Guest Post: A Dou­ble Entry View on the Keen Cir­cuit Model

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Neil Wil­son is a UK-based  finance and infor­ma­tion sys­tems pro­fes­sional who blogs at 3Spoken.co.uk, and who is an active par­tic­i­pant in mon­e­tary debates. He has just pub­lished a post where he takes my “God­ley table” mod­el­ing approach and rejigs it to make it con­sis­tent with dou­ble-entry book­keep­ing stan­dards.

I am no accountant–I never stud­ied account­ing at uni­ver­sity (I did an Arts/Law degree as an under­grad­u­ate, major­ing in Eco­nom­ics with minors in Maths & Psy­chol­ogy), and have never had to develop the skills subsequently–so I am happy to take advice from some­one like Neil about how to con­form to proper dou­ble-entry stan­dards.

Neil notes below that a num­ber of mon­e­tary the­ory types rejected my model out of hand because it didn’t con­form to those standards–and they there­fore assumed it had to be intrin­si­cally wrong.

I, on the other hand, devel­oped these mod­els in the first instance as sys­tems of dif­fer­en­tial equations–an area where I do have some training–and was con­fi­dent they were cor­rect.

Neil decided to see whether the basic Cir­cuit model (as out­lined in Debunk­ing Eco­nom­ics II and this down­load­able aca­d­e­mic paper) could be expressed in proper dou­ble-entry-book­keep­ing form. His end con­clu­sion was yes: the model could be rejigged into dou­ble-entry form, and the result­ing sim­u­la­tions were numer­i­cally iden­ti­cal.

In a future post, Neil and I will jointly extend this research–including pub­lish­ing the sys­tem of equa­tions that result. But in the mean­time, I’m very happy to cross-post Neil’s blog entry here.

A Double Entry View on the Keen Circuit Model

Over the last few months I’ve enjoyed Steve Keen’s lec­ture series on You Tube, which are def­i­nitely rec­om­mended for any­body want­ing a solid under­stand­ing of why neo-clas­si­cal macro­eco­nom­ics is com­plete bunkum.

In there is an iter­a­tion of Steve’s hor­i­zon­tal money cir­cuit and the tables and equa­tions he uses to build that model. He’s rejigged those mod­els in response to a chal­lenge by Scott Full­wiler to fit the model into dou­ble entry book­keep­ing tables.Now Steve is a great speaker, a good writer and for­mi­da­ble math­e­mati­cian. But I’m afraid he would get a fail in a book­keep­ing exam. For some­thing to be con­sis­tent with dou­ble entry there has to be at least two entries in the jour­nal and the jour­nal must sum to zero. To abuse Minsky’s words: a dou­ble entry model with a sin­gle entry in it isn’t a dou­ble entry model.So its easy to see why the pre­sen­ta­tion of this par­tic­u­lar model causes a few fire­works in schools of thought who are more fas­tid­i­ous in their bookkeeping.My back­ground is in Infor­ma­tion Sys­tem design and archi­tec­ture, with a dose of accoun­tancy thrown in for good mea­sure, and I’ve worked in and around the Free Soft­ware move­ment for over twenty years. So my nat­ural ten­dency is to look at ways of re-inte­grat­ing ‘forks’. I believe all the issues com­monly com­plained about in this model can be rec­on­ciled by mak­ing the tables dou­ble entry com­plaint and extend­ing the model slightly. I hope this will show to all sides that they are talk­ing about the same thing.And by doing so I am almost cer­tain to upset every­body. Such is life.

First the cur­rent tables. This is a copy of table 14.1 in Debunk­ing Eco­nom­ics (sim­i­lar to table 1 on this post at Steve’s site):

Assets
Lia­bil­i­ties
Equity
Oper­a­tion
Vault
Loan Ledger
Firms
Work­ers
Safe
Lend Money
–Lend Money
+Lend Money
Record Loans
+Lend Money
Charge Inter­est
+Charge Inter­est
Pay Inter­est
–Charge Inter­est
+Charge Inter­est
Record Pay­ment
–Charge Inter­est
Deposit Inter­est
+Deposit Inter­est
–Deposit Inter­est
Hire Work­ers
–Wages
+Wages
Bankers Con­sume
+Bankers Con­sump­tion
–Bankers’ Con­sump­tion
Work­ers Con­sume
+Work­ers’ Con­sump­tion
–Work­ers’ Con­sump­tion
Loan Repay­ment
+Loan Repay­ment
–Loan Repay­ment
Record Repay­ment
–Loan Repay­ment

From a dou­ble entry view­point there are a few things that feel uncom­fort­able with this table.

