Tag Archives: G&L

OECD’s ‘Understanding Financial Accounts’ On The Importance Of Stock-Flow Coherent Models

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International organisations such as the UN, IMF, OECD etc., publish some good guides on national accounts and the flow of funds. I just noticed that the 2017 edition of OECD’s book ‘Understanding Financial Accounts’ has a section in appreciation of stock-flow coherent (SFC) models with a history starting with the work of Morris Copeland.

From page 407-409:

  1. Uses of financial accounts and balance sheets in economic research

Financial accounts were first modelled by Morris A. Copeland …

…

The fall of financial accounts and balance sheets and the work of Godley

In the 1960s and the 1970s financial accounts were at the centre of economic analysis. From the mid-1980s until the 2007-09 economic and financial crisis, interest in financial accounts and balance sheets more or less vanished, for a number of reasons: a growing focus on the micro-economic foundations of macroeconomics; the increasing role of monetary and credit aggregates for the conduct of monetary policy that implied a lower focus on the entire financial system; trust in the self-correcting market mechanism through price adjustments, while considering quantities – both flows and stocks – less important; the rational expectation critique of Keynesian models; a growing inclination among economists to separate monetary and real phenomena; and the problems of achieving full international harmonisation of statistics until the introduction of the 1993 System of National Accounts (SNA93).

In contrast, Wynne Godley never abandoned the idea that economic models should be founded on flows and stocks, and developed consistent models of the US economy and other countries. In his approach, modern economies have an institutional structure comprising (non-financial) enterprises, banks, governments and households. The evolution of economies through time is dependent on the way these agents take decisions and interact with one another (Godley and Lavoie [2007]) …

…

References

…

Godley, W. and M. Lavoie (2007), Monetary Economics: An Integrated Approach to Money, Credit, Income, Production and Wealth, Palgrave MacMillan, Basingstoke.

…

Inflation Accounting

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A good macroeconomic model would use national accounts and the flow of funds with behavioural hypotheses. It’s complicated by the fact that prices of goods and services change. It’s not just that if prices of goods and services change, you’re consumption would change in response to that, but also because say the deposits you hold in the bank is worth less.

So your behavioural equations need to be modified. It’s not easy. Wynne Godley recalls in his book Monetary Economics:

And no lesser authority than Richard Stone (1973) made the same mistake because in his definition of real income he did not deduct the erosion, due to inflation, of the real value of household wealth.

…

References

…

Stone, R. (1973) ‘Personal spending and saving in post war Britain’ in H.C. Bos, H. Linneman and P. de Wolff (eds), Economic Structure and Development: Essays in Honour of Jan Tinbergen (Amsterdam: North Holland), pp. 75–98.

The system of national accounts does recognise the importance of this but there aren’t any real variables defined. Real as opposed to nominal. Instead holding gains (formal phrase for “capital gains”) is divided into two parts: real holding gains and neutral holding gains. So,

Nominal holding gains = real holding gains + neutral holding gains.

Assets prices can rise differently than prices of goods and services. Para 12.89 says:

The real holding gain on an asset is defined as the difference between the nominal and the neutral holding gain on that asset. The values of the real holding gains on assets thus depend on the movements of their prices over the period in question, relative to movements of other prices, on average, as measured by the general price index. An increase in the relative price of an asset leads to a positive real holding gain and a decrease in the relative price of an asset leads to a negative real gain, whether the general price level is rising, falling or stationary.

Of course we should consider holding gains and losses on liabilities as well.

This is anyway complicated practically. I haven’t yet seen national accounts of any country producing such tables. But the SNA—including the 2008 SNA—doesn’t have any framework beyond this. This is because it considers that economic behaviour would be different for real holding gains or losses, as opposed to just the flow aspect.

In other words, if your (nominal) income is $100 and there’s a 10% inflation, your consumption would fall. But you might not react the same if you have a real holding loss of $10.

But to a first approximation you could simplify and bring real holding gains into real income. I have simplified quite a bit and these are quite challenging things, so I refer you to Wynne Godley and Marc Lavoie’s (G&L)’s book Monetary Economics.

I wrote this post after an online discussion about the government “inflating away the nominal debt”. Although such claims are loaded, there is some logic to it. In inflation accounting, holding gains/losses appear in incomes. Modeling involves going back and forth between real and nominal variables.

