Paul Krugman sometimes introduces his more complicated posts on his blog as being “wonkish”. This post is wonkish in spades–though in the linked papers rather than the content here.
I’ve just finished the first reasonable description of my multi-sectoral monetary model of production, which I’ll be presenting at the Paul Woolley Centre for Capital Market Dysfunctionality conference later this month.
There’s lots more to add before the model is complete, but this is a working first draft. Later additions will include a tendency to equalise profit rates across sectors and fixed capital, as well as fiat money creation in addition to pure credit money as in this model.
Click here for the paper, and here for the associated Mathcad file in which the modelling is done. For the latter especially, right click and download otherwise you’ll simply get a page of XML in your browser.
October 10th, 2009 at 2:37 pm
Steve,
If you have not the chance you should get yourself a copy of the AFR Weekend edition and read Alex Millmows opinion piece on pg 63.
Without mentioning your name he has a go at you and your theories noting that you have no other reason for your beliefs other than a computer model.
The funny thing is two paragraphs later he notes that no one picked the crisis and does not acknowledge that the very economist he is railing against is one of the 13 world wide that saw this coming.
You should have a look at it, this guy is on fire!
October 10th, 2009 at 2:38 pm
If anything it may warrant a right of reply from the editor in next weekends edition.
October 10th, 2009 at 3:32 pm
Steve,
I believe the last paragraph on page 15 should reference Figure 14, and similarly page 16 should reference Figure 15.
I can’t comment on the equations themselves as my Martin Braun book hasn’t arrived from Amazon yet…
October 10th, 2009 at 4:50 pm
The “multiplier effect” that Obama references in his speech of April 14 2009 has nothing to do with the conventional “money multiplier” of neoclassical economics. One should not be misled by the use of the word “multiplier” here.
(Ref. Page 14 of your paper).
It is obvious from the context that the “multiplier” he is referring to is the inverse of the required capital ratio. This is an unusual use of language, but the intended meaning and relevant application is clear. It has to do with TARP (equity) capital injections by Treasury. This is completely unrelated to quantitative easing of reserves by the Fed.
Unlike the erroneous “money multiplier” concept, the standard and correct causality of bank capital is that it is required in order to take risk, including the extension of loans where there is any credit risk. Availability of capital is the true institutional constraint of the banking system. Banks are not reserve constrained, but they are capital constrained, in the sense that they require capital to take risk (not necessarily that they can’t obtain capital when required).
The endogenous money approach is correct in reversing the causal mechanism of credit money creation given by the conventional “money multiplier” model. But it would not be correct in rejecting the legitimate causal mechanism associated with bank capital. Bank capital is required for banks to assume credit and other risks. The neoclassical view in effect has confused central bank reserves with bank capital, in attempting to identify the causality of bank balance sheet dynamics.
The creation of bank capital is normally endogenous to the banking system. Government intervention in times of crisis is obviously non-standard. That doesn’t change the correct causality of capital and risk taking, including credit risk through lending.
Keyne’s “revolving fund” is much closer in characteristic to bank capital than central bank reserves. And the Obama reference clearly pertains to capital, not a central bank reserve multiplier. I don’t know how this fits with your model.
October 10th, 2009 at 11:38 pm
Probably (bloody) Microsoft Word not updating cross references automatically cja…
October 10th, 2009 at 11:39 pm
Strange; Alex and I are reasonably good friends, but occasionally he does publish something strange in his newspaper guise.
October 11th, 2009 at 6:05 am
I find it hard to believe there is an actual place called
‘the Paul Woolley Centre for Capital Market Dysfunctionality’.
Surely something snappier could have been considered?
October 11th, 2009 at 6:51 am
Well Paul is alive and well and personally funded this centre and two others around the world, so the first 2 names in the title are a given…
And give the man big rewards for bravery: he put his money into this about 5 years ago. In that sense he belongs in Dirk Bezemer’s list.
October 11th, 2009 at 10:14 am
I’ve solved the problems with Word, I now use LaTex. Unfortunately some journals etc like submissions in Word. Of course the process then becomes write in Word, submit and then after acceptance the Word document is sent to India where it is converted to LaTex, in the process producing all sorts of problems. With the LaTex submission everything remains in LaTex and all they do is replace the headers with their own, tidy up bits and pieces and ready for publication.
October 11th, 2009 at 11:04 am
Yes, I have considered that route, but with my head already stuffed full of concepts in maths etc., I refuse to devote too much space to programming my word processor! So I have used Scientific Workplace as a halfway house to TeX, but that has all sorts of hassles to it (poor formatting of tables and non-breaking equations to mention two). So I feel somewhat stuck. I’m hoping LyX might do a better job of making TeX simpler to use, but I’ve also indulged in version 1.0 of Wolfram’s Publicon–which is based on Mathematica 4.2 right now, rather than the latest version 7.
Nothing seems straightforward any more! Decades ago I used a combination of Framework for structured text documents and Ventura Publisher on GEM (pre-Windows) for producing typeset copy which worked beautifully. Now I can’t get any combination that works as seamlessly or hassle free as that used to do. It frustrates the hell out of me.
October 11th, 2009 at 2:18 pm
Steve,
Thanks for posting this! Also, for posting the lectures — this is a great resource. I’ve been trying to reproduce these results and follow along, but don’t have mathcad, therefore I’m relying solely on the papers.
Here are some comments/questions:
In Figure 4, I would reword the two rows:
“Interest on Deposit” to “Interest on Firm Deposit” and “Interest on Worker Deposit”, respectively, or combine the two into a single “Interest on Deposit” row, in which case both C and E should appear.
N is not defined anywhere, although you can make out that it is population. Why not include the definition in Table 3?
In figure 16, the duplicate appearance of “Firm A Loan” should be “Firm A deposit”.
I really like how you derive various Phillips curves by stipulating a simple employment rate-wage growth trade-off, and also showed how this curve shifts under a change in parameters. That was an eye opener for me.
