Like a Dog Walking on its Hind Legs”: Krugman’s Minsky Model

flattr this!

Click here for this post as a PDF

I recently fired a stray shot at Paul Krugman over his joke paper "The The­ory of Inter­stel­lar Trade” (Krug­man 2010), for which I have duly apol­o­gized. How­ever in that apol­ogy I noted that Krug­man has also recently pub­lished a draft aca­d­e­mic paper pre­sent­ing a New Key­ne­sian model of debt defla­tion, “Debt, Delever­ag­ing, and the Liq­uid­ity Trap: A Fisher-Minsky-Koo approach” (Eggerts­son and Krug­man 2010), and I observed that I wish this paper was in fact a joke. Here’s why (this is a mod­i­fied extract from my forth­com­ing sec­ond edi­tion of Debunk­ing Eco­nom­ics, which will be pub­lished by Zed Books in about Sep­tem­ber or Octo­ber this year).

Though I applaud Krug­man for being prob­a­bly the first neo­clas­si­cal econ­o­mist to attempt to model Min­sky after decades of ignor­ing him, the model itself embod­ies every­thing that is bad in neo­clas­si­cal economics.

This reflect poorly, not so much Krugman—who has done the best he can with the neo­clas­si­cal toolset to model what he thinks Min­sky said—but on the toolset itself, which is utterly inap­pro­pri­ate for under­stand­ing the econ­omy in which we actu­ally live.

There is a pat­tern to neo­clas­si­cal attempts to increase the real­ism of their mod­els that is as pre­dictable as sunrise—but nowhere near as beau­ti­ful. The author takes the core model—which can­not gen­er­ate the real world phe­nom­e­non under discussion—and then adds some twist to the basic assump­tions which, hey presto, gen­er­ate the phe­nom­e­non in some highly styl­ized way. The math­e­mat­ics (or geom­e­try) of the twist is expli­cated, pol­icy con­clu­sions (if any) are then drawn, and the paper ends.

The flaw with this game is the very start­ing point, and since Min­sky put it best, I’ll use his words to explain it:

Can “It”—a Great Depression—happen again? And if “It” can hap­pen, why didn’t “It” occur in the years since World War II? These are ques­tions that nat­u­rally fol­low from both the his­tor­i­cal record and the com­par­a­tive suc­cess of the past thirty-five years. To answer these ques­tions it is nec­es­sary to have an eco­nomic the­ory which makes great depres­sions one of the pos­si­ble states in which our type of cap­i­tal­ist econ­omy can find itself. (Min­sky 1982, p. xii; empha­sis added)

The flaw in the neo­clas­si­cal game is that it never achieves Minsky’s final objec­tive, because the “twist” that the author adds to the basic assump­tions of the neo­clas­si­cal model are never incor­po­rated into its core. The basic the­ory there­fore remains one in which the key phe­nom­e­non under investigation—in this case, the cru­cial one Min­sky high­lights of how Depres­sions come about—cannot hap­pen. The core the­ory remains unaltered—rather like a dog that learns how to walk on its hind legs, but which then reverts to four legged loco­mo­tion when the per­for­mance is over.

Fig­ure 1: http://www.life.com/image/53019060;

Krug­man him­self is unlikely to stop walk­ing on two legs—he enjoys stand­ing out in the crowd of neo­clas­si­cal quadrupeds—but the pack will return to form once this cri­sis ulti­mately gives way to tranquility.

The schol­ar­ship of igno­rance and the igno­rance of scholarship

Krugman’s paper cites 19 works, three of which are non-neoclassical—Fisher’s clas­sic 1933 “debt defla­tion” paper, Minsky’s last book Sta­bi­liz­ing an Unsta­ble Econ­omy (Min­sky 1986), and Richard Koo’s The Holy Grail of Macro­eco­nom­ics: Lessons from Japan’s Great Reces­sion (Koo 2009). The other 16 include one empir­i­cal study (McK­in­sey Global Insti­tute 2010) and 15 neo­clas­si­cal papers writ­ten between 1989 (Bernanke and Gertler 1989) and 2010 (Wood­ford 2010)—5 of which are papers by Krug­man or his co-author.