An original writing is that of Wynne Godley (and Ken Coutts and Graham Gudgin)—a 1985 paper titled Inflation Accounting Of Whole Economic Systems. In that you see the equation:

(Snipped from the 2012 reprint).

So the government disposable income (in addition to taxes and central bank profits, also has the holding losses due to the fact that prices of goods and services has increased in the period, not just because of changes in prices of government bonds).

Of course, there’s also the loadedness of the phrase “inflating away the debt”. That’s a different matter, my point here is to address the intuition of why inflation can be thought of as bringing revenue to the government and reducing its debt.

Preface To The French Edition Of The General Theory

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The French edition of Keynes’ The General Theory, has a nice preface explaining what his book is all about. It is dated 20 February 1939.

This is available in The Collected Writings Of John Maynard Keynes, Volume VII – The General Theory Of Employment, Interest And Money. The Collected Writings has volumes I-XXX.

First, Keynes announces how he is breaking from orthodoxy:

For a hundred years or longer English Political Economy has been dominated by an orthodoxy. That is not to say that an unchanging doctrine has prevailed. On the contrary. There has been a progressive evolution of the doctrine. But its presuppositions, its atmosphere, its method have remained surprisingly the same, and a remarkable continuity has been observable through all the changes. In that orthodoxy, in that continuous transition, I was brought up. I learnt it, I taught it, I wrote it. To those looking from outside I probably still belong to it. Subsequent historians of doctrine will regard this book as in essentially the same tradition. But I myself in writing it, and in other recent work which has led up to it, have felt myself to be breaking away from this orthodoxy, to be in strong reaction against it, to be escaping from something, to be gaining an emancipation.

Then Keynes says what he is doing:

I have called my theory a general theory. I mean by this that I am chiefly concerned with the behaviour of the economic system as a whole,—with aggregate incomes, aggregate profits, aggregate output, aggregate employment, aggregate investment, aggregate saving rather than with the incomes, profits, output, employment, investment and saving of particular industries, firms or individuals. And I argue that important mistakes have been made through extending to the system as a whole conclusions which have been correctly arrived at in respect of a part of it taken in isolation.

Keynes, I imagine thought that the root of all orthodoxy is the saving-investment identity. Once this is understood, things follow more easily. He says:

Let me give examples of what I mean. My contention that for the system as a whole the amount of income which is saved, in the sense that it is not spent on current consumption, is and must necessarily be exactly equal to the amount of net new investment has been considered a paradox and has been the occasion of widespread controversy. The explanation of this is undoubtedly to be found in the fact that this relationship of equality between saving and investment, which necessarily holds good for the system as a whole, does not hold good at all for a particular individual. There is no reason whatever why the new investment for which I am responsible should bear any relation whatever to the amount of my own savings. Quite legitimately we regard an individual’s income as independent of what he himself consumes and invests. But this, I have to point out, should not have led us to overlook the fact that the demand arising out of the consumption and investment of one individual is the source of the incomes of other individuals, so that incomes in general are not independent, quite the contrary, of the disposition of individuals to spend and invest; and since in turn the readiness of individuals to spend and invest depends on their incomes, a relationship is set up between aggregate savings and aggregate investment which can be very easily shown, beyond any possibility of reasonable dispute, to be one of exact and necessary equality.

He then says how output is determined not by the capacity to produce but dynamic demand-led processes:

Rightly regarded this is a banale conclusion. But it sets in motion a train of thought from which more substantial matters follow. It is shown that, generally speaking, the actual level of output and employment depends, not on the capacity to produce or on the pre-existing level of incomes, but on the current decisions to produce which depend in turn on current decisions to invest and on present expectations of current and prospective consumption. Moreover, as soon as we know the propensity to consume and to save (as I call it), that is to say the result for the community as a whole of the individual psychological inclinations as to how to dispose of given incomes, we can calculate what level of incomes, and therefore what level of output and employment, is in profit-equilibrium with a given level of new investment; out of which develops the doctrine of the Multiplier.

and introducing the paradox of thrift:

Or again, it becomes evident that an increased propensity to save will ceteris paribus contract incomes and output; whilst an increased inducement to invest will expand them. We are thus able to analyse the factors which determine the income and output of the system as a whole;—we have, in the most exact sense, a theory of employment. Conclusions emerge from this reasoning which are particularly relevant to the problems of public finance and public policy generally and of the trade cycle.