  1. the lia­bil­i­ties side is strictly the wrong sign. Lia­bil­i­ties are gen­er­ally shown neg­a­tive so that when you add them to assets you get zero. You can run them as a pos­i­tive bal­ance but that means the check of sim­ply mak­ing sure the row adds up to zero doesn’t work so well (you have to mul­ti­ply the sum of lia­bil­i­ties by –1 first). Also ‘-’ is gen­er­ally a credit and ‘+’ a debit. So in the table you can see that firms appear to pay wages by ‘cred­it­ing’ and work­ers receive wages by ‘deb­it­ing’ which is incon­sis­tent with the way bank accounts are usu­ally described.
  1. The bank only gets paid when the firm pays the inter­est. Yet in account­ing the bank will ‘recog­nise’ the income (ie credit its profit and loss account) as soon as it charges inter­est and this will allow it to spend before it gets paid. This isn’t seignior­age as the bank has indeed earned that money. So the table has a minor tem­po­ral error in it which may or may not be impor­tant.
  1. The ini­tial con­di­tions on a bal­ance sheet must be cre­ated by a series of jour­nals and must bal­ance to zero. Money shouldn’t mag­i­cally appear in a Vault.
  1. But most impor­tantly there are a lot of sin­gle entries in the rows. That makes this table incon­sis­tent with the fun­da­men­tals of dou­ble entry that requires every trans­ac­tion to sum to zero. To be dou­ble entry there must be at least two entries and the jour­nal rows must sum to zero — or it is not a dou­ble entry table. So there is some­thing miss­ing from this model to bal­ance those lines.

Bear in mind that this is a lim­ited hor­i­zon­tal cir­cuit model with a lot of heuris­tic assump­tions. It is has sta­tic para­me­ters and ignores every­thing other than a sim­ple pri­vate credit cir­cuit. So there is no ini­tial cap­i­tal for the bank or equity con­sid­er­a­tions and all the para­me­ters have a fixed value. Those are all delib­er­ate.

It’s job is to show that a pri­vate credit cir­cuit with a fixed stock of money can exist stand­alone which was, prior to Steve’s work, thought impos­si­ble.

My job is to rec­on­cile this table so that it works from a dou­ble entry view­point, still have loans cre­at­ing the equiv­a­lent deposits and have them both destroyed and not destroyed at the same time all while sat­is­fy­ing as many view­points as pos­si­ble.

In other words the peren­nial accountant’s dilemma — how to present a set of accounts.

So let’s have a go at fix­ing this and see how many peo­ple we can upset.

Let’s start with the first line and fix the signs. We’re going to impose a ‘all rows sum to zero’ restric­tion on this table.

Assets Lia­bil­i­ties Equity
Oper­a­tion Vault Loan Ledger Firms Work­ers Safe
Lend Money +Lend Money –Lend Money

So we have an accu­rate jour­nal on the firm side — cred­it­ing their account with money is def­i­nitely cor­rect. But the bal­anc­ing entry now appears wrong — why would cred­it­ing a Firm account increase a vault asset?

Answer: it wouldn’t. Vault is on the wrong side of the bal­ance sheet. Paper notes in a Vault are a stock of non-cir­cu­lat­ing bank lia­bil­i­ties — as are the elec­tronic equiv­a­lent. So let’s move Vault.

Assets Lia­bil­i­ties Equity
Oper­a­tion Loan Ledger Vault Firms Work­ers Safe
Lend Money +Lend Money –Lend Money

Now it makes sense, the flow is mov­ing the lia­bil­i­ties from the non-cir­cu­lat­ing stock in the Vault to the cir­cu­lat­ing stock at the Firm.

Which then leads onto the next ques­tion. How are there any lia­bil­i­ties in the Vault in the first place?

Well, think­ing in paper for a moment, notes have to be made and there will be a limit to how many can be made. And only banks can make these notes, not firms. So what’s the dif­fer­ence?

The banks have a ‘licence to print money’ that the firms don’t have  (even if its one they gave them­selves — as a truly inde­pen­dent cen­tral or pri­vate bank would do for exam­ple). Tech­ni­cally of course this is a ‘licence to cre­ate money’ — they are not required to print it. A licence is an ‘intan­gi­ble asset’. The value of the licence to cre­ate money will vary over time depend­ing upon the terms of the licence, the amount of out­stand­ing loans and var­i­ous other fac­tors. And, like the intrin­sic good­will of the firm or its ‘human resources’, you don’t usu­ally see the value on a bank bal­ance sheet.

