Levy Paper

Published in June 28th, 2010

This is just a very quick post to make my paper at the Levy Institute available. Later I’ll add a post of the paper itself and a video of the presentation.

32 Responses to “Levy Paper”

1
Sackerson
June 28th, 2010 at 9:13 pm
Hi, Steve

As a non-pro I have read your paper with great interest and attempted to summarise it for the layman (my clients) here: http://broadoakblog.blogspot.com/2010/06/keen-debt-and-deflation.html – have I fairly represented your views?
2
spike
June 28th, 2010 at 9:53 pm
proof reading the pdf;
p33 – Error! Reference source not found.
3
Lyonwiss
June 28th, 2010 at 10:08 pm
Steve,

Impressive (even if a bit rough on some details): way ahead of anything else I’ve seen including Godley and Lavoie (2007). Certainly, it is a very promising framework, capable of describing and predicting events that no other theory (as far as I know) has the potential to even describe. But it has a long way to go in terms of empirical verification and out-of-sample prediction. My instinct for progress is to work on sub-models of your framework to get stylized postdictions of asset bubbles and the GFC.
4
Steve Keen
June 29th, 2010 at 12:57 am
Thanks Lyonwiss–much appreciated. I agree re the empirical work.

Spike, that is probably a reference that got lost in editing–I’ll fix it soon.

Sackerson, I’m still caught up in the Levy conference right now, but I’ll try to check this on Thursday this week. Thanks for doing this!
5
robjoh
June 29th, 2010 at 7:57 am
First thanks for your paper, I wait for the presentation.

Second, Some questions:
You write:
“Here some credit may be due to “Helicopter Ben”.6 Though Bernanke and Greenspan clearly
played a role in encouraging private debt to reach the heights it did, it is certainly conceivable
that his enormous injection of base money into the system in late 2008 averted a nascent
deflation (Figure 10).”

1, This base money supply was given to the banks. If you should use the money press would it not be better to give the money to the public.

2, How far should you go with the printing press? Yes deflation is dangerous however so are inflation, and inflation may in the long result in that aggregate demand from the poor goes down, when food prices and energy prices goes through the roof.

3, If it was easier to default on your debt, which would cause massive deflation in the housing market, and combine that with the printing press to secure the savings for the savers. Would not that solve some of the major problems, too expensive to save up to a house and too much debt in the society?
6
Lyonwiss
June 29th, 2010 at 1:41 pm
Below is a good summary of the current economic reality by Robert Samuelson (free registration with Washington Post may be necessary):

http://www.washingtonpost.com/wp-dyn/content/article/2010/06/27/AR2010062703257.html

Different economic religions will not agree on what to do next. Steve, we need a compelling theory along your line.
7
noah cross
June 29th, 2010 at 4:37 pm
And then Dean Baker unpicks Samuelson’s article.

http://www.cepr.net/index.php/Blogs/Beat-the-Press/robert-samuelson-economics-is-hard?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+beat_the_press+%28Beat+the+Press%29
8
Lyonwiss
June 29th, 2010 at 6:23 pm
noah cross

Yea, everyone else is stupid except Dean Baker. He should be running the world. But he needs to convince others first.
9
noah cross
June 29th, 2010 at 6:27 pm
Perhaps…mostly Baker’s arguments against the MSM are cogent and credible.

Here is the Economist’s perspective on debt with some nice charts. Australia is not covered in the data

A special report on debt
Repent at leisure
http://www.economist.com/node/16397110
10
greg_g
June 29th, 2010 at 10:40 pm
Hi Steve, I find your paper quite amazing. Though, as a mathematician, I cannot help noticing that the derivation of the equations for your model is not as elegant and straightforward as it could be. For instance in Table 1, why having row B “Compound debt”? Either the firm pays the interest (row 2) or borrows more money (row 1). By the way, since the term B is equal to C, row B and row C vanish. I also find the distinction cash/vault/bank equity quite confusing throughout the paper.

I think the misunderstanding comes from the assumption that “each row sums to one”, while in reality some of those entries represent asset and some liabilities of a bank balance sheet and cannot just be summed.
This is also the reason that forces to use fictional “ledger entries”.

