Mort­gage Finance Asso­ci­a­tion of Aus­tralia Talk

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The screen cap­ture video of my talk at this sem­i­nar gives an overview of both my eco­nomic analy­sis and my views on the Aus­tralian hous­ing mar­ket. Sev­eral blog mem­bers have com­mented that it’s the best overview I’ve pro­vided, so I’ve put it on the essen­tial read­ings list.

I spoke at a MFAA Pro­fes­sional Devel­op­ment Day, fol­low­ing a speaker who pointed out that most deci­sions are made by the emo­tional com­po­nents of our brains–hence some of my ref­er­ences to using the CEO seg­ment of your brain instead.

Steve Keen’s Debt­watch Pod­cast 

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Click here for the Pow­er­Point slides.

About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, 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 private debts accumulated globally, and our very low rate of inflation.
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  • ak


    I fully agree with the ini­tial posi­tion pre­sented by VK.

    I did not want to wade into the dis­cus­sion about the non-exis­tence of the “bank vault” and wrong cau­sa­tion in the model described in one of the pre­vi­ous posts as I didn’t think the time was right but this issue is too impor­tant to be left as it is.

    The mod­els dis­cussed now are mis­cal­i­brated and this explains why mod­er­ate fis­cal stim­u­la­tion was suc­cess­ful in the US in 2009 (pre­vented slid­ing the global econ­omy into another Great Depres­sion). The addi­tional debt increase con­tri­bu­tion to GDP is not 0% of d(debt)/dt as the neo­clas­si­cals would like us to believe but it is also not 100% of d(aggregate_debt_of_the_private_sector)/dt

    (Note. I am not talk­ing about the net posi­tion but about the sum of all the loans)

    The coef­fi­cient could be maybe 20–40% ( I did a rough esti­ma­tion a long time ago so this num­ber may be wrong). This cor­re­sponds exactly to the amount of money spent on the sce­nar­ios dis­cussed by VK com­pared with the total amount of money cre­ated by the bank­ing sys­tem.

    If we ini­tially the ignore sec­ondary effects like spend­ing mul­ti­plier we should look at the amount of money injected to the econ­omy in a period of time which is spent on buy­ing new prod­ucts and ser­vices. This flow (accounted for as a com­po­nent of “invest­ment”) passes through the cir­cuit and is even­tu­ally with­drawn in the form of sav­ings. The rest of the money used to buy prop­er­ties on the sec­ondary mar­ket is sim­ply saved as deposits, used to pur­chase other exist­ing assets or to repay loans. Only some of the money is used to finance con­sump­tion. There is also some stim­u­la­tory effect due to spend­ing some of the bor­rowed money on Real Estate ser­vices, addi­tional costs like removals, etc. Some money is with­drawn as taxes or may flow over­seas if there is a trade deficit.

    How­ever dur­ing the debt delever­ag­ing phase dif­fer­ent effects take place and the impact of d(Debt)/dt on GDP may me much higher. Peo­ple repay loans and all the credit money is sim­ply destroyed.

    Look­ing at the NIPA accounts sys­tem we may eas­ily be con­fused as:
    1. “sav­ing” includes an increase in bank deposits, bonds but also pur­chas­ing com­pany equity — this flow of money is recy­cled and deposits do not change when one buys shares
    2. buy­ing a house even for myself is con­sid­ered to be invest­ment rather than con­sump­tion what is counter-intu­itive for non-econ­o­mists
    3. not all the invest­ment is financed by tak­ing new loans — some is financed by sav­ing (see 1)
    4. there is an imputed income paid to one­self by a home owner

    All of these issues are dis­cussed in detail in “Mon­e­tary Eco­nom­ics” W. God­ley and M. Lavoie
    espe­cially in Chap­ter 2. 

    Every­thing is explained there in detail and I do not want to repeat the analy­sis.