Was this the best he could have done? Hardly! For starters, the one Min­sky ref­er­ence he used was, in my opin­ion, Minsky’s worst book—and I’m speak­ing as some­one in a posi­tion to know. Any­one want­ing to get a han­dle on the Finan­cial Insta­bil­ity Hypoth­e­sis from Min­sky him­self would be far bet­ter advised to read the essays in Can “It” Hap­pen Again? (Min­sky 1982), or his orig­i­nal book John May­nard Keynes (Min­sky 1975)—which despite its title is not a biog­ra­phy, but the first full state­ment of the hypothesis.

Krugman’s igno­rance of Min­sky prior to the cri­sis was par for the course amongst neo­clas­si­cal authors, since they only read papers pub­lished in what they call the lead­ing journals—such as the Amer­i­can Eco­nomic Review—which rou­tinely reject non-neoclassical papers with­out even ref­er­ee­ing them.

Almost all aca­d­e­mic papers on or by Min­sky have been pub­lished in non-mainstream journals—the Amer­i­can Eco­nomic Review (AER), for exam­ple, has pub­lished a grand total of two papers on or by Min­sky, one in 1957 (Min­sky 1957) and the other in 1971 (Min­sky 1971). If the AER and the other so-called lead­ing jour­nals were all you con­sulted as you walked up and down the library aisles, you wouldn’t even know that Min­sky existed—and most neo­clas­si­cals didn’t know of him until after 2007.

Before the “Great Reces­sion” too, you might have been jus­ti­fied in ignor­ing the other journals—such as the Jour­nal of Post Key­ne­sian Eco­nom­ics, the Jour­nal of Eco­nomic Issues, the Review of Polit­i­cal Econ­omy (let alone the Nebraska Jour­nal of Eco­nom­ics and Busi­ness where sev­eral of Hyman’s key papers were pub­lished) because these were “obvi­ously” infe­rior jour­nals, where papers not good enough to make it into the AER, the Eco­nomic Jour­nal, Econo­met­rica and so on were finally published.

But after the Great Reces­sion, when the authors who fore­saw the cri­sis came almost exclu­sively from the non-neoclassical world (Beze­mer 2009; Beze­mer 2010), and who were pub­lished almost exclu­sively in the non-mainstream jour­nals, neo­clas­si­cal econ­o­mists like Krug­man should have eaten hum­ble pie and con­sulted the jour­nals they once ignored.

That might have been dif­fi­cult once: which jour­nals would you look in, if all you knew was that the good stuff—the mod­els that actu­ally pre­dicted what hap­pened—hadn’t been pub­lished in the jour­nals you nor­mally con­sulted? But today, with the Inter­net, that’s not a prob­lem. Aca­d­e­mic econ­o­mists have as their bib­li­o­graphic ver­sion of Google the online ser­vice Econ­lit, and there it’s impos­si­ble to do even a cur­sory search on Min­sky and not find lit­er­ally hun­dreds of papers on or by him. For exam­ple, a search last month on the key­words “Min­sky” and “model” turned up 106 ref­er­ences (includ­ing three by yours truly–Keen 1995; Keen 1996; Keen 2001, and one more will prob­a­bly be there now ; Keen 2011).

Fig­ure 2: The result of a search on “Min­sky” and “model” in Econ­lit

27 of these are avail­able in linked full text (one of which is also by yours truly–Keen 1995; see Fig­ure 3), so that you can down­load them direct to your com­puter from within Econ­lit, while oth­ers can be located by search­ing through other online sources, with­out hav­ing to trun­dle off to a phys­i­cal library to get them. To not have any ref­er­ences at all from this rich lit­er­a­ture is sim­ply poor schol­ar­ship. Were Krug­man a stu­dent of mine, he’d get a fail for this part of his essay.

Fig­ure 3: My paper which is down­load­able directly from Econ­lit

So in attempt­ing to model a debt cri­sis in a cap­i­tal­ist econ­omy, Krug­man has used as his guide Fisher’s piv­otal paper, Minsky’s worst book, and about 10 neo­clas­si­cal ref­er­ences writ­ten by some­one other than him­self and his co-author. How did he fare?