May I propose a table format that lets you derive the same dynamic in a way that looks a bit simpler? First, the quantities should clearly correspond to actual balance sheet entries for the banking system:

Liabilities:
1) Firm deposits (Fd)
2) Workers deposits (Wd)
3) Bank capital and bankers deposits (B)
Assets:
4) Firm loans (Fl)
5) Cash (C)

Then each operation in the table is represented exactly as a bank would write it in its balance sheet:

| Fd | Wd | B | Fl | C |
———————————————————————–1. Lend money | +A | | | +A | |
2. Pay Interest | -C | | +C | | |
3. Deposit interest (firm) | +D | | -D | | |
4. Wages | -E | +E | | | |
5. Deposit interest (workers)| | +F | -F | | |
6. Consumption | +G+H | -H | -G | | |
7. Repay loan | -I | | | -I | |

The cash entry is never touched: as in reality, no significant cash really exchanges hands when a single bank deals with its clients, all changes are made to balance sheet entries.
The assumption that each row sums to zero is substituted with the assumption that assets and liabilities remain balanced: mathematically, you can say that the table M (as matrix) is such that M times the vector (-1 -1 -1 +1 +1) equals zero.
Note that the equations that are derived are the same, so the system dynamics do not change. By the way, the matrix has rank three, so it produces a set of three linearly independent differential equations,
the fourth can be derived by the balance sheet identity.

The only difference is the dynamic for Bv in your paper: your results can be reproduced here by setting “A = bV * (MaxLoans – Fl)”, instead of “A = bV * BV”.
“MaxLoans” is the maximum quantity of loans that the bank can make (maximum balance sheet expansion). MaxLoans has the same value as the initial value of what you call “Vault”, but I think it is more clear to treat it as “maximum loans” than to “Vault”, since the latter can be confused with actual cash (which remains constant).

Moreover, this table format can stay the same for the other sections of your paper. For instance for table 7 you can just substitute “A” with the term “J = 1/tauM Fl(t)” which accounts for a continuous increase in the bank’s balance sheet.
Government policy would be an entry with +K in Bank capital and +K in Cash (bank bailout) or +K in Workers deposits and +K in Cash (workers help), and so on. You can even simulate regulatory policy by setting the maximum balance sheet expansion as a multiple of Bank capital.

Thanks for your work, I really think the conclusions of your paper are brilliant, and I just wanted to make sure the derivation is as solid as possible.
11
Lyonwiss
June 29th, 2010 at 11:48 pm
Here is a less “one-eye” view and analysis of the situation by Edward Harrison:

http://www.creditwritedowns.com/2010/06/stimulus-is-no-panacea.html?utm_source=feedblitz&utm_medium=FeedBlitzEmail&utm_content=442913&utm_campaign=0

containing chartalist accounting and Austrian malinvestments.
12
ak
June 30th, 2010 at 8:50 am
Lyonwiss,

The statement that “marginal rate of GDP return is ever-decreasing” is not Austrian but Marxist to me. Perhaps von Mises learned something from Oskar Lange.

I agree that just pouring money into the leaky bucket of the current Western economic system can only cause bubbles and probably a currency crisis down that path – when “financial markets” bolt.

So let’s fix that leaky bucket. This is the missing (or under-emphasised) part of MMT for me. Capital gains tax and resources rental tax could help. Instead of hoarding money and speculating people should be “gently” encouraged (by a 90% capital gains tax on real estate and 10% annual tax on wealth above $10mln for example) to invest in modern productive technologies and move us away from dependency on fossil fuels. At the same time the state has to guarantee decent pensions to everyone (as the superannuation scams will collapse) and print enough money to fill the gap caused by all our bubbles popping.

A guy with a PhD has been recently employed as a software tester in a company which writes trading software. This is the best example of a real resource misallocation in our society to me. Nobody will tell me that this brings any benefits to the humanity. “We provide liquidity …” – you know what I mean. If you look at the IT jobs in Sydney there are a very few which are not related to the FIRE “industry”.

We should be doing exactly the opposite to we were told over the last 30 years by monetarist, Austrian and neoclassical economists.

