Ep 397 - Sectoral Balances: Predicting the Next Crises with Jim Byrne

Steve Grumbine: 00:00:42

All right folks, this is Steve with Macro and Cheese and baby, we're back to macro land.

Today we are diving deep into macroeconomics, mmt, core mmt.

And what I mean by that is sectoral balances, the most necessary accounting identity you will ever stumble into.

And before I get my guest introduced, I want to say this right up front.

Sectoral balances, which is a, an accounting identity.

Folks, in accounting, unlike you know, economics, accounting is a science.

Accounting is fact based.

Accounting can be traced, you can prove it over and over again.

Accounting is.

Matt, it is science.

It is something that is a truism, so it's either true or false kind of thing.

We are not talking about.

It's up to your interpretation, man.

Right.

That's the beautiful thing about ledgers and about accounting is it gives everybody a common lens, a common framework for understanding what is reality.

Right now you, once you start overlaying political economy and all that stuff over top of it, you've now left the building of factual, provable science and you are now into ideology which can be backed by science.

But it is still not the same thing.

It is not the same level of science as what we're talking about today, which is sectoral balances.

And for those that don't know, sectoral balances describes like the government sector, the private sector and what we'll call the rest of world, three sectors primarily to focus on what their balance of payments is, whether they are in debt, whether they are not in debt, whether they're flush.

And you can see this very, very well through a graphic that if you go to the Federal Reserve, you can actually print out what the sectoral balances are at any given time.

ecession, the Great Recession: 2008

We are going to talk about sectoral balances because understanding sectoral balances is how these MMT economists were able to see before it happened even they were able to predict with accuracy, not with hyperbole, but with accuracy, the global financial crisis.

Here to discuss that with me today is my good friend and educator from MMT101 substack and a Udemy course which I strongly recommend getting if you're interested in learning mm at a, a deeper level is my friend Jim Byrne from Scotland and he is Scottish and my goodness, the minute he says hello Steve, you're going to hear the voice I butcher.

I probably sound like Bill Mitchell when I did that from Australia.

I'll just tell you how bad my accents are.

So with that.

Hey buddy.

Jim.

Welcome to the show sir.

Jim Byrne: 00:04:29

Hi Steve.

Steve Grumbine: 00:04:31

You like you try to cop an American accent.

How the hell are you doing man?

Jim Byrne: 00:04:38

I'm good.

Taste yourself.

Thanks for inviting me on.

Always very happy to come on chat to you.

Steve Grumbine: 00:04:44

Well you are one of my dear friends and I appreciate how you bear with my rapscallion kind of mindset here.

I tend to be a little rascally here so I appreciate you bearing with me but, but you wrote a recent piece and our organization has been trying to find ways of bringing about how the MMT community was able to use the sectoral balances to identify the collapse and the you know, in the economy and the impacts across the globe.

And you know, as far as I'm concerned, I mean we all, we already know there are high end economists that are fellow travelers and friends that know this stuff inside and out and I, I'll self deprecate for you, I know that that isn't you but you have really really taken great pains of making these narratives understandable for non economists which is really key here because this information for economists may be important or for Jane and Joe Sixpack, Main street regular people that have to go to work every day and come home and have no idea about this stuff.

It's important to be able to give them narratives that take this really really brilliant insights and boils it down so people can basically understand it and that's what you do quite well and that's why I've invited you to this.

So Jim, I guess to start with thank you but then to follow up with that, your paper, tell me why you wrote this paper on on sectoral balance aside from your normal just hey, I educate every day.

What was it that brought sectoral balances into your line of Sight and tell us a little bit about the paper.

Jim Byrne: 00:06:35

Okay.

I mean, a lot of the time when I'm trying to write, I want to write something, it's because I want to understand it better myself.

So I then usually try and go back to the simplest possible representation of some idea.

And I remember, I mean, I've been maybe doing this for, I don't know how long I've been doing it, four or five years, I don't know, to be honest with you, because I was interested in it before I started writing about it.

And I do remember hearing the phrase sectoral balances way back.

And I didn't really look into it at the time because it just sounded complicated.

I thought that sounds a bit weird.

I don't know what that is, probably beyond my understanding.

But then of course you start getting into MMT and you start understanding a bit about it and the sectoral balances, I kind of get a handle on it.

But I always remembered my initial reaction to the phrase and my initial reaction to trying to figure out, well, what is that about?

So when I was writing my article, I don't know where it was three weeks ago or two weeks ago, I thought, what I want to do is write something that is so simple because it is basically a very simple idea.

It's a very simple accounting type idea.

I thought if I can write something that shows the simplicity of it first and then works towards looking at it in a real world situation like the economy, then hopefully what I'm doing is I'm educating somebody who was in the same position I was a few years ago who doesn't want to look at it because it just sounds complicated.

So I don't know if you, I assume you had a look at it, but I started it in the article by just saying, grab some cups from the cupboard, fill one with water, pour that water into another cup.

You know, how much is in the first cup?

I have 50%.

How much is in the second cup?

50%.

You know, I just kind of took it from there and said the arithmetic relationship between these things is very, very, very simple.

So then you split the cup, the second cup into two, and you pour some of the second cup into the third cup.

Now you've got what you could say, you've now got the three sectors of the economy which are represented further down the line when I replace that water with some money.

So the first cup has got the money spent by the government into the second cup and the third cup which represent the non government sector.

And I looked at it that way.

I developed that model that way from the most simple possible view of what sectoral balances is, which is that it's just a mathematical relationship between these three different sectors based on the currency of the, of that of a particular country that you're operating in.

In my case it was the uk.

I don't know if that, if I was making, if I'm making sense when I say that.

Does that sound like something that makes, would make sense to somebody who's not an economist?

I'm trying to define it, you know, I think so.

So I define a relationship between three sectors by using cups that people can take down from their, from their cupboard with water in them.

And then I go from that to putting money in it, and then I go from that to the real world sectors.

It's exactly the same relationship that we had when we had the water in the cups.