Min­sky with­out money (let alone endoge­nous money)

One thing I can com­pli­ment Krug­man for is hon­estly about the state of neo­clas­si­cal macro­eco­nomic mod­el­ing before the Great Reces­sion. His paper opens with the obser­va­tion that:

If there is a sin­gle word that appears most fre­quently in dis­cus­sions of the eco­nomic prob­lems now afflict­ing both the United States and Europe, that word is surely “debt”” (Eggerts­son and Krug­man 2010, p. 1)

He then admits that pri­vate debt played no role in neo­clas­si­cal macro­eco­nomic mod­els before the crisis:

Given both the promi­nence of debt in pop­u­lar dis­cus­sion of our cur­rent eco­nomic dif­fi­cul­ties and the long tra­di­tion of invok­ing debt as a key fac­tor in major eco­nomic con­trac­tions, one might have expected debt to be at the heart of most main­stream macro­eco­nomic models—especially the analy­sis of mon­e­tary and fis­cal pol­icy. Per­haps some­what sur­pris­ingly, how­ever, it is quite com­mon to abstract alto­gether from this fea­ture of the econ­omy. Even econ­o­mists try­ing to ana­lyze the prob­lems of mon­e­tary and fis­cal pol­icy at the zero lower bound—and yes, that includes the authors—have often adopted representative-agent mod­els in which every­one is alike, and in which the shock that pushes the econ­omy into a sit­u­a­tion in which even a zero inter­est rate isn’t low enough takes the form of a shift in everyone’s pref­er­ences. (p. 2; empha­sis added)

How­ever, from this mea culpa, it’s all down­hill, because Krug­man makes no fun­da­men­tal shift from a neo­clas­si­cal approach; all he does is mod­ify his base “New Key­ne­sian” model to incor­po­rate debt as he per­ceives it. On this front, he falls into the neo­clas­si­cal trap of being inca­pable of con­ceiv­ing that aggre­gate debt can have a macro­eco­nomic impact:

Ignor­ing the for­eign com­po­nent, or look­ing at the world as a whole, the over­all level of debt makes no dif­fer­ence to aggre­gate net worth — one person’s lia­bil­ity is another person’s asset. (p. 3)

This one sen­tence estab­lishes that Krug­man has failed to com­pre­hend Min­sky, who realized—as did Schum­peter and Marx before him—that grow­ing debt in boosts aggre­gate demand. Min­sky put it this way:

If income is to grow, the finan­cial mar­kets… must gen­er­ate an aggre­gate demand that, aside from brief inter­vals, is ever ris­ing. For real aggre­gate demand to be increas­ing… it is nec­es­sary that cur­rent spend­ing plans, summed over all sec­tors, be greater than cur­rent received income … It fol­lows that over a period dur­ing which eco­nomic growth takes place, at least some sec­tors finance a part of their spend­ing by emit­ting debt or sell­ing assets. (Min­sky 1982, p. 6)

Schum­peter made the same case in a more sys­tem­atic way, by focus­ing upon the role of entre­pre­neurs in cap­i­tal­ism. He made the point that an entre­pre­neur is some­one with an idea but not nec­es­sar­ily the finance needed to put that idea into motion. The entre­pre­neur there­fore must bor­row money to be able to pur­chase the goods and labor needed to turn her idea into a final prod­uct. This money, bor­rowed from a bank, adds to the demand for exist­ing goods and ser­vices gen­er­ated by the sale of those exist­ing goods and services:

THE fun­da­men­tal notion that the essence of eco­nomic devel­op­ment con­sists in a dif­fer­ent employ­ment of exist­ing ser­vices of labor and land leads us to the state­ment that the car­ry­ing out of new com­bi­na­tions takes place through the with­drawal of ser­vices of labor and land from their pre­vi­ous employ­ments… this again leads us to two here­sies: first to the heresy that money, and then to the sec­ond heresy that also other means of pay­ment, per­form an essen­tial func­tion, hence that processes in terms of means of pay­ment are not merely reflexes of processes in terms of goods. In every pos­si­ble strain, with rare una­nim­ity, even with impa­tience and moral and intel­lec­tual indig­na­tion, a very long line of the­o­rists have assured us of the opposite…

From this it fol­lows, there­fore, that in real life total credit must be greater than it could be if there were only fully cov­ered credit. The credit struc­ture projects not only beyond the exist­ing gold basis, but also beyond the exist­ing com­mod­ity basis. (Schum­peter 1934, pp. 95, 101; empha­sis added)

This argu­ment is a piv­otal part of my analy­sis, in which I define aggre­gate demand as the sum of income plus the change in debt—as reg­u­lar read­ers of this blog would know.

Krug­man also has no under­stand­ing of the endo­gene­ity of credit money—that banks cre­ate an increase in spend­ing power by simul­ta­ne­ously cre­at­ing money and debt. Lack­ing any appre­ci­a­tion of how money is cre­ated in a credit-based econ­omy, Krug­man sees lend­ing as sim­ply a trans­fer of spend­ing power from one agent to another, and nei­ther banks nor money exist in the model he builds.

