CSIRO-UNEP Mod­el­ling

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The United Nations Envi­ron­ment Pro­gram did a very unusual and far-sighted thing last year: it asked the CSIRO to pro­duce a ver­sion of its bio­phys­i­cal model of the Aus­tralian econ­omy for devel­op­ing coun­tries, and to pair that with an eco­nomic model which had to be non-equi­lib­rium in nature.

The Stocks and Flows Resource Mod­el­ling team at CSIRO Sus­tain­able Ecosys­tems, which main­tains this bio­phys­i­cal model, approached me in July to see whether I would be will­ing to attempt the devel­op­ment of that non­equi­lib­rium mul­ti­sec­toral eco­nomic model.

The CSIRO’s bio­phys­i­cal model uses a soft­ware pack­age called WhatIf? that is designed for multi-dimen­sional aggre­ga­tion of data and extrap­o­la­tion of the trends that data dis­plays. Resource data is stored at as dis­ag­gre­gated a level as pos­si­ble (pop­u­la­tion, for exam­ple, is dis­ag­gre­gated by age, sex and loca­tion), and then aggre­gated to the national and global level. A sim­i­lar exer­cise applies for con­sumer demand, which is dri­ven by an age-based pro­file of the pop­u­la­tion, allied to the con­sump­tion pat­terns that apply for each age cohort across all indus­tries in an econ­omy, and the resource require­ments of out­put in that indus­try.

As I doc­u­ment in this paper, the project to develop a mon­e­tary, multi-sec­toral, non­equi­lib­rium model of pro­duc­tion was suc­cess­ful, while the CSIRO suc­cess­fully adapted their Aus­tralian stocks and flows model to the avail­able Asian data. The CSIRO and I pre­sented our results to the UNEP group in Novem­ber.

The video qual­ity is pretty terrible–I’ve learnt a bit about film­ing since then–but nonethe­less here they are. The videos “speak for them­selves”, so I’ll let them do just that.

Franzi Poldi’s expla­na­tion of the CSIRO’s of the Asia-Pacific Stocks and Flows Model:

Steve Keen’s Debt­watch Pod­cast 

| Open Player in New Win­dow

My expla­na­tion of my mul­ti­sec­toral mon­e­tary model (and the PPT file for my talk):

Steve Keen’s Debt­watch Pod­cast 

| Open Player in New Win­dow

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  • Re #25. Inter­est­ing thoughts mmb. Trond is very approachable–drop him an email about it: trond.andresen at itk.ntnu.no.

    The BR account is some­thing that JKH might argue would be bet­ter called BE for Bank Equity.

    The point about seignor­age is that a lender can’t directly spend money it cre­ates on commodities–though it can earn an income from that money via inter­est pay­ments and spend that. Hence the ini­tial sep­a­ra­tion of BR from BD (or BI–I’m still work­ing out how to label these var­i­ous accounts in my delib­er­ately skele­tal model): BR is not a source of spend­ing by the bank whereas BD is.

  • mmb

    I’ll drop Trond a note as you sug­gested. Now regard­ing the BR account. If the bank can’t spend the money in BR and can only make money by lend­ing it out, how is it val­ued? Is it con­sid­ered an asset on the banks books but not val­ued at face value? It would seem to be a very strange asset that must be val­ued using some esti­mate of how much inter­est could be gen­er­ated from lend­ing it all out. Maybe a NPV of future inter­est pay­ments?

    It doesn’t seem like BR should be bank equity either. Isn’t bank equity = assets — lia­bil­i­ties? Where am I going wrong here? Not to bother prof Keen with such a new­bie ques­tion but can any­one else clar­ify?

    Thanks!

  • mmb

    The BR account is a pool of credit lines. When a firm repays a por­tion of a loan, it restores its credit line.

  • ak

    Steve,

    Back to the usual sub­ject of credit money destruc­tion:

    Open­ing a line of credit is not the same as cre­at­ing credit money. It is “a com­mit­ment from a lender to make avail­able to a bor­rower a cer­tain amount of credit”. Credit money is cre­ated when the actual loan is extended and it is extin­guished when the loan is repaid.

    http://www.creditorweb.com/definition/revolving-line-of-credit.html

    The best exam­ple of such a line of credit is my credit card account. When I pay using the card I spend newly cre­ated credit money. When I repay the debt credit money is destroyed and my credit card account reverts back to the same state it had had before spend­ing money. The ini­tial state of the credit line is restored and I am again able to draw (bor­row) the same amount of money — cre­ated on demand by the bank.

    But I am not charged inter­ests just for hav­ing a line of credit — this is another argu­ment that this is not money as it can­not be spend, doesn’t cre­ate a bank asset and doesn’t gen­er­ate income. Pay­ing a fixed fee to the bank for main­tain­ing the credit line doesn’t change any­thing.