The “new money” parameter is still a bit confusing: You have three parameters:
“New Money”, “Money relend” and “Repay Loans”.
Why would firms repay principle, H, if they are at the same time borrowing more? Isn’t the effect of this (at the level of sectors) to net out the principle repayment, and if not, why is this not an artifact of the model? In the same way, what is the justification for a separate “money re-lend” term in addition to the “new money” term? If your rule is that borrowing occurs from reserves, then you either need to enlarge reserves in order to have a positive new money term, or you need to scrap the rule that borrowing occurs from reserves.
It seems that what you need are just two parameters: reserve growth and “new borrowing”, where the first can occur via government infusions or Bank Income reinvested into reserves, which does occur in the world.
Once you have growing reserves, you only need to control for the borrowing rate of these reserves, with a “new borrowing” parameter, and this parameter should determine net principle repayments, as well as net re-lending of reserves, if any.
If these two parameters don’t yield the same dynamics of your three parameters, then I believe that some of the dynamics are artifacts of the model. Am I missing something?
October 11th, 2009 at 4:25 pm
Does anybody know when Windows 7 comes out? Also, will you upgrade to it?
I’m still using XP. I have my free Premium Vista disc. But since they had so many bugs to work out (they always do?), I’ll hold off on 7 for a while.
October 11th, 2009 at 5:37 pm
October 22, and I’ll upgrade almost immediately. I know enough about software beta product cycles to accept that it seems Microsoft have finally nailed a good operating system with 7.
October 11th, 2009 at 6:37 pm
Hi Steve, interested to see what you think of this “article” below, seeing your name was mentioned in it.
http://www.theage.com.au/business/house-prices-hotting-up-20091010-grnf.html
October 11th, 2009 at 9:06 pm
Steve you said – I know enough about software beta product cycles to accept that it seems Microsoft have finally nailed a good operating system with 7.
Now I am really nervous as my money is own Steve with all the world economy but to make such a big presumptions call makes me have second thoughts.
Dont know what the engineers or developers are doing there to get paid so much and keep churching out complicated, unstable software that has always failed me and drove me to a point I just dont use it anymore.
Lets hope your expectations are met Steve! I am willing to short Microsoft given their lousy past performance.
October 11th, 2009 at 9:37 pm
Elegance left the software industry decades ago. I don’t believe it is possible to get a basic operating system, with a GUI, browser, email client, without a massive layer of bloatware underneath. Gone are the efficient coding days of the early 1980’s. It’s all about lays of libraries and API’s built up on more layers of legacy libraries and API’s.
- Ernie.
October 12th, 2009 at 2:00 am
Just came across a new Jim Rogers radio interview. In some ways, the same old soundbites (hedge fund managers need to learn how to farm, fire Bernanke and Geithner, etc.).
But here’s something new. He’s a firm believer in commodities. And now, he’s talking about China and others using their trillions in dollars to buy up various commodities supplies. This way they protect their population and their global standing by not destroying the States’ economy.
And (assuming this is true), he’s buying up more silver than gold. If the value of the dollar goes down, more gold and silver are bought up (which then raises the price). What’s the advantage of going with silver?
Am I missing something?
October 12th, 2009 at 5:53 am
soho44@ 17 “What’s the advantage of going with silver?”
During a recent interview, David Morgan told Tom Jeffries the many reasons why he bought silver.
(quote)
Mr. Jeffries: Everybody’s talking about gold’s place in the “new world order.” Woo! Let’s not get spooky, folks. How would you expect silver to act in the event of a world oligopoly, David?
David Morgan: I think that, as I wrote so many years ago in Silver Investing Rules, no one likes to be a prophet of doom, but silver is the money of last resort, and I still believe that. However, gold certainly has a higher monetary aspect to it as basically a store of wealth, a store of value, and a safe haven. Silver has those qualities because it’s an industrial metal as well.
But from a practical perspective, silver is the one that you’d be actually using in times of crisis. Not that you wouldn’t use gold, but if something happened and you needed to get a loaf of bread, a gallon of gas, pay rent, or keep your landlord off your back, and you had some silver coins, that would be a lot more advantageous to you than a gold bar, which would be pretty hard to divide up and pay your landlord or whatever.
So silver really has been money in more places for longer periods of time than gold has, and whenever I make that statement it seems to get some people upset, but it’s a fact, it can’t be disputed. Through all of recorded history it (silver) has far more functionality as money than gold does.
October 12th, 2009 at 7:12 am
Just out curiousity (in Australia):
How many banks have gone under?
If a bank does goes go under, does the RBA take temporary control (or does someone else)?
Has anyone ever sued the RBA for not prosecuting the predatory lenders that caused much of this depression? I don’t know the total percentage there. But here in the States, nobody’s ever sued the Fed.
I know there’s a bill in Congress to audit the Fed. But Bernanke and the bank lobby are spending millions every day to kill it. Now (in the WSJ), at least 100 small banks have gone down this year. The FDIC Fund is essentially bankrupt. And the govt. wants banks to use some of their massive windfall from their TARP funds to loan them money.
And finally, why did Obama win the Nobel Peace Prize (11 days into his new term)? Millions worldwide are desperate to believe that he’s the Coolest President in the world and can solve all of our problems. Give him time and he can do it. Right.
Unlike the 90-day probationary period we have in our everyday jobs, no such thing exists for him. He’s not perfect. And he hasn’t done anything substantial to promote peace.
Obama keeps talking about stopping terrorists. What about the “economic” terorists that caused this global depression? In all of the global “debate” on the Peace Prize, not once has anybody mentioned that.
Take this one step further. Obama took an oath to uphold the Constitution. To protect the States “from enemies both foreign and domestic.” As I write this I can already see the lines of attorneys whow would love to cash in on trying this case. If you agree that these people are terrorists, this means that he could be impeached.