Instead, in place of the usual neo­clas­si­cal trick of mod­el­ing the entire econ­omy as a sin­gle rep­re­sen­ta­tive agent, he mod­els it as two agents, one of whom is impa­tient while the other is patient. Debt is sim­ply a trans­fer of spend­ing power from the patient agent to the impa­tient one, and there­fore the debt itself has no macro­eco­nomic impact—it sim­ply trans­fers spend­ing power from the patient agent to the impa­tient one. The only way this can have a macro­eco­nomic impact is if the “impa­tient” agent is some­how con­strained in ways that the patient agent is not, and that’s exactly how Krug­man con­cocts a macro­eco­nomic story out of this neo­clas­si­cal micro­eco­nomic fantasy:

In what fol­lows, we begin by set­ting out a flexible-price endow­ment model in which “impa­tient” agents bor­row from “patient” agents [where what is bor­rowed is not money, but ““risk-free bonds denom­i­nated in the con­sump­tion good” (p. 5)], but are sub­ject to a debt limit. If this debt limit is, for some rea­son, sud­denly reduced, the impa­tient agents are forced to cut spend­ing; if the required delever­ag­ing is large enough, the result can eas­ily be to push the econ­omy up against the zero lower bound. If debt takes the form of nom­i­nal oblig­a­tions, Fish­er­ian debt defla­tion mag­ni­fies the effect of the ini­tial shock. (Eggerts­son and Krug­man 2010, p. 3)

He then gen­er­al­izes this with “a sticky-price model in which the delever­ag­ing shock affects out­put instead of, or as well as, prices” (p. 3), brings in nom­i­nal prices with­out money by imag­in­ing “that there is a nom­i­nal gov­ern­ment debt traded in zero sup­ply… We need not explic­itly intro­duce the money sup­ply” (p. 9), mod­els pro­duc­tion under imper­fect com­pe­ti­tion (p. 11)—yes, the pre­ced­ing analy­sis was of a no-production econ­omy in which agents sim­ply trade exist­ing “endow­ments” of goods dis­trib­uted like Manna from heaven—dds a Cen­tral Bank that sets the inter­est rate (in an econ­omy with­out money) by fol­low­ing a Tay­lor Rule, and on it goes.

The math­e­mat­ics is com­pli­cated, and real brain power was exerted to develop the argument—just as, obvi­ously, it takes real brain power for a poo­dle to learn how to walk on its hind legs. But it is the wrong math­e­mat­ics because the analy­sis com­pares two equi­lib­ria sep­a­rated by time rather than being truly dynamic by ana­lyz­ing change over time regard­less of whether equi­lib­rium applies or not, and wasted brain power because the ini­tial premise—that aggre­gate debt has no macro­eco­nomic effects—was false.

Krug­man at least acknowl­edges the for­mer problem—that the dynam­ics are crude:

The major lim­i­ta­tion of this analy­sis, as we see it, is its reliance on strate­gi­cally crude dynam­ics. To sim­plify the analy­sis, we think of all the action as tak­ing place within a sin­gle, aggre­gated short run, with debt paid down to sus­tain­able lev­els and prices returned to full ex ante flex­i­bil­ity by the time the next period begins. (p. 23)

But even here, I doubt that he would con­sider gen­uine dynamic mod­el­ing with­out the clumsy neo­clas­si­cal device of assum­ing that all eco­nomic processes involve move­ments from one equi­lib­rium to another. Cer­tainly this paper remains true to the per­spec­tive he gave in 1996 when speak­ing to the Euro­pean Asso­ci­a­tion for Evo­lu­tion­ary Polit­i­cal Econ­omy:

I like to think that I am more open-minded about alter­na­tive approaches to eco­nom­ics than most, but I am basi­cally a maximization-and-equilibrium kind of guy. Indeed, I am quite fanat­i­cal about defend­ing the rel­e­vance of stan­dard eco­nomic mod­els in many situations…

He described him­self as an “evo­lu­tion groupie” to this audi­ence, but then made the telling obser­va­tion that:

Most econ­o­mists who try to apply evo­lu­tion­ary con­cepts start from some deep dis­sat­is­fac­tion with eco­nom­ics as it is. I won’t say that I am entirely happy with the state of eco­nom­ics. But let us be hon­est: I have done very well within the world of con­ven­tional eco­nom­ics. I have pushed the enve­lope, but not bro­ken it, and have received very wide­spread accep­tance for my ideas. What this means is that I may have more sym­pa­thy for stan­dard eco­nom­ics than most of you. My crit­i­cisms are those of some­one who loves the field and has seen that affec­tion repaid.