    In my opin­ion the only rea­son BR account may be included in the gen­eral model is to limit the max­i­mum amount of credit money cre­ated — if the model is not dri­ven by the bank push­ing money. If we want to sim­u­late the behav­iour of the sys­tem dur­ing the defla­tion­ary phase we must assume that debt is being repaid — this is exactly what slowes down the econ­omy by reduc­ing the demand. Only dur­ing the expan­sion­ary phase the amount of credit money in the sys­tem may be close to the lim­its.

  • mmb

    Steve, War­ren and AK,

    AK makes a good point but hints that this has been dis­cussed before. Not want­ing to dupli­cate dis­cus­sion points, can some­one list arti­cles and post #‘s where this was cov­ered so I can review. I looked for a way to search the com­ments but could find none.

    AK, I am intrigued by your com­ment regard­ing BR being used as a way to limit money cre­ation. This seems to me like the right way to intro­duce this vari­able into the ODE’s and is likely related to the con­cept of bank lend­ing being reserve con­strained. The paper by Trond Ander­son, that Steve pointed me to, 

    http://www.itk.ntnu.no/ansatte/Andresen_Trond/econ/basel-working8.pdf

    describes such a con­straint in terms of bank lend­ing being capital/asset ratio con­strained.

    Trond uses an equal­ity con­traint in the form of A-L/A=k where A=bank assets, L=bank lia­bil­i­ties and k=the min­i­mum capi­tol to asset ratio. He also sug­gests the equal­ity cor­re­sponds to the case where the econ­omy is not pes­simistic (i.e. banks want to lend and bor­row­ers want to bor­row) In my opin­ion it is impor­tant to have the model describe the case where bank credit money cre­ation (flow) is dynam­i­cally deter­mined based on banker and bor­rower sen­ti­ment but sub­ject to inequal­ity capi­tol and reserve con­straints. In the exam­ple of Tronds paper where he con­sid­ered capitol/asset ratio con­straints with­out a cen­tral bank, this would sug­gest state vari­ables A and L should be free to wan­der around in the state space until they bump up into the con­straint curve A-L/A=k. As the sys­tem tries to move beyond this con­straint bound­ary (i.e. A-L/A<k) the con­straint becomes “active” and over­pow­ers the new credit money cre­ation flows pre­ferred by bankers and bor­row­ers and dri­ves the state (A,L) back inside the con­straint. Once it is back inside, the con­straint turns off and the state vari­ables (A,L) are again free to roam around based upon the banker/borrower pref­er­ences. If for some rea­son banker/borrower pref­er­ences are always try­ing to push past the con­straint bound­ary, the state will move par­al­lel to the con­straint much like an ant that wan­ders around your floor until he reaches a wall.

    It would seem to me that bank reserve con­straints could be han­dled the same way.

    Can some­one describe the acount­ing mech­a­nism in which a bank can add or sub­tract money from its reserve account (not Steves BR but Tronds R) at the cen­tral bank (CB)? It seems to me it can only trans­fer money into its CB Reserve account from its own account (i.e. Steve’s BI account) This is the account where the bank stores all of its inter­est income and money from the sale of assets it owns? Is my under­stand­ing cor­rect?

    Thanks every­body!

  • ak

    mmb,

    I can rec­om­mend read­ing Steve’s papers and search­ing this forum for posts writ­ten by JKH. This will lead you to the rel­e­vant threads.

    Do a fol­low­ing Google search:

    JKH site:http://www.debtdeflation.com/blogs

    (I’m not post­ing a full URL of the search because it may not sur­vive).

    Bank lend­ing may not be reserve con­strained:
    http://www.debtdeflation.com/blogs/2009/12/23/mish-on-the-fictional-reserve-system/#comment-19129

  • My lat­est 1 sec­tor real­iza­tion of Steve’s model.

    If you com­pare with US Unem­ploy­ment 1890–2009, it get­ting pretty clear that Steve is within an exoge­nous shock or two of hav­ing them com­pletely sur­rounded.

  • Notice the oscil­la­tions about Unemp=5% and com­pare with pre­vi­ous simulation/

  • Re #32–33 CSIRO/UNEP. You’re mak­ing me jeal­ous Warren–I wish I had time to work on my own mod­els but right now I don’t, too busy with the blog I have to put together on the walk I’m doing to Mt Kosciousko. So many thanks to you for get­ting well and truly into the mod­el­ling.

  • OK, so here’s a credit crunch 100<t<120

    I’d like to join you on the walk. It’s just the 18 hour
    air­plane flight that’s putting me off.