But Western societies are not ready yet to wrestle power back from the hands of corporations, banks, speculators and neoliberal brainwashers. Our democracy is defunct and people don’t believe in the institution of the democratic state acting in their interest.

The Chinese Communist Party understands this very well. Even if their system is initially less efficient and always tainted with corruption this is more than compensated by the fact that they have a direction on what they are doing. And their society is ruled by engineers not by economists or lawyers.

Round three will go to Oskar Lange I would say.
13
TruthIsThereIsNoTruth
June 30th, 2010 at 9:46 am
“A guy with a PhD has been recently employed as a software tester in a company which writes trading software. This is the best example of a real resource misallocation in our society to me. Nobody will tell me that this brings any benefits to the humanity. “We provide liquidity …” – you know what I mean. If you look at the IT jobs in Sydney there are a very few which are not related to the FIRE “industry”.”

Firstly most of the IT infrastructure in finance is associated with transactional banking and financial accounting. Without these things, as efficient as they are in Australia, you could not have a modern economy. Your statement is a pretty long extrapolation, finding one example of alledged misallocation and casting all IT jobs in Sydney in this light.

In terms of trading software… The fact that you need a PhD to test it could tell you something about the level of sophistication. The high frequency trading you are referring to is essentially gaming the system using powerful computers, one strategy for example is to flood the market with quotes to disadvantage other guys doing high frequency by chewing up their computing time. I agree it should not be allowed, but look at where it is happening – the land of lax regulation.
14
ak
June 30th, 2010 at 10:34 am
TruthIsThereIsNoTruth,

1. So do a serach for IT job offers, please – if you find something decent not related to the FIRE industry in R&D please let me know.

2. I am sorry but I probably know a bit more than you think about issues related to HFT but I may not be able to comment for different reasons. Believe me there is no sophistication at that level.
15
TruthIsThereIsNoTruth
June 30th, 2010 at 10:44 am
ak,

What I am saying is that the IT jobs in finance at least in Sydney have little to do with trading software and mainly revolve around the infrastructure needed to support millions of daily transactions which really underpins what we call the economy.

Sophistication is a matter perspective, maybe you are just very clever… I don’t actually know any details about trading systems but I know broadly how they work and I’m pretty sure it is not very big in Australia, but if it takes a PhD qualification to do the testing it can’t be that simple…

You will be hard pressed to find IT jobs in R&D in Australia, may I suggest a move to India perhaps. You are in a country with a high standard of living because it can sell it’s resources on a massive scale, so if you want to do what you enjoy intellectually you might have to give up on your claim to your portion of the resource wealth. Can’t have the best of both worlds.
16
noah cross
June 30th, 2010 at 10:48 am
Time to shut down the US Federal Reserve?

http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100006729/time-to-shut-down-the-us-federal-reserve/

Like a mad aunt, the Fed is slowly losing its marbles.

Kartik Athreya, senior economist for the Richmond Fed, has written a paper condemning economic bloggers as chronically stupid and a threat to public order.

Matters of economic policy should be reserved to a priesthood with the correct post-doctoral credentials, which would of course have excluded David Hume, Adam Smith, and arguably John Maynard Keynes (a mathematics graduate, with a tripos foray in moral sciences).

“Writers who have not taken a year of PhD coursework in a decent economics department (and passed their PhD qualifying exams), cannot meaningfully advance the discussion on economic policy.”

Contact him here and express your ignorant and ill informed views

http://www.richmondfed.org/research/economists/bios/athreya_bio.cfm
17
ak
June 30th, 2010 at 1:13 pm
TruthIsThereIsNoTruth,

Smart people are used to do dumb work but don’t worry when the financial sector cancer is finally amputated we’ll bounce back.