Krugman’s obser­va­tions on method­ol­ogy in this speech also high­light why he was inca­pable of truly com­pre­hend­ing Minsky—because he still starts from the premise that neo­clas­si­cal eco­nom­ics itself has proven to be false, that macro­eco­nom­ics must be based on indi­vid­ual behavior:

Eco­nom­ics is about what indi­vid­u­als do: not classes, not “cor­re­la­tions of forces”, but indi­vid­ual actors. This is not to deny the rel­e­vance of higher lev­els of analy­sis, but they must be grounded in indi­vid­ual behav­ior. Method­olog­i­cal indi­vid­u­al­ism is of the essence. (Krug­man 1996; emphases added)

No it’s not: method­olog­i­cal indi­vid­u­al­ism is part of the prob­lem, as the Sonnenschein-Mantel-Debreu con­di­tions establish—a point that neo­clas­si­cal econ­o­mists have failed to com­pre­hend, but whose import was real­ized by Alan Kirman:

If we are to progress fur­ther we may well be forced to the­o­rise in terms of groups who have col­lec­tively coher­ent behav­iour. Thus demand and expen­di­ture func­tions if they are to be set against real­ity must be defined at some rea­son­ably high level of aggre­ga­tion. The idea that we should start at the level of the iso­lated indi­vid­ual is one which we may well have to aban­don. (Kir­man 1989, p. 138)

So while Krug­man reaches some pol­icy con­clu­sions with which I concur—such as argu­ing against gov­ern­ment aus­ter­ity pro­grams dur­ing a debt-deflationary crisis—his analy­sis is proof for the pros­e­cu­tion that even “cut­ting edge” neo­clas­si­cal eco­nom­ics, by con­tin­u­ing to ignore the role of aggre­gate debt, is part of the prob­lem of the Great Reces­sion, not part of its solution.

Ref­er­ences

Bernanke, B. S. and M. Gertler (1989). “Agency Costs, Net Worth and Busi­ness Fluc­tu­a­tions.” Amer­i­can Eco­nomic Review
79: 14–31.

Beze­mer, D. J. (2009). “No One Saw This Com­ing”: Under­stand­ing Finan­cial Cri­sis Through Account­ing Mod­els. Gronin­gen, The Nether­lands, Fac­ulty of Eco­nom­ics Uni­ver­sity of Groningen.

Beze­mer, D. J. (2010). “Under­stand­ing finan­cial cri­sis through account­ing mod­els.” Account­ing, Orga­ni­za­tions and Soci­ety
35(7): 676–688.

Eggerts­son, G. B. and P. Krug­man (2010). Debt, Delever­ag­ing, and the Liq­uid­ity Trap: A Fisher-Minsky-Koo approach.

Keen, S. (1995). “Finance and Eco­nomic Break­down: Mod­el­ing Minsky’s ‘Finan­cial Insta­bil­ity Hypoth­e­sis.’.” Jour­nal of Post Key­ne­sian Eco­nom­ics
17(4): 607–635.

Keen, S. (1996). “The Chaos of Finance: The Chaotic and Marx­ian Foun­da­tions of Minsky’s ‘Finan­cial Insta­bil­ity Hypoth­e­sis.’.” Economies et Soci­etes
30(2–3): 55–82.

Keen, S. (2001). Minsky’s The­sis: Key­ne­sian or Marx­ian? The eco­nomic legacy of Hyman Min­sky. Vol­ume 1. Finan­cial Key­ne­sian­ism and mar­ket insta­bil­ity. R. Bellofiore and P. Ferri. Chel­tenham, U.K., Edward Elgar: 106–120.

Keen, S. (2011). “A mon­e­tary Min­sky model of the Great Mod­er­a­tion and the Great Reces­sion.” Jour­nal of Eco­nomic Behav­ior & Orga­ni­za­tion
In Press, Cor­rected Proof.

Kir­man, A. (1989). “The Intrin­sic Lim­its of Mod­ern Eco­nomic The­ory: The Emperor Has No Clothes.” Eco­nomic Jour­nal
99(395): 126–139.