Keynes then argues against the typical claim that the rate of interest adjusts to bring saving equal to investment:

Another feature, specially characteristic of this book, is the theory of the rate of interest. In recent times it has been held by many economists that the rate of current saving determined the supply of free capital, that the rate of current investment governed the demand for it, and that the rate of interest was, so to speak, the equilibrating price-factor determined by the point of intersection of the supply curve of savings and the demand curve of investment. But if aggregate saving is necessarily and in all circumstances exactly equal to aggregate investment, it is evident that this explanation collapses. We have to search elsewhere for the solution. I find it in the idea that it is the function of the rate of interest to preserve equilibrium, not between the demand and the supply of new capital goods, but between the demand and the supply of money, that is to say between the demand for liquidity and the means of satisfying this demand.

Keynes then announces his break away from Monetarism:

I have called this book the General Theory of Employment, Interest and Money; and the third feature to which I may call attention is the treatment of money and prices. The following analysis registers my final escape from the confusions of the Quantity Theory, which once entangled me. I regard the price level as a whole as being determined in precisely the same way as individual prices; that is to say, under the influence of supply and demand. Technical conditions, the level of wages, the extent of unused capacity of plant and labour, and the state of markets and competition determine the supply conditions of individual products and of products as a whole. The decisions of entrepreneurs, which provide the incomes of individual producers and the decisions of those individuals as to the disposition of such incomes determine the conditions. And prices—both individual prices and the price-level— emerge as the resultant of these two factors. Money, and the quantity of money, are not direct influences at this stage of the proceedings. They have done their work at an earlier stage of the analysis. The quantity of money determines the supply of liquid resources, and hence the rate of interest, and in conjunction with other factors (particularly that of confidence) the inducement to invest, which in turn fixes the equilibrium level of incomes, output and employment and (at each stage in conjunction with other factors) the price-level as a whole through the influences of supply and demand thus established.

And finally attacks the docrine of Say’s Law:

I believe that economics everywhere up to recent times has been dominated, much more than has been understood, by the doctrines associated with the name of J.-B. Say. It is true that his ‘law of markets’ has been long abandoned by most economists; but they have not extricated themselves from his basic assumptions and particularly from his fallacy that demand is created by supply. Say was implicitly assuming that the economic system was always operating up to its full capacity, so that a new activity was always in substitution for, and never in addition to, some other activity. Nearly all subsequent economic theory has depended on, in the sense that it has required, this same assumption. Yet a theory so based is clearly incompetent to tackle the problems of unemployment and of the trade cycle. Perhaps I can best express to French readers what I claim for this book by saying that in the theory of production it is a final break-away from the doctrines of J.-B. Say and that in the theory of interest it is a return to the doctrines of Montesquieu.

If you have read Monetary Economics by Wynne Godley and Marc Lavoie, you will notice that their approach is quite close to this spirit. In their approach, the components of demand which are exogenous are government expenditure and exports. Etc.

Link

Stock-Flow Consistent Models: A Survey

There’s a new paper by Gennaro Zezza and Michalis Nikiforos for the Levy Institute.

Abstract:

The stock-flow consistent (SFC) modeling approach, grounded in the pioneering work of Wynne Godley and James Tobin in the 1970s, has been adopted by a growing number of researchers in macroeconomics, especially after the publication of Godley and Lavoie (2007), which provided a general framework for the analysis of whole economic systems, and the recognition that macroeconomic models integrating real markets with flow-of-funds analysis had been particularly successful in predicting the Great Recession of 2007–9. We introduce the general features of the SFC approach for a closed economy, showing how the core model has been extended to address issues such as financialization and income distribution. We next discuss the implications of the approach for models of open economies and compare the methodologies adopted in developing SFC empirical models for whole countries. We review the contributions where the SFC approach is being adopted as the macroeconomic closure of microeconomic agent-based models, and how the SFC approach is at the core of new research in ecological macroeconomics. Finally, we discuss the appropriateness of the name “stock-flow consistent” for the class of models we survey.

[The title is the link]

The Non-existence Of NAIRU In SFC Models

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Simon Wren-Lewis has a post on his blog, The NAIRU: A Response To Critics. In that he refers to a blog post from me where I refer to the book Monetary Economics by Wynne Godley and Marc Lavoie. He perhaps doesn’t like me just citing the textbook and needs an explanation. How is that for an argument! Suppose I write a paper on gravitation. Do I always have to derive Einstein’s equations? Can’t I just refer it to the reader?