So then, you know, that was the approach I took because I thought, well, if I do it in a way that I think, well, I would have understood that a couple of years ago because it seems so incredibly simple.

Why did I ever think it was complicated then?

That gives us sort of a door into that topic for somebody who's reading it for the first time.

I don't know if you've got any, any questions before I go on further than that.

Steve Grumbine: 00:10:24

Well, no, I just, I think that, you know, one of the interesting things was going back to the concept of stock flow consistent modeling.

This is a big word, right?

These are the words that, you know, the, the economists would use.

And going back to a: 2011

You know, he basically came up with some basic arithmetic, if you will, which I think most people are not going to spend any time trying to learn because they don't want to be an economist.

They just want to know what's going on.

So I think that based on that, you know, using a cup strategy, it's just as good as any man.

It's a visual that most people can hold on to.

But when you think about what you're doing, you're modeling something that is scientific.

You're taking, you know, like if I were a kid and I wanted to build something for the science fair at my school, you know, you're doing exactly that because if you think back to the initial conversation, you know, sectoral balances, stock flow consistent modeling, understanding aggregate demand through this, it's science.

And you have made that abundantly easy to understand.

Jim Byrne: 00:11:46

In my opinion, I mean, I'll pick up on something you mentioned earlier on.

I don't know if it was before we come on or after, but you used the word identity, which is a word that accountants use for an accounting relationship.

That's true by definition.

So when we look at, I mean, I'll go away for the cups for a second and use the words like deficits and surpluses.

Okay, so if there's only two sectors, there's the government sector and the non government sector.

If the government sector spends £100 into the non government sector, then the government sector is in deficit by £100.

The non government sector is in surplus by £100.

An accountant would say that relationship is true by definition.

They use the word identity.

So that relationship is true by definition.

Which goes back to something you've been saying a couple of times, which this is not opinion, this is scientifically true.

So when we're looking at the economy and as MMT as we're using sexual balances, we are not expressing an opinion about government spending, we are expressing a fact about the amount of money the government spends into the non government sector.

Which by the way, if you're in the UK or in the us, that means about, and some people don't believe me when I say this, that means there's about 97% of that money spent goes into the private sector.

That goes into your pockets, my pockets, the businesses, all that kind of stuff.

So, so basically when the government spends that money, it mostly goes into the private sector.

So in my article I go from that sort of arithmetic relationship to looking at what that means in terms of the health of the economy.

I mean, I don't spend a lot of time, so I get into the details.

But all I'm saying is that, for example, if the government is not running a deficit, perhaps the government is running a surplus.

What does that mean for the non government sector, primarily the private sector?

That means the private sector is now in deficit.

Right.

That means there's been money basically taken out of the bank accounts of the people in the private sector taken out of the private sector, individuals taken out of businesses, banks, accounts.

Because the relationship between the amount that the government spends into the economy and the amount that they've taken out in taxes has flipped and they're now taking more tax out than they're spending in.

Does that have an impact on those people in the private sector?

I would ask you that question, Steve, because I think you might know the answer.

Steve Grumbine: 00:14:44

Yeah, well, you know, let me add to that Real quick for a second because this, I think people need to really understand this.

You're talking about one side of the ledger being in surplus and one side of the ledger being in deficit.

And when we think about the private sector being in deficit, we are not currency issuers.

So us being in deficit is a real life and death struggle.

It could mean not getting dental work done, it could mean not getting a car fixed, it could mean, you know, not fixing necessary repairs on your home or it could be not feeding your family.

But when the government is in deficit, some people would think, oh my God, the government is broke.

The government, oh my God, what is going to happen?

There's a huge deficit.

The government, you know, we need, you know, we got to celebrate in the United States, we got to celebrate Bill Clinton because Bill Clinton gave the government a surplus.

So they think like a household budget on this one.

They think that the household has to have money in the bank account to spend, whereas the government doesn't spend by money sitting in a bank account.

Government creates money when it spends.

So it's brand spanking new money out of the chute and when it's taxed, it's destroyed or it purges reserves or however we want to say it.

I don't want to get too ticky tack as people aren't going to want to know all the inner banking, you know, wonkery there.

But the reality is, is that when, when money comes back from the government, it's destroyed, it has, it has done its job.

The government always spends new money into existence and it always taxes old money out of existence.

And when it comes to sectoral balances, the thing that's different about you and I is that when we are in deficit we can borrow money, AKA private credit.

But you and I, I mean I don't know what your credit rating is, but mine's not that great.

And if I was trying to borrow money to finance something, not only would I be paying more for it than I need to because of the interest, but I only have a certain level of debt that I can take on before a bank is going to tell me, sorry, you can't have any more credit.

And that's not the same with the government.

The government has no financial limit unless it's a rule that somebody puts in place.

Your thoughts on that?

Jim Byrne: 00:17:09

Yeah, I mean, absolutely.

You reminded, while you were talking there, you reminded me of something which I think it was Randall Ray that said it in one of his lectures.

He said that I think it's.

Is it six we've had six points in history where the government was running a surplus.

It might be five, I can't remember.

And after each of them, there was a economic recession.

Absolutely.

Steve Grumbine: 00:17:35

In fact, let me, let me go a step further on that.

I can even tell you specifically when those things were because we, we made a meme about this, you know, a graphic that, you know, allowed everybody to kind of see it, you know, kind of in real time here.

If you just give me one second, I'm pulling it up as we speak.

Okay.

All right.

So, you know, when, when he talked about that.

Right.

In: 1817

This is the U.S. okay.

d it, the depression began in: 1819

result of the depression hit: 1823

In: 1837

In: 1852

And in: 1857

And you can go all the way up: 1998

And we've seen it happen over and over again whenever they've tried to do this.

So, yes,: 1929

Well, we all know what happened, the Great Depression.

So.

Yes, anyway, Keep going, sir.

Jim Byrne: 00:18:57

No, well, I mean, I suppose the thing is that when these words deficit and surplus, people don't always know what those things mean, you know, and.

