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

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.

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

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!

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.

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

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!

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.