    AD(t) = GDP(t) by def­i­n­i­tion and this is not the for­mula one can play with. 

    What we need to analyse is what con­sti­tutes the out­flows of money at the nodes of the model and what con­sti­tutes the inflows of money. One of the com­po­nents of the inflows to the house­hold sec­tor is d(Debt)/dt

    There is even a sec­tion lat­ter in the book (which I haven’t thor­oughly analysed yet) where a sce­nario with “an increase in the gross new loans to per­sonal income ratio” was sim­u­lated by W.G. and M.L. what led to very famil­iar look­ing curves. Yes there was a spike in GDP when new lend­ing was increased but then there was a hang­over.

    (sec­tion 11.8.2 Fig­ure 11.8B — see below)

  • I dis­agree AK, on the basis of the for­mula that vk sub­se­quently agreed to: AD(t) = GDP(t-tau) + dD(t)/dt. This is some­thing you will find in Schum­peter, Min­sky and Marx. I believe that the God­ley et al analy­sis on this falsely brings in a con­ser­va­tion law that does not apply in our credit dri­ven econ­omy.

    Schum­peter put it best:

    THE fun­da­men­tal notion that the essence of eco­nomic de-vel­op­ment 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)

  • ak


    We must not con­fuse dif­fer­ence equa­tions and dis­crete time mod­el­ling with dif­fer­en­tial equa­tions and con­tin­u­ous time domain. There­fore aggregate_expenditure(t) must always be equal to aggregate_income(t) (con­tin­u­ous time) or aggregate_expenditure(t_n) = aggregate_income(t_n) (dis­crete time)

    It is not that AD(t) = GDP (t minus lag) + dD(t)/dt

    t — tau is used in dif­fer­ence equa­tions and it is t_n-1

    Nyquist-Shan­non sam­pling the­o­rem binds together syn­chro­nous-dig­i­tal (dis­crete) and ana­log (con­tin­u­ous time) sig­nal pro­cess­ing approaches. As long as sam­pling fre­quency is high enough both approaches are equiv­a­lent. W. God­ley was using dis­crete time domain but this doesn’t change any­thing as his mod­els can eas­ily be trans­posed to the con­tin­u­ous time domain.

    If we have pos­i­tive dD(t)/dt (new mort­gage loans cre­ation) this will be seen in NIPA as a tem­po­rary increase in both I (invest­ment) and S (sav­ings) as (by def­i­n­i­tion)

    Y = C + I + G + (X – M) = C + S + T 

    Nobody will notice what’s wrong. Every­one is happy as the econ­omy is hum­ming, invest­ment and sav­ings have risen, etc… In fact C will also rise (due to the spend­ing mul­ti­plier — see below).

    It is a bit more tricky to see the impact of ris­ing con­sumer credit as it may man­i­fest itself as falling S (com­pen­sated by ris­ing T-G lead­ing to a bud­get sur­plus or/and falling X-M lead­ing to trade and cur­rent account deficits) or may not be vis­i­ble at all in NIPA — except for an unex­pected growth of C

    Let’s split house­holds into H1 (savers) and H2 (spenders) and assume that G=T and X=M.

    H2 draw new credit from the bank­ing sec­tor at a rate dL/dt = S2 and their con­tri­bu­tion to sav­ing is (-S2) They spend this amount of money on plasma TVs, vodka, gam­bling, overeat­ing, etc, what makes them instantly happy. This extra spend­ing increases C by S2 and the GDP increases (all things equal and assum­ing spare pro­duc­tive capac­i­ties) by S2 in the first period as well. The mech­a­nism is self-feed­ing as in the sec­ond period the econ­omy grows fur­ther. The length of the period (the time con­stant) is deter­mined by the aver­age pro­duc­tion-sale period which is closely related to the money veloc­ity in the pro­duc­tive econ­omy (pro­vided that we defined the money cor­rectly). Can the econ­omy grow for­ever because of the extra load­ing? Assum­ing lin­ear tax­a­tion and zero mar­ginal propen­sity to import it is up to house­holds H1 to remove the addi­tional flow. Let’s assume that they save 20% of their extra income (mar­ginal propen­sity to save) which is equal to 0.5 of GDP. So they can remove 0.1 of the delta. Let’s assume zero mar­ginal sav­ing propen­sity of H2 The new equi­lib­rium will be reached at S1 = S2 but know­ing that delta S1 = 0.1*delta Y