Well, you know, what are you talking about, Jim?

Surplus, deficit?

I don't know what you're talking about.

Well, what it means is that the government has basically taken money, people's accounts in the private sector via, you know, because they've taken more tax and out than the spending in so often.

What happens then is that people want to maintain their lifestyles despite the fact they've now got less money in their accounts.

And how do they do that, Steve?

They take on debt.

You know, you want to keep your car going.

You want, you want to either keep your paying your mortgage, you to want, want to make sure that you're still able to put food in the cupboard and maintain your lifestyle or, or if you're a business, maintain your investment.

So the government is actually taking money out of people's accounts when they tax people.

I mean, as simple as that, really.

So you've got less money.

You're a private individual.

You've now Got less money in your account.

How do you maintain your, your lifestyle?

I mean, you might be doing that for a period of time because you maybe think, well, I'll assume this will happen for a period of time, things will get better and I'll be able to pay off this, this loan that I've got to try and maintain my lifestyle.

But what happens when you can't, when you can't pay off that loan and the bank won't actually give you another loan to cover the previous loan?

Then you, you get to a point where people stop spending money in the economy.

It's kind of, to me it seems a fairly obvious idea.

People are not, they think, okay, this is a problem, it's not going to finish, it's not getting better, I better cut my spending.

What does that mean in the economy?

That means a lower aggregate demand.

If everybody's thinking about the same thing, the demand was down in aggregate.

What does that mean for business?

Businesses are selling less.

What does that mean overall?

The economy goes into recession.

Is it a mystery that this has happened?

Or there's a quick look at sectoral balances and the idea of deficits and surpluses balancing together.

Does that give us a clue as to what happened there and why that happened?

And if we look at just the facts of it, does that lead towards why there was a recession?

I would tend to think that the logic is all there.

ome other MMTRs predicted the: 2008

Not entirely on just sectoral balances alone.

at the sectoral balances and: 2008

But it was all the stuff that happened prior to that.

I think we communicated earlier on, before we come on and I think you even mentioned it just there.

to: 2001

Is that that ring a bell?

And the private sector was in deficit at that point.

And the foreign sector wasn't helping because the foreign sector was also running a surplus.

So the people that were getting hit for that four year period were the folk in the private sector.

which led up to the crash in: 2008

People were getting credit, banks were lending.

So they were able to borrow money.

So there was not actually a fall in the ability for these people to spend.

They were still paying for their cars, they were still paying their mortgages, they were still running, having the lifestyle and investment that they had prior to that.

So there was no indication in the economy itself.

There was no short fall in demand.

The economy was still looking healthy, but people were building up debt and they thought property is a good thing to invest in and I can get a mortgage even if, even if I've not got a lot of income because there's all these new.

And again, we then mentioned, talked about this off this podcast that we talked about earlier.

I can't remember.

People were actually thinking, well, this property is going to last for a while.

Even if this loan that I've got goes sour, I can always sell the property and make it, probably make a profit as well.

So during the credit boom and during the property boom, all looked rosy.

So the, the orthodox economists were looking at that and they saw nothing wrong.

But what did the MMT ers and Steve Keane, who is specifically looking at private sector debt, what did he see?

He saw that that private sector debt was getting out of hand and he knew that if there was a turn in the property market, this would all fall down and the ship would hit the fan, so to speak.

So Steve Keane predicted the: 2008

I don't see any problems here.

This is probably a time for you to intervene.

Stephen, I don't know whether you've got anything to say about my wee story there.

Steve Grumbine: 00:24:41

Yeah, well your story is just the way it goes, man.

I think most people, when they look backwards at that time period, they are still unsure of.

I mean, there was that great movie, the Big Short, and we've covered that many times here with different economists and discuss the entirety of that through the elite control fraud, especially through the legal end with Bill Black and others.

Others.

But you know, from, from a purely economic standpoint, you know, the private sector had taken on more private debt than it could pay back.

And the loans themselves, because they were giving outrageous mortgages to people that simply didn't have the income to pay for it.

And when all of a sudden people started defaulting on that, you know, you had all these basically no credit check loans, man, no money down loans, 110% of value loans, balloon loans, you know, all sorts of, you know, absolutely corrupt lending practices.

It allowed the private sector just to consume and consume and consume until it ran out of private credit.

And, and quite frankly, the economy itself couldn't sustain that.

And as they started defaulting, you know, the economy went into the toilet.

And so that's important why the sectoral balances model is so important.

We look at government spending and non government spending and we can or should say non government balances and government balances and they're like a mirror.

You know, Stephanie Kelton would show you a picture of the mountainside with a lake in front and you would see the trees and the mountain going up in reality and then you would see the reflection of it being exactly the same on the bottom.

And you can kind of tell when government pulls back and it starts pinching pennies and it starts reducing its spend.

And the private sector, on the other hand, has to reduce its spend as well because it is trapped in a debt bubble, right?

It's trapped in its own private debt that it can't get rid of.

It ends up what happens, you end up having a collapse, you end up having a crash that only the federal government as a currency issuer could step in and fulfill.

Go ahead, Jim.

Jim Byrne: 00:27:05

Yeah, I was thinking, I mean, that particular crash was a real poisonous mix of, you know, we look back at the, you know, that period where the, the government was in surplus, private sector was in deficit, and then we'll look at the rise of the huge amount of debt that private sector was taking on.

re was a third reason why the: 2008

The reason that those fancy named and stupidly named loans were being taken out was because of the deregulation of banking.

And the idea from the government's point of view was we want to unshackle the banks because when people can borrow money, they can create businesses and we will get stupendous growth.

So what we need to do is stoke that growth by taking the shackles off, the ability of the banks to do fancy things and make fancy loans.

And that's why you got to those loans were people that had no money to pay off a loan, were buying houses because they were being given loans, even though the people that were giving them the loans knew that they couldn't pay the money back.

I can't remember all the names of the financial contraptions that they're producing.

I looked at it earlier on before.

Steve Grumbine: 00:28:34

Synthetic, they were these synthetic.

