moment), the units in the real sector, in aggregate, can’t save money. You get this familiar, MMT-favorite identity:

(6) Government Deficit + Trade Surplus = Real Sector Money Saving (Net Acquisition of Financial Assets)

When you’re looking at the actual accounts, Money Saving doesn’t equal zero. Because we all know: households and businesses save money — but only, in aggregate, if there are inflows from outside (which there are). If Sectoral Saving meant money saving, as it does at the bottom, unit level, what you see at the top would be the non-zero sum of what you see at the bottom.

It’s not crazy to think about sectoral saving as money saving. Both the NIPAs and the FFAs provide a sector-level measure of Personal Saving (households), which is unequivocally money saving: Money Income – Money Expenditures. (Nobody would say that household saving is “stockpiling of real goods.”)

Unfortunately the accounts don’t have a similar measure of money saving labeled Business Saving, which would be this:

(7) Business Saving = Income – Expenditures – Distributed Profits = Undistributed Profits

(This because Distributed Profits count as Income for households, so they contribute to Household/Personal Saving, not Business Saving.)

Why no such Business Saving measure? Because this is the turning point, the crux, of the definitional legerdemain. Within the real sector in the NIPAs, businesses only do Investment Spending, and only businesses can do Investment Spending. (Households only do, only can do, Consumption Spending.) Is Investment (aka Business) Spending an Expenditure, or isn’t it? Is it Expenditure or Saving? If there were a measure here called Business Saving — money saving — then matter (real goods) would collide with antimatter (money), and the Universal Accounting Construct (perhaps the whole universe!) would explode and vanish in a fiery conflagration.

Okay, fine, hyperbole. But really: we know that businesses save money. You’ve no doubt noticed that corporate cash balances are at historic, all-time highs. It’s hard to pull that off if they’re not saving money. It would be nice to see that money saving by businesses clearly presented as such, in so many words, in the national accounts. It could then be totalled up with Household Money Saving to show Real- (nonfinancial) and Private-Sector Money Saving.

I’ve got more to say on all this, but I think I can clarify best by suggesting a different way of thinking about it, using different words/labels/definitions that might cut this conceptual Gordian knot, and help people better wrap their brains around the national (and world) accounts.

I’m going to talk in terms of the NIPAs here, and about the real sector, because the constructs are different in the FFAs, adding the financial sector makes things more complicated, and I want to be perfectly clear.

The basic problem: we’re short a word. We have more things to describe than we have words. So I’m adding one.

Whenever you see Saving in the NIPAs (except “Personal Saving”), replace in your mind with:

 Accumulation (of real goods)

 When you think about Saving, think money saving:

Household/Personal Saving (Income – Expenditures)
+ Business Saving (Income – Expenditures – Distributed Profits = Undistributed Profits) 

Adopting those labels, when you see “Investment,” think:

 Spending that adds to the Accumulation measure

Consumption?

 Spending that doesn’t add to the Accumulation measure

And here’s the crucial point:

Neither Consumption Spending nor Investment Spending adds to or subtracts from the Saving measure. Not directly.

Each of these spending flows increases Income and Expenditure simultaneously and equally, so they can’t increase Saving (which is the difference between the two). Sectoral Saving only happens if there are inflows to the sector.

If you want to talk about indirect effects (incentives, constraints, emergent properties, etc.), you’ve left the backward-looking realm of accounting, and entered the world of Economics, Psychology, Sociology, Dynamic-Systems Theory, and a whole host of other disciplines. Accounting can never tell those disciplines when they’re right. It can only, and only sometimes, tell them when they’re wrong.

In that backward-looking world, we can say that X% of spending in a period was Consumption Spending, and the rest was Investment Spending. But that tells us exactly nothing about what caused the mix. We can’t say from the accounting, for instance, that if there had been less Consumption Spending, there would have been more Investment Spending. The result might just have been less spending overall (even, perhaps, less Investment Spending), so less Income, and less Production (allowing for the buffer stock of inventories, though that looms ever smaller as our economy goes past 80% services, and produce-on-demand supply chains for physical goods get ever more efficient; the production comes after, and is caused by, the expenditure).

This last point — that spending (of either type) doesn’t reduce sectoral saving — is crucial because failure to understand it lies at the root of things like the ridiculous loanable funds model, the idea that more individual money saving (not-spending) causes more investment, the notion that consumption spending takes resources “out of society,” and many other evil and foolish economic misconceptions that I might encapsulate somewhat trivially with two words: “trickle down.”

Also realize: When you look at actual data for the real sector and think about it using these terms, Saving and Accumulation (née Saving) won’t show any kind of obvious relationship, except that they both generally grow over time with the economy.

That’s because the sector isn’t closed. There’s lending/borrowing to/from the other sectors, and loan payoffs in both directions — summing out to Net Lending/Borrowing — and crucially, trade imbalances, and government deficit-spending into the real sector, with money created ex nihilo. (The latter being the ultimate though not necessarily proximate source of real-sector money saving, a.k.a. Net Acquisition of Financial Assets.)

For the (open) real sector over the long term, Income > Expenditure. Hence: money saving.

For those who have been confused as I have been (and who admit it), this thinking and terminology might make it easier to think about important questions of (macro)economics — how personal/business saving relates to investment and production, the role of debt and equity financing and the financial industry in economic growth, the nature of “demand,” how the stock of financial assets (so-called “financial capital”) relates to the real capital stock, etc. I’d love to hear your thoughts.

Before I go, one more thought: After coming up with this “accumulation” notion/usage, Very Little Googling revealed that (no surprise) it’s hardly original. It’s right there in Volume I of Das Kapital. (I just discovered this? Hey, I’m self-taught, with the resulting predictably spotty/spotlight reading background. I’m working on it!)

And let’s not forget: It was the 1930s. Kuznets and co. were developing the national accounts, and they were devoted capitalists. They’re gonna use Marxist language, much less concepts and theory? In the National Accounts? Of The United States of America? Not gonna happen.

Just a notion. But it does make sense…

I said at the top that Saving in the national accounts is labeled the way it is for not-crazy reasons. Some who are better-versed in Marx and his (far more cogent) successors than I am, might beg to differ with me.

And I might very well agree with them.

That’s the kind of normative, rhetorical, and ultimately political insight and implication to all this seemingly mundane and purely “positive” accounting stuff that I’d like to write more about in future posts. Thanks for listening.

* For those who are thinking S = I + (S – I): right. Writing and rewriting this post (over and over and over) finally helped me internalize it.

Cross-posted at Asymptosis. 

  1. April 21st, 2013 at 14:30 | #1

    Take an example with standard definitions.

    Your disposable income is $100 and your consumption is $100 every period.

    Mine is $100 and I consume $70 and buy a piece of house for $30 every period (no loans).

    In both cases expenditure = $100.

    After many years I am richer than you.

    I am a saver. You are not.

  2. April 21st, 2013 at 15:46 | #2

    In S = I, doesn’t S (saving) = Y – C (income minus consumption)

    When most people talk about saving, they mean S (saving in the MOE/MOA) = Y – C – I (income minus consumption minus investment [NIPA definition, not financial investment])

  3. April 21st, 2013 at 20:16 | #3

    @Ramanan Right. We’re households. That’s how S is calculated for households. See Personal Saving. And discussion of Personal Saving, above.

  4. April 21st, 2013 at 20:17 | #4

    @Fed Up Right. The point here is that in the accounts, both are used. And unlike other measures, one doesn’t sum to the other.

  5. JKH
    April 21st, 2013 at 20:29 | #5

    Some thoughts that I’ve probably mentioned previously:

    – I think the general direction you’re headed in here is to redefine saving as what MMT refers to as net saving, or sector financial balances. Global net saving sums to zero.

    As far as the existing definition of saving is concerned, a few points:

    – It’s a flow definition. Saving is a function of income in all cases. To the degree that income is normally measured and paid in terms of the medium of exchange, saving is monetary rather than real

    – Saving is defined as a residual of income

    – Household saving is disposable income less spending on consumption goods

    – Business saving is also defined as a residual – undistributed profits

    – Government saving is the budget surplus (analogous to undistributed corporate profits)

    – These definitions correspond to net saving (not to be confused with MMT net saving); gross saving adds back capital consumption

    – The existing definition of saving is NOT a direction function of investment, and does not include investment as any part of that definition

    – For example, the equation S = I + (S – I) does NOT say that private sector investment is part of private sector saving; it says that private sector saving decomposes into two subsets – an amount of saving equal to what is required to acquire investment goods produced by the private sector; and an amount of saving in excess of that which allows the private sector to accumulate a net financial asset position as well – this is a symmetric opportunity in the sense that real and/or financial assets are being acquired with saved income – but it does not say that investment is part of saving

    Fair point to disagree with my “unhelpful/unproductive” remark. It was directed more to my own bias in adapting to existing definitions.

  6. JKH
  7. brookside
    April 21st, 2013 at 21:05 | #7

    The Gross Domestic Income Account (GDI) part of the National Income and Product Accounts (NIPA) includes a category entitled “Net Operating Surpluses” which is basically business profits. If you look at GDI and GDP together it is easy to see how economists say S = I. I don’t know enough about the Feds FFA to say how it handles business profits.