Koo, R. (2009). The Holy Grail of Macro­eco­nom­ics: Lessons from Japan’s Great Reces­sion. Wiley.

Krug­man, P. (1996). “What Econ­o­mists Can Learn From Evo­lu­tion­ary The­o­rists.” from http://web.mit.edu/krugman/www/evolute.html.

Krug­man, P. (2010). “THE THEORY OF INTERSTELLAR TRADE.” Eco­nomic Inquiry
48(4): 1119–1123.

McK­in­sey Global Insti­tute (2010). Debt and Delever­ag­ing: The Global Credit Bub­ble and its Eco­nomic Consequences.

Min­sky, H. (1957). “Mon­e­tary Sys­tems and Accel­er­a­tor Mod­els.” Amer­i­can Eco­nomic Review
67: 859–883.

Min­sky, H. P. (1971). “The Allo­ca­tion of Social Risk: Dis­cus­sion.” Amer­i­can Eco­nomic Review
61(2): 389–390.

Min­sky, H. P. (1975). John May­nard Keynes. New York, Colum­bia Uni­ver­sity Press.

Min­sky, H. P. (1982). Can “it” hap­pen again? : essays on insta­bil­ity and finance. Armonk, N.Y., M.E. Sharpe.

Min­sky, H. P. (1986). Sta­bi­liz­ing an unsta­ble econ­omy, Twen­ti­eth Cen­tury Fund Report series, New Haven and Lon­don: Yale Uni­ver­sity Press.

Schum­peter, J. A. (1934). The the­ory of eco­nomic devel­op­ment : an inquiry into prof­its, cap­i­tal, credit, inter­est and the busi­ness cycle. Cam­bridge, Mass­a­chu­setts, Har­vard Uni­ver­sity Press.

Wood­ford, M. (2010). Sim­ple Ana­lyt­ics Of The Gov­ern­ment Expen­di­ture Mul­ti­plier. Nber Work­ing Paper Series. Cam­bridge, MA, National Bureau Of Eco­nomic Research.

About Steve Keen

I am a professional economist and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous debts accumulated in Australia, and our very low rate of inflation.
Bookmark the permalink.

68 Responses to Like a Dog Walking on its Hind Legs”: Krugman’s Minsky Model

  1. Steve Keen says:

    All this forms a large part of my rewrite of Debunk­ing Eco­nom­ics AK–especially the inva­lid­ity of util­ity theory.

  2. mahaish says:

    hey steve form virginia,

    cant be too hard on benanke, because he essen­tially runs a bank, the cen­tral bank.

    and in pol­icy terms, the cen­tral bank can only effect three things, the total level of liq­uid­ity in the bank­ing sys­tem, the com­po­si­tion of that liq­uid­ity, and the yield curve on that liquidity.

    so when we have a house­hold bal­ance sheet prob­lem, the only way he and the cen­tral bank can improve the sit­u­a­tion is to try and reduce the debt ser­vice bur­den on the economy.

    and when you have an offi­cial pol­icy rate at near zero, there’s no where to go for a cen­tral bank.

    thats when con­gress and trea­sury should get involved

    far to lit­tle and far too late in the case of the yanks im afraid

  3. mahaish says:

    yes , it sort of depends if one is a glass half full or half empty kind of person.

    is the exter­nal deficit, a case liv­ing beyond our means, or for­eign­ers desire to hold oz dol­lar denom­i­nated assetts.

    which ever way we look at it, the exter­nal deficit needs to be financed, and right now its being done care of for­eign­ers invest­ing directly in our econ­omy and financ­ing the bor­row­ing requirment of the bank­ing system.

    and right now the gov­ern­ment can dream of run­ning bud­get sur­pluses, because of those sur­plus dol­lar denom­i­nated cur­rency hold­ings in our bank­ing sys­tem, but even that appears ephemeral.

    now if for­eign­ers change their mind and stop financ­ing the exter­nal deficit, then the gov­ern­ment will have to cover the short fall. unless it wants mas­sive unemployment

    a rea­son­able chunk of our credit cre­ation engine is exter­nally financed, and that rep­re­sents our sin­gle great­est vul­ner­a­bil­ity, namely term fund­ing mis­match and rollover risk in the bank­ing system.

