Great question. Thinking in terms of poorer vs richer and their likelihood to spend out of new “savings,” I’m drumming my fingers waiting for the DFA asset and wealth #s for Q4. Should be out in the next couple of days.

My impression is most of the wealth increase is at the top (no surprise…), which would mute the “release” effect somewhat when people can spend again out in the world.

I also wonder whether the savings represent that lost service consumption among those who are well off. The wealthy are wealthy because they don’t spend all their income. Sure, everyone may take a deferred vacation, but that doesn’t seem like a long-lasting event. If we know *who* was saving, we’d have a better handle on what might happen in the future.

But will households start spending those assets when things open up? is the right question…what will have changed in how people think about money and how they use it as a result of 2020? What do people need to buy besides food? This isn’t the postwar era where new and previously unimaginable products were coming out all the time.

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I think how this all plays out on net depends on how productively (or not), the capital is used. Let’s take an extreme example. Government buys 1b gallons of crude oil and burns it. We then have a large decrease in private net worth.

I think that’s true in a sense. But there’s a crucial difference: Gov def spending (with or without bond issuance) increases private-sector balance sheet assets and net worth.

Bank (net new) lending increases private-sector assets, but it increases liabilities equally. Both the financial and nonfinancial sectors expand their balance sheets — with no change to net worth.

It seems there would be very different economic effects, reactions, to those very different changes in private-sector balance sheets.

The central issue is government spending and tax *does* act very much like a bank. Imagine spedning first water cycle view VAT (UK slaes tax) as ‘cashback’ no saving in the spending chain get all the money spent back as tax.

All currency issuing governments run intraday overdrafts at their central bank and intraday repos etc. Here is the UK’s : https://publications.parliament.uk/pa/cm200102/cmselect/cmpubacc/349/349ap02.htm “Government bank accounts at the Bank of England are linked together in a system known as the Exchequer Pyramid, to ensure that any cash balances that remain at the end of each day are channelled into the main central government accounts to reduce the government’s cash borrowing needs to a minimum. If the Consolidated Fund has a surplus at the end of the daily operation this is automatically transferred to the NLF to reduce its borrowing needs. If, on the other hand, the Consolidated Fund is in deficit, for example through outflows on the day being greater than taxation receipts, this is automatically financed by a transfer from the NLF. The NLF will then borrow overnight any remaining cash deposits held in any government accounts at the Bank of England (including the accounts held by government departments at the OPG). The overall effect of this will be a net Exchequer Pyramid surplus or deficit in the NLF.”

And the US: http://heteconomist.com/exercising-currency-sovereignty-under-self-imposed-constraints/ and http://heteconomist.com/self-imposed-constraints-as-an-obfuscating-factor/

I bet you quants are using linear algebra optimization techniques to solve Ax=b where A is a matrix representing all possible future market states, b is a vector of your desired payouts, and x is your optimal portfolio. You can hedge perfectly and profit no matter what. The only risk is how much you will make, not whether you will profit.

Derivatives strip out risk and represent net financial asset creation. So you can hedge against a recession or crash. Goldman Sachs bought insurance (Collateral Debt Obligations, etc.) on its Mortgage-Backed Securities; GS was prepared to profit if there was a crash in MBS, or if there wasn’t. The insurance piece (AIG was guaranteeing MBS with MBS) failed in 2008; but the Fed stepped in to make sure GS got paid on its insurance claims when MBS went to $0 in financial markets.

Supposedly the insurance piece is fixed and derivative net financial asset creation is paying out dividends as capital gains (or unreported income) to investors so they can afford inflating housing prices, as investments …

https://www.zerohedge.com/sites/default/files/inline-images/q1%202018%20assets%20liabs%20breakdown_0.jpg?itok=Ry829PY0

Two thumbs up. Thx.

No. It is not forgivable. In physics, just everything can be analyzed from the point of view of free-body interactions. Change in state is a function of the combined forces acting on an object. You can do esoteric quantum mechanics or be accounting for general relativity, but you have to get the proper local behavior.

One of the biggest flaws in modern economics is that it is inconsistent with accounting. Economists are always positing behavior that makes no sense from an accounting point of view. How can one consider rational agency when the macroeconomics is inconsistent with entity accounting. That’s why we hear nonsense about encouraging hiring by cutting business taxes without stimulating demand.

Every time I encounter an economist, and there are more and more of them lately, who seems to recognize that this is a problem, I feel I have to offer a few words of encouragement. Consider these words of encouragement.

Possible, but that doesn’t explain graph #3. Same index applied to the two series.

“So why not simply do the analysis on a nominal basis instead of a real basis?”

