Tuesday, February 9, 2010

Macroeconomic Balance Sheet Visualizer — Draft

I've been loosely following discussion of Circuitism and Chartalism (Modern Monetary Theory) since late summer or early fall, though I have not yet had time to work through some of the details to my satisfaction. But it's clear to me that the core accounting principles emphasized by Modern Monetary Theory are accurate, and that the MMT perspective is highly relevant to the global economy right now. At some point I hope to address some of my current issues with it, but they take secondary priority.

On some of the blogs I visit I've seen a lot of time spent discussing the mechanics of various macroeconomic operations (though I haven't had time to read or comment in much depth), and it always strikes me that a lot of time could be saved with better reference material on this stuff, whether wiki-based or otherwise. Discussion threads seem to lead to a lot of repetition of the same topics, ambiguity in descriptions, people talking past each other due to having different understandings of what concepts mean, etc.

It occurred to me to go ahead and try to put together a visual tool myself to help visualize and document some of these macroeconomic concepts. It was also an excuse to play with SVG (browser technology) for the first time.

NOTE: This is a preliminary DRAFT copy of a tool to help visualize the balance sheet effects of these concepts. I am hoping for feedback from folks who are already knowledgeable on these topics and can correct my mistakes. If you are learning this like me, I recommend you skip this until an updated version is ready, otherwise you could be unnecessarily misled or confused. I will post another blog entry when a more polished version is ready — both more accurate, and with added features, usability, more accessible step-by-step walkthrough, etc.

Here's the tool: Macroeconomic Balance Sheet Visualizer (DRAFT)

I welcome anyone (but especially those with a better understanding than me) to offer corrections and constructive feedback in the comments section below or via email (the address is on my profile). Thanks!

P.S., I'll hopefully be adding additional operations (equity/stock offerings, more central bank operations, markets repricing tradeable securities, etc) as well as adding better visualization of flows rather than just stocks (quantities). Plus depicting asset bubbles, the balance sheet outcomes of Japanese vs Great Depression vs "ideal" resolutions, balance sheet breakdowns within each sector, etc.

List of Updates to Balance Sheet Visualizer:

UPDATE1 2/22/2010: Renamed assets held by Treasury from 'Reserves' to 'Treasury Deposits' (abbreviated for now until able to show more detail).

UPDATE2 2/25/2010: New feature: Mouse over a balance sheet name to compare the balance sheet side by side with a copy from before the last operation.
Posted by at Tuesday, February 09, 2010
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14 comments:

  1. Just a comment on style. I find the gray background at http://econviz.com/bsexplorer.html
    a bit too dark. It reduces readability for me, if you are thinking of going with it in the final. The text in the graphs is hard to read, too, especially in the blue. Maybe tone down the hue toward the pastel for the column backgrounds. Otherwise, very nice job setting this up.
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  2. Thanks Tom! I hadn't thought twice about the colors since picking them, or tested other monitors... I just made some color changes based on your suggestions.
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  3. 1) Perhaps separate federal from state government because they handle liabilities different as States don't own a printing press.

    2) Net private assets equals government liabilities. So private assets don't equal private liabilities.

    3) What are government assets during normal times? The government/Fed has recently purchased private liabilities but do they do that normally? Besides the printing press and unspent balances at the Fed, I can't think of any government financial assets. Mostly they just operate with financial liabilities.
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  4. Anon, thanks for commenting...

    1) Good point that there could be confusion on that topic... I will relabel the treasury balance sheet next time I update to make it clear it's federal only. I haven't broken out states (nor foreign sector) in order to save space on this page, but have considered listing all of them in a separate step-by-step walkthrough of operations.

    2) Agreed. If I've said otherwise please let me know where. Unless you are just suggesting this be emphasized, which it should.

    3) My understanding is about the same as yours on this, and that's what's currently shown in the tool. If you are suggesting this as an additional emphasis, I agree that could be worthwhile.
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  5. I'd suggest using real world numbers so people know what your numbers represent.

