Jun28
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.
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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?
proof reading the pdf;
p33 – Error! Reference source not found.
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.
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!
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?
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.
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
noah cross
Yea, everyone else is stupid except Dean Baker. He should be running the world. But he needs to convince others first.
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
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.
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.
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.
“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.
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.
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.
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
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).
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?
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.
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.
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.
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…
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.
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.
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.