Moving virtual money around doesn’t add any real value to anything. I am not against market economy but there must be good reasons why the Chinese didn’t let the foreign traders to trade in Shanghai or why we cannot buy real Gazprom shares (not the shares of a proxy company).
18
Steve Keen
June 30th, 2010 at 1:47 pm
Many thanks greg_g, I’m travelling now but will check this through very carefully and simulate it when I return to Oz–and possibly before. Looking forward to more contributions from you here–and have you considered downloading QED and giving this a try there?
19
sj
June 30th, 2010 at 1:54 pm
Writers who have not taken a year of PHD coursework in a decent University should shut up now!
I’m self educated never gone to any University, so I should shut up now.
Dumb people become smart because they know their limitations.
Why I like Nassim Taleb embraces ignorance lack of knowledge as corner stone of good investment.
Competence verses overconfidence Dunning-Kruger effect.
Only think worse than making a bad decision is to make a bad decision and think it’s good.
Who are you really going to listen too a person with a stable salary or billionaire who will never go broke or a self educated battler who is betting the farm?
I will bet on the self educated battler anyday.
20
TruthIsThereIsNoTruth
June 30th, 2010 at 2:07 pm
ak,

virtual money? – what do you consider non-virtual money? Coins, notes? What is truly unappreciated is a well functioning transaction system and how important that is to the efficient functioning of an economy, consumer confidence, investor confidence. It reduces the need for tedious accounting, by not carrying cash around the risk of personal assault goes down, I could go on… To appreciate these kind of things you have to step down from the heights of the ivory towers and think about real tangible pragmatic reality.

Money has always been tokenistic, even when it was limited by physical constraints such as the speed at which gold could be processed from the ground. Please tell me you don’t think that we should all be carrying around sacks of gold coins.
21
ak
June 30th, 2010 at 2:24 pm
TruthIsThereIsNoTruth,

Money in derivative trading or short selling is more virtual than in my pocket.

These are often conditional claims on claims on future goods and services.

Just think about the value of CDS or other OTC instruments.

One may say that there is certain risk associated with these obligations on virtual objects. This is a kind of measure of the virtuality.

I think that what looks like a cheap computer game will end up like a game when the power goes off.
22
TruthIsThereIsNoTruth
June 30th, 2010 at 3:24 pm
ak,

we’ve gone from saying that IT jobs in Australia are not contributing to society because they only exist in finance to transactions of virtual money to derivatives. At least your consistent with your approach, you take one example which plausibly enforces your view and you apply the conclusion to the entire argument. The world could be do without some of the derivatives that are around, but at the same time a lot of derivatives perform an important role in the economy, but that’s another topic and is not what I was referring to in my questions.

In the age of surplus information we apply a filtering algorithm to what we seek and decide to digest. One of the conclusions from my observations of the comments on this blog is that the algorithm applied is to seek anything that confirms ones theoretical point of view and discard or not seek anything that could destroy those theoretical beliefs. I feel at a great advantage by applying an algorithm which seeks, first and foremost to prove myself wrong, because I appreciate that everytime I do that I have advanced my knowledge at the cost of not inflating my ego…
23
slaphappy
June 30th, 2010 at 3:33 pm
In 1930 the average life expectancy for a white australian male was 59 years – in 2005 it was 79 years.
One’s life expectancy would surely have an impact one’s ability to repay debt and the terms upon which it is offered by borrowers.
24
ak
June 30th, 2010 at 9:03 pm
TruthIsThereIsNoTruth,

I am not interested in personal attacks or questioning anybody’s intentions. Please do not insert the world “all” into these sentences I intentionally did not put it.

Just because I work on communication software used in trading doesn’t mean that I need to identify myself with the current global financial system.

Where did I say that all the credit creation by commercial banks and all the trading of derivatives is bad for the economy? But what if that level of hedging which was common in the 1960-ties was good enough?

Virtually nobody questions the contribution of banks and stock exchanges to helping in smooth operation of the real productive sectors of the economy. But if one part of the body starts growing at a cost of the others this is usually not good.

Or what is the difference between having one beer and drinking a bottle of vodka at once?

The point which I was trying to make was that the financial sector in some Western countries became a kind of tumour maybe even a cancer because it started overgrowing the real economy.