But in this model we want to know how much ‘poten­tial money’ is in the sys­tem at any point in time so let’s add in a jour­nal to give the bank the abil­ity to cre­ate a fixed amount of money (remem­ber this model is oper­at­ing under fixed para­me­ter heuris­tic assump­tions). This neatly solves the prob­lem of where the ‘ini­tial value’ comes from and makes new money and old money the same thing — the value of the licence can vary dynam­i­cally like any other vari­able.

Assets Lia­bil­i­ties Equity
Oper­a­tion Licence Value Loan Ledger Vault Firms Work­ers Safe
Grant Licence +Grant Value –Grant Value
Lend Money +Lend Money –Lend Money

And then finally add in the record­ing of the loan.

Assets Lia­bil­i­ties Equity
Oper­a­tion Licence Value Loan Ledger Vault Firms Work­ers Safe
Grant Licence +Grant Value –Grant Value
Lend Money +Lend Money –Lend Money
Record Loan –Lend Money +Lend Money

So now we have an extended bal­ance sheet with the money cre­ation sys­tem declared explic­itly on the face of the bal­ance sheet. A credit licence has value and that ini­tial value is added to the bal­ance sheet as a non-cir­cu­lat­ing intan­gi­ble asset and the asso­ci­ated non-cir­cu­lat­ing reval­u­a­tion reserve lia­bil­ity — which we have called Vault in this model for want of a bet­ter name.

Issu­ing Loans reduces the remain­ing value of the credit licence and at the same time the Deposit reduces the remain­ing amount in the Vault. Loans still cre­ate deposits — but by chang­ing non-cir­cu­lat­ing lia­bil­i­ties into cir­cu­lat­ing ones.

So far so good. Let’s add some inter­est.

Inter­est can be seen as an exten­sion to the loan, where the asso­ci­ated deposit is imme­di­ately paid over to the Bank. So we can add that in.

Assets Lia­bil­i­ties Equity
Oper­a­tion Licence Value Loan Ledger Vault Firms Work­ers Safe
Charge Inter­est +Inter­est Charge –Inter­est Charge
Record Inter­est –Inter­est Charge +Inter­est Charge

Gen­er­ally there is no sep­a­rate pay­ing of inter­est. As any­body who has a mort­gage knows you just make one repay­ment which cov­ers the prin­ci­pal and accrued inter­est.

But this is really a styl­is­tic point at this stage as the value of the pay­ment is the Loan Repay­ment + Inter­est Charge any­way.

Assets Lia­bil­i­ties Equity
Oper­a­tion Licence Value Loan Ledger Vault Firms Work­ers Safe
Repay Loan and Inter­est –Loan Repay­ment ?Inter­est Charge +Loan Repay­ment +Inter­est Charge
Record Loan and Inter­est Repay­ment +Loan Repay­ment +Inter­est Charge –Loan Repay­ment ?Inter­est Charge

So the revised Lend­ing table looks like this in total:

Assets Lia­bil­i­ties Equity
Oper­a­tion Licence Value Loan Ledger Vault Firms Work­ers Safe
Grant Licence +Licence Value –Licence Value
Lend Money +Lend Money –Lend Money
Record Loan –Lend Money +Lend Money
Charge Inter­est +Inter­est Charge –Inter­est Charge
Record Inter­est –Inter­est Charge +Inter­est Charge
Repay Loan and Inter­est –Loan Repay­ment ?Inter­est Charge +Loan Repay­ment +Inter­est Charge
Record Loan and Inter­est Repay­ment +Loan Repay­ment +Inter­est Charge –Loan Repay­ment ?Inter­est Charge

As a check let’s remove the intan­gi­ble asset and asso­ci­ated jour­nals from the bal­ance sheet and see what we get:

Assets Lia­bil­i­ties Equity
Oper­a­tion Loan Ledger Firms Safe
Lend Money +Lend Money –Lend Money
Repay Loan and Inter­est –Repay­ment +Repay­ment
Charge Inter­est +Inter­est Charged –Inter­est Charged

Which should look famil­iar to any­body on the MMT side of the debate.