    we will get delta Y = 10* dL/dt

    In this model as long as no inde­pen­dent invest­ment deci­sions are made, I=S

    Obvi­ously the stim­u­la­tory effect of con­sumer debt load­ing on the econ­omy may be throt­tled due to tax­a­tion, changes in G (“auto­matic sta­bilis­ers”) and non-zero mar­ginal propen­sity to import. How­ever I can guar­an­tee that no neo­clas­si­cal econ­o­mists will spot the real cause of the mys­te­ri­ous great mod­er­a­tion… that is the growth of the can­cer of debt and deposits in the bank­ing sec­tor gob­bling the whole econ­omy (con­tribut­ing to over 10% of GDP in Aus­tralia now — not by new credit but by income redis­tri­b­u­tion). We also need to con­sider sec­ondary effects of the invest­ment deci­sions where the accel­er­a­tor kicks in. This is the real dynam­ics which is dri­ven by credit binge and when debt load­ing goes into reverse, the mul­ti­plier also goes into reverse and the neg­a­tive effects of the cri­sis can only be mod­er­ated by increased gov­ern­ment deficits as long as this is polit­i­cally palat­able.

    In the model out­lined above the quan­tity of money (credit) does not affect the GDP as the cau­sa­tion doesn’t go that way. Mon­e­tarism is incor­rect and the lag is not con­stant. There is no volt­age in eco­nom­ics and the value of GDP(2011) (flow) mainly depends on the value of GDP(2010) (another flow) and some other flows not on the stock of M1, M2 or M3 how­ever the stock of debt (and sav­ings) does influ­ence the flows due to inter­ests accrued on loans (again this is invis­i­ble in the highly aggre­gated GDP sta­tis­tics).

    In this con­text to analyse the credit impulse one has to dis­ag­gre­gate the changes in debt into the com­po­nent related to repay­ing the old long-term loans — delever­ag­ing — and tak­ing new short-term pro­duc­tive loans (increas­ing the size of the revolv­ing fund used to finance pro­duc­tion). If the half-decay time of loans (“money veloc­ity”) is short­ened, there can be an increase in the eco­nomic activ­ity even in a pure credit econ­omy when the over­all level of debt decreases. 

    I am fully aware that the analy­sis pre­sented above is extremely over­sim­pli­fied but my goal was to show how to tackle the mys­tery the impact of debt super­charg­ing on the econ­omy rather than to build a dynamic model since what’s really inter­est­ing is the behav­iour of the spec­u­la­tors (affected by the changes in the value of assets), the impact on invest­ment in pro­duc­tion (the accel­er­a­tor effect), changes in the infla­tion rate and unem­ploy­ment, sec­ondary effects caused by the changes in the inter­est rate etc… It will take years to get every­thing right but as long as the basic model is not sound I can guar­an­tee that the model sim­ply won’t work.

  • ak


    Ques­tion­ing account­ing prin­ci­ples will not lead us any­where. I am com­ing from a per­spec­tive of a guy who first writes down num­bers on a piece of paper and then tries to draw any con­clu­sions. This is the only work­ing approach in engi­neer­ing even if analy­sis and design involve top-down stages — induc­tive think­ing is the key to get every­thing right. So I will first exam­ine bal­ance sheets of a firm, worker and a bank, then aggre­gate them and add the trea­sury and the cen­tral bank. Only at this stage I can start exam­in­ing the nature of rela­tion­ships between parts of the sys­tem and in the end — the nature of money.