Basically they were shadow banking, they were betting on bets, they were bundling Mortgages, okay.

And these mortgages were subprime mortgages where people were very, very high credit risks and the credit agencies were rating them as an A plus, man, go for it kind of investment.

And so people were buying up these synthetic, you know, debt instruments.

These, these, you know, basically Wall street black market kind of just destructive kind of financial arrangements that hid and masked for a while anyway the collapsing housing market.

Because you figure houses, most people think houses are never going to depreciate.

They're always just going to go up, up, up, up, up, up, up.

And so it's a safe bet.

And so everybody bets on the mortgage market.

But when they started rolling in these toxic assets, these, these you know, really, really bad defaulting loans into these buckets, you know, they started collapsing and failing really quickly.

And so all of a sudden, you know, one of the guys, you know, I, I think it's Burns, Bear Stearns, he was from Bear Stearns.

He had noticed this stuff and started banking on it.

And they, that's where the big short came from.

He shorted the housing market because nobody predicted the housing market collapsing.

Yeah, exactly though.

So anyway, it was one of the many ways to tell what was going on.

The, the private debt had risen to such a point and the, the defaults had risen to such a point.

And you know, this kind of goes back to Mosler's law that no financial issue, no, no crisis is so great that a sufficiently large, you know, spending package can't fix it.

Right.

The government, you know, here in the United States, you know, with Barack Obama he barely invested in at all.

I mean he, I don't even think he put a trillion toward it.

And it required a pandemic like spending package to be able to pull it out.

And had he done that?

Had he understood or.

I believe he understood, but it was against his handlers desires for the government to step in and spend because why?

Those houses were being bought secondarily by very, very, very rich people.

Private equity, you name it.

Buying all these force, these, these houses that had gone into default, buying them out of foreclosure and suddenly they had tons and tons and tons and tons of assets that they had picked up on the cheap.

So the rich didn't want necessarily this to go away, but the investors in those things were like, hey, where's my money?

We've lost everything.

The other guys were like, hey, we are, you know, it's kind of like, you know those old Star wars adats when the big foot comes on junk, junk, you know, they, they Kind of shook it up and watched all the little players fall to the ground while they scooped up all the stuff.

And you can kind of see this now as you realize how much private equity is bought up.

So much of the properties, not just in the United States, but really around the world, but definitely in the United States.

So I think it's a capital game.

You know, it depends on which capitalist is betting.

And the idea of capitalism, there's always winners and losers and they bet big on everybody losing and they won.

Jim Byrne: 00:32:10

Yeah, absolutely.

I mean, what you're saying is, unfortunately, always seems to be the case that the folk with the money get more money.

The folk at the bottom, for whatever reason.

Well, I say whatever reason.

It's an ideological reason, obviously, tend to be the people that get hit.

No matter what's happening in the economy, if things are going great, the people with the money are making more money.

If things are not going great, the people at the top are making more money.

Doesn't seem to be a blind bit of difference.

Steve Grumbine: 00:32:41

I want to throw a funny story in real quick.

So years ago, we had Pavlina come on with Mark Cuban.

I couldn't believe it.

We're sitting there hosting a discussion between Pavlina and Mark Cuban.

Now, Mark Cuban is in no way, shape or form one of us.

He is a billionaire, and he happens to be a slightly more enlightened billionaire, perhaps, but he's still a billionaire.

And you don't become a billionaire by doing good deeds.

That's just not the way it works.

But they, you know, Pavlina was talking to him about the job guarantee and he had some kind of tropes back and forth.

But one of the things he said that I will never forget, he said, you know what?

I don't care if you raise taxes on me.

I don't care if you cut taxes on me.

Either way, at the end of the day, I'm always going to end up making money because that's the way it works.

When you have money, you make money.

And it was kind of, you know, I have an mba.

I would have thought I would have known this stuff.

But it was just sort of jaw dropping to hear him articulate that to Pavlina.

And there's a video of it somewhere out there.

Maybe one day I'll find it and we can run with it.

But it really was jaw dropping just to hear him say that.

It doesn't matter what scheme you try to come up with, we will always end up being on the right side and making money.

Intermission: 00:34:07

You are Listening to Macro and Cheese, a podcast by Real Progressives.

We are a 501c3 nonprofit organization.

All donations are tax deductible.

Please consider becoming a monthly donor on Patreon, Substack or our website realprogressives.org. Now back to the podcast.

Jim Byrne: 00:34:30

Yeah, you mentioned some.

I mean that's true.

And unfortunately the folk at the bottom, I mean it's like people are seem to be designing things to make sure they can poke all the money.

The poorest people that are out there because they've got a investment opportunity or something or they've discovered some new way of making money, more money for themselves and the people that they can get that money from.

Easiest I'm prattle on a wee bit here but I'm heading somewhere the folk at the bottom of the wealth sort of mountain.

The people will least as a good place to grab some of that money.

And it's sort of in my head anyway, wrapped up in that phrase that you mentioned earlier on.

I remember watching the: 2008

The journalist on the television was saying these phrases and I bet they didn't have a clue what any of them were, not a word of it.

We certainly didn't know what they were.

But they sounded as if something bad's happening here.

But the one I'll pick out for you right now is this subject.

Prime mortgage market.

Right.

The subprime mortgage market is a market for providing loans to people who are poor.

Right?

That's what it means.

These people are setting up, sitting in their office, in their bank and they've got some poor person sitting on the other side of the table who cannot afford a mortgage, cannot, can't afford to pay it back.

And that person on this side of the table is selling them a mortgage so they can buy a house.

Because in their head they're thinking, all right, I can sell this person a mortgage.

Because what I'm going to do is we've got these new things that the deregulated market has allowed us to have, which is these collateralized debt obligation things, which means I can bundle up these poor, you know, these loans that I know are going to be defaulted and I can sell them to somebody else.

These are loans that I know are going to be defaulted on and I'm going to sell them to somebody else and I'll get a return right now and the problem will be moved on to the People that I sell them to, that is what these collateralized debt obligations were.