  8. April 21st, 2013 at 22:22 | #8

    @JKH

    “Household saving is disposable income less spending on consumption goods”

    It’s probably uncommon, but why can’t a household invest (NIPA definition, not financial investment)?

    “For example, the equation S = I + (S – I) does NOT say that private sector investment is part of private sector saving; it says that private sector saving decomposes into two subsets – an amount of saving equal to what is required to acquire investment goods produced by the private sector; and an amount of saving in excess of that which allows the private sector to accumulate a net financial asset position as well”

    I agree with the wording, but I think the equation needs to be changed somehow to be more informative. Some people will say (S – I) = (S – I) or S = +S or 0 = 0 and then say those are meaningless. How about private sector saving in the MOE/MOA or saving in financial assets denominated in the MOE/MOA means some other entity is in deficit? Next, assume gov’t deficit = 0 and CA deficit = 0. What’s left? The equation would be (S – I) private = (S – I) other entity where (S – I) private is positive (surplus , saving) and (S – I) other entity is negative (deficit , dissaving).

  9. April 21st, 2013 at 22:30 | #9

    @JKH

    “For example, the equation S = I + (S – I)”

    I believe that is a deaggregation of S = I (or [S – I] = 0). It seems to me you need to state that.

  10. April 22nd, 2013 at 00:22 | #10

    @Asymptosis

    “For each of the economic units at the bottom level of that sector (households and nonfinancial businesses), Saving means money saving:”

    But in my example that wasn’t so.

    Also there is nothing really called “money saving” in a strict sense even though people tend to use it informally.

    I am unsure what you are trying to say here.

    It isn’t all that complicated but I am trying to read your mind.

  11. JKH
    April 22nd, 2013 at 01:25 | #11

    @Fed Up

    “and then say those are meaningless”

    and they have said that
    and that’s a side discussion
    and that’s covered quite a bit at monetary realism
    and that’s not going to be repeated here
    but Asymptosis sees some value in it, thankfully

  12. April 22nd, 2013 at 02:15 | #12

    Just saw this … came out yesterday I guess:

    http://www.ft.com/intl/cms/s/0/52d23fa6-aa98-11e2-bc0d-00144feabdc0.html

    “The revision, equivalent to adding a country as big as Belgium to the estimated size of the world economy, will make the US one of the first adopters of a new international standard for GDP accounting.”

    and the link points to 2008 SNA. http://unstats.un.org/unsd/nationalaccount/sna2008.asp

  13. April 22nd, 2013 at 02:17 | #13

    Also

    “US economy gets a Hollywood makeover”

    http://www.ft.com/intl/cms/s/0/63bbbd22-aa95-11e2-bc0d-00144feabdc0.html

  14. JKH
    April 22nd, 2013 at 03:28 | #14

    @Ramanan

    obviously, they’ve been reading Asymptosis

  15. April 22nd, 2013 at 07:41 | #15

    @JKH:

    Thanks for all this. Before replying, to say that I’d really love to hear your feedback on:

    1. The title topic of this post: saving not summing to saving. The only measure in the accounts for which this is true?

    2. Proposed labeling (accumulation & saving) that would address that (?), and make it easier for people to grok this stuff.

    On the latter:

    “my own bias in adapting to existing definitions”

    I don’t see it as bias so much as mastery. And I suppose some lack of empathy for those of us who are not well endowed. (I suppose you could call that “bias”…) You’ve got all of this internalized, so you can comprehend in an instant what different measures mean. It’s taken me years to get to the crude understanding I’ve achieved — I think because of how the constructs are labeled.

    “An educated and informed citizenry” and all that rot.

    And I think you’ll agree that many economist still don’t understand it even as well as I do. Hence a great deal of shitty and arguably evil economic thinking.

    – I think the general direction you’re headed in here is to redefine saving as what MMT refers to as net saving, or sector financial balances. Global net saving sums to zero.

    I think you’re right. (See request for identities below.) Because it’s an accurate representation (once you change saving to accumulation) that’s much easier to grasp.

    – It’s a flow definition. Saving is a function of income in all cases. To the degree that income is normally measured and paid in terms of the medium of exchange, saving is monetary rather than real

    I doubt you’ll like this, but I don’t think of Saving as a flow. It’s the residual of two flows, resulting in a construct that you’ve described using various abstruse (and accurate!) wordings that I’m too lazy to search for right now. On the unit level, at least, it’s exactly the opposite of a flow — money not transferred.

    – Business saving is also defined as a residual – undistributed profits

    Key point was that the words “Business Saving” don’t appear in the NIPAs. Things would be much clearer if they did.

    In fact, the “Saving and Investment” account (can “Investment and Saving” have an “account”?) should be renamed “Firms” or “Businesses,” and conform to a structure similar to households. (Would this work?)

    As it stands, the account labeling strikes me as constituting hand-waving, smoke & mirrors, to conceal the definitional prestidigitation that’s at play for Saving, and the capital- (as opposed to labor and households) biased impression that inevitably results.

    Valorization of business over people.

    Firms invest! And Save! And Build Capital!!!

    Households consume (oh, and work).

    – These definitions correspond to net saving (not to be confused with MMT net saving)

    Since I’m sure you can give me this right off, can I have the identities for these two “net saving” measures? I should be able to do this in my head…

    – …the equation S = I + (S – I) …  says that private sector saving decomposes into two subsets – an amount of saving equal to what is required to acquire investment goods produced by the private sector; and an amount of saving in excess of that which allows the private sector to accumulate a net financial asset position as well

    This is very good. Really helps me get it. But it’s a lot of words that require a lot of parsing. Couldn’t the same accounting “statement” be achieved, much more clearly, with a line in the tables titled Saving & Accumulation?

    – this is a symmetric opportunity in the sense that real and/or financial assets are being acquired with saved income – but it does not say that investment is part of saving

    Again, how many will understand “symmetric opportunity”? I think you’re making a very useful statement about what funds what. (Right?) But it’s a statement that very few will understand from the accounts as labeled.

    >http://neweconomicperspectives.org/2013/04/modern-money-and-public-purpose-seminar-6.html

    Great minds…

    >obviously, they’ve been reading Asymptosis

    Thanks @Ramanan! Just did a post (tangentially) on the revised NIPA “investment” setup. Not something I really talk about in this post, but I’ve been meaning for a while to do one on the nature of “real capital” vis-a-vis “fixed capital.”

    Here’s a preview, in two tweets I sent to Matt Yglesias when he asked for people’s thoughts on the change:

    @mattyglesias NIPAs: Keep enlarging, have to stop calling it “fixed” capital.
    @mattyglesias More capital: my ability to work for the next X years. Intertemporal optimization meets the national accounts!
  16. April 22nd, 2013 at 07:52 | #16

    Oh and here’s a related out-of-the-blue poser for everyone:

    Is there any imaginable way to look at the value of not-working (“leisure”) time through the lens of the national accounts? Similar problem to Saving (not-spending)?

    If we really care about family values, shouldn’t we we looking at the “value” of family time? That business of estimating/assigning value to often-hard-to-value things is the very essence of accounting…

    http://www.asymptosis.com/home-work-25-of-gdp.html

    And follow Related Posts at the bottom for more on that.

  17. April 22nd, 2013 at 08:02 | #17

    @brookside “The Gross Domestic Income Account (GDI) part of the National Income and Product Accounts (NIPA) includes a category entitled “Net Operating Surpluses” which is basically business profits.”

    This is great, thank you. Can you give me the identity(ies) that distinguish(es) between this measure and Business Profits? Would be very interested. Thx.

    “If you look at GDI and GDP together it is easy to see how economists say S = I. ”

    Maybe for you, smart person! I’d like it to be easier for me, and others of such lesser ability and comprehension. And yes: for economists too. But I’ll try looking at it that way. Seems very promising.

  18. April 22nd, 2013 at 08:34 | #18

    @JKH

    he he he 🙂

  19. April 22nd, 2013 at 08:46 | #19

    @Asymptosis

    “The title topic of this post: saving not summing to saving. The only measure in the accounts for which this is true?”

    That’s what is strange. I think if saving doesn’t sum to saving, something else will not sum to itself.

  20. JKH
    April 22nd, 2013 at 09:03 | #20

    @Asymptosis

    Let me save your first 2 questions for the end. And I’ll take some time now to respond to various pieces of the puzzle over several different comments. Could take a while, with some breaks.

    For this comment, regarding saving as a flow, here is how I mean that:

    There are 3 basic type of accounting statements in a complete set of accounts – income statement, balance sheet, and sources and uses of funds.

    At the macro level, NIPA is the income statement. There are alternative presentations for the balance sheet, including those contained in the Fed Flow of Funds tables and the SNA tables. Finally, the Fed Flow of Funds does the job of sources and uses of funds at the macro level.

    I tend to refer to them all generically, micro and micro, as income statement, balances sheet, and flow of funds.

    Both the income statement and flow of funds cover periods of time – between balance sheet stages. The balance sheet is a snapshot in time.

    In that sense, the income statement and flow of funds are differentials and the balance sheet is an integral (so to speak).

    There is also the stock/flow characterization.

    The balance sheet is clearly a stock presentation.