That’s the bank lend­ing items sorted. Let’s adding the spend­ing ele­ments and com­plete the cir­cuit. So for the expanded bal­ance sheet the final table looks like this:

Assets Lia­bil­i­ties Equity
Oper­a­tion Licence Value Loan Ledger Vault Firms Work­ers Safe
Grant Licence +Licence Value –Licence Value
Lend Money +Lend Money –Lend Money
Record Loan –Lend Money +Lend Money
Charge Inter­est +Inter­est Charge –Inter­est Charge
Record Inter­est –Inter­est Charge +Inter­est Charge
Repay Loan and Inter­est –Loan Repay­ment ?Inter­est Charge +Loan Repay­ment +Inter­est Charge
Record Loan and Inter­est Repay­ment +Loan Repay­ment +Inter­est Charge –Loan Repay­ment ?Inter­est Charge
Pay Firm Deposit Inter­est –Firm Inter­est +Firm Inter­est
Pay Worker Deposit Inter­est –Worker Inter­est +Worker Inter­est
Hire Work­ers +Pay Work­ers –Pay Work­ers
Work­ers’ Con­sump­tion –Work­ers’ Con­sump­tion +Work­ers’ Con­sump­tion
Bankers’ Con­sump­tion –Bankers’ Con­sump­tion +Bankers’ Con­sump­tion

Write out the intan­gi­ble assets and you get this:

Assets Lia­bil­i­ties Equity
Oper­a­tion Loan Ledger Firms Work­ers Safe
Lend Money +Lend Money –Lend Money
Charge Inter­est +Inter­est Charge –Inter­est Charge
Repay Loan and Inter­est –Loan Repay­ment ?Inter­est Charge +Loan Repay­ment +Inter­est Charge
Pay Firm Deposit Inter­est –Firm Inter­est +Firm Inter­est
Pay Worker Deposit Inter­est –Worker Inter­est +Worker Inter­est
Hire Work­ers +Pay Work­ers –Pay Work­ers
Work­ers’ Con­sump­tion –Work­ers’ Con­sump­tion +Work­ers’ Con­sump­tion
Bankers’ Con­sump­tion –Bankers’ Con­sump­tion +Bankers’ Con­sump­tion

So as you can see the bal­ance sheets that ‘cre­ate’ and ‘destroy’ hor­i­zon­tal money are con­sis­tent with the one where hor­i­zon­tal money merely changes state to dor­mant, and the dif­fer­ence is sim­ply to intro­duce an account­ing pol­icy requir­ing an intan­gi­ble asset to rep­re­sent poten­tial loan capac­ity that cur­rently isn’t in cir­cu­la­tion.

This is a very sim­i­lar to the approach taken in account­ing under IFRS 3 when report­ing pur­chased good­will. Prior to 2005 pur­chased good­will was writ­ten out of the bal­ance sheet and essen­tially com­bined with the intrin­sic good­will of the pur­chas­ing busi­ness. After 2005 it had to be car­ried explic­itly on the face of the bal­ance sheet. To get to the prior posi­tion you just take a IFRS 3 com­pli­ant bal­ance sheet and write out the car­ried good­will.

But what ben­e­fit does car­ry­ing the amount of ‘poten­tial loans’ give us in the model? Well it helps to show how ‘hun­gry’ a bank is to lend. A bank with a high val­u­a­tion on its credit licence has a lot of capac­ity to make loans, whereas one with a low val­u­a­tion hasn’t. It is very likely that the first is going to be sell­ing loans as hard as its can whereas the sec­ond is more likely to be putting its efforts into lob­by­ing reg­u­la­tors to relax the cap on its lend­ing capac­ity.

As I see it, the key point from the expanded model is that although it is easy to add credit poten­tial to a sys­tem, it is some­what more dif­fi­cult (and may even be impos­si­ble in prac­tice) to get rid of it again as it embeds itself deeply into the dynamic struc­ture of the sys­tem.

In addi­tion, by explic­itly record­ing the value we can graph it over time and see how close to poten­tial the econ­omy gets, and as the model evolves we can com­pare dynamic caps on the credit licence to sta­tic caps and see what effect they have. Par­tic­u­larly as our cur­rent credit licences in the real world are linked to the amount of ‘reg­u­la­tory cap­i­tal’ a bank has and are there­fore dynamic in their own right.

So whether you use an expanded bal­ance sheet for your hor­i­zon­tal cir­cuit or a col­lapsed one depends on what you’re try­ing to find out with your model.

I’ve cre­ated the dou­ble entry model using the QED pro­gram from Steve’s site (which is based on the sim­plest sta­ble model cre­ated in Steve’s crash course lec­ture.). QED likes to see things pos­i­tive (or it suf­fers an asser­tion fail­ure), so the lia­bil­ity side has all been mul­ti­plied by –1 com­pared to the tables above.