They were a way of bundling up these loans, which you knew were bad loans, making a quick buck and then passing on the problem to somebody else.

And then that problem was then sold to somebody else as a way to make a regular income.

Of course, they didn't know that these were poisonous loans, poisonous sets of loans that they were trying to get money out of.

So you had all these folk in one end of this table thinking, okay, how do we make money from these new financial things that we've built?

And who are we going to make that money from?

Well, I know I could go and chat the door of Mr. Smith up the road there.

I think he probably would love to have a house of his own.

I know I'm going on and I need to shut up.

money, it reminded me of that: 2008

And then you learn exactly what that jargon means.

And that tells you about the sort of ideology of the people who come up with this stuff about their way of thinking.

And their way of thinking is not, it'd be great for Mr. Smith to have a home of his own because that would make it his life better.

They're not thinking that.

They're thinking it'd be great for Mr. Smith to have a home of his own because that means I could profit from the fact that I can sell my mortgage, which I can then sell onto somebody else.

And I won't.

I'll be selling off the risk from that mortgage and I'd be making some money in quite quickly, in the short term from it.

Steve Grumbine: 00:38:35

Dude, you got it right.

I mean, this is the stuff.

If you all want to really see a phenomenal.

We did a huge, I believe it was a 12 part series called the New Untouchables with Bill Black and all the whistleblowers from that time.

It was.

And it's a video on we podcast here is usually audio, but that was back when we were doing video.

And it was incredible to learn how they purposely did these things.

This was not an accident, right?

This was known.

And you're right.

So by the time the bomb blew up from the bat, you know, toxic debts, these people were long gone.

Those, those, those businesses were, I mean, barely even put up.

They were a legal entity in one minute and the next minute they were out of business and gone.

But the money was already taken.

So trying to find the trail of, of these criminals was, it was ridiculous.

But one of the things I think that is important here is getting back to the identities of, of understanding sectoral balances.

You know, the way it was always told to me, and I did a video a long time ago of this when I was still very much a noob.

And it's pretty funny actually, but I think it's not entirely horrible.

I had people say pretty close, but, but you know, the idea of sectoral balances is that the mirror, the, the federal government is where money comes from.

And then private banks create loans, loans create deposits.

These are basic MMT stories, right?

And so when you understand that the government's quote unquote spending is our income, their red ink as our black ink, but you realize that they aren't borrowing that money.

See everybody out there, I mean, that's not an MMT or anyway, even our dear friends in the post Keynesian world, right, they all believe that money comes from bonds, that the government is borrowing at 3%.

And so it's a good time to, to spend because you know, government debt is at an all time low.

And you know, realize that these are all policy decisions.

The quote unquote debt doesn't have to be at all.

They could stop selling bonds or gilts or whatever else they sell, or they could, but they don't because the world would erupt because you need a safe bet, you need a safe investment.

And that safe investment is government securities.

They always pay because government checks don't bounce.

So with that in mind, everybody's, you know, retirement funds, their investment portfolios, all the other things, and mind you, everybody doesn't have a retirement fund.

Everybody doesn't have an investment portfolio.

In fact, the vast majority of people are living paycheck to paycheck, if they have a paycheck at all.

Okay, so I don't want to seem like I'm aloof here, but I want to put this into perspective that the reason why it's so hard to stop selling government debt, which is nothing more than a interest bearing savings account, is because people, when they invest in the markets or whatever, they want a safe hedge.

They want to be able to make sure that they don't lose everything.

And government bonds pay a predictable yield, they pay a predictable interest and they are fungible.

They are almost as liquid as cash is.

And so they can sell those things.

And it's very important to see the relationship of government spending and private sector spending or the lack thereof.

And as the government stops spending.

Money dries up in the economy because government spending, net financial assets are created when the government spends after it taxes that the money that's left in the economy is a net financial asset.

And so with that in mind, you know, if they choose to cut spending, then the money, the net financial assets in the economy dry up.

And it's not the rich that hurt, it's the people at the bottom who hurt because the system is wired in such a way that the rich get richer and the poor get poorer.

And that's why sectoral balance is one of the main reasons it's so important to understand.

Jim Byrne: 00:43:00

Yeah, you made me think of another thing there which is, and it's something that I get quite a lot of comments on my sub stack and quite a lot of people are interested in this sort of bones thing which you were speaking about there.

And they're also interested in the idea that the money in the economy comes from the banks.

Right.

So that's the common people say, Jim, I know you're talking about this stuff about the government.

The government doesn't put money in.

It's all about the banks.

And what you said there is correct.

The only people that can bet net new financial assets into the private sector, into the non government sector is the government.

Nobody else can do it.

You know, if you said to folk, okay, are you telling me that all the money come from the banks?

The banks, what are banks?

They give loans.

Does that mean you don't pay back the loans or does it mean that you're making the money in your basement?

Or what does it mean?

People seem to think that the private sector makes money, it makes wealth, it makes the money.

And the government some kind of thing that hangs off the private sector just getting in the way.

I mean, I see.

No, wait a minute.

The government is the only place where you can find net new financial assets getting spent into the private sector.

The banks provide loans which have to be paid back.

The private sector makes no net new money.

The private sector just moves that money around.

Usually it moves it up the way as we've discussed and creates greater and greater inequality.

But it private sector does not create new money.

Steve Grumbine: 00:44:39

I want to say something here real quick to that because this is important because folks will be nuh, nuh.

You're wrong.

You're wrong, Jim, you're wrong.

Steve, you don't know what you're saying.

The reality is, is that when a bank gives a loan, the bank keeps the interest and the interest, by the way, it boils down to government spent money.

Because the quote, unquote deficit that the government spends is the only thing that stays in the economy until that money is taxed back.

So the loans that are paid net back to zero, like when a loan is paid off, banks don't quote, unquote, create money in the sense they create loans and those loans are denominated in the currency of the government.

However, once that loan is paid off, all the bank gets to keep is the interest.

They don't get to keep the principal.

