Saturday, 2 May 2015

Andrea Terzi applies Keynsian / MMT thinking to EZ: a mistake.

Terzi makes the point at this INET conference that aggregate demand is related to whether the private sector has the savings it thinks it needs (that’s money savings as distinct from savings in the form of physical assets like houses or cars).

In saying that he simply repeats what Keynes said and what MMTers have been saying for years, i.e. that saving money causes recessions, thus the private sector must be supplied with the money savings it thinks it needs. (Terzi does incidentally admit his debt to Keynes.)

Problem though is that that’s not the basic problem in the Eurozone. The main problem in the EZ is the DISPARITY in performance as between the core and periphery – most notably the difference in competitiveness as between Germany and Greece. Put another way, there’s scarcely any problem in Germany and the rest of the core if unemployment figures are any guide.

That’s not to say the EZ might not benefit from a BIT MORE stimulus in the core. My guess is that it WOULD BENEFIT. But the MAIN problem is in the periphery, Greece in particular.

Relevant screen shots in chronological order are below. His maths is translated into English in red font under each equation.


  1. The Terzi analysis contains a fundamental error, as does all analysis that bases job availability on debt data. The error is that debt is a remainder of stimulative activity, not the driver of stimulative activity.

    Terzi included export activity in his formula. Export-import activity is an excellent vehicle to demonstrate the shallow nature of the job-savings relationship. Simply consider that there can be both a very large import-export component to an economy and a zero change in the external debt. While the external debt may not change, there can still be a huge change in the number of jobs related to imports-exports measured on a year-to-year basis. This possibility clearly illustrates that debt is not a good measure of job activity.

    I go into more detail in my post at Macroeconomic Stimulus Leaves a Remainder

    1. Strikes me that debt actually IS A DRIVER of activity, in that government debt is a private sector asset. And the more the value of your paper assets, the more you're likely to spend. When people win a lottery, their weekly spending rises, doesn't it?

    2. I think the basic driver of increased economic activity is the DECISION to undertake a new or additional economic activity. It may be FUNDED by debt or not. Increased imports with balanced exports is an example of increased economic activity but no increase in debt.

      If there is an increase in economic activity, there should be a corresponding increase in taxes collected. This should be true whether we are looking at a sales tax, VAT tax, or income tax. If GOVERNMENT is running a deficit, then the deficit should fall if economic activity increases.

      While a SINGLE increase in debt Y/Y would indicate that a stimulative event had occurred, a REPEATED increase in debt would only indicate that the economy had grown tolerant of annual debt increases, creating a debt dependent macro-economy that may be stable year-to-year.

      Using you example of lottery winnings, the macro-economy would experience winnings every year. The result would be a stable economy with winnings spent by someone each year.

    3. No idea what you're trying to say.


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