The dou­ble entry model con­verges nicely and ends up look­ing like this (click for the full size ver­sion):

Whereas the orig­i­nal model ended up like this:

As you can see the fig­ures con­verge to the same value — demon­strat­ing that they are the same model at this level of dynamism. The dou­ble entry ver­sion shows the cir­cu­la­tion between the assets and the lia­bil­i­ties hap­pen­ing sep­a­rately (although in step of course) once the credit licence has cre­ated the ini­tial stock of credit money. And if you add up the pots in each cir­cu­la­tion at any point in time the total stocks should be the same value. The bal­ance sheet now bal­ances as it should.

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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  • RJ: “it is han­dled by banks now rather than indi­vid­u­als”

    Exactly right. We’ve just replaced men­tal tally sheets with physical/electronic ones.

    Is Tel’s sce­nario “barter”? Per­haps, assum­ing the debt oblig­a­tions are not exchange­able with oth­ers — can’t be traded/bought/sold. Basi­cally a ques­tion of the def­i­n­i­tion of “barter.”

  • Tel: I’ve spent a lot of time with those OLG spread­sheets and dis­cus­sions, and still have a question/confusion (which I’m embar­rassed to bring up with Nick, he spent so long on it already…)

    The model assumes that sup­ply is unchanged for­ever. I won­der whether that makes it an invalid model to answer the “bur­den” ques­tion.

    As I under­stand it, there would only be a bur­den if, as a result of (greater) gov­ern­ment debt, future gen­er­a­tions had a smaller econ­omy than there would have been with­out that extra debt. Less apples con­sumed *and sup­plied.*

    IOW, will a larger deficit this year result in slower eco­nomic growth over the next X years? (Yes, ignor­ing the per­haps ben­e­fi­cial or detri­men­tal effect of how that money is spent by gov­ern­ment; assume it has no effect on future growth rates.)

    I don’t think account­ing can answer that. 

    ??

    Account­ing and account­ing iden­ti­ties tell zero about how humans will behave (indi­vid­u­ally or in aggre­gate) in response to given incen­tives and con­straints. They can only tell us what the account­ing results (rep­re­sent­ing real occur­rences) will be *if* they behave in a cer­tain way. 

    Those out­comes (reflected in the account­ing results) affect people’s future incen­tives and con­straints, but they still don’t tell us any­thing about how peo­ple will behave in response.

  • RJ

    IOW, will a larger deficit this year result in slower eco­nomic growth over the next X years? (Yes, ignor­ing the per­haps ben­e­fi­cial or detri­men­tal effect of how that money is spent by gov­ern­ment; assume it has no effect on future growth rates.)”

    A larger deficit can result from

    Lower taxes or
    Higher Govt spend­ing

    Either way it will result in an INCREASE in money or finan­cial assets held by the non bank non Govt sec­tor. So a larger Govt deficit this year should either increase future growth. Or have no impact

    I can not see any rea­son why it would slow future eco­nomic growth

  • cliffy

    If a real­lo­ca­tion of resources makes pro­duc­tion more effi­cient in a way that remains so into the future then that is growth.

    Can debt grow in excess of GDP growth?

    We need an aswer to that ques­tion because that is what has hap­pened for some decades now. There is no point pre­tend­ing it hasn’t.

    My view is that along­side the Min­sky layer we have this [yes it is Scheumpter but the debt to GDP expan­sion inside Scheumpter below Min­sky is the bit that inter­ests me].

    If an asset with no debt asso­ci­ated with it becomes uncom­pet­i­tive with a pos­si­ble new asset then new debt flows to the new asset to form it and debt to gdp will rise.

    Has that occured in the last 30 years? [Inter­net, Cheap Labour]. 

    I sus­pect yes?

  • cliffy

    On the account­ing thing, let’s not for­get that book­keep­ing is the dou­ble entry account­ing for trans­ac­tions.

    Account­ing” is tak­ing those num­bers and adjust­ing between assets, lia­bil­i­ties, and equity to present a “true and fair value” [in a regime of judge­ment and rules] of the finan­cial sit­u­a­tion within a bound­ary of rights and oblig­a­tions known as an “entity”.

  • alain­ton

    Inter­est­ing report from McK­in­sey pub­lished today on global delever­ag­ing
    http://www.mckinsey.com/Insights/MGI/Research/Financial_Markets/Uneven_progress_on_the_path_to_growth

    Sug­gest­ing delever­ag­ing phase in US is all but over — and so inter­est rates will rise

    If so the UK will be unlikely to main­tain its zero rate bound and a very painful period of delever­ag­ing will begin — espe­cially as its banks have the high­est global sov­er­eign debt expo­sure.