“Finance and insurance is the fourth largest sector in Australia’s economy, generating 8.1 per cent or A$81 billion of real gross value added in 2008-09. This contribution is up from 6.6 per cent two decades ago (Source: Australian Bureau of Statistics, can.no.5206.0, National Income, Expenditure and Product, Time Series Workbook (released 2 September 2009). The finance and insurance industry is almost as big as the mining sector (the industry traditionally associated with Australia’s economic wellbeing) and its expansion has also aided growth in related sectors such as communications, property and business services.”

http://www.austrade.gov.au/Invest/Why-Australia/Strong-and-Sophisticated-Financial-Services-Sector/Strong-and-Sophisticated-Financial-Services-Sector/default.aspx

I am not entirely convinced that the “expansion of property and business services” is so good for everyone in our society and there will be no side effects of the amount of private debt owed by Australians in the future.
25
TruthIsThereIsNoTruth
June 30th, 2010 at 10:09 pm
ak – in essence all I was saying was that the largest proportion of the banking infrastructure revolves around the functioning of the electronic transaction system and the associated accounting. The transactions range from people buying groceries to companies settling commodity contracts. Whereas you tried to cast this in the same light as high frequency trading and in the end derivatives.

beer better than vodka? have you been on this spirit forsaken island for too long?!

I am curious how they measure “real gross value added” – but it must include wages. So if the financial sector is employing more people to deal with the increased level of tranactions and investment that’s a bad thing?

Clearly what we are worried about on this site is the high levels of debt, which the financial sector facilitates and even profits from. The financial sector is by law required to act in the best interests of the shareholders – I personally believe this is a good thing. It includes going after profit but staying within regulatory constraints. The sector is controlled via regulation and this is where the solutions are.
26
glubilee
July 1st, 2010 at 10:36 pm
@sj – its seems to me formal education = formal influence….somewhat parallel, I find it interesting when I see self-made millionaire/billionaires business folks (not investment guys) on financial shows they always seem way more sensible than CEOs that did not build their businesses but who simply rose thru the ranks, a different skill set than creating, growing a business…sometimes some of initial success looks like a lot of luck, but guys like Branson, Mark Cuban, they seem to have much more lively, independent minds and seem, strangely, more connected to real economic world.
27
djc
July 3rd, 2010 at 12:26 pm
Steve,

Congratulations on your latest work. I agree that you are way ahead of the pack, but still a way to go (well, that will always be the case).

Some thoughts on your equation (15). As I understand it your basic equations are (k=1/taus)

PQ = kF (1)
LW=k(1-s)F (2)
Q=aL (3)

Dividing (2) by (1) and substituting L/Q = 1/a from (3)and a minor rearrangement gives your result

W/P = a(1-s) (4)

I think this simple derivation shows firstly that an assumption of “equilibrium” is not required. Equation(4) holds even when all variables depend on time or on all the other variables.

The key assumption I think is that Q in (1) is the same as Q in (3). It seems to me that the simplest way to ensure this is to define Q as units sold rather than produced, in which case productivity a includes the efforts of workers in distribution, sales, marketing etc. With P defined as cash received by the firm (approximately the same as price but allowing for delays in payment) I think (1)-(4) are exact. Such things as variable inventories could be allowed for with k as a function of time. But since (4) is independent of k it is not affected. There is an obvious advantage in having P understood as price in (4) but I think it would be much easier to introduce a correction such as a time delay in a final result, rather than attempt to incorporate delays in the differential equations.

Taking (4)-(3) gives

W/P-Q/L = -as

again not requiring an equilibrium assumption. In fact, I think this shows that equilibrium is impossible and why your treatment is needed (rather than: there is an equilibrium, but capitalists can’t make a profit). I think it also shows that equilibrium cannot be considered a reasonable approximation (unless a and/or s vary with time, including negative values so that -as somehow averages to zero; or if some angel is available to supply cash at the rate as).

It also seems to me that all these results follow in a multi-firm model with the variables expressed as appropriately weighted averages.

When I can find the time I will have a go at QED.
28
Marco2
July 3rd, 2010 at 12:34 pm
@ AK and TruthIsThereIsNoTruth

I believe AK only meant to provide an illustration of unproductive resource allocation with the PhD guy designing HFT software example. That, I would say, does not mean IT is the only or indeed the main place where resources are this kind of thing happens.

The paragraph where AK mentioned the PhD guy was preceded by measures to fix the “leaky bucket”: “Capital gains tax and resources rental tax could help. Instead of hoarding money and speculating people should be ‘gently’ encouraged (by a 90% capital gains tax on real estate and 10% annual tax on wealth above $10mln for example) to invest in modern productive technologies and move us away from dependency on fossil fuels”.