Can’t cumulatively sum nominal over years, and compare it meaningfully to a this-year amount.

Also, i think you’ll find that for at least the last two decades your “Q” will closely match consumer confidence…suggesting valuation plays a role.

Ask to borrow some. He’ll change his tune.

If you define money as currency (dollar notes and coins and bank reserves) than you would have to rewrite the “myths”. A lot of things would change.

“would say money is “umm, kinda like gold, only made out of paper, or something.” ”

Agree. The core problem is the irresistible desire to equate money with currency and currency-like financial instruments. (Those whose price is pegged to the unit of account.) “We’ve always called coins money, they must be money.”

That’s a fine meaning for the word, but clinging to it inevitably leads to two meanings for the same word, and unavoidable confusion.

Ask the owner of twelve apartment buildings (say with with near-zero financial assets or “cash” holdings), “how much money do you have?”

The answer is not zero.

“I don’t think money = financial assets gets us anywhere.” What I struggle with is how to explain money to people who would find “financial assets” confusing. The kind of people who if asked, would say money is “umm, kinda like gold, only made out of paper, or something.” (Wanna see deer in the headlights? Ask a BANKER what money is). Money = financial assets is probably exactly right, (gotta think a bit more about that) but it doesn’t seem like a helpful explanation for Joe Sixpack at the bar.

>A title or deed to real property is certainly a claim of ownership, but it’s not a claim denominated in a unit of account

See lines 84 and 98:

https://www.bea.gov/national/nipaweb/Ni_FedBeaSna/TableView.asp?SelectedTable=3&FirstYear=2009&LastYear=2016&Freq=Year

Titles to real estate have market value (necessarily designated in financial statements in the UofA).

(The accounting method to estimate those values — purchase price, book value, marked-to-market value as in the above, estimated replacement cost of structures, etc. etc. — is a separate issue.)

> does not constitute a liability to any other person

“Constitute” is a problem here IMO. Whole point is that “has an offsetting liability” /== “is a liability.”

> therefore is not money, right?

By the definition you’ve bruited, right. But I don’t think that’s a useful definition. We have a perfectly good word for financial assets already (those with offsetting liabs on other balance sheets): “financial assets.”

I don’t think money = financial assets gets us anywhere.

Yes, I’d accept Government bonds as money, albeit with a contingency.

Interesting question about shareholder equity. On a firm’s financial balance sheet the dollar value of real assets (land and buildings) is listed as an asset, and that same number appears on the liability side as owner’s equity, or perhaps as a mortgage-type entry. But say you personally own a plot of land. On what balance sheet would that appear as a liability?

Sorry if this answer is only partial, I may be able to say more later.

“Assets that have a corresponding liability on another balance sheet.” IOW, they are claims on other balance sheets’ assets. (That’s what a righthand-side liability is: a claim against the lefthand-side assets.) That is also the definition of a financial asset.

So you’re saying that money = financial assets. Okay, run with that.

So government bonds are money? Corporate junk bonds? Collateralized Debt Obligations?

None of those financial instruments is included in any monetary aggregate (MB, M0, M1…MZM…). But they’re money by your definition?

> do not have a corresponding liability

What do you call a firm’s righthand-side Shareholders’ Equity? You could certainly say it’s not a liability, in an important sense; by the terms of equity issuance, it’s not forced-redeemable by the asset holder, or on a specific date. But it certainly constitutes a legal claim against the issuer.

Take a look at the Firms-sector balance sheet here, line 133:

https://www.bea.gov/national/nipaweb/Ni_FedBeaSna/TableView.asp?SelectedTable=14&FirstYear=2013&LastYear=2017&Freq=Qtr

They’ve got $25 trillion in equity liability, right there on the righthand side of their balance sheet. (Just for a sense of comparative magnitude, household-sector assets total $110 trillion.)

Similarly consider the liability on the Treasury balance sheet offsetting outstanding currency. That liability is likewise not forced-redeemable by the asset holder. So you might say it’s just pro-forma. But…

Saying “that’s not money cause that’s not how I’m defining money,” then giving a not-very-well-thought-through definition of money doesn’t help with the conversation.

My best shot at it: Money is the value of ownership claims, designated in a unit of account.

(That UofA-designated value is recorded on the lefthand side of balance sheets, as labeled asset entries.)

Those legal ownership claims are embodied in financial instruments (including titles to land). The terms of those instruments — rights and obligations — are wildly diverse.

Among those terms and conitions: The price of a subset of those financial instruments is institutionally pegged to the unit of account. The price of one dollar in a checking account is always one dollar.

The aggregate value of those fixed-price instruments is what’s tallied up in monetary aggregates.

But that definition is far narrower than “financial assets.”

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