In other words, how is telling somone that, “SFC models have no NAIRU” not a good argument? Easy to check.

Anyway, an explanation: In stock-flow coherent models, the wage dynamics is given by equations such as these (page 302) :

ωT= (W/p)T = Ω0 + Ω1·pr + Ω2·(N/Nfe)

W = W–1·(1 + Ω3·(ωT−1 – W-1/p-1))

Here,

p is the price level, W is the nominal wage rate, ωT is the target real wage rate, pr is the labour productivity, N is the level of employment, Nfe is the full employment level and the three Ωs are parameters.

Wages change only discretely. Workers have a target wage rate which depends on productivity and the employment level. The actual wage rate is the outcome of bargaining of employees of firms with management. So workers try to catch up to what they consider fair. And their target depends on the level of employment. If unemployment is high, negotiation is more difficult and if unemployment is low, it’s easier as jobs can be switched. So there’s a Phillips curve.

Another important point is that there is no inflation expectations here.

The parameters Ωs used by the authors Godley-Lavoie and Gennaro Zezza are: –0.4, 1, 1.2 and 0.3.

Simulations of such models do not produce a runaway inflation, only higher inflation at full employment.

It’s not difficult to see why. How does the wage dynamics equations imply a runaway inflation? Can you inspect them conclude in a straightforward manner that there’s NAIRU? Anyway, simulations confirm.

That doesn’t mean there can’t be a wage-price spiral. This might happen—as the authors Godley and Lavoie explain—if the parameters Ωs change fast with time or if wage settlement happen more frequently. But as I have mentioned, it’s not necessarily so.

More realistic models have a flatter segment like this (Figure 11.1, page 387 from Monetary Economics, Ed. 1):

snipping via amazon.com

In this model (the “growth model prototype”) with behavioural equations for the government, central bank, firms, banks and households, the wage dynamics are similar to the equations above except that they have a flat segment. Again no accelerating prices!

In the discussion above (with no flat segment), I mention that there’s no NAIRU, but just to confirm I asked Marc Lavoie if this is crucial and he said no. Quoting his email with his permission:

The (unique) NAIRU has to be associated with a relationship that says that any negative discrepancy between the actual rate of unemployment and the NAIRU will lead to an acceleration of the rate of inflation. In terms of the rate of employment, it implies that any positive discrepancy between the actual rate of employment and the NAIRU will lead to an acceleration of the rate of inflation. This means that we can draw an upward-sloping curve relating the rate of employment to the change in the rate of inflation, where the change is zero when the economy is at the NAIRU.

In the case of Godley and Lavoie (2007), whether it is chapter 9 or 11, the equations that define the real wage target are such that they do not lead to such a curve. What we get is an upward-sloping curve that relates the rate of employment to the rate of inflation, and not to its change. When we are in the flat area of Figure 11.1, this means that the rate of inflation remains constant even if the rate of employment is higher. Besides the flat area, we have a kind of old Phillips curve: to a higher rate of employment is associated a higher rate of inflation, but that is all. There is no acceleration. Another way to put it is to say that there is an infinite number of NAIRU or a multiplicity of NAIRU (of rates of employment with steady inflation).

So with explanations about wage dynamics which has a Phillips curve (with or without a flat segment), I show that SFC models have no NAIRU.

Simon Wren-Lewis, NAIRU And TINA

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Last month, Matthew C Klein wrote an article for Financial Times’ blog Alphaville arguing against the concept of NAIRU. Today, Simon Wren-Lewis published a reply to Klein on his blog defending NAIRU. SWL’s argument is essentially that there is no alternative (TINA):

… But here is the rub. If we really think there is no relationship between unemployment and inflation, why on earth are we not trying to get unemployment below 4%? We know that the government could, by spending more, raise demand and reduce unemployment. And why would we ever raise interest rates above their lower bound?

… There is a relationship between inflation and unemployment, but it is just very difficult to pin down. For most macroeconomists, the concept of the NAIRU really just stands for that basic macroeconomic truth.

The sad part of this argument is that NAIRU isn’t the only answer to the relationship between (un)employment and inflation. Both of the following can be true:

  • There is a relationship between employment and inflation.
  • The concept of NAIRU is false.