    Both the income statement and the flow of funds are flow presentations.

    Godley/Lavoie recognize the flow characteristic of both of them by combining them, effectively, into what they call a transaction matrix.

    The income flow is self-descriptive. Over a specified accounting period, I earn income and blow in all in Vegas. That matches up income with consumption expenditure over time. I was broke when I started and broke when I finished. Zero assets and zero net worth, start and finish. Simple. Flowed away.

    The flow of funds is interesting and essential. It is primarily a flow of assets swaps.

    A great example is the “loans create deposits” meme.

    A bank lends a deposit into existence.

    The borrower has swapped a bank loan asset (the borrower’s liability) for a deposit asset (the bank’s liability).

    That is a flow of funds.

    The deposit funds the loan from a flow of funds perspective, at the margin, other things equal.

    And that does not conflict with the fact that the loan created the deposit.

    At the margin, if the borrower moves his deposit to another bank, the lending bank loses that funding and must find something else to replace it – at the margin, other things equal. Hence the justification for the terminology “funding”.

    In that example, there is no income statement involved. It’s only funds.

    Anyway, the income statement is also a flow.

    Income is a flow.

    Taxes, spending, and saving are all sub-flows so to speak.

    This is not because there is a flow of money into saving directly – because it is a residual. It is because saving is being measured as an event that occurs over time, time that begins and ends with two different balance sheets.

    So the flow characteristic is identifiable with the passage of time, and the stock characteristic is identifiable with a point in time.

    So saving from income over a stated accounting time period is a flow.

  21. JKH
    April 22nd, 2013 at 09:19 | #21

    @Asymptosis

    “And I suppose some lack of empathy”

    My non-empathetic swap theory:

    I think that the financial crisis has proven that there is a great and counter-productive disconnection between economics and finance. And I think that accounting is the required foundation to make that connection.

    My experience on the blogs is that there is a certain type of economist who is quite eager to sneer at the notion that accounting is critical to economics. That attitude is a lack of empathy.

    Conversely, there are those who embrace “loans creates deposits”, but have zero empathy for ISLM.

    The result is a chasm of mutual non-empathy between the mainstream economics oriented and the finance and accounting oriented.

    (BTW, my personal empathy for ISLM took an early dive, but is now increasing over time. And yes, I know Hicks effectively disavowed it.)

  22. JKH
    April 22nd, 2013 at 09:25 | #22

    @Asymptosis

    “I think the general direction you’re headed in here is to redefine saving as what MMT refers to as net saving, or sector financial balances. Global net saving sums to zero.”

    If you agree with that, it’s huge.

    Because it puts meat on the bones of a formal proposal to change macro accounting in its entirety.

    That sort of change would also be a rocket booster for MMT communication, IMO.

    I’ll have to think about this some more. Not sure it can work; not sure it can’t. My sudden instinct right now is that it’s possible, as a coherent system of accounting.

  23. JKH
    April 22nd, 2013 at 09:42 | #23

    @Asymptosis

    “The identities for these two “net saving” measures”

    This is on the run, but simple examples:

    NIPA gross and net saving:
    Assume no government spending, no taxes, no consumer spending, no exports, no imports
    Private sector gross investment I, saving S
    I is gross investment; S is gross saving
    And GDP = I = S
    Capital consumption of KC
    Then net investment = net saving = I – KC = S – KC
    GDP is still I, but income is now net saving, the difference being KC

    MMT net saving:
    Add exports E to above in the NIPA gross investment/saving version
    Then GDP = I + E
    Saving = I + E
    Net saving = E

    These two netting platforms can then be compounded:
    Net NIPA investment (I – KC) is funded by the same amount of net NIPA saving, while net NIPA, net MMT saving still = E

    Pretty hairy, huh?

  24. JKH
    April 22nd, 2013 at 09:46 | #24

    @Asymptosis

    I know I did this in reverse order to what you requested, but I’m going to have to come back to your first two questions later. I’m finding it difficult to wrap my mind around those. My first reaction is that I may not agree with # 1, which makes answering # 2 difficult as well. Later today then.

  25. April 22nd, 2013 at 11:05 | #25

    @JKH

    By #1, do you mean my comment on top?

  26. April 22nd, 2013 at 11:09 | #26

    @JKH

    A bit funny how there are two net saving 🙂

  27. JKH
    April 22nd, 2013 at 11:21 | #27

    @Ramanan

    Ramanan,

    Steve asked for feedback on these two:

    1. The title topic of this post: saving not summing to saving. The only measure in the accounts for which this is true?

    2. Proposed labeling (accumulation & saving) that would address that (?), and make it easier for people to grok this stuff.

  28. JKH
    April 22nd, 2013 at 11:27 | #28

    @Ramanan

    I find it interesting that MMT net saving is invariant under either NIPA gross saving or NIPA net saving

    i.e. NIPA gross x MMT net = NIPA net x MMT net

    Not exactly a catalyst for Steve’s mission to simplify this stuff!

    🙂

  29. JKH
    April 22nd, 2013 at 11:29 | #29

    @Ramanan

    yeah, you and I may be thinking similarly on # 1, but I want to reflect on it a bit more

  30. JKH
    April 22nd, 2013 at 11:34 | #30

    @Ramanan

    BTW, you may recall that I was taken to task by Joseph Laliberté in comments at my long MR post on S = I + (S – I), because I had overlooked the distinction between NIPA gross and NIPA net saving

    He was right to do that – but – I also pointed out to him what I said in # 28 above, so that the analysis held under either version of NIPA saving

  31. JKH
    April 22nd, 2013 at 11:41 | #31

    @Asymptosis

    Wild Experiment:
    Asymptotic Conversion of S = I + (S – I) to ‘Asymptotic Saving”

    OLD:

    GDP
    = C + I + G + (X – M)
    = Y income
    = C + S + T

    GDP Output = Y income

    S here is correctly NIPA private sector gross saving, adding back capital consumption to net saving

    NEW:

    GDP
    = C + I + G + (X – M)
    = Y
    = C + (I + (S – I)) + T
    = C + I + AS* + T

    Where AS*, Asymptotic Private Sector Saving, is the old (S – I) net saving, and I is the amount of income (but no longer defined as an amount of saving) required to fund investment I

  32. April 22nd, 2013 at 12:48 | #32

    @JKH

    Yeah recall that and your conversation. I think it was a minor point in the major thing that was discussed and it was address properly as well.

  33. JKH
    April 22nd, 2013 at 19:13 | #33

    @Asymptosis

    Steve,

    Based on my own understanding/interpretation of saving, I guess I don’t get the “saving doesn’t equal saving” part.

    I think NIPA flow saving is consistent from micro to macro.

    And the conversion to balance sheet stock savings by whatever method typically requires factoring in market to market valuation – e.g. real estate, equities. And on that basis it can be consistent with NIPA flow inputs.

    As I said, I’m not sure about the feasibility of the “Asymptotic Saving” idea as described above. In total, its also not clear to me that what I described earlier as “colloquial” use of the term saving should be the guiding light for an analytical framework in economics. And while I’m relatively open to the possibilities, that doesn’t eliminate the desirability of understanding the existing system while it’s in place. I doubt the existing framework for developing NIPA measures of saving and corresponding stock savings is going to change much, although the dividing line between what constitutes consumption and saving may be a shifting one. One just has to investigate what that is, depending on level of interest and desired granularity. That said, I would still like to ponder the Asymptotic Saving idea.

  34. JKH
    April 22nd, 2013 at 19:28 | #34

    @Asymptosis

    BTW, undistributed corporate profit is the core of net saving by business, with some data smoothing adjustments around the edges.

    That is found from the first footnote to table F8 in the Fed flow of funds, which refers to table 5.1 here:

    http://www.bea.gov/scb/pdf/2013/04%20April/D%20Pages/0413dpg_a.pdf

  35. brookside
    April 22nd, 2013 at 21:27 | #35

    @Asymptosis
    The BEA has prepared a guide to the NIPA which describes GDP and GDI and their various sub accounts and provides some detail on the items within those accounts. The guide can be found at: http://www.bea.gov/national/pdf/nipaguid.pdf.

    As to S = I, you have to look at both GDP and GDI. These are the two different ways to measure national income with GDP using expenditures and GDI using income. GDP and GDI are equal. (I am going to ignore the export/import sector to make it a little easier for me to explain) The formula for GDP is GDP = C + I + G where C is consumption spending, I is investment spending and G is government spending. The formula for GDI is GDI = W + P +T where W is wages, salaries and other compensation, P is business profits (revenues – costs) plus depreciation (capital consumption allowance) and T is government taxes.

    GDI = GDP or

    W + P + T = C + I + G

    Using a little algebra

    (W – C) + P + (T – G) = I

    Since (W -C) is consumer (or household) savings and P is business savings and (T -G) is government savings (a deficit is savings with a minus sign) the equation can be rewritten as:

    S + S + S = I or

    S = I

    Simply stated Total Income Savings equals Total Investment Spending.