    W. Godley’s mod­els are con­sis­tent with the real­ity, please find a sin­gle hole in his maths or any incon­sis­tency between his mod­els and the real­ity. If a model is incon­sis­tent with the account­ing iden­ti­ties then it is not a model of the finan­cial econ­omy. Do I need to quote every­thing here again? If after a pro­duc­tive cycle all the com­modi­ties are con­sumed (or invested as pro­duc­tive cap­i­tal) by the work­ers, cap­i­tal­ists and bankers the ini­tial loan can be repaid and credit/money destruc­tion can occur — but this obvi­ously doesn’t make sense in the real life so the next pro­duc­tive cycle starts imme­di­ately. It is not the quan­tity of money lent what deter­mines the out­come. It is the amount of real assets which can be used as a lien to secure a loan and the expected rev­enue, costs and prof­its. The only rel­e­vant lag is deter­mined by the pro­duc­tion period length what is not con­stant because some­times sell­ing pro­duc­tion takes longer than antic­i­pated (and varies depend­ing on the indus­try). After aggre­gat­ing mul­ti­ple firms the quan­tity of money (the size of the revolv­ing fund of credit) has its upper limit because it is deter­mined by the value of the real cap­i­tal goods (assets) but it is also an arte­fact of the busi­ness activ­ity — hence there is another fun­da­men­tal error in the cau­sa­tion of the mod­els stat­ing that the amount of credit deter­mines the pro­duc­tion level. Again — it is the value of the pro­duc­tive (real) cap­i­tal and the demand. The demand depends on the wages, changes in con­sumer credit and invest­ment deci­sions regard­ing the next cycle. That’s why QE doesn’t change any­thing — banks don’t lend despite rolling in liq­uid­ity and com­pa­nies have a lot of cash sit­ting on their accounts and do noth­ing until there is enough antic­i­pated demand to restart the pro­duc­tion of goods.

    I didn’t read the whole Cap­i­tal but from what I saw Marx also got the basic pro­duc­tion cir­cuit right — what he messed up was his value the­ory because as a philoso­pher he wanted to cre­ate the ulti­mate the­ory of every­thing. Hoard­ing money is not a goal of the cap­i­tal­ists (except for very spe­cial cir­cum­stances), they are after increas­ing prof­its and build­ing wealth (retain­ing some of the prof­its). They want to be rich — own the biggest cor­po­ra­tions, have huge man­sions, planes, yachts, land, other real assets, maybe some gov­ern­ment debt secu­ri­ties. Only a cer­tain small per­cent­age of their assets are deposits in the bank­ing sys­tem with­drawn from the cir­cu­la­tion.

    The fun­da­men­tal mis­take is in my opin­ion related to assum­ing that RETAINED prof­its in the basic mon­e­tary cir­cuit are mon­e­tary — they are mostly in real assets. I have already sent a link to the paper explain­ing that. This could explain the fun­da­men­tal error lead­ing to a leak in the mod­els. The total value of sav­ings and bank equity in a pure credit econ­omy must be always be equal to the aggre­gate debt and there is no mys­te­ri­ous way of accu­mu­lat­ing prof­its based on bank vaults, notes or what­ever. It is not the act of print­ing bank notes what cre­ates money (tokens), it is the cre­ation of trans­fer­able IOUs which can be extin­guished in a sim­i­lar way they were cre­ate — like old debt tal­lies. Again this is so obvi­ous to any­one who ever worked with any account­ing data­base sys­tems. In the end the asset and lia­bil­i­ties sides on all the bal­ance sheets must off­set them­selves and the only way to get there is to acknowl­edge that there is a kind of “con­ser­va­tion” law (I’m not sure what you mean by it but it sounds about right to me). Only the gov­ern­ment can cre­ate money out of thin air.