    if we should ever wit­nessed what tran­spired in the inter war period where cap­i­tal moved from the periph­ery back to the cen­tre of bank cap­i­tal, then gov­ern­ment will have to re write the play book on on the fund­ing mech­a­nism for the local bank­ing sys­tem, vastly expand­ing the role and cap­i­tal base of the cen­tral bank to cover the national devel­op­men­tal needs of the economy

    in the process, the gov­ern­ment will have to also re write the play book and dis­man­tle igbc(inter tem­po­ral bud­getary constraint).

    i think thats where we are headed

    but i dont nece­ser­raly buy into the argue­ment ak, that larger deficits unbacked by the bond mar­ket, ulti­mately leads to a cur­rency melt down.

    ulti­mately the inter­nal value of the cur­rency deter­mines the exter­nal value of the cur­rency . and the inter­nal value of the cur­rency is deter­mined by the unem­ploy­ment rate and the wage level.

    so as long as those large deficits are financ­ing pro­duc­tive endeav­ours , then the cur­rency in the long run is sound, despite short term blips.

    alot will depend on whether we end up being the next saudi ara­bia or not as some in the min­ing indus­try seem to think.

  4. peterjbolton says:

    @ Steve
    “The same applies in spades to Aus­tralia (though “spades” may save us as well, given our huge min­eral export­ing capacity).”

    Aus­tralia also exports grains, diary and fruit and veg­eta­bles; not much else as the fish­ing indus­try moved off­shore many years ago.

    Dig­ging holes or “spades” will soon dry up this time around, but one must ques­tion just what value is Aus­tralia actual receiv­ing from this indus­try as it appears that most prof­its are freely exported through div­i­dends to for­eign share­hold­ers, bond­hold­ers — as Aus­tralian Banks are not the big lenders to this indus­try. So there are jobs.

    Inter­est­ingly, WA where the min­ing indus­try is in boom time big-time — the Lib­eral scum-bag gov­ern­ment has been increas­ing util­ity costs faster than than an Olympian ath­lete jump­ing hur­dles and the local MSM rag reported a few days ago that the new rate rises for elec­tric­ity and gas were adding +$3000 per annum. Too bad if you hap­pen to be a pen­sioner as this means you can’t afford to eat any more. The rag also reported on the great job that the WA police are doing hav­ing raised over $70M (by lay­ing under bushes and radar­ing the unsus­pect­ing mas­ter crim­i­nals doing a few km/per hour over the speed limit or hav­ing more than 2 beers after work) which was des­per­ately needed for the ail­ing annual bud­get.
    And while the WA gov­ern­ment won the GST tax grab from Gillard –the-Tax Queen (“A tax, a Tax, my king­dom for a Tax”) I am left to won­der, just what this Min­ing Boom brings to Australia.

    Speak­ing of Fraud, excel­lent arti­cle of where the Gold be…

    http://jessescrossroadscafe.blogspot.com/2011/03/dwindling-comex-warehouse-supply-of.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed:+JessesCafeAmericain+(Jesse’s+Caf%C3%A9+Am%C3%A9ricain)

  5. OldSkeptic says:

    I’ve always main­tained that neo-liberal eco­nom­ics was purely a polit­i­cal (the­o­log­i­cal?) ide­ol­ogy, that had no basis in the facts. Any­one remem­ber that howler of ‘the twin deficits the­ory’ to take the most ridicu­lous example.

    Rather it was an attempt to return to some sort of imag­ined Vic­to­rian UK economic/social ideal (which never actu­ally existed).

    It is con­tra­dic­tory to Adam Smith (who must turn in his grave many times a day as he is mis­quoted) and rejected Marx’s insights (as well as Keynes, Myn­sky, et al). It is also con­tra­dic­tory to any sort of social demo­c­ra­tic model.

    There was noth­ing sur­pris­ing about this, Friedman’s TV series “Free to Choose’ was quite explicit about the ‘ideal eco­nomic soci­ety’ he envis­aged, non demo­c­ra­tic colo­nial Hong Kong being his poster child, with all those peons beaver­ing away, liv­ing in a hole in the ground, for their betters.

    By and large most eco­nomic (and hence polit­i­cal) elites signed up to it as a won­der­ful fig leaf to cover a mas­sive wealth trans­fer to them and the finan­cial­i­sa­tion of economies. The famous ‘Wash­ing­ton Con­sen­sus’ being the inter­na­tion­alised version.