What is NAIRU (non-accelerating inflation rate of unemployment)? According to the originators of this incorrect idea, it is the rate of unemployment U* below which inflation starts rising indefinitely. It’s a bit of a misnomer as it’s prices which is accelerating, not inflation. Nonetheless, the extreme nature of this should be clearly stated: NAIRU advocates think that a fraction of the workforce should be kept unemployed to keep inflation under control. 

Post-Keynesians have rejected these arguments since the beginning. In their book Monetary Economics, Wynne Godley and Marc Lavoie show that in their model full employment can be achieved without a runaway inflation.

This is not the first time SWL has defended orthodoxy. A few years ago, he called rational expectations “one of economics’ major achievements” and also that:

It is not a debate about rational expectations in the abstract, but about a choice between different ways of modelling expectations, none of which will be ideal. This choice has to involve feasible alternatives, by which I mean theories of expectations that can be practically implemented in usable macroeconomic models.

…

However for the foreseeable future, rational expectations will remain the starting point for macro analysis, because it is better than the only practical alternative.

Remarkable Admission On Fiscal Policy

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There’s a paper by Jason Furman who is the Chairman of the Council of Economic Advisers which concedes how wrong economists were on fiscal policy. The link is a file hosted at the White House’s website! The paper starts off with a remarkable admission on fiscal policy (h/t and words borrowed from Jo Michell)

A decade ago, the prevalent view about fiscal policy among academic economists could be summarized in four admittedly stylized principles:

  1. Discretionary fiscal policy is dominated by monetary policy as a stabilization tool because of lags in the application, impact, and removal of discretionary fiscal stimulus.
  2. Even if policymakers get the timing right, discretionary fiscal stimulus would be somewhere between completely ineffective (the Ricardian view) or somewhat ineffective with bad side effects (higher interest rates and crowding-out of private investment).
  3. Moreover, fiscal stabilization needs to be undertaken with trepidation, if at all, because the biggest fiscal policy priority should be the long-run fiscal balance.
  4. Policymakers foolish enough to ignore (1) through (3) should at least make sure that any fiscal stimulus is very short-run, including pulling demand forward, to support the economy before monetary policy stimulus fully kicks in while minimizing harmful side effects and long-run fiscal harm.

Today, the tide of expert opinion is shifting the other way from this “Old View,” to almost the opposite view on all four points. This shift is partly the result of the prolonged aftermath of the global financial crisis and the increased realization that equilibrium interest rates have been declining for decades. It is also partly due to a better understanding of economic policy from the experience of the last eight years, including new empirical research on the impact of fiscal policy as well as observations of the reaction of sovereign debt markets to the large increases in debt as a share of GDP in the wake of the global financial crisis. In the first part of my remarks, I will discuss the theory and evidence underlying this “New View” of fiscal policy (with, admittedly, the core of this theory being an “Old Old View” that dates back to John Maynard Keynes and the liquidity trap).

Compare that to the Post-Keynesian view, which according to Wynne Godley and Marc Lavoie in their book Monetary Economics written before the crisis (from chapter 1, Introduction):

The alternative paradigm, which has come to be called ‘post-Keynesian’ or ‘structuralist’, derives originally from those economists who were more or less closely associated personally with Keynes such as Joan Robinson, Richard Kahn, Nicholas Kaldor, and James Meade, as well as Michal Kalecki who derived most of his ideas independently.

… According to post-Keynesian ideas, there is no natural tendency for economies to generate full employment, and for this and other reasons growth and stability require the active participation of governments in the form of fiscal, monetary and incomes policy.

DSGE, SFC And Behaviour

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This is a continuation of my post Simon Wren-Lewis On Wynne Godley’s Models. I was comparing stock-flow coherent models to DSGE models implicitly (didn’t mention the ‘DSGE’).

One of the things I spoke of was behaviour: firms deciding how much to produce. In stock-flow consistent models, it is decided by trends in sales. So if entrepreneurs see a fall in their inventory-to-sales ratio, they’ll produce more typically. This can be made more accurate. See Wynne Godley and Marc Lavoie’s text Monetary Economics for more details.

Here I want to concentrate on models such as DSGE or any other model used by institutions such as the UK Treasury for the case of production. In these models, there is a production function describing how much firms will produce. This is incorrect to begin with. It says nothing about behaviour. If households start borrowing a lot, in DSGE models, producers are still producing the same because production is governed by the production function. In stock-flow consistent models, simple modeling assumptions about how much firms produce are far superior. So in this case, in SFC, more borrowing leads to more sales and a change in sales trends, inventory/sales ratio and hence affecting how much will be produced.