    What­ever can be added can also be sub­tracted. Every trans­ac­tion which can be done can also be undone. The only excep­tions to sym­me­try are the flow of time which goes in one direc­tion and the inter­est accrual (it is hard to imag­ine peo­ple vol­un­tar­ily allow­ing for neg­a­tive inter­est rates).

    If we ques­tion these basic account­ing rules and want to spec­u­late what money is what is not, I am afraid we will not be able to build a viable the­ory any bet­ter than these invented by Mil­ton Fried­man. It may be enough to get a Nobel price in eco­nom­ics but may not be enough to explain what’s going on.

  • juk

    Thanks for the replies Steve and oth­ers. I think i got most of it, but i got a lit­tle lost in the end.

  • hat­less

    Hi Steve,

    Great talk as always.

    Just one ques­tion. Do you think there is a big dif­fer­ence in how every­thing plays out given that the RE bub­ble in Aus­tralia con­sisted mainly of bid­ding up exist­ing house prices, com­pared to the US and say Ire­land, which had a lot more addi­tional build­ing? I’d be inter­ested in your thoughts on this. 



  • Thanks Hat­less,

    And yes I do think that’s a sig­nif­i­cant dif­fer­ence in how things will play out here–though not as the spruik­ers see it of course.

    Their argu­ment has been that since we didn’t build as many houses here as in the US (true), there won’t be the same over­hang of unsold new prop­er­ties depress­ing prices (true). There­fore our prices won’t fall (false).

    What they’re omit­ting from their think­ing is that, given that Aus­tralians bor­rowed more money to gam­ble on hous­ing than even the Amer­i­cans did, our bub­ble was more of a purely spec­u­la­tive one than theirs was. They at least did some “invest­ment”, even if it was inap­pro­pri­ate to needs in the medium term. We did far less, so far more of our money went to gam­bling on house prices than increas­ing the quan­tity of hous­ing.

    This is one rea­son our price bub­ble was more extreme than theirs, and there­fore poten­tially has much fur­ther to fall.

    It also will spread the pain of a price fall more broadly. Whereas we will have less losers among prop­erty devel­op­ers, we will have more losers amongst those who bought an exist­ing prop­erty for cap­i­tal gain as a retire­ment invest­ment. Some­thing like 30% of mar­ket demand came from “mum and dad investors” at the peak of the bub­ble. If a sig­nif­i­cant pro­por­tion of them think that the longer they hold a prop­erty, the less they’ll have for retire­ment, then–with a large lag–they could switch from the buy side to the sell side.

  • ferb

    Love how stuff comes out in the wash when things are tight…

    Wont be long b4 it hap­pen here either.

  • BrightSpark1


    Nyquist-Shan­non sam­pling the­o­rem binds together syn­chro­nous-dig­i­tal (dis­crete) and ana­log (con­tin­u­ous time) sig­nal pro­cess­ing approaches. ”

    The sam­pling the­o­rem does no such bind­ing. It defines the min­i­mum sam­pling rate that will enable the dig­i­tal rep­re­sen­ta­tion to be used to recon­struct the orig­i­nal sig­nal — data stream. This is achieved as it avoids the effect of alias­ing. In any case most eco­nomic data is sam­pled at a far too low rate to meet the Nyquist-Shan­non require­ment. Dif­fer­ence equa­tions are part of the dis­ci­pline of dis­crete math­e­mat­ics and are not valid in the descrip­tion of a dynamic sys­tem. They are not used for this pur­pose by engi­neers. Dif­fer­en­tial equa­tions are the only valid approach.

    The debt super­charg­ing is best illus­trated by the pos­i­tive feed­back loop of a dynamic sys­tem, too much loop gain and you don’t need any input (deposits) to get an out­put (credit). In days gone by before the fre­quency shift method was used to avoid the prob­lem every­one was famil­iar with this feed­back in a pub­lic address sys­tem — too much gain and it screeched! Now pos­i­tive feed­back is the warm and fuzzy type that you get from an ebay cus­tomer.