Now reality. The neocons would jump on this in a second (if they could spin it in way that doesn’t make them look obviously racist). How much do you wanna bet that in THIS case the Democrats would suddenly find all the votes they needed to stop that. They can’t find the votes to pass single-payer health care. But they would stop impeachment.
All the reliable indicators that I’ve seen are saying that China’s economic growth will be between 8-10% for the next few years. And as much as people like Jim Rogers for daring to be different in his views, he’s missing one thing.
Growth like that anywhere obviously sounds great. But how do you maintain that growth with so much currency flucuation worlwide? Especially as many key countries swich from a dollar-driven market to other currencies?
I know that some people are having a go at Robert Fisk (who initially broke this story). But think for a second. If this story isn’t true, what could these countries gain by putting it out? All they’d do is add more turmoil to what’s going on. Long-term, it creates no potential leverage for them.
Instead, as the dollar goes down, the hype to buy gold drives the price up even more. I know Schiff and the other “doom and gloom” people are still plugging this. But I’d be very surprised if gold acutally went up to $5,000 an oz. within the next 6 months (based on what I think is reputable information up to this point).
Just one view.
October 12th, 2009 at 8:48 am
The Australian people put their money in the hands of their fund managers. Most of us find comfort in following the money talk shows. I believe our banks are flushed with money right now but I am not sure of their exposure to foreign debts. Yeah there is so much currency fluctuation worldwide and the official economic growth figures do not necessarily reflect productivities in the way we understand. There are so many people earning commission, fees, bonuses, dividends, interests etc from financial instruments at the expenses of industrial and agricultural wages and salaries. How can the world feed its population by selling papers to each other? I don’t know.
October 12th, 2009 at 11:45 am
http://www.abc.net.au/news/stories/2009/10/11/2710738.htm
“Swan pumps $8b into mortgage market
Posted Sun Oct 11, 2009 12:48pm AEDT
Updated 1 hour 16 minutes ago
The Federal Government is trying to stimulate competition in the mortgage sector.
The Federal Government has announced it will invest up to an extra $8 billion in new residential mortgage-backed securities to support competition in the home-lending market.
The Federal Opposition has backed the Government’s decision, but says it should have acted sooner.
The Government originally stepped in to support smaller and non-bank lenders last year, but Treasurer Wayne Swan says the market is still weak.
He says the latest investment will support competition in the sector, provide a boost to small lenders, and help put downward pressure on borrowing rates over time”
Don’t like the sound of this. Pumping the bubble.
October 12th, 2009 at 12:12 pm
Laurence.
The topic of feeding people has come up before. It seems that all our dominant disciplines (economics included) ignore the fundamentals that are essential to human life on this planet. This problem has been well documented for many decades now, by very prominant and well-informed people, but for some reason never gets traction. We have massive unsustainable agri-business instead of sustainable small-farming. It seems all long-lived civilisations focused on the health of their soil. Others, like the Romans, declined once they gave up sustainable agriculture. It is a serious problem that it seems can only be addressed by grass-roots movements, but whether that is enough to avoid catastrophy at some point for us or our children seems unlikely.
For a good overview see:
“Farming and Gardening for Health or Disease” By Sire ALbert Howard,
Available at soilandhealth.org
Quote:
“great principle underlying Nature’s farming
has been ignored … it has been flouted and the
cheapest method of transferring the reserves of humus (left by
the prairie and the forest) to the profit and loss account of homo
sapiens has been stressed instead. Surely there must be
something wrong somewhere with our agricultural education”.
October 12th, 2009 at 12:22 pm
Also I haven’t read this yet but it may be relevant given its investment money subtitle. Buckmaster Fuller gives it a good rap.
“The Survival of Civilization depends upon our solving three problems:
carbon dioxide, investment money and population.”
Selected papers of
John D. Hamaker
Link:
http://www.soilandhealth.org/01aglibrary/010146tsoc.pdf
October 12th, 2009 at 12:37 pm
Laurence,
“There are so many people earning commission, fees, bonuses, dividends, interests etc from financial instruments at the expenses of industrial and agricultural wages and salaries.”
Good point. A very important plank of our Financial Industry is to keep people convinced that they do not have the ability to deal with their own finances.It takes too much time, it’s too complicated for them, better left with the Professionals etc etc. Once our money is in their hands, they use it according to their rules. For example, most funds are OBLIGATED to be almost fully invested in shares regardless of the stock index situation.Should it be collapsing these funds have no choice but to simply sit pat watching wealth (ours!) evaporate or only carry a mandated maximum in cash. Meanwhile, fees are still being generated buying and selling (churning) which is how funds make their income. Then there is the sweetheart deals Funds have with Brokers- more fees and churning The simple formula is that whether investors make money or not is irrelevant to Investment Funds.As long as money remains invested, Funds earn fees. This is why during the recent stock downturn there was massive advert campaigns imploring people not to remove their investments.You will note that a much respected figure , Bernie Frazer, is a leading figure in this advert campaign. Propaganda to keep hold of your money.
Aside from this, I have read in the AFR where SMSF’s performed FAR better during the last 2 years than most all Managed Investment Funds at substantially lower costs. (I know mine did MUCH better). Not surprisingly, the Investment Fund Industry is lobbying Govt tooth and nail to place yet even more adverse restrictions on SMSF’s under the guise of ” investor protection”. This so that they can staunch the massive leaks now appearing in their funds under investment.
Best to know how the scam works before playing I would say.
October 12th, 2009 at 12:58 pm
Compliments of the ABC:
http://www.abc.net.au/news/stories/2009/10/12/2711403.htm
“Commercial finance has been stubbornly weak since the global financial crisis froze credit markets, but posted a 5.6 per cent bounce during August with $28.5 billion borrowed according to the Bureau of Statistics’ seasonally adjusted figures.”
“The personal finance figures also recorded a bounce, up 4.1 per cent to $7.2 billion borrowed by households for non-housing related purchases, much of it on credit cards.”
October 12th, 2009 at 1:21 pm
MMitchell,
“We have massive unsustainable agri-business instead of sustainable small-farming.”
