Alternately, send the file to me via email (debunking at gmail dot com) and I’ll post it to my FTP site and thence to here.

Thanks for responding so quickly.

I’ve taken all the points you make into account in my thinking. For instance, if the capitalists are buying from each other then where is their cash held when we take a snapshot? It’s either held in an account X that is not currently included in the model, or, without loss of generality, we can assume it’s the deposit at the bank FD.

In equilibrium we would have X constant. From a modelling point of view this is equivalent to FD constant.

If loans are repaid from X then this will decrease the value of X until it disappears.

X can’t be an asset or liability of the bank, otherwise we’d have to put it into the bank’s balance sheet. In a Circuitist approach it can be the credit of the capitalists circulating between themselves. If so, then how does the bank allow it to reduce a bank debt? The bank needs to monetise the debt by lending against the capitalist credit or by consuming additional commodities. This would require a reduction in their savings (effectively the bank’s capital).

If X is in the form of a stock of bank notes then there should be a liability of the bank reflecting this.

What this gets down to is essentially what you have in your model on p14 – FD and FL are reduced in equal amounts.

BTW, I can’t understand the model on p14. When a bank reduces the loans and deposits in equal amount then there is no change in the level of reserves. The cashflow to the bank is positive from the reduction in the loan, and negative in the reduction of the deposit. As these amounts are identical in size they cancel each other out, leaving no excess amount to flow into reserves. By adding this “reserve” term into the model you have upset all your carefully balanced stocks and flows.

Frank Ashe

However in the single sectoral model, this intra-sectoral expenditure by capitalists on the output of other capitalists appears as a zero, but it is still there in the actual dynamics of the model.

Total spending is F_D/tau_S per annum: this reflects workers spending of (1-s)*F_D/tau_S (from their wages) and implicitly s*F_D/tau_S expenditure by capitalists (bank expenditure from its net income is a zero-sum transfer and therefore doesn’t contribute to aggregate spending).

When I first wrote the model I used a “supply and demand” price-setting equation where supply was the output and demand was the monetary sum of worker plus capitalist expenditure, which is F_D/tau_S. This returned exactly the same values in equilibrium as using the price setting equation I use in the paper.

I know it looks strange at first, but it is an artefact of the intersectoral nature of the model.

I’m busy writing a paper with a 5pm today deadline, so I’ll have to leave a more detailed exposition to later. I’ll see if I can post an earlier version of the paper that will make this point clearer.

Frank

I’m not so much worried about paying back the loan, as your comment that it can be done with the profit. The “profit” in your model doesn’t seem to be monetary, it is physical. I’ve attached the spreadsheet, which I hope is self-explanatory. The two rightmost columns show the production consumed by the household and the banker. There is a surplus of production kept by the capitalist but unless someone buys it off him (and we’re assuming this doesn’t happen becasue we haven’t specified that cash flow) then there is no cash with which to repay the loan. Or almost no cash – there is some in the firm’s working (variable) capital and we can use this cash to reduce the debt.

To keep the bank’s assets and liabilities in balance the repayment from reducing the working capital (FD in your work) of course exactly matches the reduction in the loan (FL).

The slide bars allow the user to easily change any of the variables and see what happens to the output in real time. (Warning, may not work on Mac.) I find this a useful tool to get a feel for these things, and an invaluable teaching tool.

Frank

Adam is spot on. This model implements the Circuitist endogenous money perspective that “loans create deposits” in a simple “pure credit economy”–ie one in which there is no central bank or government (that itself causes some fraction with Chartalists, but let’s ignore that for once -:) ).

If loans are repaid, then–whether I then implement my perspective that loan repayment does not destroy money but does take it out of circulation (consistent with Keynes’s “revolving fund of credit” vision in his 1937 paper “The rate of interest”) or the standard Circuitist perspective that the money is actually destroyed when debt is repaid–the money in circulation drops and over time economic activity will cease because there is no money in the economy.

One way to answer your question is that the bank supplies the dollars with which its debt is repaid: repayment is simply returning to the bank the money it created endogenously in the first place when it issued the loan. While the debt continues to exist, it finances a turnover of economic activity equivalent to F_D/tau_S — the money in the firm’s deposit account divided by the turnover period (the time between M and M+ in Marx’s terminology)–which can be several times the size of the loan per year. If the debt falls to zero, then so does the money in F_D and all the other bank accounts, and economic activity ceases.

By the way, would you mind sharing your spreadsheet with the blog? There are several people here working on different computing technologies to implement the model (Warren Raftshol, who’s done some brilliant work to extend the model in Scilab, began with a spreadsheet version from memory, while AK is working on a Scilab front-end to my tabular system, and my off-list collaborator Cyril Wilkinson is developing a standalone interface in the Lua language), and every bit of cross-fertilisation helps.

I totally agree with you. Debt money exists only as long as the debt is not repaid, therefore if we don’t want to see a collapse in the simple model:

1. firms cannot repay its debt or
2. another class of agents needs to be indebted to create credit money elsewhere in the system (e.g. households) or
3. fiat money has to be introduced

In reality we can observe what happens when M3 collapses and debt is repaid. This is consistent with this very simple model.