    F= G/(1-GH)

    Also what is this about destruc­tion of debt/money, is this a legal require­ment? is this a bank pol­icy? How is it done? Is it legal?


  • ak


    1. Dif­fer­ence vs dif­fer­en­tial equa­tions:

    The dif­fer­ence equa­tion (dis­crete time) approach doesn’t dif­fer from the dif­fer­en­tial equa­tion (con­tin­u­ous time) approach because these two approaches are (vir­tu­ally — I don’t want to get into detail) equiv­a­lent for all the com­po­nents of the sig­nal which have fre­quency lower than the half of the sam­pling fre­quency. This is what I wanted to say by men­tion­ing Nyquist-Shan­non.

    In the fre­quency domain (assum­ing that the sys­tem is lin­ear) we can use a con­for­mal map­ping such as
    to trans­late con­tin­u­ous-time and dis­crete-time sig­nal rep­re­sen­ta­tions and trans­fer func­tions.

    Please notice that I was using this method­ol­ogy in dig­i­tal sig­nal pro­cess­ing so let’s assume that I know what I am talk­ing about.

    There are some lim­i­ta­tions related to the prob­lem of the unique­ness of the solu­tion of the dif­fer­ence equa­tions but this is not very rel­e­vant to our dis­cus­sion.

    NIPA data is sam­pled either monthly, every quar­ter or annu­ally. We won’t get bet­ter time res­o­lu­tion any­way unless we want to model a stock mar­ket crash (trans­ac­tions hap­pen in a sub-mil­lisec­ond timescale). 

    Kalecki / God­ley were con­cerned about processes hap­pen­ing in the time scale of years so his sam­pling fre­quency (usu­ally 1 year) was ade­quate. Per­son­ally I would pre­fer to use the con­tin­u­ous time approach because to me it is eas­ier to think in terms of df(t)/dt rather than (f(t) — f(t-1))/ sam­pling_pe­riod (the Godley’s book is full of indices what makes it par­tic­u­larly hard to read) but we have to keep in mind that any ODE solver inter­nally runs Runge-Kutta so in the end we have a set of dif­fer­ence equa­tions any­way.

    2. The issue of money destruc­tion:

    When you go to a bank and take a loan for L dol­lars, they record L on the lia­bil­i­ties side (this is your new deposit) and L on the assets side (this is your new debt). Obvi­ously they will start accru­ing inter­ests by adding r_L* L to your debt and r_D*L to your deposit every month where r_L is greater than r_D. But imag­ine that you come to the bank next day after tak­ing a loan and sim­ply change your mind and repay it, L is then sub­tracted from both the asset and lia­bil­i­ties sides of the bank’s bal­ance sheet (these trans­ac­tions are recorded in the elec­tronic ledger which is a data­base sys­tem).

    The sys­tem reverts back to the same state it had had before you took the loan (plus-minus bank fees but this is not the point).

    This is exactly an exam­ple of the destruc­tion of the credit money. If we want to say that banks can cre­ate money by extend­ing credit we also must say that debtors can destroy money by repay­ing the loans.

    Once we acknowl­edge this obvi­ous fact, we don’t need the non-exist­ing “bank vault” which has been invented to store the money after repay­ing the debt. Please have a look at the pro-forma bal­ance sheet of Wes­pac on page 43:

    So where is the vault in West­pac? We can see Assets, Lia­bil­i­ties and Equity and by def­i­n­i­tion Assets = Lia­bil­i­ties + Equity but there is no trace of any “vault”. It is as fake as util­ity max­i­miza­tion by ratio­nal agents in neo­clas­si­cal eco­nom­ics I would say.