  36. JKH
    April 22nd, 2013 at 21:45 | #36

    @brookside

    yes, that’s very clear

    it splits private sector gross saving (i.e. including CCA) into household and business components

    in total, it would be a 4 sector breakdown (when including foreign sector) of the amount of saving equating to the amount of investment, compatible with 4-sector financial balances on a flow basis

  37. April 23rd, 2013 at 00:01 | #37

    @JKH

    Oh good link. I was surprised by Asymptosis’ comment earlier that NIPA doesn’t have it. There is indeed the phrase business saving mentioned explicitly in NIPA. Would have been surprised if it weren’t the case as it exists in FoF and also in other countries’ accounts.

  38. April 23rd, 2013 at 03:22 | #38

    Very interesting discussion Steve, JKH and Ramanan. Thanks for the post as well as many of your recent ones Steve, this is a very needed exposition of these ideas. Ive had similar thoughts but didnt crystallize them into a coherent post/question. Many props to you for that

    A couple questions/comments

    JKH- You seem to object to solely defining saving in money terms (MMTs preference as I understand it)but is it okay to think of income in only money terms? According to comment #20 above (a very good one btw) saving, spending and taxation are all subflows of the income flow so it would seem proper to think of these subflows in the same numeraire as the original flow.

    Much of this just seems like whos perspective are we examining this from. Obviously firms arent interested solely in money, they actually need to produce stuff, but the govt just funds things and redistributes things so they just “keep score” in monetary terms. Does this fact account for differences in macro economic analysis in your view…. Steve, JKH or Ramanan?

  39. JKH
    April 23rd, 2013 at 04:04 | #39

    @Greg

    Greg,

    I do define saving in money terms.

    It is a residual subset of income, which is defined in money terms.

    But saving, defined as per NIPA, is not the same thing as what MMT defines as net saving.

    Both saving and net saving are defined in money terms.

    Saving accumulates to savings in balance sheet stock form.

    Savings is also defined in money terms.

    It is on the RHS of the balance sheet (equity, net worth).

    The real and financial assets that correspond to it are on the LHS of the balance sheet. And they are commingled. And they often exceed savings in total, because of debt on the RHS of the balance sheet. So in many cases, you can’t tell exactly what composition corresponds to savings. For one thing, that’s why savings and investment (stock) are two different things.

  40. JKH
    April 23rd, 2013 at 04:07 | #40

    @JKH

    i.e., savings (equity, net worth) is a money terms defined residual as much as saving is, although the AMOUNT of savings in total macro closure is equal to the AMOUNT of investment (stock)

  41. April 23rd, 2013 at 04:33 | #41
  42. April 23rd, 2013 at 04:40 | #42

    @Greg

    I think Steve is exploring some way of defining saving differently. JKH’s definitions haven’t changed and is as per flow-of-funds terminology and he is checking Steve’s experimentation with this. I am a bit a pessimistic and adamant as I think the standard definition of saving cannot be otherwise.

  43. JKH
    April 23rd, 2013 at 05:08 | #43

    @Ramanan

    lovely!

  44. April 23rd, 2013 at 11:45 | #44

    @JKH

    I wonder what NNT thinks of MMT.

  45. April 23rd, 2013 at 12:21 | #45

    @Ramanan

    In comment #1, I believe both saved $100 of MOE/MOA and then dissaved $100 of MOE/MOA. Next, what if you bought a stock instead of a house.

  46. April 23rd, 2013 at 12:26 | #46

    “For the (open) real sector over the long term, Income > Expenditure. Hence: money saving.”

    Any chance I can get you to stop using the term “money”? The problem is a lot of people think “money” means monetary base (currency plus central bank reserves). I believe “money” means currency plus demand deposits.

  47. April 23rd, 2013 at 13:55 | #47

    @Fed Up

    In #1, the two situations are different. Saving is disposable income minus consumption. This difference is allocated in nonfinancial and financial assets or used to reduce a liability.

    I am a saver and the other person not a saver.

  48. JKH
    April 23rd, 2013 at 16:21 | #48

    With Fed Up participating in the comments, it reminds me of the medium of account/medium of exchange framework. It’s not one I’ve personally found great use for to date, but suddenly an application occurs to me in the context of this series of posts by Steve.

    My view is that the NIPA definition of saving is constructed around the reality of a monetary economy. In a monetary economy, most income is paid in terms of the medium of exchange.

    On the other hand, GDP is a real economy phenomenon, in the sense that goods and services are real ‘things’ rather than monetary things.

    GDP is expressed in terms of the medium of account (which is generally the same measure as the medium of exchange).

    Roughly, GDP = GDI + capital cost allowance.

    (I also view capital cost allowance as a special form of income, above the net income line, in the sense that it corresponds to an equivalent amount of revenue that is set aside for the option of financing replacement capital due to capital depreciation. A business with zero income will generate cash in the bank, initially at least, in an amount sufficient to replaced depreciated capital.)

    So saving as a subset of income is a residual monetary item, at least initially. The saver at the micro level then has a choice whether to leave it in monetary form as a financial asset, or purchase a real asset. At the micro level, only some of those real assets will correspond to new investment in the same accounting period, but not all of them (‘old’ assets relative to the accounting period can be purchased with micro saving, but do not correspond to new investment).

    At the end of the day, in a well defined macro economy that includes all relevant saving (e.g. global, or 3 sector national), those new investments will be equal in amount to aggregate saving. That saving can be identified as a specific source of funds in the flow of funds statement (a medium of exchange source), and the corresponding investment is a specific application of funds to acquire things in the real economy (things that are denominated in the medium of account).

  49. April 23rd, 2013 at 18:11 | #49

    @JKH
    Thanks for the response JKH. I apologize for the rookie mistake of using the term money, I know its ambiguous and I should have been more clear.

    Actually your comment #48 is addressing some of the points I meant to make.

    I know we discussed the MOE/MOA idea in a thread at MR a while back so using that terminology I would say that MMT seems to look at saving from the aspect of positive MOE balances while you are subscribing to a more comprehensive view that includes MOA.
    Most of us think of saving as how many dollars (MOE) we have in our savings account, which is a “specific source of funding in flow of funds” and those who hold stocks or other assets with a price (MOA) feel richer (feel like we “have” more….or have saved more) as that price rises. In this sense, I suspect, is how S=I in the household sector. It seems though that a problem with this portion of the identity is that as prices of assets fall our savings fall even though we’ve done nothing to change our distribution of holdings, or the portion of income we have chosen to consume from.

    Your view of savings includes the MMT view (NFAs) but adds to it. I think its also true that your more comprehensive view needs the NFAs. Without a growing level of MOE the MOA cant expand it seems to me. The MOA is just the price of something, which is the number of MOE you want to part with it.

    I hope that made some sense

  50. April 23rd, 2013 at 19:12 | #50

    @JKH

    I think you should have “NDI” instead of GDI in that.

  51. JKH
    April 23rd, 2013 at 19:34 | #51

    @Ramanan

    what? an error? what a disgrace!

    🙂

    I think you’re right.

  52. April 23rd, 2013 at 21:15 | #52

    @Ramanan

    Sorry, I meant to combine #1 with #10. There was “money saving” going on. I consider “money saving” as saving MOE/MOA. For example, say someone is retired and receives their direct deposit on the 1st of the month. They save MOE/MOA (money save). Then over the course of the month, this person spends by dissaving MOE/MOA.

    In your example, you saved (Y – C – I) $30 of MOE/MOA (money save) and then decided to buy a financial asset. There is no reason you could not continue to hold the $30 of MOE/MOA.

  53. April 23rd, 2013 at 21:25 | #53

    @JKH

    “My view is that the NIPA definition of saving is constructed around the reality of a monetary economy.”

    Goods/services and financial assets are denominated in MOE/MOA. OK.

    “In a monetary economy, most income is paid in terms of the medium of exchange.

    On the other hand, GDP is a real economy phenomenon, in the sense that goods and services are real ‘things’ rather than monetary things.

    GDP is expressed in terms of the medium of account (which is generally the same measure as the medium of exchange).”

    It seems to me the MOE and MOA should be the same.

  54. April 23rd, 2013 at 21:28 | #54

    @Greg

    Could you define NFA’s?

    You might find these helpful.

    http://www.asymptosis.com/medium-of-account-vs-unit-of-account-brazil-anyone.html

    http://jpkoning.blogspot.com/2012/11/discussions-of-medium-of-account-could.html

    last comment: “A medium of exchange is an asset that is widely accepted in trade and to settle financial obligations. Currency notes or transferable bank deposits are typical examples. A medium of account is the commodity defining the unit of account. A unit of account is a specific amount of the medium of account. For example, for the gold standard the medium of account is gold, while the unit of account might be one ounce or one pound of gold of specific purity.”

  55. April 23rd, 2013 at 21:36 | #55

    Does everyone here think MOE = MOA = currency plus demand deposits?

  56. April 23rd, 2013 at 21:43 | #56

    Let me try this example.

    Currency only, no central bank reserves, no demand deposits, no savings (Y – C), no investment (NIPA definition), and no debt.

    Next, someone saves $1,000 in currency (MOE/MOA). Does S not equal I (NIPA definition) now? Do prices fall, real GDP fall, or some combination of the two fall?

  57. April 23rd, 2013 at 22:19 | #57

    @Fed Up

    “I consider “money saving” as saving MOE/MOA.”