    The Government assets are what exactly given this page only shows financial assets?

    2 and 3)Government liabilities are shown as $370 yet the difference between private sector liabilities and private sector assets is zero. Given the government would normally have zero financial assets, the private sector should have a positive $370 difference between assets and liabilities. The government would normally have a negative equity of $370.

    Look at $30 of government spending.

    If the government spends, it increases their negative equity by $30 while increasing private sector financial assets by an equal amount. Private sector equity would decrease by $30 while their financial assets would increase by $30.

    Government spending transfers real assets to the public sector in exchange for financial assets.

    I don't think your graph does not show this. If it does, please explain.
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  6. Anon-

    I agree that real world numbers would be a helpful alternative, and am hoping to eventually include the Z1 data, but I thought the minimalist made-up sample data would be easier to read and fit on one screen as a starting point, and with less obscure assets and liabilities.

    As stated in the tips section, this tool does not currently show any real/tangible assets. I may add a toggle to turn them on/off later. This is to keep it simple to start and emphasize the role of various types of borrowing and spending in the economy. And when the government spends, it doesn't always transfer real assets to the public sector. What about social security payments, unemployment benefits, paying for scientific research, etc?

    The lower row of balance sheets (scroll down) shows which assets and liabilities are in government vs private sector. Government financial assets are central bank reserves and treasuries.

    The difference between private sector liabilities and financial assets is $160 in the default data here. That's equal to the negative net worth of the aggregate government sector.
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  7. "And when the government spends, it doesn't always transfer real assets to the public sector."

    Right lately its been buying private sector financial assets (MBS).


    "What about social security payments, unemployment benefits, paying for scientific research, etc?"

    These public assets include a wealthier elderly population, wealthier unemployed population, and more scientific research etc. How quickly these public assets depreciate, or their initial public value depends on how the money is spent. When the government spends the public sector receives some asset in return even though it may have little initial value or devalue quickly.



    "Government financial assets are central bank reserves and treasuries."

    170 + 120 = 290 ?????

    "The difference between private sector liabilities and financial assets is $160 in the default data here. "

    huh????



    "That's equal to the negative net worth of the aggregate government sector."

    Neg Treasury equity + Central bank equity
    170 - 10 = 160
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  8. Might want to check this out

    http://bilbo.economicoutlook.net/blog/?p=8013
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  9. Anon @ 12:53am - Thanks, Bill Mitchell is actually in my RSS reader and I will try to get to that post.

    Anon @ 3:05pm - Regarding benefits received from government spending, yes we all benefit from it, but that doesn't equate to actual new assets on the government's balance sheet in all cases. If you meant the private sector gets some asset in return, then yes, and that is shown via an increase in private sector deposits as a result of government spending.

    I'm not following what you think is wrong with the balance sheet math, and others have looked and not seen a problem. 170 + 120 sounds like you are referring to treasuries (assets) held by the central bank and reserves (liabilities) issued by the central bank, but that's only half of the government. The "government sector (aggregate)" balance sheet adds up the "treasury (government)" AND "central bank (government)" balance sheets into one.
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  10. Hey hbl,

    How is your BS Explorer coming along ?

    Btw you may find this useful

    http://books.google.com/books?id=9nmNUN0R6PgC&lpg=PA11&dq=godley%20lavoie%20realistic&pg=PA251#v=onepage&q=%20%20realistic&f=false
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  11. Hi Ramanan-

    Thanks for checking in... No updates yet, but I should be able to work on it some tomorrow. I also held off a bit hoping for feedback as to whether what's there so far is accurate, but I didn't get a sense as to whether anyone looked over all the operations or not. JKH said he'd try to follow up but I haven't seen it. Anyway I'll incorporate the comments so far (mainly switching assets held by treasury from 'reserves' to 'treasury deposits' and commenting on central bank balance sheet equity or lack of it).