This, it seems to me, implies that resources are allocated unproductively in other markets. Perhaps AK had mining and real estate in mind as he wrote that?

As I am not in IT, I can’t judge by myself, on my own experience, but I find it quite possible that TruthIsThereIsNoTruth has a point when he states that FIRE IT is chiefly concerned with other kind of things.

This, I suppose, does not mean that TruthIsThereIsNoTruth is denying that FIRE sector is indeed innovative and that some of these innovations are indeed detrimental to the stability of the system.

From my humble perspective, the morals of the story is: this discussion (as is often the case with discussion ideologically motivated) started by someone misreading someone else’s probably unfortunate example.

Just my two cents. Now, please, by all means, carry on.
29
djc
July 3rd, 2010 at 2:11 pm
I’m getting a message: zipped folder is invalid or corrupted when I try to open QED on my computer. Anyone else?
30
Marco2
July 3rd, 2010 at 4:08 pm
I’ve found Robert Samuelson’s article quite instructive:

Economics: the shaky science
http://www.washingtonpost.com/wp-dyn/content/article/2010/06/27/AR2010062703257.html

In short: Mr. Samuelson is AFRAID that the stimulus-generated deficit and debt will somehow cause a catastrophe.

One should be afraid too, Mr. Samuelson seems to believe.

In Samuelson’s words:

“This means that the benefits of higher deficits can be lost in many ways:
[1] through higher interest rates if greater debt FRIGHTENS investors;
[2] through declines in private spending if consumers and businesses lose confidence in governments’ ability to control budgets; and
[3] through a banking crisis if bank capital — which consists heavily of government bonds — declines in value.
There’s a tug of war between the stimulus of bigger deficits and the FEARS inspired by bigger deficits.”

Samuelson makes it appear that there are two separate channels (i.e. [1] and [3]) through which the financial markets could collapse.

That’s not true. Samuelson explains it as two separate, different channels, but it is only one (I guess, two things look scarier than one).

You see, the present value of a bond is related to the coupons paid to the bond-holder and the interest rate by the following formula:

V = C/r [*]

In this formula, V is the present value of the bond, which is also its market value; C is the coupon, and r is the interest rate. If interest rate goes up (i.e. r “grows”), as the coupon does not change, then V falls as well, and so falls the market value of the bond.

So, it’s misleading to explain this as two separate things: interest rates increases and falling bonds market values go together.

But this does not address the question: is it likely that interest rates will go up?

Curiously, Samuelson admits he doesn’t have any immediate reason to be afraid: “Interest rates on 10-year Treasurys are just over 3 percent”. So, no, they aren’t high right now.

Thus, whatever the risks of a financial collapse are, they seem remote. Consequently, “lenders haven’t lost confidence in U.S. Treasury bonds”.

But even though interest rates are rising now, is there any reason why interest rates in the US should go up any time soon? No, not really. Inflation in the US is low and in the US as in Australia, central banks consider their main duty to control inflation.

Further: the decision to increase interest rates belongs to the Fed. By rising interest rates, the Fed also hurts the employment perspectives of millions of Americans. However, nobody seems to care much for them. In particular, Mr. Samuelson does not even mention them. But he is very concerned about US bank stockholders… Hmmm.

But if this is how things are in the US, what about Europe, where the debt situation is, in some senses, worse than in the US?

Let’s particularly have a look at Ireland, where the local experts have done what Mr. Samuelson wants the American Government to do (i.e. cut down Government spending and taxes):

A Terrible Ugliness is Born
http://krugman.blogs.nytimes.com/2010/06/29/a-terrible-ugliness-is-born/

In Ireland, a Picture of the High Cost of Austerity
http://www.nytimes.com/2010/06/29/business/global/29austerity.html?_r=1&hp

And let’s have a look at Iceland, another little island, not too far from Ireland, where the Government could not do what local experts wanted to do:

The Icelandic Post-Crisis Miracle
http://krugman.blogs.nytimes.com/2010/06/30/the-icelandic-post-crisis-miracle/

So, the Irish have done what Mr. Samuelson asks, and they aren’t doing too well. The Icelanders haven’t done it, and the sky hasn’t fallen.