Its been known for a long time that small-scale farming is more efficient than large-scale corporate agribusiness. George Monbiot has a good article on it: http://www.monbiot.com/archives/2008/06/10/small-is-bountiful/
Also, it is more difficult for small farmers to externalize costs and rent-seek, something which corporate agribusiness is very proficient at. For all the talk about the banks controlling the money supply, very little is said about agribusiness controlling the food supply. Corporate control, cost externalization, rent-seeking, crimes, oligopolistic formation, extreme monopolistic intellectual property rights been applied to natural entities, monocultures, speculation on food futures, and terminator seeds makes for a very crappy food supply, environment, and biodiversity.
It reminds me of the author Michael Pollan, who gave an illustration of a kilo of oats which costs a dollar in the supermarket. There’s a problem with that – it doesn’t make enough profit. Dunk it in sugar, artificial preservatives, flavorings, and god knows what else, then present it in a flashy box and combine it with irrational advertising campaigns designed to undermine rational information in order to create artificial consumer demand (created wants). Sell it for five dollars which is far more profitable.
If you are interested in this topic, may I recommend the documentary The Future of Food. It’s a grassroots US production about the problems of agribusiness. It is well worth watching.
October 12th, 2009 at 1:37 pm
MMitchel Re #23,
Indeed that brings me back: the threat of global cooling, soil depletion, and mass starvation by 1990.
People forget that prior to the Global Warming Fear there was a pretty big Global Cooling Fear, and commentators would go on television shows talking about glaciers swallowing up the northern hemisphere, and turning the earth into a ball of ice. In one such show — The Donahue Show — scared housewives would call in, asking what they could do to be prepared; how best to make arrangements to retrieve their kids from school and snatch them away from the advancing ice. How much warning would they get before the ice came? Men would wonder if they should stockpile gold and guns — surely the time must come when it all degenerates into a Mad Max scenario.
That peaked in the mid-to-late 1980s. There was also the “population bomb” — I think one of the former population bombers is now a chief science advisor for Obama — and the population bomb was in some cases combined with Bell-curve type fears that the smart/rich/west was shrinking while the dumb/poor/non-westerners were becoming more numerous, leaving a frozen, over-populated earth without sufficient top-soil swarming with mental deficients. Even Gore Vidal penned an essay proposing that we end the cold war and make an alliance with Russia as our great white hope.
There’s something oddly re-assuring about reading Hamaker’s tracts, now that all the fear is drained out of them. Definitely a smart guy, and well worth reading through. I guess the moral here is to keep a sense of perspective and always be prepared to admit you can be wrong. Keep an eye on the data, and make falsifiable predictions within short time frames. Kudos to Steve for the Chartalist dialogue (not that I think he is wrong, or that the Chartalists’ perspective is anything but complementary). I’d recommend Hamaker to anyone who is too worried or crazy about anything — peak oil, peak population, peak cooling or warming, etc. Not that the world doesn’t undergo constant change, and that there aren’t real challenges, but civilizations tend not to collapse in the face of these things. Strangely enough, we manage to keep plodding along, hopefully advancing in knowledge along the way; although some prefer the doomsday world of a basement stacked with bars of gold to the more complicated one in which we live.
October 12th, 2009 at 1:48 pm
Hi All
Mainly in response to JKH’s post #4.
There seems to be a notion that banks create money in the economy. I would like to challenge that and say that banks redistribute money in the economy but do not create anything extra. My potentially naive challenge is based on the fact that if you look at any bank’s balance sheet, the lending assets (loans etc..) are covered by liabilities (call deposits, bond issues etc..).
The capital requirement described by JKH is a bit more complicated than just holding capital. It’s more about the type of capital used to cover the various risks. For example a home loan can be mostly covered by call deposits, but some less liquid (to the customer) capital must be set aside as a contingency.
So maybe I’m misunderstanding this notion of bank money creation or misunderstanding bank’s balance sheets.
I’m sure someone will be keen to correct me.
October 12th, 2009 at 2:36 pm
RSJ,
“Strangely enough, we manage to keep plodding along, hopefully advancing in knowledge along the way”
The fact that some people managed this for 200 years in the US doesn’t prove anything. People from Eastern Europe have a completely different experience including famines in 19-20th centuries, several wars and gas chambers to make room for the superior Arian race.
If I keep smoking cigarettes despite warnings and laugh at the doctors because I am still alive – does it make a sound argument? So you are saying that because some warnings were incorrect in the past we can ignore current warnings because it is all a doomsday cult?
“I’d recommend Hamaker to anyone who is too worried or crazy about anything — peak oil, peak population, peak cooling or warming, etc. Not that the world doesn’t undergo constant change, and that there aren’t real challenges, but civilizations tend not to collapse in the face of these things.”
Civilizations collapsed multiple times just read this: http://en.wikipedia.org/wiki/Collapse_%28book%29
Our civilization may also collapse quite soon.
Now the challenge – could you answer some of my questions, please? Please bear in mind that I’m an engineer not an economist so one or two slick equations won’t do.
1. What is the next source of energy when the oil and then coal runs out?
2. Which physical phenomena can be used to generate more energy than burning fossil fuels?
3. Please list a few new inventions which are in the pipeline to be commercialized in the IT industry.
4. For how long the Moore’s law (doubling the number of active elements in processors) will not be violated?
5. Do you think that bandwidth available in wireless network can grow without limitations and paying hefty price for increased cell density? (Hint: have a look at this:
http://en.wikipedia.org/wiki/Hartley%27s_law#Hartley.27s_law ). So what are prospect of further development of wireless networks / communication technologies and will it have any impact on Silicon Valley?
I am not saying that there are no inventions in the pipeline to be commercialized – for example related to biotechnology or nanotechnology. I don’t want to say that everything will collapse. But unless a dramatic change in the way the society and economy are run occurs – we are very vulnerable because our system is demand-constrained and will not cope with any throttling at the resources availability end.