    Expect a fall in ster­ling

  • mahaish

    Account­ing and account­ing iden­ti­ties tell zero about how humans will behave (indi­vid­u­ally or in aggre­gate) in response to given incen­tives and con­straints. They can only tell us what the account­ing results (rep­re­sent­ing real occur­rences) will be *if* they behave in a cer­tain way. 

    Those out­comes (reflected in the account­ing results) affect people’s future incen­tives and con­straints, but they still don’t tell us any­thing about how peo­ple will behave in response”

    all i know steve roth,

    is that if the gov­ern­ment put 10 grand into my ex girl­friends bank account,

    the poor peo­ple at prada and dj’s wouldnt know what hit them 😉

    there’s an awfull lot of power in the gov­ern­ment hand­ing out cash to a nation of female shop a holics 😉

  • cliffy

    Alain­ton,

    Re mck­in­sey 6 mark­ers to other side of delever­ag­ing …

    I guess the inter­est­ing ques­tion is “what can make exports grow?”

  • cliffy

    You char­ac­ters have good research skills. I am inter­ested in explor­ing the pat­tern of debt rise and fall as a result of things which move effi­ciency.

    I’ll need:

    1. Major pro­tec­tion­ism change events in his­tory
    2. Major tech­no­log­i­cal change events in his­tory

    And then times series

    3. World debt
    4. World GDP

    A quick step down the path gives:

    $109 tril­lion world debt [2010]
    http://www.zerohedge.com/article/total-global-debt-has-double-over-200-trillion-2020-preserve-economic-growth

    $65 tril­lion GDP [2010]
    http://www.google.com.au/publicdata/explore?ds=d5bncppjof8f9_&met_y=ny_gdp_mktp_cd&tdim=true&dl=en&hl=en&q=world+gdp

    I’ll prob­a­bly fol­low my nose into those two links but does any­one have any leads I could explore on same?

  • cliffy

    Inter­est­ing one:

    A PANORAMIC VIEW OF EIGHT CENTURIES OF FINANCIAL CRISES
    http://www.nber.org/papers/w13882.pdf?new_window=1

  • sj

    Well Mr Keen
    High unem­ploy­ment and high cost of liv­ing is hap­pen­ing under your poli­cies?

    Car industry,airlines and steel are lay­ing off work­ers …

    Whose next under your pol­icy of expen­sive wages that can­not com­pete with Asia?

    Who wants to invested in man­u­fac­tur­ing real cap­i­tal and real jobs when you can gam­ble on ris­ing assets, then a debt jubilee will save you from any real finan­cial pain.

    Next pol­icy will be to give more tax­pay­ers money to a unpro­duc­tive busi­ness and lower inter­est rates below the rate of real infla­tion, send­ing savers into the poor house.

    I have always said your extreme social­ist poli­cies will do great long term dam­age to the Aus­tralian econ­omy.

  • cliffy

    Mahaish, $10,000 spent by your girl­friend or lent to a com­pany that reck­ons it has some­thing she would go for even more is still money going to busi­ness.

    The ques­tion is what are the dif­fer­ences?

    For exam­ple, it may be the case that given to your girl­friend to spend reduces smooths out the process as an exist­ing pro­duc­tion process has a track record of pro­duc­ing, whereas a loan to some­thing that may or may not work is risky.

    Equally, though, the cash for her to spend weights the game towards exist­ing processes.

    The ques­tion is what is a bet­ter eco­nomic out­come and why?

  • clive

    Gee Sj, I didn’t realise Mr Keen had so much power and influ­ence. So he now deter­mines eco­nomic pol­icy for Aus­tralia? Does Wayne read this blog?

    Although I must admit he may have had some influ­ence on some peo­ples think­ing…

    Big banks told to raise cap­i­tal lev­els

    The Inter­na­tional Mon­e­tary Fund has called on Australia’s biggest banks to bol­ster their lev­els of cap­i­tal even fur­ther, warn­ing the sec­tor may not be able to with­stand the dual shock of a res­i­den­tial prop­erty down­turn and losses on cor­po­rate lend­ing.

    The find­ing fol­lows a stress test of Australia’s bank­ing sys­tem run by the IMF late last year which mod­elled the impact of an Irish-style eco­nomic crunch tak­ing place locally.

    Read more: http://www.smh.com.au/business/big-banks-told-to-raise-capital-levels-20120124-1qet3.html#ixzz1kKmE7400

    Judg­ing by IMF’s past pre­dic­tions things will be worse than they pre­dict.

  • sj

    Clive please don’t be ridicu­lous!

    You are well aware that most econ­o­mists have Steve Keen view no inde­pen­dent thought when it comes to large cen­tral plan­ning of a extreme left wing gov­ern­ment.