That principle is deleted, zeroed out, just like attacks.

So go ahead, Jim.

Jim Byrne: 00:45:35

Yeah, just a very quick thing, I don't know if you heard, I probably said this before, but Steve Hale, I mean I did the course from on the banking thing and I remember being surprised by one thing that he says in one of his videos, which is that when you are, you said the bank takes interest from you, you get that loan, you pay back that loan and you pay back more, then the loan is taken out, obviously the bank makes a profit.

He says if the bank does not put that back into the private sector as some kind of debt, you know, in some, some way, a dividend, for example, then what is actually happening from that private sector loan is it takes money out of the private sector.

And that's always stuck in my head this idea because people think, yeah, it's all about loans, it's all about the banks, it's all about getting money out in the private sector.

In fact, loans could take money out of the private sector.

When they don't put that money back in that interest payment, the bank does not put that interest payment back into the private sector via a dividend.

If it holds onto it.

They actually take money out of the private sector.

And I remember hearing that from Steve and thinking, I've never heard any of that in my life.

That's just incredible.

We all think that they're putting the money in and we need the banks.

But to discover that there's a thing there, there's a mechanism there where the banks themselves extract money from the private sector and you end up with less money in the private sector after you get a loan than you did before, it always surprised me.

So when you mentioned that, I thought, I just thought that'd be quite an interesting thing to put back to you there.

Steve Grumbine: 00:47:13

Yeah, so in our sectoral balances conversation, we've talked about the national government spending, that the government sector, and then we've talked about the non government sector.

But then the thing we haven't really talked about is rest of world or demand leakages.

And those demand leakages are your savings accounts, the things you're saving.

When you take that money out of the economy, savings becomes a part of that third sector.

It's weird, right?

You would think, hey, I'm saving, it's good, right?

Well, no, because one person's spending is another person's income.

And in a capitalist system where growth is everything and we're looking at the velocity of money and we're looking at spending and so forth, what you're dealing with here is once again a situation where you are now creating austerity through the private side.

You know, when you, when someone saves, it's literally slowing the economy down.

This demand leakage is the third sector, it's the rest of the world, balance of payments with other countries, etc.

So there are three sectors that are typically looked at in that kind of space.

And if you want to see some really wonky, really great, detailed work.

Scott Fulwiler wrote a bunch of stuff, especially going back to New Economic Perspectives.

He had written a couple papers right in that time frame that I think Everybody should read.

,: 2011

Really, really important thing.

He's piggybacking off of a couple articles by Stephanie Kelton.

So for those of you who want to learn this stuff, obviously please read Jim's blog.

But I strongly recommend you can go to our website.

We've published a lot of these articles after the fact.

But you can also go straight to New Economic Perspectives.

Again, this is from: 2011

And see the formulas and really get a deeper understanding of the way this works because again, it's counterintuitive.

I think the public really believes that when government is in surplus, that's a good thing that, you know, hey, the government's now got more money to spend because it's in surplus.

It has a surplus.

But government, and I love the way this was said years and years ago, Warren Mosler would say the government neither has nor doesn't have money.

It spends the money into existence.

So the idea of a government being in surplus means that it took more money out of the economy, destroyed more money in the economy than it put back into the economy.

So you have what guy named Steve Larchuk dubbed monetary famine, a money famine.

And so when you start shrinking it up, that's what happened with Bill Clinton's balanced budget amendment.

We had a disruptive technology called the Internet that was busting under the scenes.

But when that bubble burst, government had pulled back, welfare checks have been cut back.

Everybody was struggling.

I mean we hit a really, really bad two, two quick recessions.

And then they said, hey, we need a little military Keynesianism, let's go ahead and attack Iraq, let's go ahead and attack Afghanistan after 9, 11.

So they use these things as a means of propping the economy up.

Rather than spending money into the economy on people to give people a chance to rebound.

They decided, let's go kill some people.

We'll spend on the war machine and we'll make the economy right as rain.

Obviously, Obama then inherited the Great Recession, actually happened on his watch.

It started under Bush as he was walking out the door and Obama took it on.

And Obama, being a good fiscally conservative bastard, went ahead and slow played this thing.

And it took years and years and years for it to come out of that hole.

But that's because government spending creates savings for you and I, Jim.

But I want to say one thing before I turn it over to you here, and I think this is really important.

A good socialist is going to come to me and say, who is our money?

Who is this we you're talking about, Steve?

And they're not wrong.

There is far too much of this aggregate looks from a macro perspective on who that deficit is going to.

The average person in the United States is not flush with cash.

The rich are exceedingly rich.

The money is going to them.

When we talk about government spending, they, they're spending the biggest welfare queens of them all like Elon Musk, who I think some $39 billion given to him for his pursuits and largely turn those things into more and more and more money for himself.

And you can look at this with Peter Thiel and the AI Boom.

You can look at government spending of where they place their priorities and money and you can think that it's an accident.

And I know there are people out there, oh, if they just understood, they wouldn't do these dumb things.

But for the socialists out there who understand the state as an arm of elite control and as a capital wing of domination, the institutions of the state serve to dominate the working classes.

This conflation, this fascism, this corporatism that is prevalent here, we don't look at stratification.

So we don't think about where all those dollars are savings.

Well, you know, yes, I guess technically the pennies in my account are my savings.

But compare that to the trillions of billions that Musk and others are getting directly from the government and you think to yourself, maybe we should be talking about stratification here too.

But I digress, because I know that's not sectoral balances, but it is for those people that are socialists out there that are hearing about sectoral balances for the first time.

Maybe don't think of this stuff as very important.

I want you to understand that this is still very important.

You just have to add another layer to understand where the money's going to and why they're doing it and the motives that they have.

Go ahead, Jim.

Jim Byrne: 00:53:24

Now you've just identified one of the things that sexual balances doesn't tell us, which is where does the money go?

Steve Grumbine: 00:53:30

Exactly.

It's a blunt tool.

It's an accurate tool, but it's a blunt tool.