    3. Feed­back loops:

    I agree that there are var­i­ous feed­back loops in the sys­tem but in order to model them we must first iden­tify the sig­nal path and the error sig­nal sub­trac­tion node. The feed­back loop related to the bub­ble-burst cycle must include asset val­u­a­tion and credit creation/destruction what is cou­pled with the pro­duc­tive econ­omy and can affect the level of demand and as a con­se­quence, the level of production/consumption in the econ­omy.

  • BrightSpark1


    Thanks for your com­ments.

    Agreed you can use dif­fer­ence equa­tions to eval­u­ate an expres­sion which con­tains inte­gral and dif­fer­en­tial terms. Agreed this is done in Dig­i­tal Sig­nal Pro­cess­ing (DSP).

    What you can­not do is find the solu­tions of a dif­fer­en­tial equa­tion. Hav­ing found found the solu­tions using appro­pri­ate method­ol­ogy the solu­tion equa­tions can then be eval­u­ated using dis­crete math­e­mat­i­cal method­ol­ogy. Any set of dif­fer­ence equa­tions would yield a dif­fer­ent result with the error (rang­ing from small to infi­nite) depend­ing on the orig­i­nal equa­tions. Dis­crete method­ol­ogy sim­ply can­not cor­rectly model feed­back with the error increas­ing as open loop gain increases.

    On the money destruc­tion ques­tion we will just have to agree to dis­agree.

  • ak


    Thank you for your response.

    I obvi­ously agree with you in regards to the issue of errors in dif­fer­ence equa­tions used to sim­u­late feed­back sys­tems with a closed loop. We effec­tively dis­re­gard all the fre­quency com­po­nents above f_sampling/2. But in economics/econometrics some of the GDP data (not only in China) is col­lected with accu­racy of sev­eral % any­way and so if we analyse the short-term trends we do not make a seri­ous mis­take by using dif­fer­ence equa­tions.

    The U.S. cable reported that Li, who is now a vice pre­mier, focused on just three data points to eval­u­ate Liaoning’s econ­omy: elec­tric­ity con­sump­tion, rail cargo vol­ume and bank lend­ing.

    By look­ing at these three fig­ures, Li said he can mea­sure with rel­a­tive accu­racy the speed of eco­nomic growth. All other fig­ures, espe­cially GDP sta­tis­tics, are ‘for ref­er­ence only,’ he said smil­ing,” the cable added.

    Li is widely expected to suc­ceed Wen Jiabao as pre­mier in early 2013, a posi­tion that will put him in charge of pol­icy mak­ing in the world’s sec­ond-biggest econ­omy.”

    I also agree that dif­fer­en­tial equa­tions are much eas­ier to under­stand than matri­ces pol­luted with hun­dreds of indices. But my point was only that Kalecki-Kaldor-God­ley approach is not invalid even if the meth­ods used there can be traced back to the 1921–24 period when Kalecki was study­ing at Danzig Poly­tech­nic (Gdansk Uni­ver­sity of Tech­nol­ogy).

    How­ever the two remain­ing issues are much more seri­ous. The prob­lem of money destruc­tion is impor­tant but is sec­ondary. The most impor­tant issue is whether flows depend in prin­ci­ple on flows with some stock depen­dency (as in Kalecki-God­ley) or whether flows depend mainly on stocks due to time con­stants deter­min­ing spend­ing / pro­duc­tion process lag (what is pure mon­e­tarism as in Fried­man). So far the mod­els based on the mon­e­tary cir­cuit are seem to be mon­e­tarist to me.

    N.B. pro­duc­tion lag for a sin­gle com­pany should be mod­elled as flow_out = flow_in(t-lag) what leads to rather inter­est­ing con­se­quences when we want to describe the process in terms of dif­fer­en­tial equa­tions. This is basi­cally a delay line which may need to be imple­mented as a Bessel fil­ter, good luck with that…

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  • The analy­sis pre­sented is oversimplified,but there are some errors and draw­backs which have been dis­cussed and is of great use.

    Aus­tralia Tax­a­tion

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