    Next steps I tackle may run something like:

    1. Adding additional operations (fed funds open market operations, stock/capital raises, asset bubbles & writedowns, etc).

    2. Additional/better descriptions such as mouseover text for each balance sheet. Plus other UI tweaks like auto-rescaling growing balance sheets.

    3. Better visualization of flows between balance sheets.

    4. A "tutorial mode" walking step-by-step through various operations to convey the key big picture concepts in a sensible order.

    5. Option to show with real world data (especially US & Japan).

    ...etc... (There are lots of possibilities, time and interest permitting!) I'm happy to get input (from anyone) on what might be most valuable.

    Also, I did get a copy of the "Monetary Economics" Godley and Lavoie book that you recommend to people (thanks). I haven't read it, but when I glanced through I hadn't seen anything that seemed to summarize the concepts I'm capturing here. Did I miss something or do I need to actually find time to read the whole thing? :) Oh and thanks for the link.
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  12. Yeah TO/hbl,

    In chapter 2, you will find good accounting concepts and the reason for use of market prices, chapter 11 - you will find a good way to do bank capital accounting. Plus in the various tables, you can see a lot of good accounting being done. But you seem to be very comfortable with those things.

    Reading the whole thing takes a lot of time! I mean to appreciate the whole articulation and appreciate it is a long process - though a highly enjoyable one.

    Your plans look very nice!
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  13. Ramanan-

    Thanks for the pointer to those chapters, they seem to get at the heart of one of my current areas of disagreement with MMT... whether the market value of shares and bonds should be used on the liability side of the issuer. On page 28 it says "With balance sheets evaluated at market prices, the bond will be entered as a $120 claim in the balance sheets of both the holder and the issuer of the bond, although the corporation or the government still look upon the bond as a $100 liability". I see chapter 11 gets into it a little more also but so far I am not finding a satisfactory (to me) answer, and the "that's what it would cost for the corporation to pay off all liabilities" justification I've seen in blog comments doesn't make sense to me if no one will realistically make economic decisions about their "net worth" and ability to spend by thinking in those terms. I know I should read those chapters in full, as maybe I will find a more thorough explanation.

    I've also started perusing this guide on shareholders' equity account and I have yet to see any justification for using market valuable on the liability side for equities, though I understand from elsewhere that sometimes it is done for bonds, since a falling bond price can actually be used as an addition on the income statement of the issuer. (Right?)

    In summary, when trying to understand how the economy actually works, this type of accounting seems as problematic as Bernanke as quoted by Keen saying, "I do not deny the possible importance of irrationality in economic life; however it seems that the best research strategy is to push the rationality postulate as far as it will go."

    I may change my mind as I am able to read more but so far this seems like an unrealistic accounting assumption for the sake of defending the "only the government can change non-government net financial assets" rule (to which I agree for all other scenarios, as my visualizer shows). Are there URLs to a more thorough discussion of this topic that has already occurred in the MMT blogosphere?
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  14. Let me think about it. A lot of it is national accounts so the logic may be difference. The logic provided by Wynne and Marc (just know them by few email exchanges, but will use their first names anyways) - is that if we use the market price of bonds/equities issued in liabilities, things balance. They even mention that Z.1 accountants do not include equities issued as liabilities!

    The convenience of net financial assets summing to zero is more than just convenience I believe. For example, in the early 2000s the Net Worth of the production sector became negative! Which is good to know.

    However, if you include bank capital complications, then things become complicated! You have to define "Own Funds" which accumulates.

    Of course, the authors do not make an assumption that depends on which convention you choose, so that is good. There is plenty of room for irrational behaviour. After all Wynne Godley mapped out prospects for the United States in 1999 - Seven Unsustainable Processes in www.levy.org/pubs/sevenproc.pdf and emphatically throughout the decade.
    ReplyDelete

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