October 12th, 2009 at 4:08 pm
AK, I’m confused as to what points you are trying to make here. I’m not predicting the future, but you seem to be hinting at some dark vision that you are certain will pass. I didn’t know that there was some concern about lack of wireless or IT inventions. There have always been concerns, for as long as there was life. Actually things like the environment and resource depletion were looking much more grim during most of human history, when we were in a Malthusian trap, and they were looking bad even up until the 1960s, before a lot of advances in agricultural science and measures to protect the environment. It would be pretty ignorant of human history to claim that the pressures you cite are not an order of magnitude less sever than in most of human history.
Who knows how long IT will be a cash-cow? Who knows how long we will keep driving? The chief source of industrial energy for the world at one time was whale blubber. Then coal. I don’t know what the next thing will be, but we still have coal and whales — we’ve just moved on to things that are cheaper.
But I would suggest that the trouble with Eastern Europe, and Slavs in general, is a very sick culture. I say this as a Slav myself. There are all sorts of jokes about the slavic farmer who is granted a wish, and uses his wish to send a curse on his neighbor for having a prize winning sow, instead of wishing for his own prize-winning sow. It is a very fatalistic and envious place, filled with hate for anyone who paints their apartment, or gets a new car. That makes it very hard to have a modern credit-based economy. Hell, it makes it hard to have public bathrooms in which everything nailed down isn’t stolen. Social capital is important. And maybe that, too, will change, and the next big quantum computing advance will come out of Lomonosov University. They had amazing mathematicians who, when they weren’t busy informing on each other, really advanced the field. I think the Russians were the first to discover Input/Output equations, and this fact caused, during the cold war, the BLS to stop using those equations for political reasons. Fortunately they got sense in the 1970s. The thing about most of the world is that good ideas tend to flourish, and all you need is a handful such to keep things going.
So we will have to see what the next innovations will be. Perhaps we will all become slow-food buffs, move back on the farms, and grow our own food. If that happens, I won’t send any curses your way
October 12th, 2009 at 4:17 pm
RSJ,
As I stated I haven’t read enough to be familiar with all Hamakers arguments. But the case against soil depletion seems solid, others have contributed good evidence, such as the other reference I provided above, as for global warming versus cooling I have no idea as I have not know his arguments. However, of course we do know now that he made a mistake in his prediction timeframes (on this blog we know of others who have done that). Over confident predictions do not invalid the basic arguments, I believe Steve’s identification of a debt problem is valid, regardless of whether or not he can predict exactly when this will lead to some of the possible effects. In my brief examination of it, Hamaker seems to be making a case for debt problems that are similar to many explanations that have been given since the GFC broke. It very difficult for Hamaker or anyone else to predict the future, but he may yet be correct with the third problem he identified, that of population growth. My guess is that the population and soil/food problems are linked and will coincide. In short, I agree with Ak. Unless someone can explain how we will replace fossil fuels, or ensure they remain cheap and available for the indefinite future, then we are facing a big problem.
October 12th, 2009 at 4:52 pm
Sorry, RSJ,
But one more point. If civilisation “keeps plodding along”, then the plodding probably continues for as long as the civilisation is capable of identifying and responding to threats. To say that we are so ingenious that we can fix every problem at the last possible moment seems both full of hubris and someone cavalier about our future (sorry Steve to appropriate your term).
October 12th, 2009 at 6:17 pm
Supercoincare
This problem arose a long time before 1999. Perhaps I am just too damned old! My arguments in this field date back to my final University days around 1969 to 72. The sort of Economic crud that has resulted in this mess was being peddled as advanced economics back in those days as well. I guess a whole lot of people have built a whole lot of fancy mathematical models based on wrong assumptions since. Fancy maths built on stupidity is still stupidity.
I don’t know about the USA, I have just observed the Aus economy over a lifetime and worked in industries which were totally decimated by idiotic economic policies over 50 years and people whose welfare has been sacrificed to the altar of winning the next election over the same period. At a minimum, Australia’s problems date back somewhere prior to 1959.
I believe that is why Bill Mitchell et al are dead set wrong about govt deficits. Their observations on the operation of deficits is far too short.
If you presume a Govt with perfect knowledge, an ability to target and distribute money perfectly, a long-term view of say minimum 50 years, no self-interest in winning the next election, then perhaps this theory about Govt deficits, if used solely to make use of otherwise unused national resources, not doing any harm and never having to be paid for would have SOME merit.
My main observation is that they include the Government in the equation and I’m not too sure how one wouldn’t, however, the external account is not included. We have, for more than 50 years survived on external funding. We assume we can go on borrowing even the money to pay the interest at no cost. There is an assumption now by all sides of the economic debate (except a few of us fundamentalists) that this can go on forever. I see comments in this forum, which largely agrees on the disequilibrium of everything around us, that the currency and the external account are self-adjusting!!!!!!In other words, always in equilibrium. The structure and loss of industry in this country over the last 50 years, and the state of our external account, is testament to the fact this is not so.
Now I can’t do great mathematical models such as Steve builds but I’ll tell you this much for a fact concerning this statement
‘national level accounting! Government deficits add to the private sector saving whereas everyone except Post Keynesian seems to think the opposite.’
This statement is not true or, at least, not NECESSARILY true as is held so adamantly by Mitchell et al. The difference in terms of logic is fundamental.
‘national level accounting! Government deficits add to the private sector saving whereas everyone except Post Keynesian seems to think the opposite.’
In fact, the lagged effect of a Govt deficit may well be, and generally will be, lower private sector saving as well as a Govt deficit!! The Double entry book-keeping that is espoused, and certainly at a minimum double entry standards are necessary, does not support the statement. A whole sector is missing from the accounts!