It requires stratification economics to understand where that money's going.

Jim Byrne: 00:53:40

So yes, yeah, absolutely.

I mean, one thing I. I know we've been going on a bit.

One thing that when I was sending you some stuff earlier on, I was reading, I don't know if you remember, William Thompson and Dirk ens.

Did they put out a paper about sectoral balances in Scotland?

Oh yeah, it was about, I don't know when it was a year ago or six months ago.

No sense of time here.

Steve Grumbine: 00:54:05

It wasn't that long ago.

It was actually relatively recent.

He and I talked months back.

Jim Byrne: 00:54:10

Okay, so.

Steve Grumbine: 00:54:11

Yeah, but anyway, go on.

Jim Byrne: 00:54:12

And so I was having a quick look at it before, well, this morning in fact, to remind myself what that was about.

And it was connected with the idea that if Scotland becomes an independent country, which I hope it does, and then becomes a member of the eu.

The eu, if it has got that thing called.

What is it?

The Prosperity and something packed.

God, what the hell was it called again?

I can't remember any names of anything, but it says the idea that if you want to align yourself with the EU, you've got to have at maximum a -3% deficit in your government spending.

Right.

What is the name of that again?

Hold on a second.

If I can find it anywhere.

Steve Grumbine: 00:54:58

The European outlined a prosperity pact for Ukraine.

I don't know what it is for the other stuff, but I do know that that was what they did for Ukraine.

Jim Byrne: 00:55:07

Yeah, they call it prosperity, of course, but it's a lot of nonsense.

So.

So Dirk and William are looking into this idea and say, well, what would that leave Scotland if that.

If Scotland actually aligned themselves with the EU, saying that you must only have a minus 3% GDP deficit.

Well, unfortunately what that would mean is that Scotland would end up with the private sector in deficit.

Because unfortunately, unfortunately, in some sense people think this is a great thing, but Scotland has a lot of external investment goes into the country, in fact, huge amount.

And what that means, I mean, people celebrate this here, but what it means is actually profits then get moved out of the country.

The profits from all this investment goes abroad, right?

And it's a huge amount of money.

I can't, I don't have the figures, I've had the figures in my head in the past, but I know it's a huge amount of money.

So they were looking at this and saying, okay, what would happen if Scotland did align themselves with this -3% deficit?

The private sector would actually end up having to run a minus 4% deficit because the foreign sector, given where it runs at the moment, would have a plus 7 surplus in an independent Scotland.

So all the money, all the positive money is going out of the country and both the government and the private sector would be running a deficit.

So there's some.

I'll give you a quote from that paper.

What that would mean.

They're saying what that would mean is a collapse in economic growth.

It would raise unemployment and it would reduce public goods and services.

It would also likely increase household debt.

Stress disproportionately affect the lowest earners, women, children and minority groups.

So that's from their paper.

That's a quote from a paper.

Now, how would you know that that might be the result of that happening?

Well, the only way you could know that that was the result of that happening would be to look at the sexual balances of Scotland.

Clearly the, the Scottish government, which says that they would sign up to, to this, what's it called again, growth and something packed with the eu, if they did in fact sign up to that they are in a new country already, given them a good kick in the knees, breaking their legs and making sure that Scotland from the get go could not be a successful country and we'd all be running up debt.

Just as I mentioned earlier on, we'd all be sitting there with no money in their accounts, trying to maintain our lifestyles that are investment.

And the private sector would be running a minus 4% deficit.

So balances, it's not just a good idea, it's not just something we can play with saying, look, this sector's got a deficit.

That means this sector's got a surplus.

Isn't that interesting?

Let's pour the water out of the cups into the other cups.

No, this has a real impact on people's lives.

So if we can apply this model to, for example, an independent country like Scotland, we can see why it would be a bad idea for Scotland to sign up to these types of restrictions on what it can spend.

In their paper, they say that for the private sector to run a surplus, given that the, the foreign sector, if it stays the same as it is at the moment, would be running a 7% surplus, that would imply that the government would actually have to run a deficit of 12%, which for a lot of orthodox economists, their faces would go red.

I think that is absolutely ridiculous.

Your country's going to go down the pan because you're going to be building up a huge amount of debt.

And they would maybe even say national debt, even though they're only referring to the government.

You're going to have a country that's going to have huge debt, and you know what that's going to mean for you, for your future children.

They're going to have to pay back that debt.

You're coupling your country from the get go.

But we know, Steve and myself, we know that that deficit of 12% does not affect in any way the government's ability to spend now or in the future.

Because things that do affect that are whether there is inflation in the economy and what the ideological approaches are of the politicians making the decisions to either spend or not spend.

Those are the important levers that can prevent the government from running that deficit and prevent the government from ensuring that the private sector is healthy from the get go.

Because of the circumstances that I've just mentioned.

I don't know if that makes sense to you, Steve.

Steve Grumbine: 01:00:00

No, it makes a lot of sense.

And I want to add to that.

You know, one of the things that I want you all to take away from this.

You know, again, we started this off talking about this being an accounting identity.

Okay?

That means there's a formula that you can know.

And you know, again, we're not trying to do the maths here, but quite simply, domestic private sector net savings equals government sector deficit plus current account balance.

Okay?

By current account balance, we can look at the relationship between the private sector, households and businesses, the foreign sector, exports, imports and savings.

And we can look over here at the public sector, the federal, state and local governments, those three sectors they're looking at when they're doing this.

And again, domestic private sector net savings equals government sector deficit plus current account balance.

The current account is what we call trade, the balance of trade, the, the inflows and the outflows of the country.

And when that Money leaves the country.

That is a demand leakage, right?

That money, it doesn't get remade.

It could get remade.

And that's kind of where this whole MMT story takes us, is that we come up with this fake myth that the governments are broke, when in reality it's you and I that can go broke.

It's the local governments that can go broke, it's businesses that can go broke, but the state can never go broke.

And so when the state, if it's responsible, when we say responsible, we're not talking about, well, we're cutting spending.

