tag:blogger.com,1999:blog-6837159629100463303.post1612761695843837040..comments2023-06-18T01:25:08.748-07:00Comments on Information Transfer Economics: What does it mean when we say money flows?Jason Smithhttp://www.blogger.com/profile/12680061127040420047noreply@blogger.comBlogger41125tag:blogger.com,1999:blog-6837159629100463303.post-1771903030468740342016-06-25T09:17:37.608-07:002016-06-25T09:17:37.608-07:00No. Γ is directly related to the number of times m...No. Γ is directly related to the number of times money circulates in the economy in a given time period. It would be related to the number of times a typical dot travels around the roundabout in x time periods. In the version of the diagram above, Γ ~ 1/1000 (I can calculate the actual value, but I'm too lazy to look it up right now) -- each dot moves one square on average in 1000 or so time periods.<br /><br />You can test this by looking at the two diagrams and watching how many sites the peak of the wave moves versus how many time steps in the second diagram.<br />Jason Smithhttps://www.blogger.com/profile/12680061127040420047noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-82217299158774474512016-06-24T23:55:55.728-07:002016-06-24T23:55:55.728-07:00Jason,
In G&L's SIM model we have
∆H = G...Jason,<br /><br />In G&L's SIM model we have<br /><br />∆H = G - T<br /><br />which means that the amount of money in circulation in the economy during any time period is increased by government spending and decreased by government taxation. Or, as they put it, government spending creates money and government taxation destroys money.<br /><br />In your model we have instead<br /><br />∆H = Γ(G - T)<br /><br />which means that Γ is directly related to the change in the amount of money in circulation the economy. There is an indirect relation with the velocity of money, because the velocity of money affects taxes, and, OC, because the amount of money in the economy also affects velocity. In the round-about the number of dots remains the same. By analogy, ∆H = 0.<br /><br />I have a bit more to say, but it will wait until after your blogging break. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-85935686950045356792016-06-22T08:12:01.931-07:002016-06-22T08:12:01.931-07:00Sorry, Jason. In the economy of the G&L simple...Sorry, Jason. In the economy of the G&L simple model, money is actually created and destroyed by government spending and taxation. In your model for that economy Γ affects the rate of creation and destruction of money, not its velocity.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-67135237348617620062016-06-21T19:00:51.302-07:002016-06-21T19:00:51.302-07:00"there can be flow dynamics that have nothing..."there can be flow dynamics that have nothing to do with stock dynamics -- for example there could be a recession in "flows" but not in "stocks".<br /><br />You are exactly right. Flow dynamics refers to new stuffs. Stock dynamics refers to existing stuffs. <br /><br />GDP recession is in flow dynamics. Debt unsustainable is in stock dynamics. Financial instability could be on both.pliu412https://www.blogger.com/profile/06404437429487666914noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-87535648540950605812016-06-21T18:48:45.604-07:002016-06-21T18:48:45.604-07:00I meant this:
In order to derive this temporal the...I meant this:<br />In order to derive this temporal theorem "GDP=GDI", we need to clearly understand the meanings of flow variables from their measurement methods. pliu412https://www.blogger.com/profile/06404437429487666914noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-74168648937864806562016-06-21T18:38:17.225-07:002016-06-21T18:38:17.225-07:00"Annual GDP" in the three examples (if t..."Annual GDP" in the three examples (if that is all that happened in a year) are 10 dollars, 5 dollars and 5 billion dollars. pliu412https://www.blogger.com/profile/06404437429487666914noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-2642168208460447532016-06-21T18:37:24.628-07:002016-06-21T18:37:24.628-07:00Operational definition determines "value"...Operational definition determines "value" of kg, however in equations you can deal entirely in terms of mass scales.<br /><br />This has nothing to do with the discussion. Analogy would be that you deny the existence of mass scale so that everything is massless and measured in units of 1/distance. <br /><br />Instead, you deny the existence of a time scale, so there is no time which which to consider a flow and time is measured in units of 1/money.Jason Smithhttps://www.blogger.com/profile/12680061127040420047noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-80739402942238166442016-06-21T18:30:44.253-07:002016-06-21T18:30:44.253-07:00GDP is not counting goods sales. It counts the pr...GDP is not counting goods sales. It counts the production, value added part. I assume that only one widget is produced. pliu412https://www.blogger.com/profile/06404437429487666914noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-85229646408574549552016-06-21T18:25:03.538-07:002016-06-21T18:25:03.538-07:00Each accounting flow variable such as C, I, G, ......Each accounting flow variable such as C, I, G, ..., etc. has a procedural measurement method. It is similar in physics to use "operational" definition method to define physical units such as kg, ...pliu412https://www.blogger.com/profile/06404437429487666914noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-15988011735080423522016-06-21T18:19:40.739-07:002016-06-21T18:19:40.739-07:00That is not responsive to the example. "Annua...That is not responsive to the example. "Annual GDP" in the three examples (if that is all that happened in a year) are 30 dollars, 15 dollars and 15 billion dollars, respectively.Jason Smithhttps://www.blogger.com/profile/12680061127040420047noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-71969848942359314932016-06-21T18:05:05.554-07:002016-06-21T18:05:05.554-07:00GDP=GDI spending/income relationships recording in...GDP=GDI spending/income relationships recording in accounting in this way.