    Fed-Up,

    That should be looked at as asset allocation. For a unit or a sector, saving is the difference between its disposable income and consumption. This saving is allocated into various assets – financial and nonfinancial including cash, deposits, equities, houses etc.

    So saving in cash or if you prefer saving in currency (MOE/MOA) is somewhat loose terminology. There is first saving and this is allocated across assets or used to reduce a liability.

    This point is not really minor and requires some care.

  58. JKH
    April 24th, 2013 at 00:07 | #58

    @Ramanan

    “For a unit or a sector, saving is the difference between its disposable income and consumption. This saving is allocated into various assets – financial and nonfinancial including cash, deposits, equities, houses etc. … There is first saving and this is allocated across assets or used to reduce a liability.”

    yes, that’s the point, clearly made – and allocation is the word

  59. April 24th, 2013 at 02:06 | #59

    @JKH

    Although I haven’t read much of Keynes, I think it was him who articulated this first as a “two-stage process”. It is amazing how he got so many things right but unfortunately made errors elsewhere and the economics profession readily accepted the wrong part and hasn’t understood things he got so right.

  60. April 24th, 2013 at 02:08 | #60

    @JKH

    Btw, the full chronological story of NNT versus Whelan:

    http://www.businessinsider.com/nassim-taleb-lashes-out-on-twitter-2013-4?op=1

  61. April 24th, 2013 at 02:46 | #61

    @Fed Up

    As I understand NFA, its a non bank loan created dollar. A dollar asset with no liability attached. These are rising for everyone (sector wise) when the deficit is rising. In your terminology it would be a MOE increase.

  62. JKH
    April 24th, 2013 at 02:48 | #62

    @Ramanan

    yes, in fact, the two stages are income statement and flow of funds

    or, three stages, with income statement, flow of funds, and balance sheet

    I think I said that somewhere – must have been subliminal Keynes at work

    BTW, Keynes was VERY accounting alert, and thankfully filled the GT with the logic rather than the chicken scratch

  63. JKH
    April 24th, 2013 at 02:54 | #63

    @Ramanan

    ha!

    its a contest to see which one of the two is more insufferable

    I like this:

    “He’s a guy who wrote some books about how unexpected things happen sometimes”

  64. April 24th, 2013 at 02:59 | #64

    After some thought overnight I think Ive figured what I see as a problem with much of common views of saving and the remedies for a depressed economy. Any critique is welcome.

    When I have 10,000$ in saving, a 100,000$ mortgage and a 5000$/mo income which I am only consuming 4000$ from I can add 1000$ month to my savings account. If I buy a stock for 5000$ in period A I now have 5000$ in saving account and a stock worth 5000 so my saving is still measured as 10,000$…. correct? Period B 5 months later nothing changes except stock price so now I have 10000 in saving account plus a stock price of 10000 for a total savings of 20,000$…. correct $ Period C 5 months later the stock has tanked to 1000 and my savings account is now at 15000 so my savings has dropped to 16000. I am now told by economists on TV that I must save more as the remedy for our slow economy, which will mean I spend less on someone elses business lowering their income etc etc etc because I have read keynes and know of paradox of thrift but I keep hearing that its all a problem of my too high consumption and too low saving…… I am getting dizzy from hearing the stoooopid!

  65. April 24th, 2013 at 07:23 | #65

    Hey all, I’ve been out and about the last two days, sorry, lots to catch up on. Hoping to do so today…

  66. April 24th, 2013 at 11:08 | #66

    @Greg

    I think when you started with “10,000$ in saving”, you really meant a net wealth of $10,000.

  67. April 24th, 2013 at 11:09 | #67

    @JKH

    “three stages,”

    Yes. Else one ends up with three stooges math – like 7 x 13 = 28.

  68. April 24th, 2013 at 13:48 | #68

    @Ramanan

    “That should be looked at as asset allocation. For a unit or a sector, saving is the difference between its disposable income and consumption. This saving is allocated into various assets – financial and nonfinancial including cash, deposits, equities, houses etc.

    So saving in cash or if you prefer saving in currency (MOE/MOA) is somewhat loose terminology. There is first saving and this is allocated across assets or used to reduce a liability.”

    I believe disposable income, consumption, and saving are all denominated in the MOE/MOA. I’ll do a monthly budget example. Someone has wage income of $1,000 of currency and/or demand deposits. That someone spends $800 of currency and/or demand deposits to consume. That person saves $200 of currency and demand deposits. Next, that person decides what asset allocation to have.

  69. April 24th, 2013 at 14:35 | #69

    @Fed Up

    Yeah denominated in one currency. But can be allocated in nonfinancial assets as well. In a slightly more complicated example, it can be allocated in a foreign currency as well.

    So if my disposable income is $1,000 and consumption is $6,000 my saving is $4,000. It can be allocated into $3,000 of investment in a house and $1,000 equivalent in an asset denominated in foreign currency – such as €768 of French government bonds denominated in Euro.

  70. April 24th, 2013 at 15:44 | #70

    @Ramanan

    meant $10,000 of disposable income not $1,000

  71. April 24th, 2013 at 20:50 | #71

    @Greg

    Greg, I have never gotten exactly what a NFA is from MMT. I think it includes, but is not limited to, central bank reserves. If so, I don’t consider central bank reserves MOE or MOA.

    If the gov’t borrows from someone who has saved (not a bank), then MOE/MOA does not increase.

  72. April 24th, 2013 at 21:16 | #72

    @Ramanan

    “So if my disposable income is $1,000 (EDIT $10,000) and consumption is $6,000 my saving is $4,000. It can be allocated into $3,000 of investment in a house and $1,000 equivalent in an asset denominated in foreign currency – such as €768 of French government bonds denominated in Euro.”

    OK

    From #1, “Your disposable income is $100 and your consumption is $100 every period.

    Mine is $100 and I consume $70 and buy a piece of house for $30 every period (no loans). ”

    From #10, “But in my example that wasn’t so.

    Also there is nothing really called “money saving” in a strict sense even though people tend to use it informally.”

    I’m saying in all 3 examples saving in MOE/MOA (money saving) happened and then dissaving in MOE/MOA (money dissaving) happened.

    Also, take the top example and assume the house part is I. So …

    C = $6,000, I = $3,000, and financial investment = $1,000. C + I go into GDP, while the financial investment does not. There was $1,000 of leakage from the real economy.

  73. April 24th, 2013 at 21:32 | #73

    @Greg

    “I am now told by economists on TV that I must save more as the remedy for our slow economy, which will mean I spend less on someone elses business lowering their income etc etc etc because I have read keynes and know of paradox of thrift but I keep hearing that its all a problem of my too high consumption and too low saving…… I am getting dizzy from hearing the stoooopid!”

    I believe what they mean is consumption is too high with debt. If consumption was too high, price inflation would be too high.

  74. April 25th, 2013 at 03:48 | #74

    @Ramanan

    Actually, wouldnt my net wealth be -90,000 since I also have a 100,000 mortgage? Yes my net wealth is improving by the day because of my 5000 income flow but at the period A snapshot I am -90,000…… correct? I suppose I have to know the actual dollar worth of the house to make this assessment so a 100000 mortgage on a 200,000 house gives me an additional 100000 of net worth?

    But this illustrates some of the issues with our defining of saving, net wealth etc. Market wide price crashes affect everyones savings by lowering the price of the assets they hold even when no ones individual choice of consumption had changed.

  75. April 25th, 2013 at 03:59 | #75

    @Fed Up

    “I believe what they mean is consumption is too high with debt”

    I dont think so Fed Up. Seeing as debt is pretty much the only way to consume since banks issue most money in our system which is credit money. Additionally most economists we hear on TV think everyones savings are pooled together to “fund investment” by some magic expectations fairy that adjusts interest rates to keep the investments flowing and the economy recession free if our govt would just stop enforcing minimum wage laws and taxing our brilliant job creators.

  76. April 25th, 2013 at 04:36 | #76

    @Greg

    Haven’t fully understood your scenario but you also seem to have an asset – which is your house.

  77. April 25th, 2013 at 05:25 | #77

    @Fed Up

    Okay there one first accumulates financial assets as one receives income – such as from wages, interest payments etc and an act of consumption may be looked upon as an act of dissaving. However, purchasing a house from selling financial assets is not dissaving.

    So there is no dissaving from MOA/MOE in the latter simply because there is no dissaving at all.

  78. April 25th, 2013 at 06:12 | #78

    ‘Kay, it’s gonna be a little bit before I can pull together responses to all this. Great stuff. I’ll probably do an Asymptosis-only response post to keep the discussion concentrated.

  79. April 25th, 2013 at 20:57 | #79

    @Greg

    “Seeing as debt is pretty much the only way to consume since banks issue most money in our system which is credit money.”

    I think there are plenty of entities who receive MOE/MOA and don’t have to repay it. Let’s use your example with no mortgage. You receive $5,000 per month of wage income (MOE/MOA). You spend $4,000 of MOE/MOA to consume. You save $1,000 per month. It seems to me you have consumed with no debt.

    “Additionally most economists we hear on TV think everyones savings are pooled together to “fund investment” by some magic expectations fairy that adjusts interest rates to keep the investments flowing and the economy recession free if our govt would just stop enforcing minimum wage laws and taxing our brilliant job creators.”