We're talking about responsible, meaning running a quality economy for all, right?

Which we don't have a government.

None of us have a government that's seeking this right now.

It's fundamentally part of capitalism, which I think Jim and I may or may not agree on.

But from my vantage point, and what I'm going to put my flag on, within a capitalist system, it's all about accumulation.

It's not about fairness.

It's not about making sure everybody's doing well.

So putting motives on a government that is run by the revolving door of capital and industry versus the people, Main street, telling what their interests are, what their needs are.

Okay?

When government serves the rich, we're all left high and dry.

And government is an arm, it's an institution.

It is literally the long arm of capital at this point.

And you could see it like, don't let my words color you.

Look.

Let your lying eyes tell you what you see.

And now that you have this formula, now that you understand that there's a sectoral approach to this stuff, that if government is in surplus, that means that either the private sector is in deficit, which means we don't have money, or there's a problem with the rest of the world too.

But in this case, when we're looking at these identities, they all balance to zero.

All these numbers equal zero because one person's spending is another person's income.

And that's why these formulas don't lie.

They're not a hot take, which you see all over social media.

Repulsively horrible depictions that make us dumber for reading them.

Okay?

We are literally inundated with the biggest amount of stupid from, from economists, from media, all the arms of this lie that carries it forward makes us less intelligent every time we read it.

This is what is so important about sectoral balance.

It is truly a science and accounting identity.

Where it fails, where.

I shouldn't say where it fails, because it doesn't fail.

It does exactly what it's supposed to do, where it's incomplete or where it doesn't tell us enough information is we need stratification to look where that money's going to.

And folks, look in your bank account sometime for those you are doing jolly good.

Good for you man.

But for the bulk of the world we're all suffering.

We're all one paycheck away from destitution and it's important to understand these things.

Some would say from a positive standpoint we can say, oh, we can do these great things.

I take a different approach.

I'm looking at it as a, as a tell.

We're learning what the capital order is doing to us.

By studying these sectoral balances we're able to see the.

That they're doing to us as opposed to cosplaying and pretending that their interests are our interests because we understand their class interests are radically different than the average working class person.

Jim, your final thoughts as we go out.

Jim Byrne: 01:04:43

Who are my finals?

I was just listening to you there.

I didn't have anything in my head.

Usually what happens is usually you'll say something and it'll pop in my head.

Oh right, I could reply to that.

It's interesting.

I've got something to say about that but by the time you got to the end of that I was just nodding my head.

So all I could say is thanks for inviting me on Steve and I think hopefully we've been of some use to your listeners.

That's really all I can say, I suppose.

Steve Grumbine: 01:05:13

Well, I hope we can get you a cup of coffee sometime and get you to come to Macro and chill on a Tuesday night.

It'd be a little late for early for you depending upon.

I think you guys are five hours ahead of us so that would be like.

It would start at like 1am Your time.

I'll send you a cup of espresso and see if I can get you.

Yeah, but anyway, Jim, tell everybody where they can find more of your stuff.

Jim Byrne: 01:05:36

Well, if you.

Actually it's very easy to find me these days because I'm on MMT101 on substack but if you were to type MMT101 into Google or any other search engines, you go straight there because I don't think there's anything else out there or NMT 101 economics perhaps, but I think just the name would, would get you there.

That's, that's all I can say.

There's lots and lots of articles on there now.

I do one every single week.

This one I'm doing this week, strangely enough, which I'm writing at the moment, is called An Introduction to Modern Monetary Theory.

So you can't get any more MMT than that.

And I hope, I was hoping it would be a short article, but if you've read any of my articles, you'll know that it's unlikely to be terribly short.

Steve Grumbine: 01:06:22

I do get Graffiti is not your.

But that's okay though, because you are trying desperately to reach people with analogies.

And, and I love that.

I mean, Jim, Jim, for real, like I love the fact that you use so many analogies that are.

People are able to relate in their own lives that are not economists, that have no intention to be an economist, that will never ever get a master's degree from Torrens University in sustainable economics or anything like that.

They will simply go to work every day, come home, bounce their kid on their knee and hope for the best.

And these, the education that you provide and hopefully that we do here as well, will hopefully give people some insights into the world in which they live that maybe they don't hear elsewhere.

And you know, hopefully, in whatever fashion, we're doing good work.

So with that, I, I beg you all, please support Jim, go to MMT101 on Substack and if you're not on Substack, get on.

So it's a great platform compared to a lot of the other social media platforms.

Some actual constructive conversations occur there.

It's not all hyperbole.

So I strongly urge you, please consider following, you know, us real progressives at On Substack, myself, Steve Grumbine on substack, Jim with MMT 101 on substack and a host of others.

You can see our previous guest Errol Colassi on there.

There's just tons of really, really good, solid material out there.

So please consider doing that.

And with that, Jim, I'm gonna take us out.

I want to thank you once again for being my guest and for folks out there that are just tuning in.

We release this podcast every Saturday morning and we desperately need you to share this stuff on social media.

Folks, I'm telling you, it's free to do and it helps us in a big, big way.

So you could share wherever, whatever social media platform you're on.

We'd love for you to take the link for this and send it to your friends, send it on to your groups that you're in, etc.

And aside from that, we are a 501c3 non profit real progressives.

What we are doing is trying to educate people, bringing on guests, working through these issues, talking about macroeconomics and the intersection of class, geopolitics, et cetera.

If you find the work that we do here valuable, we'd love for you to become a monthly donor.

You can go to our patreon which is patreon.com real progressives.

You can go to our substack and become a monthly donor or you can go to our website@realprogressives.org and become a monthly donor or a one time donor.

And if you have a bug and you're interested in volunteering, we have room for you here too.

On behalf of my guests Jim Byrne, myself, Steve Grumbine and the non profit Real Progressives and the podcast Macro and Cheese, we are out of here.

End Credits: 01:09:27

with the working class since: 2015

To become a donor please go to patreon.com realprogressives realprogressives.substack.com or realprogressives.org.

End Credits: 01:09:52

Sam.