<br /><br />C+I+G+X-M = WB + NetOperatingSurplus + CFC + Tariffs - Subsides<br /><br />Assume GDP = 10 dollars from one widget<br /><br />spending = C = 10 dollars ( only one product )<br /><br />income = WB(wages) + NetOperatingSurplus + CFC +Tariffs - Subsides = 10 dollars<br /><br />You see there are different flow variables from spending and income to calculate the production and should have same value.<br />pliu412https://www.blogger.com/profile/06404437429487666914noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-30965136179669934262016-06-21T14:51:41.931-07:002016-06-21T14:51:41.931-07:00This is incorrect. Γ is the decay constant for the...This is incorrect. Γ is the decay constant for the single bin in the second animation. The dots are being "destroyed" in one bin (the first one), but are still in the roundabout. And this decay constant is directly related to the velocity of the dots.Jason Smithhttps://www.blogger.com/profile/12680061127040420047noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-47874710843009802692016-06-21T13:38:57.553-07:002016-06-21T13:38:57.553-07:00Text: "The velocity of the wave is a free par...Text: "The velocity of the wave is a free parameter not established by pure accounting. In the linked post, I called that free parameter Γ and was promptly attacked by the stock-flow consistent community for heresy."<br /><br />Except that in the round-about the number of dots is constant. If we applied your stock-flow model to the round-about, Γ would determine the rate at which dots are created or destroyed (or added and subtracted from the round-about, if you prefer). Thus, Γ would have no intrinsic relation to the velocity of the dots, although it could under certain circumstances. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-85729536504886279792016-06-21T12:46:04.985-07:002016-06-21T12:46:04.985-07:00No, [accounting identities] constrain spending and...<i>No, [accounting identities] constrain spending and income flows/stocks in financial and non-financial assets.</i><br /><br />NO THEY DO NOT.<br /><br />1. I give you 10 dollars to buy a widget from you, you give 10 dollars to Brian Romanchuk to buy a widget from him, and he gives 10 dollars to me to buy a widget from me.<br /><br />2. I give you 5 dollars to buy a widget from you, you give 5 dollars to Brian Romanchuk to buy a widget from him, and he gives 5 dollars to me to buy a widget from me.<br /><br />Accounting is same in both cases. Yet in one case, 10 dollars went around the circle and in the other 5 dollars did.<br /><br />Accounting does not constrain that flow. Our actual assets and widgets constrain that flow. If I didn't have 10 dollars, I couldn't do #1. If Brian didn't have any widgets, we couldn't do #1 or #2.<br /><br />In fact the only thing that stops<br /><br />3. I give you 5 billion dollars to buy a widget from you, you give 5 billion dollars to Brian Romanchuk to buy a widget from him, and he gives 5 billion dollars to me to buy a widget from me.<br /><br />... is our lack of 5 billion dollars. That has nothing to do with accounting.Jason Smithhttps://www.blogger.com/profile/12680061127040420047noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-79738867384576061322016-06-21T09:52:04.809-07:002016-06-21T09:52:04.809-07:00"Accounting identities are definitions and th..."Accounting identities are definitions and therefore do not constrain anything except the words and symbols you use to discuss the model" <br /><br />No, they constrain spending and income flows/stocks in financial and non-financial assets. Equilibrium equations are related to demand and supply.<br /><br /><br />For example, GDP(spending) = GDI(income). Actual money demand and velocity are calculated from spending-income flows. Various kinds of spending and income data are in the accounting.<br /><br /> Basic economic axiom is "my expense is your income".<br /> Basic finance axiom is "my liability is your asset".<br /><br />Whole accounting system is built up from these axioms, then definitions and theorems like "GDP = GDI". <br /><br /><br />pliu412https://www.blogger.com/profile/06404437429487666914noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-34061239569788377522016-06-21T09:24:15.059-07:002016-06-21T09:24:15.059-07:00Yes, this is money supply velocity, but not money ...Yes, this is money supply velocity, but not money demand velocity. IMO, it is not useful/meaningful. <br /><br />Money demand velocity and actual money demand can be estimated from accounting by spending and income flow variables. <br /><br />Md Vd = P Q is an accounting identity.