    1) I don’t believe in 100% loanable funds.

    2) I don’t believe real AD is unlimited (the most common definition of economics).

  80. April 25th, 2013 at 21:25 | #80

    @Ramanan

    “However, purchasing a house from selling financial assets is not dissaving.”

    I’m going to argue it is dissaving. Let’s use Greg’s example with some different assumptions. Greg does not believe in enriching bankers with interest payments and does not trust the banks. Therefore, he does not get a mortgage and manages to save using currency only “under the mattress” (any wage income he gets in demand deposits he redeems for currency). Greg gets $5,000 per month of wage income (MOE/MOA) and now only spends $3,000 of MOE/MOA to consume and saves $2,000 per month (MOE/MOA). After 60 months, Greg decides to buy a house for $120,000. That month his wage income is $5,000 (MOE/MOA), he spends $123,000 (MOE/MOA), and dissaves by $118,000 (MOE/MOA). The $118,000 (MOE/MOA) of dissavings that month is funded by $118,000 (MOE/MOA) of accumulated savings. Greg now has a house, $0 (MOE/MOA) of savings, and no mortgage.

  81. April 26th, 2013 at 02:32 | #81

    Ramanan :
    @Greg
    Haven’t fully understood your scenario but you also seem to have an asset – which is your house.

    Right, I did point that out in my comment that the value/price of my house would be considered towards my net worth/wealth

    BTW are you differentiating between savings and net wealth?

  82. April 26th, 2013 at 02:39 | #82

    Fed Up :
    @Greg
    “Seeing as debt is pretty much the only way to consume since banks issue most money in our system which is credit money.”
    I think there are plenty of entities who receive MOE/MOA and don’t have to repay it. Let’s use your example with no mortgage. You receive $5,000 per month of wage income (MOE/MOA). You spend $4,000 of MOE/MOA to consume. You save $1,000 per month. It seems to me you have consumed with no debt.

    But somewhere a bank loan generated this income flow for me. Somewhere along the line a business loan got this all going. It seems nothing starts without a bank loan or deficit spending which generates a bond……. correct? Its all predicted on increasing asset values which make the bank loans good (not ponzi dynamics of bad debt just funding more debt) or increasing deficit spending.

  83. April 26th, 2013 at 08:06 | #83

    @Fed Up

    In my example, one purchased nonfinancial assets via funds from income exclusively.

    In more complicated examples, this can be done by borrowing as well but don’t mix scenarios.

    I intentionally avoided having bank loans in my scenario to do away with complications which do not matter too much to get definitions right.

  84. April 26th, 2013 at 08:48 | #84

    But I realize I want to ask this question right off:

    Imagine a real sector with zero net lending/borrowing.

    Every household and business spends all their income. None of them “saves”; they spend everything they get.

    They spend some on consumption goods (consumed within the period), some on investment goods (which continue to exist into the next period).

    In what sense, here, is saving = investment? Except in a purely tautological, definitional, “identical” sense that basically means…nothing. The statement has no import.

    Or to put it another way (repeating myself): we already know that Net Investment increases the capital stock. What else do we know (or understand), what insight do we gain, if we call that increase Saving?

  85. April 26th, 2013 at 09:08 | #85

    @Asymptosis

    “Imagine a real sector with zero net lending/borrowing.
    Every household and business spends all their income. None of them “saves”; they spend everything they get.”

    Different things. Zero net lending and zero saving are not the same.

    The best way for you is to first use existing definitions and propose a new framework and not mix the two.

    “In what sense, here, is saving = investment? Except in a purely tautological, definitional, “identical” sense that basically means…nothing. The statement has no import.”

    But nonfinancial assets are assets. It means something.

    The way national accountants have made a framework is a careful work of thousands of people across years in the last century and this. You cannot be so dismissive of that because it is extremely solid.

  86. JKH
    April 26th, 2013 at 09:21 | #86

    @Asymptosis

    “What else do we know (or understand), what insight do we gain, if we call that increase Saving?”

    That’s exactly the question I posed to myself, when earlier above suggesting the following:

    …………………………………………………..
    Wild Experiment:

    Asymptotic Conversion of S = I + (S – I) to ‘Asymptotic Saving”

    OLD:

    GDP
    = C + I + G + (X – M)
    = Y income
    = C + S + T

    GDP Output = Y income

    S here is correctly NIPA private sector gross saving, adding back capital consumption to net saving

    NEW:

    GDP
    = C + I + G + (X – M)
    = Y
    = C + (I + (S – I)) + T
    = C + I + AS* + T

    Where AS*, Asymptotic Private Sector Saving, is the old (S – I) net saving, and I is the amount of income (but no longer defined as an amount of saving) required to fund investment I
    ………………………………………………..

    I think there is an answer, but need to ponder this one some more.

  87. JKH
    April 26th, 2013 at 09:33 | #87

    @Ramanan

    “The way national accountants have made a framework is a careful work of thousands of people across years in the last century and this.”

    This is very true. The existing set of accounts hangs together. The coherence of the existing logic is infallible, as far as I’m concerned. Whether it can be ‘tweaked’ terminologically and categorically along the lines Steve is suggesting and ‘improved’ that way is really a separate question.

    My guess is that the idea of eliminating the current measure of ‘saving’, or redefining it as MMT ‘net saving’ as I probed above, results in an inconsistency in reconciling income accounting with flow of funds accounting, micro to macro. I haven’t focused on this yet, so it may take a while to develop that argument.

  88. JKH
    April 26th, 2013 at 09:58 | #88

    @Asymptosis

    Here’s a question for you Steve:

    Let’s look at accounting for the micro household.

    (I’m assuming you want coherence between micro and macro accounting, so let’s keep that in mind.)

    Suppose the household earns income Y and spends C on consumption goods.

    Forget about taxes.

    Then the existing definition of saving would be (Y – C).

    Suppose the household leaves (Y – C) in the bank.

    Then a revised definition of saving, under which saving = NFA flow (as I probed above), would also result in saving = (Y – C) in this case.

    Now, suppose instead the household spends (Y – C) on a 10 year old house.

    How do you categorize (Y – C) as a subset of income flow?

    What do you call it?

    Income = consumption + ?

    It’s not investment, because it has no effect in terms of current period production or income.

    Moreover, suppose the household spends (Y – C) on a brand new house.

    That expenditure still does not constitute investment – because the real investment is already captured at the product level in the process of the house builder producing it. The homeowner’s purchase of a new house is captured in the flow of funds statement – not in the income statement. So you can’t even call it investment then.

    I think this what I’m getting at in terms of lack of coherence between income accounting and flow of funds accounting, micro and macro, when you starting considering basic changes to the framework like this.

    But this is just an off the top first stab at it.

  89. JKH
    April 26th, 2013 at 10:05 | #89

    @Asymptosis

    One more thing – as I said, I view the issue of whether or not the existing accounting framework can be ‘tweaked’ in terminology or categorization as being quite separate from the question of whether or not the existing accounting framework has integrity. It does. Unquestionably.

    And the issue of whether professional economists are able to deal with that is separate again. If they can’t, that’s just one more nail in the coffin of the profession as it exists. It means they don’t know enough accounting.

  90. JKH
    April 26th, 2013 at 10:14 | #90

    @Asymptosis

    And – I keep saying this – the reason you will run into these kinds of problems is that saving in a monetary economy is not the same THING as investment. It just isn’t. Equivalences refer to corresponding magnitudes, not to the same things.

  91. JKH
    April 26th, 2013 at 10:17 | #91

    @Asymptosis

    And the reason from first principles as to why saving is properly and coherently defined as a residual of income is that we have do a monetary economy.

  92. April 26th, 2013 at 10:43 | #92

    @JKH

    “One more thing – as I said, I view the issue of whether or not the existing accounting framework can be ‘tweaked’ in terminology or categorization as being quite separate from the question of whether or not the existing accounting framework has integrity. It does. Unquestionably.”

    Exactly.

    Everything is so carefully constructed.

    “If they can’t, that’s just one more nail in the coffin of the profession as it exists.”

    🙂

    “My guess is that the idea of eliminating the current measure of ‘saving’, or redefining it as MMT ‘net saving’ as I probed above, results in an inconsistency in reconciling income accounting with flow of funds accounting, micro to macro.”

    Yeah. I am reminded of a story of a mathematics student. Mathematicians try to define newer and newer things in addition to existing things such as vector spaces, groups etc. Once a student tried to define a new object and on the day of his PhD defense, it was found that the only the element zero satisfies the conditions of his definition of this new object.

  93. April 26th, 2013 at 11:12 | #93

    @Greg

    I think the best way is to start with an initial configuration. List all assets (both financial and nonfinancial) and liabilities and net worth of all sectors or at least the sector under discussion. Then talk of income flows and capital and financial flows and the effect of these flows on assets and liabilities at the end of the period.

    So I was unclear whether in your scenario, you had deposits in addition to your house as wealth and what your liabilities were etc.

    About savingS: I tend to use the phrase as a plural of savings (i.e., a flow) and avoid the stock usage – although there is nothing wrong with either. But the double usage adds to confusions unfortunately.