    The poli­cies of super low inter­est rates below rate of real inflation,taxpayer bail outs of unpro­duc­tive busi­nesses and a debt jubilee for high debt indi­vid­u­als is being put into action by many west­ern gov­ern­ments.

    Who will be pun­ished?

    Savers and pro­duc­tive work­ers in man­u­fac­tur­ing.

    Who are the win­ners?

    High debt greedy indi­vid­u­als and social­ist over­paid gov­ern­ment work­ers.

    Why do pro­duc­tive work when you can gam­ble on ris­ing assets and have Steve Keen econ­o­mists mates scream for a debt jubilee with no finan­cial pain?

  • Oh good grief SJ,

    Nor­mally I let your com­ments pass, but if you really believe that “most econ­o­mists have Steve Keen view”, I have a Har­bour Bridge I’d like to sell you.

    Bar­ring that, a copy of Debunk­ing Eco­nom­ics could enlighten you some­what on how much my eco­nomic views are sim­i­lar to those of other econ­o­mists.

  • Bhaskara II

    Who’s dodg­ing the high cost of hous­ing by build­ing their own? Don’t hear much about that. Seems like a lot of pos­i­tives to that strat­egy.

    Does using long term lever­age to raise the ratio of our hous­ing prices to our net income (after all expenses includ­ing hous­ing) make those work­ers less attrac­tive to employ­ers com­pared to those in other coun­tries with lower real expenses or no lever­age? Would high hous­ing costs drive one’s jobs to lower cost areas? When most get in the lever­aged house bid­ding game are they par­tially bid­ding their income away and expenses up?

    If the house prices go down, the lever­age increases, com­pound­ing the prob­lems. Those with out any lever­age do not have that prob­lem.

    It seems to me that the Aus­tralians have a rep­u­ta­tion for can do. Is the rep­u­ta­tion mostly deserved? 

    If one faces $1/2 mil­lion for a house with a long term mort­gage. That might make the costs with inter­est of $1 mil­lion or more. Please, for­give the com­par­i­son I might be using city rates and com­par­ing to a strat­egy eas­ier done in the hin­ter­lands. It doesn’t take 15–30 years of labor to build a house. Seems, like build­ing one’s own house, as income allows, could put some one much fur­ther ahead than being behind with large long term oblig­a­tions.

    Are there many Aus­tralians or oth­ers beat­ing the hous­ing prob­lem by build­ing their own?

  • Bhaskara II

    Pro­fes­sor Keen has an enor­mous can do atti­tude for advanc­ing eco­nom­ics.

  • sj

    Mr Keen
    Good you have not lost your sense of humour.

    You do have inde­pen­dent thought when it relates to per­sonal debt and unsta­ble frac­tual eco­nom­ics.

    When it comes to your poli­cies to fix the prob­lems your ideas are no dif­fer­ent to any other key­ne­sian econ­o­mist.

    Mr Keen they are reseal­ing the har­bour bridge and clos­ing it down on the week­ends if only I could close down all eco­nomic depart­ments that teach key­ne­sian ideas of big cen­tral gov­ern­ment.

    That would be a very hard sell, to give up your key­ne­sian bridge ideas.

  • Derek R

    Bhaskara II wrote: Who’s dodg­ing the high cost of hous­ing by build­ing their own? Don’t hear much about that. Seems like a lot of pos­i­tives to that strat­egy.

    Trou­ble is that a major part of the house price is paid for the empty lot, not the build­ing. Sure you can save a bit if you put up the build­ing your­self but you still need to buy a plot to put it on. There’s no way to make that your­self.

  • alain­ton

    There was a good piece in the Econ­o­mist yes­ter­day by Phillip Inman on the
    fail­ure of right wing eco­nomic solu­tions

    http://www.guardian.co.uk/business/economics-blog/2012/jan/23/economic-recovery-confidence-britain

    We now have just about enough exam­ples of dif­fer­ent approaches to bal­ance sheet reces­sion to set out some stylised facts about what works and doesn’t work — we know that the aus­ter­ity death spi­ral of pub­lic sec­tor aus­ter­ity and pub­lic sec­tor led delever­ag­ing doesn’t work, pri­vate sec­tor lever­age has increased in those coun­tries that tried it as yes­ter­days McK­in­sey Study showed, and we now know that increas­ing pub­lic debt and decreas­ing pri­vate sec­tor lever­age as in the States is at last pro­duc­ing results — though there is still some way to go — we still need QE3 and a mort­gage write­down.