Those who believe Govt deficits crowd out the private sector don’t actually argue that oversimplified statement. To claim that they do is not entering into serious debate but using unjustified ridicule to halt a close examination of the assumptions. The overcrowding occurs when one tries to pay back the deficit. Now Mitchell et al are correct here. If you never worry about the deficit, then – no problem! No need to raise taxes to pay it back. No worries mate…we just got a whole lot for nothing…bit like the PNG natives who were so ridiculed for believing in the Cargo Cult. If you never worry about a CAD and Foreign debts…No problem!!!
However, it is argued that the deficit is wound back EXACTLY the same speed as the private sector picks up. Perfection!! However a simple fact of govt spending is that it is used to build structures (and not USEFUL ones)that are NEVER dismantled. So Govt expenditure is never unwound. So, in the end, Govt deficits do compete with the private sector even for physical resources. In practice of course what happens is that in response to Govt deficits, some sectors of the economy are at over-capacity while others still sit totally idle.
Now at the point where Govt is supposed to wind back the deficit, to fund the expenditure, with a Private sector now humming along and the Economy at over-capacity, Govt must raise taxes and interest rates, again crowding out the private sector. Faced with a choice of sacrifice, in the Govt sector or the private sector, guess which one Govts choose to burn?
October 12th, 2009 at 6:49 pm
MMitchell@31, MMitchell@32, ak@29
Australia is more susceptible to peak oil, peak soil and climate change than most other continents on earth. Let us forget about what other people are saying for the time being just examine the issues briefly in accordance with our own unique circumstances.
Australia has in general only a thin veneer of top soil to grow our food on, so a great proportion of our productive land was used for grazing. Being sparsely populated, undulating but mostly unhindered, the land is primed for mechanised farming. The lack of top soil is largely overcome by huge quantity of fertilisers and insects and weeds are conquered by aerial assaults with lethal chemicals. There you go, all these activities viz., land clearing, ploughing, planting, aerial spraying, fertilising and harvesting are oil based. Oil gives us the fertilisers, herbicides and insecticides and gives the energy to power the machinery. For city dwellers, the meats, fruits and vegetables and all the rest come in via Lindsay Fox road trains. More oil is consumed along the way.
But we have to begin with the machineries. They are made out of metals and metals came from ores which are mined by mining machines and mining machines are powered and lubricated by oil.
No water, no agriculture. Australia is the driest inhabited continent on earth and we can never depend on regular monsoon rainfalls. Irrigation water delivered mainly by pumping is an indispensable component in Australian agriculture. The water delivered by mechanised means include surface runoff, local groundwater, water from the Great Artesian Basin, and treated effluent. Again, oil provides the power, the mechanical parts and lubricants.
Because of the poor original condition of the soil, the foods we grow today depend largely on oil and its derivatives. For Australia, peak oil and peak food are synonymous.
Even if we have the oil, our soil may not last much longer. Past practice of land clearing and devoid the agricultural land of large tress whose roots have been keeping the groundwater table deep beneath the surface. Now the groundwater has surfaced and it brought with it large quantities of salt covering an enormous area. The once fertile land and the not so fertile farmland have become so saline that nothing except salt-tolerant species of weeds can grow on it. The pumping of groundwater too has also brought the same result.
The drought does not help. Once dries the top soil become dusts so light that it rises up into the atmosphere in still air. A strong breeze will carry the soil-turned-dust away from the farm into the nearby river system. An even stronger breeze will carry it all the way over Sydney or Melbourne and dumped somewhere offshore, permanently lost.
No top soil, no foods.
Climate change, if it means global warming, will be especially devastating for Australia. Firstly water. At most places where irrigation water is coming from the Great Artesian Basin, an average of 3 litres of water are evaporated for every litre delivered. That is, evaporation accounts for 3 quarters of water usage. Therefore global warming is particularly unfriendly towards Australia.
Another aspect is that the tyranny of distance in Australia will become unbearably oppressive under a hotter sun.
Let’s not waste our time arguing and start a hydroponic garden in our garage.
October 12th, 2009 at 7:46 pm
The economist Michael Perelman did some work on the energy expenditures of agriculture. He found that for every 1 calorie of agricultural product created, 10 calories were expended in its production. It is very inefficient but to be expected considering oil and is derivatives are under-priced by a factor of 5-15 mainly due to negative externalities.
The Productivity Commission produced a report on the water situation in Australia. Some of the statistics are quite interesting. For Victoria, even though most of the population and housing is concentrated in Melbourne, it only uses 9% of water. Industry uses around 20%-30% and the rest is… agriculture. It is still using the most inefficient techniques that should’ve been eliminated a long time ago. Such is the power of the agribusiness and farming lobbies that the government will not do much to change the situation.
October 12th, 2009 at 7:48 pm
ABCTV has just reported the plight of the Zimbabwean farmers again. I watched the same news report during the mid-day news broadcast, together with the tour by a Danish prince in the sports stadium. SBS evening news was talking about the harsh life in a remote Pakistan village. Are these distractions deliberately planned to mask our own problems or not? Are we being deliberately dumbed down for easy pickings or what? What about a bit more reporting on plight of our own farming community? The taxpayer-funded national broadcasters should have been more sympathetic towards our own problem.
October 12th, 2009 at 8:19 pm
Laurence #34,
Well these are the same questions asked by Hamaker, an he connects these problems to economics. In particular, (from page 173 on) he talks about debt and the processes by which wealth and power are concentrated in few hands and that this is a process whereby the wealthy acquire all the profitable enterprises, I presume leaving only unprofitable (and I guess this includes small farming) for everyone else. This leads to a massive drain on the population and, in history, often revolt. His solution I am still trying to understand, but it involves a number of suggestions, including amendments to the US constitution. He claims his ideas will result in technical improvements leading to shorter working hours rather than unemployment. I need to think about these more before I can really comment though.
October 12th, 2009 at 8:44 pm
MMitchell@37, I downloaded your reference “The Survival of Civilization” but did not read any more when I noticed that the Hamaker-Weaver Publishers are located in Michigan California, because I am convinced that Australia is dealing with a unique natural environment and experience from America may not be helpful at all. I didn’t realise it delved into the economical-sociological aspects. Sounds like good reading.