    What­ever the ‘the­ory’ they expound, the actions they pro­pose are always the same:
    Cut taxes to the rich.
    Pri­vati­sa­tion.
    Smash unions.
    End social secu­rity, pub­lic health, etc.
    Wage infla­tion bad, asset infla­tion good.
    Cut tar­iffs.
    Pri­vate debt (espe­cially for lever­aged bets) good, Govt debt bad.
    Etc, etc, sadly etc.

    So you can prove how wrong it is until the cows come home and it wont make the slight­est dif­fer­ence. It is sim­ply too entrenched in the ‘elites’ and they have a VERY strong vested inter­est in keep­ing it going as long as pos­si­ble (which the way things are going wont be very much longer now).

    The analo­gies to soviet ‘econ­o­mists’ are legion. Right up to the last minute I’m sure many there were writ­ing away ‘prov­ing’ that their sys­tem was per­form­ing won­der­fully and where it was not, just a more rigourous appli­ca­tion of their ‘the­o­ries’ would solve every­thing (“we can’t feed our­selves, we need more col­lec­tivi­sa­tion comrade”).

  6. barrythompson says:

    @ Steve, Mahaish, Brett123.

    Can any­one rec­om­mend a good book / source that explains the national accounts and bal­ance of pay­ments and their rela­tion­ship with bank bal­ance sheets?

    For exam­ple, why does an export sur­plus (that cre­ates a cur­rent account sur­plus) boost GDP — what is the mech­a­nism of account­ing at work here?

  7. LyndonB says:

    Steve,

    you describe Krug­man as a neo-classical. But on prac­ti­cal pol­icy grounds, what would you do dif­fer­ently? He has advo­cated ZIRP and large enough fis­cal stim­u­lus to get econ­omy back to full health again. Clearly he is some­one who under­stands impor­tance of the demand side of the econ­omy. Mere fact that he accepts Koo’s argu­ments means he under­stands that debt and time play roles in deter­min­ing eco­nomic outcomes.

  8. Steve Keen says:

    Hi Lyn­donB,

    For starters, I’d abol­ish the debt that should never have been issued in the first place, espe­cially the roughly 60% of GDP worth increase in mort­gage debt since 1990. That would neces­si­tate putting much of the finan­cial sec­tor into receivership–akin to what the Swedish did dur­ing their cri­sis towards the end of the last cen­tury. Once the bank­ing sec­tor had been reori­ented towards pro­vid­ing work­ing cap­i­tal for the indus­trial and ser­vice sec­tors, then it would be re-privatized.

    Whether or not a large enough fis­cal stim­u­lus and ZIRP could get the econ­omy back to full health again, I believe that polit­i­cal con­sid­er­a­tions will pre­vent that fis­cal stim­u­lus from ever being that large. The US will end up in the zom­bie world that Japan has inhab­ited for the last 2 decades by fol­low­ing even Krugman’s uncon­ven­tional poli­cies, since those poli­cies don’t address the exces­sive level of pri­vate debt (Krug­man, after all, doesn’t believe that the aggre­gate level of debt matters).

  9. Lloydie says:

    It is because neo clas­si­cists are so stub­born in their con­vic­tions that debt does not mat­ter that I have the oppor­tu­nity to profit from their idiocy.

    Krug­man, keep up the good work mis­lead­ing Key­ne­sian fools.

    You’re the man Steve. Thanks for all your enlight­en­ing work. With­out you I would have made far less money.

  10. Lloydie says:

    haha — bril­liant analysis.

  11. Pingback: Sense from Krugman on private debt | Steve Keen's Debtwatch

  12. Pingback: Sense from Krugman on private debt « Real-World Economics Review Blog

  13. Pingback: Does it Matter if Early Models are Flawed? « Unlearning Economics

  14. Pingback: How Free-Market Fundamentalists are Hopelessly Wrong, III: money, debt and blindness | Better Nature: commentary by Geoff Davies

  15. Pingback: On private debt | Credit Writedowns

  16. Pingback: DSGE, Epicycles and Neoclassical Methodology « Unlearning Economics

  17. Pingback: Geert Noels : Pour comprendre la crise mieux vaut suivre les traces d’ Hyman Minsky que la voie sans issue du désormais idéologue patenté Paul Krugman « le blog a lupus…un regard hagard sur l'écocomics et ses finances….

  18. Pingback: Misinterpretations in Mainstream Economics | Unlearning Economics

Leave a Reply