The DSGE production function is thus inconsistent with the Keynesian principle of effective demand. DSGE is not even Keynesian. It’s thus ridiculous how economists defending DSGE models and its ancestors accuse SFC modelers of not paying attention to behaviour.

Link

New Bank Of England Paper On The Financial Balances Model For The United Kingdom

Stephen Kinsella is out with a new paper with co-authors Stephen Burgess, Oliver Burrows, Antoine Godin, and Stephen Millard published by the Bank of England.

From the paper:

Our paper makes two contributions to the literature. First, we develop, estimate, and calibrate the model itself from first principles as well as describing the stock-flow consistent database we construct to validate the model; as far as we know, we are the first to develop such a sophisticated SFC model of the UK economy in recent years.4 And second, we impose several scenarios on the model to test its usefulness as a medium-term scenario analysis tool. The approach we propose to use links decisions about real variables to credit creation in the financial sector and decisions about asset allocation among investors. It was developed in the 1980s and 1990s by James Tobin on the one hand, and Wynne Godley and co-authors on the other, and is known as the ‘stock-flow consistent’ (SFC) approach. The approach is best described in Godley and Lavoie (2012) and Caverzasi and Godin (2015) and underpins the models of Barwell and Burrows (2011), Greiff et al. (2011), and Caiani et al. (2014a,b). Dos Santos (2006) describes how SFC models incorporate detailed accounting constraints typically found in systems of national accounts. SFC models allow us to build a framework for the model where every flow comes from somewhere in the economy and goes somewhere, and sectoral savings/borrowings and capital gains/losses add or subtract from stocks of wealth/debt, following Copeland (1949). Accounting constraints allow us to identify relationships between sectoral transactions in the short and long run. The addition of accounting constraints is crucial, as one aspect of the economy we would like to model is the way it might react differently when policies such as fiscal consolidations are imposed slowly or quickly

4 Such models were popular in the past; for example Davis (1987a, 1987b) developed a rudimentary stock flow consistent model of the UK economy.

[The title of this page is the link]

On The Blogs

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Two things caught my attention in the last two days.

First is the claim by Roger Farmer:

The Keynesian economics of the General Theory is static.

That’s the strangest critique of the GT I have ever seen. How is the GT static? John Maynard Keynes highlighted how a fall in the propensity to consume reduces output. His mechanism was quite dynamic. He was arguing that a fall in the propensity to consume will reduce consumption and hence firms’ sales and hence production and hence employment and hence consumption and so on. Keynes did not explicitly write down a mathematical model like as done for example in the book Monetary Economics by Wynne Godley and Marc Lavoie. But his arguments were quite dynamic in nature. So was his argument about how investment creates saving. And also the Keynesian multiplier. “Stock-flow consistent” models are quite close to Keynes’ spirit.

The second is this paragraph from Michael Pettis:

… This is one of the most fundamental errors that arise from a failure to understand the balance of payments mechanisms. As I explained four years ago in an article for Foreign Policy, “it may be correct to say that the role of the dollar allows Americans to consume beyond their means, but it is just as correct, and probably more so, to say that foreign accumulations of dollars force Americans to consume beyond their means.” As counter-intuitive as it may seem at first, the US does not need foreign capital because the US savings rate is low. The US savings rate is low because it must counterbalance foreign capital inflows, and this is true out of arithmetical necessity, as I showed in a May, 2014 blog entry (link broken: archive.is link).

Oh boy! That’s confusing accounting identities with behaviour. A simple way to show how inaccurate this is by using standard Keynesian analysis. Assume US households reduce the propensity to consume. This leads to a fall in output and income and hence a fall in imports and an increase in the current account balance of payments (assuming exports are exogenous to the model). This can be seen more precisely in a stock-flow consistent model.

Pettis’ arguments are in response to Stephen Roach’s recent article on US balance of payments and I discussed that recently here.  Both Roach and Pettis are incorrect.

Balance of payments is important and in my opinion, the most important thing in Economics. Michael Pettis gets the attention because he realizes the importance of balance of payments in the economic dynamics of the world. However looked more closely, many of his arguments appear vacuous.