October 12th, 2009 at 10:24 pm
Hi Steve,
Unrelated to your post… but here are two good questions.
1. Who do you think *will* win the Nobel prize for economics today?
2. Who do you think *should* win it?
Wasabi
October 12th, 2009 at 11:28 pm
It’s already been decided Wasabi:
http://nobelprize.org/nobel_prizes/economics/laureates/2009/
And as befits these times it’s relatively obscure. Governance is a “insider” topic, and Williamson’s stuff is vaguely interesting on why firms exist (from a neoclassical point of view the firm is a command structure with a market economy).
As to who should, I’d go for Augusto Graziani and Basil Moore amongst living economists–for developing the endogenous money approach within economics. However limited the start, it’s essential to get economics to finally come to grips with money and time.
October 13th, 2009 at 1:05 am
Truth … comment # 28
The primary purpose of bank capital is to absorb losses as required. The capital requirement mostly is in the form of equity capital that qualifies under regulatory specification. There is such a thing as bank debt capital, but it must be structured in a qualifying way to absorb losses easily and as required, just behind equity capital. It is also restricted in size when measured as a proportion of equity capital. Not all bank debt qualifies as capital. And bank deposit liabilities are not considered as capital.
Banks do redistribute existing deposit money in their function as an integral part of the payments system. But they also create new deposit money when they extend new loans or acquire new assets. Those are the activities that account for most money supply and banking system balance sheet growth.
Capital is not the same as liquidity. The purpose of capital is to absorb losses from income and/or designated asset/liability mark downs/ups. The purpose of liquidity is to facilitate repayment of liabilities under normal non-loss conditions with matching cash flow from assets or replacement liabilities. Banks maintain liquidity protection by holding liquid and/or early maturing assets and having reasonably assured access to various liability markets.
Liquidity and capital are the two primary risks in banking. Risk to capital results from upstream asset/liability risks such as credit risk and interest rate risk.
Capital risk can trigger incremental liquidity risk when bank counterparties get nervous about a bank’s capital position and its ability to remain viable. Liquidity risk can trigger incremental capital risk and losses when banks are forced to liquidate assets at fire sale prices in order to meet liabilities. The two risks, while mutually reinforcing at times, are still distinct.
The central bank reserve account is in effect a liquidity operating account; i.e. it is an operational clearing house for the interbank net exchange of “good” funds.
The equity account is a capital account; it is an accounting clearing house for the absorption of losses and for reserving designated funds against such losses.
The two types of accounts – central bank reserves and equity (capital) – are distinct in purpose and nature.
October 13th, 2009 at 1:36 am
To add to JKH’s excellent elaboration of the capital vs. reserves points
Banks DO create money if money is defined as deposits or other short-term liabilities, which is the usual definition of the term (or at least a subset of the normal definition). (Again, as I’ve said numerous times, better to not use the term “money” at all and simply specify which liabilities one is referring to.)
But, banks DO NOT create NET financial assets in the economy. As Truth 28 correctly noted, for every asset they create, a liability of equal size is created. This goes for the private sector as a whole . . . given the two-sided nature of financial assets, both the asset and the corresponding entry on the liability/equity side remain in the private sector, so transactions among private sector actors do not create new net financial wealth for the private sector as a whole.
Best,
Scott
October 13th, 2009 at 1:40 am
Steve . . . regarding Nobel (or the award given by bankers in honor of Nobel, as it is more correctly labled), the writings of the other winner, Elinor Ostrom, were required readings in my undergraduate and graduate Institutional Economics courses. She’s perhaps the least neoclassical person to win the award, at least in terms of methodology (unless Myrdal is).
Best,
Scott
October 13th, 2009 at 1:58 am
G’day Outback Oracle
I wonder why you and I are the only contributors to this blog who are as concerned, about the external debt and the CAD which is now back on the rise?
You called the mathematics “fancy”. Back in the late sixties I too was at university (John Blatt author of one of the references of Steve’s paper was my first computing teacher at UNSW). I actually studied maths, 3 years of it and I know that the neoclassical modelling is trivial nonsense using no more than junior high school arithmetic, and misuse of a junior highschool scientific concept, equilibrium. The correct words for them to use would be “Equilibrium” = “equal to” and “Disequilibrium” = “not equal to”. In Psychology I leaned that the correct word for the neoclassical’s lack of intellect, the most perjoritive term, it is “Idiot”.
In the eighteenth century there were many scientific discoveries, and an age that came to be called the “Enlightenment”. Newton and Leibnitz discovered calculus and neoclassical economists seen only aware of the discoveries of James Cook and Joseph Banks who discovered our black swans, and one throw away line by Adam Smith, the “invisible hand”.
On the bad use of the word equilibrium to mean something more that “equals”, scientists and engineers always qualify equilibrium as being, stable, unstable or metastable. The stupid deoclassicals think that “equilibrium” is adequate to describle what the hope will occur which I assume is stable equilibrium. Engineers have worked out how to use mathematics correctly to design control systems to be always in stable equilibrium. Without this it would not be safe to travel on anything other that a horse, for example train rails and wheels are such a system which ensures stable equilibrium. All of these systems designed by engineers or found in nature can by proven to be in stable equilibrium by the correct use of mathematics. The neoclassicals seem to find no need to prove just what they meen by their “equilibrium” and assume that everyone will understand what they think it means. Thier defintion would be a “fail” answer in a science or engineering exam.
This idea of equlibrium is not part of a set of apriori rules, it is an article faith, faith in the Cargo Gods. What I said in the privious paragraph is blasphemy against the cargo gods. An even worse blasphemy is our suggestion that the “free [international} trade” does not works. How many times have you seens “free trade” mentioned without comment or question on the MSM?
Now just what is in equilibrium? The levels of private debt have been clearly part of a system which has been running waway and in no form of real equiblrium for more that 50 years, the CAD and foreign debt has also been in no form of equilibrium for more than 50 years. The technological cababilty of Australia has all but gone and that of the US has only been maintained by the military imperative.