<br /><br />Ms V = P Q is not an accounting identity.pliu412https://www.blogger.com/profile/06404437429487666914noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-9887880189894704292016-06-21T08:56:52.568-07:002016-06-21T08:56:52.568-07:00Accounting identities can be formalized as an axio...<br />Accounting identities can be formalized as an axiomatic logic system. I illustrate <a href="http://www.pragcap.com/ama/why-has-heterodox-economics-become-orthodox-on-wall-street-has-or-has-not/" rel="nofollow"> here. http://www.pragcap.com/ama/why-has-heterodox-economics-become-orthodox-on-wall-street-has-or-has-not/</a><br /><br /><br />This axiomatic system starts two economic axioms, temporal definitions for every terms, and derived temporal theorems.<br />It is a self-consistent and correct logic system. <br /><br />Temporal theorems are about constraints between spending and income flows/stocks in financial and non-financial assets. D/S equilibrium equations are behaviors, not temporal theorems. These behavior equations often contradict temporal theorems that you may not aware.<br /><br /><br />pliu412https://www.blogger.com/profile/06404437429487666914noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-15715678664655438562016-06-21T08:21:06.580-07:002016-06-21T08:21:06.580-07:00It is a temporal definition (i.e. a definition, ac...It is a temporal definition (i.e. a definition, accounting or not)<br /><br />V ≡ PY/M<br /><br />Therefore:<br /><br />PY = MV<br />PY= M(PY/M)<br />PY = PY<br />1 = 1<br /><br />However I am not sure what the distinction between accounting identities, axioms, temporal definitions, other definitions and identities buys us.<br /><br />Note that this is literally true: M2 velocity on FRED is exactly PY/M2.<br /><br />It is a definition and all accounting identities are definitions, so this is a distinction without a difference.Jason Smithhttps://www.blogger.com/profile/12680061127040420047noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-86487277384489120252016-06-21T07:48:18.741-07:002016-06-21T07:48:18.741-07:00
MV = PY is not accounting identity!!
Accounting...<br />MV = PY is not accounting identity!! <br /><br />Accounting identities are either economic axioms (E=Y or A=L), temporal definitions or derived temporal theorems. No ad-hoc axiomatized equation such as !!!<br /><br />Accounting identities are specifications about real economic data and can be used for economic models validation.pliu412https://www.blogger.com/profile/06404437429487666914noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-29037821012928292532016-06-20T13:00:49.074-07:002016-06-20T13:00:49.074-07:00Accounting identities are definitions and therefor...Accounting identities are definitions and therefore do not constrain anything except the words and symbols you use to discuss the model.<br /><br /><a href="http://informationtransfereconomics.blogspot.com/2016/03/does-saving-make-sense.html" rel="nofollow">They are either</a> useful definitions or arbitrary definitions. Failure to make an accounting identity hold just means you've mistakenly used two different definitions of something that are inconsistent with each other.<br /><br />For example MV = PY is an identity. Given P, Y and M, it tells you what V is ... V ≡ PY/M.<br /><br />Now is this useful? Well, if V is constant, then yes! But it's not. However it could have a particular functional form, which does make it useful.<br /><br />See <a href="http://informationtransfereconomics.blogspot.com/2015/03/theories-of-identities-are-nonsensical.html" rel="nofollow">this post</a> for a useful definition of V as the ensemble average of transactions thousands of random markets (as well as more on accounting identities).Jason Smithhttps://www.blogger.com/profile/12680061127040420047noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-16091341171890288252016-06-20T12:51:00.411-07:002016-06-20T12:51:00.411-07:00If there are separate stock and flow balance matri...If there are separate stock and flow balance matrices with nothing connecting them, then the relationship between stock and flow is completely arbitrary and there can be flow dynamics that have nothing to do with stock dynamics -- for example there could be a recession in "flows" but not in "stocks".<br /><br />This is of course absurd, so there is obviously some connection.<br /><br />See my <a href="http://informationtransfereconomics.blogspot.com/2016/06/stock-flow-accounting-with-calculus.html" rel="nofollow">new post</a> for what that connection is. A flow is necessarily a change in stock over a time scale (or a stock is the integral of a flow over a time scale).<br /><br />Whether a definition is recursive or not is not relevant.Jason Smithhttps://www.blogger.com/profile/12680061127040420047noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-12345093774949566522016-06-20T12:35:54.640-07:002016-06-20T12:35:54.640-07:00No, this is mathematically inconsistent -- my comm...No, this is mathematically inconsistent -- my comment on (3) stands. See here:<br /><br /><a href="http://informationtransfereconomics.blogspot.com/2016/06/stock-flow-accounting-with-calculus.html" rel="nofollow">http://informationtransfereconomics.blogspot.com/2016/06/stock-flow-accounting-with-calculus.html</a>Jason Smithhttps://www.blogger.com/profile/12680061127040420047noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-55596518990849888152016-06-19T19:41:51.635-07:002016-06-19T19:41:51.635-07:00Jason,
I address point (2).