This is clear a sign that Mr. Samuelson is right, no doubt… Hmmm.

As we have seen many times here, monetary policy in Europe follows a largely different set of rules than in the US, because of the Monetary Union. As it has been treated here before, probably much better than I’d manage, I will save myself the trouble.

Okay, we have dealt with three of the channels Mr. Samuelson considers things can go pear shaped. What about the remaining channel, that is [2]?

What happens if people lose confidence?

Frankly, I don’t know. The potential consequences, I believe, might range from people jumping off a cliff; to just taking a warm shower, a cold beer and going to bed early. Your guess is as good as mine.

Is there any reason to believe the loss of confidence will be catastrophic? No, there isn’t. As far as I know: no real data, no theory. Nada.

By the way, I don’t know what the consequences could be, but neither does Mr. Krugman (and he is a Nobel Prize):

The Conventional Superstition
http://krugman.blogs.nytimes.com/2010/06/29/the-conventional-superstition/

Does Mr. Samuelson know? He might, but thankfully, he spared us the shilling details.

However, for someone who is so awfully concerned about panics and loss of confidence, Mr. Samuelson seems very comfortable scaring people, as his article does. Maybe he should have campaigned to get the Obama administration to impose more rigid controls and regulations on the financial industry, as Frau Merkel wanted to do in the recent G20 meeting.

NOTE:

[*] Any Macro 101 NEOCLASSICAL book, available pretty much anywhere, contains either this formula or an equivalent. Those interested need just to search for it.
31
scepticus
July 5th, 2010 at 10:44 am
Hi again steve. I am not fiished reading this latest output of yours but I wanted to question this bit:

“Circuit theory
gives the best foundation for understanding the dynamics of credit creation, but initial attempts
to devise a model from this theory reached paradoxical results—in particular, the widespread
conclusion that capitalists could not make profits in the aggregate if they had to pay interest on
borrowed money, or if workers saved any of their wages”

I tentatively suggest that the initial conclusion above is correct. Sectoral balances tell us that if we assume no government sector then the income of the business sector must equal the deficit of the household sector. These are flows.

These flows can only be sustainable (e.g. avoid an increase in private debt) if the business sector spends all its profits such that they recirculate as wages.

However to expect such recirculation without some dissiapative effect in a closed zero growth economy seems to me to be a matter of theoretical license.

Is it not the case that rising public sector debt combined with the illusion of the perpetual reliability of sovereign AAA ratings has served to keep the household sector afloat and mask the essential and inescapable conclusions of business-household sector balance identies?

Had people not believed 1980-2010 in the infallibility of soveraign debt then existing private debt-gdp levels could not possibly have reached the heights they have actually attained.

I am suggesting that the excess business sector profits that have been realised 1980-2010 above that which was actually sustainable long term can more or less now be measured as the global public sector deficit.
32
djc
July 8th, 2010 at 4:10 pm
Steve,

Further to my comments on your eq(15): modifying the basic equations to allow for some helicopter money to be dropped on the economy (H in $/time) gives

PQ = kF
LW=k(1-s)F + H
Q=aL

which leads to a steady-state (“balanced”) economy when H = sPQ. This leads to W/P = a instead of your W/P = a(1-s). The source of H could be fiat money created at the rate g ($/time) combined with credit created at the rate m.g where m is a dimensionless multiplier. Then g(1+m) = sPQ is required for steady-state. Taking s=0.4 (which I think from memory you have used) and PQ as GDP then g(1+m) needs to be 40% of GDP. This seems plausible – say, g=0.1*GDP, m=3. Note that this is a no-growth economy, so actual observed values for g(1+m) are likely to be higher. BTW, this formulation doesn’t imply that m is fixed and that g determines m.g but rather that together they need to be such that g(1+m) = sPQ for steady-state. For instance, it seems to me that in the US Bernanke has been substantially increasing g because m is too small.

My thought is that steady-state values for the variables might lead to a better fit of your model to data than the “equilibrium” values, without much change to the qualitative dynamics; that is, dP/dt = b(Pss-P) rather than b(Pe-P), etc