  94. April 28th, 2013 at 22:01 | #94

    @Greg

    “But somewhere a bank loan generated this income flow for me.”

    If you are trying to say all new MOE/MOA is “borrowed” into existence using what I call the “hedge fund” model, then I agree.

    “Somewhere along the line a business loan got this all going.”

    It could be something else like a credit card loan, auto loan, mortgage, or margin loan.

    It seems nothing starts without a bank loan or deficit spending which generates a bond……. correct?”

    If the gov’t borrows from a saver, then the amount of MOE/MOA stays the same.

    “Its all predicted on increasing asset values which make the bank loans good (not ponzi dynamics of bad debt just funding more debt) or increasing deficit spending.”

    Making the bank loans good is usually first about being able to repay thru income.

  95. April 28th, 2013 at 22:26 | #95

    @Ramanan

    It seems to me a house is at least a partial financial asset because most people believe it will go up in value and usually does. I believe there are 4 things entities can do with income denominated in MOE/MOA, spend to consume, spend to invest (NIPA definition), spend on financial assets, save in the MOE/MOA. If an entity wants to dissave (spend more than it earns) in the current period (I like to use months), then I think it can dissave with past savings or debt.

  96. April 29th, 2013 at 14:58 | #96

    @Fed Up

    “If an entity wants to dissave (spend more than it earns)”

    Spending more than earning is not necessarily dissaving.

    Saving is not “earning minus spending”.

    Let us say I consume *almost* (ie not all) of my disposable income and buy a house by borrowing. My spending is much more than what I am earning. Yet I have a positive saving.

    Also, while you can think of houses as financial assets, it is not the way it is done in national accounts. It is good to keep terminology differences as minimal as possible.

  97. May 1st, 2013 at 21:20 | #97

    @Ramanan

    “Let us say I consume *almost* (ie not all) of my disposable income and buy a house by borrowing. My spending is much more than what I am earning. Yet I have a positive saving. ”

    Not in MOE/MOA terms. Assume you hold currency or demand deposits. You have a small amount of saving in the MOE/MOA and a large amount of dissaving in the MOE/MOA (the mortgage). You also have an asset (the house) denominated in the MOE/MOA.

    2 years later, you lose your job and the house has fallen in value by 20% (in MOE/MOA terms). You are going to have trouble paying the mortgage (reducing your dissaving in the MOE/MOA).

    “Also, while you can think of houses as financial assets, it is not the way it is done in national accounts.”

    That is why I said partial. Housing is kind of unusual that way. I’m not totally/completely sure how housing is accounted for in the national accounts.

  98. May 1st, 2013 at 23:03 | #98

    Let’s start by defining “saving” as used in macro.

    We’ll start with JKH:

    GDP
    = C + I + G + (X – M)
    = Y income
    = C + S + T

    So from that we can extract a definition for saving: S = Y – C – T. Income not spent on consumption or taxes. What if income is spent on investment? Then it is still saving by this definition.

    We get a further breakdown from brookside:

    GDI = W + P +T where W is wages, salaries and other compensation, P is business profits (revenues – costs) plus depreciation (capital consumption allowance) and T is government taxes.
    GDI = GDP or
    W + P + T = C + I + G
    Using a little algebra
    (W – C) + P + (T – G) = I

    But there is a bit of sleight of hand in lumping a bunch of things together in P, why don’t we break it down into its constituent parts?

    (W – C) + (revenue – cost) + I + (T – G) = I

    Where did the I come from? It’s “capital consumption allowance”. You cannot use any other number, either at an aggregate number or on a firm by firm basis, and have the accounting identities work. Why, in defining P, was it described as anything other than “investment,” the term we were already using to describe that value elsewhere? Is it to paper over the fact that the definition of business saving includes investment? Put this way, it seems that there is no insight to be gained from putting I in the above equation. The interesting identity is (wages – household spending) + (revenue – costs) + (taxes – government) = 0. And it’s much clearer what’s going on in that identity. S=I does not mean any more than this; it is simply what you get when you add I=I to this equation, but it seduces you into believe it has revealed some surprising insight.

    Basically I find it impossible to define “saving” precisely without either referring to investment, referring to the same quantity by a different name, or referring to every kind of spending but investment, which to me would be implicitly defining it in terms of investment. And when you realize that investment is part of the concept of saving, that investment by one need not be matched by saving by another because the investment is itself a form of saving, and all the identity is saying is that any other sort of saving must be matched by dissaving, then it means something quite different from what it appears to mean.

  99. May 1st, 2013 at 23:56 | #99

    Intuitively I expect that S should mean some change in the supply of savings, and so you might think that if investment is a form of saving then that is because when you invest you get an asset that has value and that value is part of your savings. However, if you define it that way, it seems you ought to also account for subsequent changes in the value of that asset as saving and investment. And you could define these terms that way, but it isn’t clear to me that they are used that way. For example, that would not be consistent with the way the terms are used in the Solow growth model. In the Solow model, economies tend toward a steady state where the economy continues to save the same fraction of its GDP and invests that same amount, but the investment is only enough to make up for depreciation of the existing capital stock. So in that model, you can have positive saving and investment, but no change in the total value of the economy’s assets. So clearly saving includes the value of the investment when you buy it, but any fluctuations in the value after that are ignored.

    So buying a house might be “saving”. But if it appreciates in value that has no effect on saving — until you sell it, when you then dis-save by more than you saved.

  100. May 2nd, 2013 at 00:14 | #100

    @Fed Up

    “Not in MOE/MOA terms.”

    But there is no definition anywhere in the sense you mean. Saving in MOA/MOE has no meaning any.

    “Assume you hold currency or demand deposits. You have a small amount of saving in the MOE/MOA and a large amount of dissaving in the MOE/MOA (the mortgage). ”

    Nope no dissaving.

    See my post here http://www.concertedaction.com/2012/02/25/saving-and-borrowing/

    There are standard definitions in national accounts. What you are saying is not part of any generally used accounting concepts.

  101. May 2nd, 2013 at 06:31 | #101

    @Eric L I think I’m with you on all this. SRW maybe said it best:

    “…whenever anybody tries to make a substantive point by quoting S ≡ I, they are offering no insight at all into any nontrivial question. They are saying nothing more or less than balance sheets must balance. They reveal nothing whatsoever about how. It certainly doesn’t mean that the production of new claims (“savings”) is necessarily matched by the production of new resources (“investment”). It just reminds us that, if the new claims are not matched by real resources, we shall have to devalue the claims of others if we wish to keep our accounts straight.”

    http://www.interfluidity.com/v2/4316.html

    Or in my words:

    From an accounting perspective, which is by its nature backward-looking, with a given Y (we’re looking backward so Y is a given), if there’s less C there’s obviously more I. That’s the source of the widespread misapprehension that if we spend less on C there will be more I.

    But that backward-looking perspective actually tells us exactly nothing about why that proportion happened — what caused those spending decisions.

  102. May 2nd, 2013 at 06:46 | #102

    Also, I’ve been noodling with the notion that Expenses ≠ Expenditures.

    A company buys a bunch of drill presses. That’s an expenditure. But those are not counted as an expense. The depreciation of those drill presses is counted as expense in future years.

    Expenses reduce Saving (profits). Expenditures don’t, necessarily.

    I’ve always assumed that Investment in the NIPAs is a total of expenditures by businesses.

    But maybe it’s Expenditures – (Expenses – Depreciation)? This makes expenses, effectively, Consumption. And Expenses – Depreciation is Consumption Expenditures.

    ??

  103. May 2nd, 2013 at 08:39 | #103

    @Asymptosis

    SRW: “It certainly doesn’t mean that the production of new claims (“savings”)”

    Oh just noticed but I think JKH already noticed it before. Saving = Claims???

    Also on whether S=I is informative or not, true the identity by itself doesn’t say much but asks the question as to how these two are equal etc. And what are the mechanisms etc. Useful for a narrative.

  104. May 3rd, 2013 at 15:10 | #104

    @Ramanan

    There should be. I’ll try to use the framework of your post.

    http://www.concertedaction.com/2012/02/25/saving-and-borrowing/

    I believe it would be saving in the MOE/MOA = Net Acquisition of MOE/MOA – Net Incurrence of Liabilities in MOE/MOA

    I’ll try to use your example from the link above with a slight modification.

    Let us suppose:

    A household earns $100 in a year (including interest payments and dividends), pays taxes of $20, and consumes $80.

    He takes a loan of $500 to finance a house purchase near the end of the year whose price is $500.

    MOE/MOA saving = (100 – 20 – 80) – (+500 plus -500)

    The +500 is the mortgage (a liability), and the -500 is the demand deposits.

    Next, pay for the house. The demand deposits go to the seller. That removes the -500.

    MOE/MOA saving = (100 – 20 – 80) – (+500).

    MOE/MOA saving = -$500 (negative 500), the mortgage. It is true you have the house, an asset, but it is not MOE/MOA saving.

    In your example, “His Net Incurrence of Liabilities is +$450”. That is the mortgage and is dissaving in the MOE/MOA.

  105. May 3rd, 2013 at 23:25 | #105

    @Fed Up

    Yes you are using the phrase acquisition of financial assets etc for saving.

    It is not used like that.