In FOFA S tables, we...Jason,<br /><br />I address point (2).<br /><br />In <a href="http://www.federalreserve.gov/releases/z1/current/z1r-7.pdf" rel="nofollow">FOFA S tables</a>, we know the semantics and relationships of balance sheet(stock variable) and saving/capital(flow variables) as shown in my point (3) explanation.<br /><br />In NIPA/FOFA data, stock is not defined as the integral (or aggregation or sum) of flows via the Riemann-Stieltjes integral. It is a <b>recursive definition</b>. <br /><br />Thus, there are several issues about ΔH = G - T in G&L SFC.<br /><br />(1) This is not a NIPA/FOFA accounting identity/flow balance<br /> The correct <b>flow variable balance equation</b> is:<br /><br /> A - L = Government Saving(S) - Government Investment (I)<br /><br /> A - L Government Financial Assets - Liabilities over a time-period t <br /> S - I = G + NonG - T. NonG is non-discretionary spending<br />and G is discretionary spending = government C + government I in GDP calculation(C + I + G + X - M)<br /> <br /><br /> (2) There is a <b>stock variable balance</b> equation between government financial assets(FA), liabilities(FL), and non-financial assets(NFA) as follows.<br /><br /> FA(t) - FL(t) = NetWorth(t) - NFA(t)<br /><br /> But A - L is not equal to change in stock financial stock, which is Δ(FA(t) - FL(t)). <br /><br />In FOFA, we have <a href="http://www.federalreserve.gov/releases/z1/current/z1r-2.pdf" rel="nofollow">complete and separate SC and FC balance matrices on pages 1 and 2</a>, but no SFC transaction matrix!!!. <b>All</b> balance equations in G&L SFC transaction matrix are not true accounting identities because of misunderstanding valid-time temporal data and how to derive this accounting identity (GDP = GDI)<br /> <br /> C+I+G+X-M = WB + NetOperatingSurplus + CFC + Tariffs.<br /><br /><br /> <br /><br /><br /><br />pliu412https://www.blogger.com/profile/06404437429487666914noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-39094271962763172182016-06-19T16:39:18.358-07:002016-06-19T16:39:18.358-07:00I address point (4).
Yes, accounting tells you no...I address point (4).<br /><br />Yes, accounting tells you nothing about dynamics. But it tells you the constraints of dynamics. Behaviors in theoretical models must meet the economic specifications (i.e. accounting identities). Otherwise, theoretical models are economic fiction.<br /><br />Often, accounting identities describe the constraints among demand-side variables. They can be used for an economic <b>model checker</b>. <br /><br />For example, from accounting identities, we can derive money demand Md in GDP production flows among sectors. Md is a fixed function of GDP and independent of money supply Ms. Supply-demand equilibrium models such as MV = PQ, IS/LM, etc. do not meet the economic specifications. Accounting identities can tell us M or LM is a fixed constant not a variable or arbitrary function once GDP is given.<br /><br /><br />pliu412https://www.blogger.com/profile/06404437429487666914noreply@blogger.comtag:blogger.com,1999:blog-6837159629100463303.post-37387699316356989162016-06-19T15:19:59.851-07:002016-06-19T15:19:59.851-07:00Jason,
I address point (3) first. Usually, a sto...Jason,<br /><br /> I address point (3) first. Usually, a stock variable is recursively defined in this form<br /><br /> Stock(t) = Revaluation[Stock(t-1)] + Flow(t)<br /><br />But be careful, t in Stock(t) represents a specific time-interval [0 t], however, same t in Flow(t) represents a different time interval [t-start, t-end]. Valid time temporal logic is based on time-interval only(not time snapshot).Time t in stock/flow variables always represents some time-intervals, consistent with NIPA/FOFA time-series data. It has no meaning in individual time snapshots and valid-time temporal logic.<br /><br />For example,<br /><br /> NetWorth(t) = Revaluation[NetWorth(t-1)] + Saving(t)<br /> <br /><br />Saving(t), a flow variable, asserts total saving over a time period t, which is equal to NetWorth(t) - Revaluation[NetWorth(t-1)] by definition. Revaluation[NetWorth(t-1)] means NetWorth(t-1) over current time-interval[0, t].<br /><br />But Saving(t) is not the same thing in asserting a change in stock variable NetWorth(t) = ΔNetWorth(t) = NetWorth(t)- NetWorth(t-1).<br /><br />So, it is not a time-scale issue. It is a valid-time issue.<br /> <br /> <br /> <br />pliu412https://www.blogger.com/profile/06404437429487666914noreply@blogger.com