    Why is this — well to pay off debt you need growth, and pub­lic sec­tor aus­ter­ity has col­lapsed demand. Increas­ing pub­lic sec­tor debt pro­vides head­room for the pri­vate sec­tor to delever (which also reduced aggre­gate demand) with less pain. Also if the pri­vate sec­tor de-levers it sells assets cheap, and the receipts from Asset sales — as Steve’s and the Post Keyn­sian for­mu­las show — also add to demand — and if bought below NPV will add to prof­its and bal­ance sheets — once you have a pos­i­tive trend in demand you get less hoard­ing and pos­i­tive invest­ment, break­ing out of the liq­uid­ity trap. 

    Growth is the key — with­out this all the the­o­ret­i­cal argu­ments about ricar­dian equiv­a­lence are just guff — because if the pub­lic expect aus­ter­ity not growth they will hoard not spend.

  • clive

    Alain­ton, I’m afraid my under­stand­ing of eco­nom­ics is not good and try as I must I just don’t see what you see in the US. The money to me does not appear to be going to the right peo­ple. The banks have the money and won’t lend because of risk and the bor­row­ers that are delever­ag­ing don’t want to bor­row. Con­se­quently busi­nesses are down­siz­ing because the spend­ing that needs to hap­pen just isn’t there. Sure there has been some jobs cre­ated but mainly in the low paid ser­vices sec­tors and lots of peo­ple just can’t get enough hours to have spare cash. There are still mil­lions in neg­a­tive equity.
    I don’t see growth going for­ward and I see a drop in what I think is over­val­ued stocks.
    One of my con­cerns is that if this drags on for years resource short­ages like oil, cli­mate change and even demo­graph­ics that Harry Dent talks about will kill some of the growth any­way. The pen­sion sit­u­a­tion in the US is also dire which will also kill spend­ing.

    Maybe I’ve got it wrong and there are some US con­trib­u­tors who can set me straight.

    I’ve often spo­ken about a no growth future soci­ety with friends, after they remove the hor­ri­fied look off of their face from then on I’m about as pop­u­lar as a fart at the din­ner table.

  • cliffy

    Derek,

    If I was young and didn’t own a patch of dirt I would get together with like peo­ple and start a new town some­where. You could use that social media every­one raves about. Get that Getup mob to run a TV add “New Town Where”.

    Take a look at the attached map.

    The red box is the cur­rent area houses take up in Syd­ney. The pur­ple is land that could be used for houses.

    On the map of Oz the red dot is the area Syd­ney takes up.

    Syd­ney has 20% of Australia’s pop­u­la­tion. That lit­tle red dot!

  • Alain­ton: “The nub of the argu­ment is that although time peri­ods cant over­lap gen­er­a­tions can – so although at any one time the econ­omy is no worse off in terms of GDP from debt repay­ments – as Krug­man says ‘we owe it to our­selves’ – it is still pos­si­ble for a younger gen­er­a­tion to be net worse off – so both sides in the recent debate were right!”

    This has been demon­strated using a model where sup­ply never changes — when change in GDP (supply/demand, purchases/sales, income/expenditure) is the very crux. Maybe I’m not under­stand­ing it prop­erly, but if I am, it doesn’t demon­strate any­thing to me about future bur­dens — whether by period or gen­er­a­tion.

    ??

  • Steve Hum­mel

    If in each cycle of pro­duc­tion (and which which also has its own finan­cial cycle) because of the account­ing con­ven­tions in place, there is an inher­ent lack of total indi­vid­ual pur­chas­ing power vis a vie total prices what does this lack of demand impose on both indi­vid­u­als and busi­nesses? Why scarcity and inse­cu­rity amongst other less than desir­able things of course. So how are we ever going to craft profit mak­ing eco­nomic, finan­cial and mon­e­tary sys­tems that don’t lurch from infla­tion to defla­tion with these enforce­ments?

  • Tel

    Huh!? “Pub­lic sec­tor aus­ter­ity” in the UK?

    You must be kid­ding me. They have been run­ning some of the biggest gov­ern­ment deficits in decades. Check the graph:

    http://www.debtbombshell.com/britains-budget-deficit.htm

    Pub­lic sec­tor wages have gone up (espe­cially for top ranked staff) in the midst of a lot of pri­vate sec­tor aus­ter­ity. The pri­vate sec­tor is hun­ker­ing down for the debt bomb to go off… which is pretty much inevitable at this stage. Every other week the EU is demand­ing more cash handed over, partly for bailouts, partly for their own mas­sive pay rises. These guys wouldn’t have the slight­est clue about aus­ter­ity.