    It is not a self-consistent way of defining things.

    My definitions are standard.

    The first thing is to use standard definitions and if you think another system is better, propose it rather than mixing the two.

    There are two things – allocation and saving. You shouldn’t mix the two.

    In other words, there is nothing called MOE/MOA saving.

  106. May 4th, 2013 at 02:15 | #106

    @Fed Up

    To clarify, acquisition of financial assets cannot be said to be saving by itself but financial assets can be acquired by incurring liabilities.

    To say that one saves in MOE/MOA by dissaving in MOE/MOA is a bizarre way of describing this.

    Saving is rather disposable income minus consumption and this saving is allocated in financial assets and non-financial assets. The act of saving is not the purchase of financial assets or nonfinancial assets but the act of not consuming.

  107. May 4th, 2013 at 02:16 | #107

    @Ramanan

    “To clarify, acquisition of financial assets cannot be said to be saving by itself but financial assets can be acquired by incurring liabilities.”

    should be:

    “To clarify, acquisition of financial assets cannot be said to be saving by itself because financial assets can be acquired by incurring liabilities.”

  108. May 4th, 2013 at 09:03 | #108

    @Ramanan

    What is the definition of I here?

  109. May 4th, 2013 at 09:17 | #109

    @Fed Up

    I where?

  110. May 4th, 2013 at 09:30 | #110

    @Ramanan

    “Saving is rather disposable income minus consumption and this saving is allocated in financial assets and non-financial assets.”

    That looks to me like S = I becomes Y – C = I. Right? Is that correct at both the micro and macro economic level(s)?

  111. May 4th, 2013 at 09:36 | #111

    @Fed Up

    For a single sector, S is not equal to I.

    So take households:

    S = YD – C

    and

    S = NAFA – NIL + CF

    where CF is capital formation or investment.

    But you cannot call NAFA as saving in MOE/MOA because it is not saving to begin with.

  112. May 4th, 2013 at 09:44 | #112

    1) Let’s get I defined.

    2) “this saving is allocated in financial assets”

    I want to consider dividing financial assets into financial assets denominated in MOE/MOA (stocks, bonds, etc.) and the MOE/MOA itself. I want to consider the MOE/MOA itself as a financial asset. For example, if price inflation is negative 3%, and I put MOE/MOA “under the mattress”, I’m earning a risk free return of positive 3%.

  113. May 4th, 2013 at 09:47 | #113

    Make that I at the worldwide level.

  114. May 4th, 2013 at 09:57 | #114

    Can I equal saving allocated in financial assets denominated in MOE/MOA plus saving allocated in financial assets that are just the MOE/MOA itself plus saving allocated in non-financial assets?

  115. May 4th, 2013 at 10:02 | #115

    @Fed Up

    It is not straightforward to define I. So take a simple example where you purchase a house from a builder. The investment expenditure is what I is.

    Here is what you can do. Think of a situation and tell how you use terminology. Such as my saving is $100 or something of that sort.

    My general point is that you are mixing asset allocation with saving.

    So for example national accoutants use things such as NAFA and do not use saving in financial assets. The phrase saving is used differently.

  116. May 4th, 2013 at 11:35 | #116

    @Ramanan

    “It is not straightforward to define I. So take a simple example where you purchase a house from a builder. The investment expenditure is what I is.”

    Question about defining I. Why isn’t purchasing a house C? Does I involve a time period?

    “Here is what you can do. Think of a situation and tell how you use terminology. Such as my saving is $100 or something of that sort.”

    I’ll try with a monthly budget.

    Y = $100, C = $60. I have saved $40. The $40 is saving in the MOE/MOA. I now decide to allocate. I now buy $15 of some item that is a non-financial asset, $15 of existing stock in a company on the stock exchange, and save $10 in MOE/MOA “under the mattress”. My MOE/MOA balance went to $100 and then down to $10. I = $15 plus $15 plus $10.

    Lastly, is the I in S = I, the same I as in Y = C + I + G + NX?

  117. May 4th, 2013 at 11:48 | #117

    @Fed Up

    That looks fine except that one says $10 was allocated in cash, .. etc.

    The saving is $40 that’s all there is to saving.

    While a time period of one year is a guideline in national accounts, it isn’t the only thing. A purchase of a car by a household is not investment in SNA but is so for firms. In some other system of accounts, even purchases of cars for households is considered investment – because such items appear in the balance sheet in those systems. So it is not so straightforward.

  118. May 4th, 2013 at 12:39 | #118

    If the 2 I’s are the same, I’m going to try to make a point.

    It seems to me the $15 of stock and the $10 of MOE/MOA “under the mattress” are not circulating in the real goods/services economy. It is only the C = $60 and the $15 of the some item that is a non-financial asset that is circulating in the real goods/services economy. I should be something else. That something else should be the $15 of the some item that is a non-financial asset. The $15 of stock and the $10 “under the mattress” are leakages from the real goods/services economy.

    I believe “deaggregating” I is important.

  119. May 4th, 2013 at 15:32 | #119

    @Fed Up

    I’ve been finding it easier to think this way:

    Forget MOE and MOA. As I’ve written, “medium” has a very slippery meaning in those contexts.

    Instead think: the unit of account (the dollar). Link an inch or a pound.

    And think of units of exchange. A.k.a, as you say, financial assets. And yes, a dollar bill or a hundred-dollar bill is a unit of exchange, a financial asset like any other (we could classify all these bills into a category we call currency, or if we want to be very precise, physical currency, or domestic physical currency). It’s distinct from a dollar credit in a bank account, which is a different unit of exchange. Ditto a bank’s dollar credit at its bank, the Fed.

    You’ll notice I never used the word money. That’s (by my definition) exchange value as embodied in any of those financial assets.

    So we would stop talking about the demand for money, for instance (whatever money means in that phrase), and start talking about demand for financial assets whose values are nominally stable — that have a tight historical correlation with the unit of account. Dollar bills, of course, are the epitome of that nominal stability. The correlation is pretty much always 1.0 — becuz de gubmint sez so. Though of course you can’t predict the future with certainty, past performance is no guarantee…

    Because 100-dollar bills are so widely used for (illicit) storage worldwide, for instance, we could see them lose their tight correlation to $1 bills, to $1 Citibank deposits… It’s hard to cash in a Columbian suitcase full of $100s for a nominally equivalent citibank deposit. You gotta take a haircut along the way…

    FWIW.

  120. May 4th, 2013 at 18:56 | #120

    @Asymptosis

    I believe these 2 apply.

    http://www.asymptosis.com/medium-of-account-vs-unit-of-account-brazil-anyone.html

    http://jpkoning.blogspot.com/2012/11/discussions-of-medium-of-account-could.html

    In the comments, “A medium of exchange is an asset that is widely accepted in trade and to settle financial obligations. Currency notes or transferable bank deposits are typical examples. A medium of account is the commodity defining the unit of account. A unit of account is a specific amount of the medium of account. For example, for the gold standard the medium of account is gold, while the unit of account might be one ounce or one pound of gold of specific purity.”

    It seems to me in the USA, MOA = MOE = currency plus demand deposits.

    Also UOA = UOE = $1 of currency and $1 of demand deposits.

  121. May 4th, 2013 at 21:13 | #121

    @Fed Up

    “Also UOA = UOE = $1 of currency and $1 of demand deposits.”

    I’m thinking that should be just UOA.

  122. May 4th, 2013 at 21:26 | #122

    @Asymptosis

    “You’ll notice I never used the word money.”

    I highly recommend not using the term money.

    “So we would stop talking about the demand for money, for instance (whatever money means in that phrase), and start talking about demand for financial assets whose values are nominally stable — that have a tight historical correlation with the unit of account.”

    Exactly! The highest yielding financial asset that won’t default or go down in value (1 to 1 convertibility). Things like currency, FDIC insured checking accounts, FDIC insured savings accounts, FDIC insured CD’s, and gov’t bonds denominated in their own currency.

  123. May 4th, 2013 at 21:38 | #123

    @Fed Up

    I don’t quite understand – 2 Is?

  124. May 5th, 2013 at 09:23 | #124

    @Ramanan

    S = I and Y = C + I + G + NX.

    Are those 2 I’s the same in their meaning? I may not be clear enough here.

  125. May 5th, 2013 at 10:18 | #125

    @Fed Up

    The way the second equation is written implies government investment is contained in G.

  126. May 5th, 2013 at 11:38 | #126

    @Ramanan

    1) The investment part is defined the same even though I think deaggregation has happened?

    2) Let’s assume G = 0 and NX = 0

  127. May 5th, 2013 at 11:47 | #127

    @Ramanan

    Do you answer any questions about banks? If so, I have a question. Let’s say I save $100,000. Someone else wants to start a new bank. They sell me a $100,000 bank bond (bank capital). The reserve requirement is 0%, and the capital requirement is 10%. Can the bank now make 10 (ten) $100,000 mortgage loans?

    If so, I saved $100,000. I lent $100,000 to the bank, and the bank borrowed $100,000. The bank lent $1,000,000 to ten other people, and the ten other people borrowed $1,000,000. The bank lent $1,000,000 to ten other people, however, it only borrowed $100,000 from me.

    Is that scenario correct?

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