The restoration of the Australian economy is now totally dependent on a continual supply of cargo from cargo heaven to keep the retail sector alive and a continual supply of prime debtors with overpriced assets to pay the interest bill. But we have already crashed and are now in the process of burning.
Steve, please keep up this effort to drag economics into the 21st century, it would be nice just to get them thinking of time as a pearameter and 19th century mathematical principles. I fear paper your post will go right over the heads of all of the people who we need to undersand, but you must try thank you very much.
October 13th, 2009 at 3:11 am
@ak 29
“Our civilization may also collapse quite soon.”
Do you know something that i don’t?
Q1. What is the next source of energy when the oil and then coal runs out?
A1. Zero point energy.
http://www.youtube.com/watch?v=ox005EPI3mI
Q2. Which physical phenomena can be used to generate more energy than burning fossil fuels?
A2. The Sun, Wind or Water.
Q3. Please list a few new inventions which are in the pipeline to be commercialized in the IT industry.
A3. Are you aware of Nicola Tesla.
http://www.youtube.com/watch?v=gt8Y93k0pB0
A must read.
http://en.wikipedia.org/wiki/Nicola_Tesla
http://en.wikipedia.org/wiki/Wireless_electricity
Q4. For how long the Moore’s law (doubling the number of active elements in processors) will not be violated?
A5. This has already been broken since the CPU chips have only gone from 2gb to 3 gb over 6 years or so. RAM thought has continue to grow and is now over 3gb.
Q5. Do you think that bandwidth available in wireless network can grow without limitations and paying hefty price for increased cell density? (Hint: have a look at this:
http://en.wikipedia.org/wiki/Hartley%27s_law#Hartley.27s_law ). So what are prospect of further development of wireless networks / communication technologies and will it have any impact on Silicon Valley?
A5. See above or below.
“I am not saying that there are no inventions in the pipeline to be commercialized – for example related to biotechnology or nanotechnology. I don’t want to say that everything will collapse. But unless a dramatic change in the way the society and economy are run occurs – we are very vulnerable because our system is demand-constrained and will not cope with any throttling at the resources availability end.”
Question, where have you gotten your information? School, the media? Think critically about this. The people behind the curtains have many secrets. Once the shackles of barriers to entry are removed, humanity is free.
http://en.wikipedia.org/wiki/Barriers_to_entry
This is not limited to just economics. It also applies to government, education, media or any other form of institution.
http://www.youtube.com/watch?v=G0DUUjFntbQ
October 13th, 2009 at 4:17 am
Scott,
William Vickerey, 1996 winner was a non-neoclassical and a bit Post Keynesian. http://www.columbia.edu/dlc/wp/econ/vickrey.html – Fifteen Fatal Fallacies of Financial Fundamentalism
The article looks similar to Warren Mosler’s 7 deadly innocent frauds.
October 13th, 2009 at 6:35 am
BrightSpark1@44
Hope I’m not barging in. Just want to say a few words about “equilibrium”. In the physical world, we normally use the behaviour of water to describe the physical phenomenon of “equilibrium”. We say “water will find its own level”, or “what goes up must come down”, or “water does not travel uphill” etc., etc.
The phenomenon of “equilibrium” is achieved as a result of the interaction between water, gravity and the atmosphere. It is a dynamic equilibrium. Turn the water into ice or steam, or shut down gravity, or banish the atmosphere, you’ll break the state of this dynamic equilibrium. The breakdown of a state of dynamic equilibrium is predictable because it exists only under a specific set of physical conditions. Change the conditions and you will change the state of dynamic equilibrium.
The physical properties of materials on planet earth under normal conditions have been well researched and the laws governing their behaviours have been well established. We understand quite well now that human will-power alone are not capable of changing these proven laws of physics. Can the same be said about the economy and finance? I have my doubts but I regret I don’t have much to contribute to the field of economic theories.
October 13th, 2009 at 7:14 am
ak@49
1. What is the next source of energy when the oil and then coal runs out?
2. Which physical phenomena can be used to generate more energy than burning fossil fuels?
Answer to 1 is Tritium (H3)- an isotope of hydrogen, plenty of it on the moon.
Answer to 2 is nuclear fusion reaction.
I’ve got an idea now. If we infuse Steve Keen’s model with Steve Hawking’s scientific understanding of nuclear fusion reaction, we may be able to come up with an intellectual chain-reaction that eventually leads to an explosion in our bank accounts. I hope that’s not too mush of a digression.
October 13th, 2009 at 7:19 am
Thanks Scott, As you can tell, I haven’t followed her work–I was more familiar with Williamson’s.
October 13th, 2009 at 7:35 am
Thanks BS. I do feel like a cracked record and other bloggers probably feel like I am. I just feel the external account is used as some sort of infinite sinking fund by all sides of the economic argument. Every action spills into the external account one form or another. Yet it is totally ignored in discussion. Steve has written of the possibility of a ’sudden stop’ scenario. We came close in this last debacle. Yet the external doesn’t rate a mention in all the certain theories proffered in these pages. Please note my comments are not aimed at Steve. I understand what he is trying to do and that he is involved in a massively complex developing long-term project.
Much is being written about how great the Aus economy is in not having a recession. It is mostly rubbish. We didn’t sink into recession because we sold off another couple of paddocks of the farm and got a whole lot more debt just because we are lucky enough to have a lot of paddocks (or did have!!!). The external account is the ‘Magic Pudding’ of modern economics whether it be neoclassicists or PostKeynesians or Chartalans or whatever.
How the heck can we explain what is happening in an economy when we ignore one whole sector and treat it as an infinite source of funds at no cost.
OK I better stop banging on!!
Laurence…I don’t know about your ‘I regret I don’t have much to contribute to economic theories’ I’ve found your posts generally full of good sense….a property that is sadly lacking across the great expanse of economics….Just my opinion.