My paper for INET’s Berlin 2012 Con­fer­ence

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My paper “Insta­bil­ity in Finan­cial Mar­kets: Sources and Reme­dies” for the INET con­fer­ence “Par­a­digm Lost: Rethink­ing Eco­nom­ics and Pol­i­tics”, to be held in Berlin on April 12–14, is now avail­able via the INET web­site.

If you’d like to down­load it, you can get it either from my INET page, or from a link on the con­fer­ence pro­gram. For copy­right rea­sons I can’t repro­duce it here, but I can pro­vide a quick syn­op­sis and some excerpts, so here goes.

A Primer on Minsky

The paper starts with a syn­op­sis on Min­sky, since his “Finan­cial Insta­bil­ity Hypoth­e­sis” is one of the key foun­da­tions of my approach to eco­nom­ics. He has come into vogue these days of course, but to peo­ple who’ve known his work for sev­eral decades rather than ever since the “Min­sky Moment” of late 2007, a bet­ter expres­sion would be that he’s “come into vague”. I read papers like Krugman’s “Debt, Delever­ag­ing, and the Liq­uid­ity Trap: A Fisher-Min­sky-Koo approach”, and for the life of me, I can’t see Min­sky there. As I note in my paper:

Now, after the cri­sis that his the­ory antic­i­pated, neo­clas­si­cal econ­o­mists are pay­ing some atten­tion to his hypoth­e­sis, and there has been at least one attempt to build a New Key­ne­sian model of a key phe­nom­e­non in Minsky’s hypoth­e­sis, a debt-defla­tion (Krug­man and Eggerts­son 2010). How­ever, to those of us who are not new to Min­sky, it is hard to recog­nise any ves­tige of the Finan­cial Insta­bil­ity Hypoth­e­sis in Krugman’s work.

My good friend and long term fel­low rebel in eco­nom­ics Pro­fes­sor Rod O’Donnell once remarked that neo­clas­si­cal econ­o­mists are inca­pable of read­ing Keynes: they look at his words and then spout Wal­ras instead. A sim­i­lar phe­nom­e­non applies here: neo­clas­si­cals like Krug­man read Min­sky, and then pro­ceed to build equi­lib­rium mod­els with­out banks, and think they’re mod­el­ling Min­sky.

No they’re not: they’re cre­at­ing an equi­lib­rium-obsessed Wal­rasian hand pup­pet and call­ing it Minsky—just as they did to Keynes with DSGE mod­el­ling.


I used the word “equi­lib­rium” twice above, because one clear method­olog­i­cal aspect of Minsky’s think­ing is that macro­eco­nom­ics is about dis­e­qui­lib­rium. Neo­clas­si­cal econ­o­mists have the world pre­cisely (to use an evoca­tive piece of Aus­tralian slang) arse about tit. They believe that if it’s not an equi­lib­rium model it’s not eco­nom­ics.

Non­sense! The pre­cise oppo­site is the case: if it isn’t dis­e­qui­l­brium, then it isn’t eco­nom­ics.

There’s noth­ing “rad­i­cal” about this, which is often the way that neo­clas­si­cal econ­o­mists react when I press this point: “assume dis­e­qui­lib­rium? How dare you!?”. I dare because “dis­e­qui­lib­rium” is so com­mon in real sci­ences that they don’t even call it that: they call it dynam­ics. Any dynamic model of a process must start away from its equi­lib­rium, because if you start it in its equi­lib­rium, noth­ing hap­pens. It’s about time that econ­o­mists woke up to the need to model the econ­omy dynamically—and to give Krug­man his due here, he does admit at the end of his paper that his dynam­ics are dread­ful, and need to be improved:

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. This side­steps the impor­tant ques­tion of just how fast debtors are required to delever­age; it also rules out any con­sid­er­a­tion of the effects of changes in infla­tion expec­ta­tions dur­ing the period when the zero lower bound remains bind­ing, a major theme of recent work by Eggerts­son (2010a), Chris­tiano et. al. (2009), and oth­ers. In future work we hope to get more real­is­tic about the dynam­ics.

Hurry up Paul: you’re already eight decades behind Irv­ing Fisher, who put the case for dynam­ics even for those who assume that equi­lib­rium is sta­ble:

We may ten­ta­tively assume that, ordi­nar­ily and within wide lim­its, all, or almost all, eco­nomic vari­ables tend, in a gen­eral way, toward a sta­ble equi­lib­rium… But … New dis­tur­bances are, humanly speak­ing, sure to occur, so that, in actual fact, any vari­able is almost always above or below the ideal equi­lib­rium…

The­o­ret­i­cally there may be—in fact, at most times there must be—over-or under-pro­duc­tion, over- or under-con­sump­tion, over- or under-spend­ing, over- or under-sav­ing, over- or under-invest­ment, and over or under every­thing else. It is as absurd to assume that, for any long period of time, the vari­ables in the eco­nomic orga­ni­za­tion, or any part of them, will “stay put,” in per­fect equi­lib­rium, as to assume that the Atlantic Ocean can ever be with­out a wave.’ (Fisher 1933, p. 339)

Endogenous Money

One key com­po­nent of Minsky’s thought is the capac­ity for the bank­ing sec­tor to cre­ate spend­ing power “out of nothing”—to quote Schum­peter. As well as explain­ing endoge­nous money, I show that Minsky’s analy­sis leads to the con­clu­sion that aggre­gate demand is greater than aggre­gate sup­ply aris­ing from the sale of goods and ser­vices alone—and there­fore that ris­ing debt plays a cru­cial role in a cap­i­tal­ist econ­omy:

If income is to grow, the finan­cial mar­kets, where the var­i­ous plans to save and invest are rec­on­ciled, 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 and that some mar­ket tech­nique exist by which aggre­gate spend­ing in excess of aggre­gate antic­i­pated income can be financed. 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 1963; Min­sky 1982) (Min­sky 1982, p. 6)

This aggre­gate demand is spent not just on goods and ser­vices, but also on buy­ing finan­cial assets—hence eco­nom­ics and finance are inex­tri­ca­bly linked, in oppo­si­tion to the failed neo­clas­si­cal attempt to keep them sep­a­rate in two her­met­i­cally sealed jars. This in turn tran­scends Wal­ras’ Law to give us what I call the Wal­ras-Schum­peter-Min­sky Law:

Aggre­gate demand is income plus the change in debt, and this is expended on both goods and ser­vices and finan­cial assets. There­fore in a credit-based econ­omy, there are three sources of aggre­gate demand, and three ways in which this demand is expended:

1.    Demand from income earned by sell­ing goods and ser­vices, which pri­mar­ily finances con­sump­tion of goods and ser­vices;

2.    Demand from ris­ing entre­pre­neur­ial debt, which pri­mar­ily finances invest­ment; and

3.    Demand from ris­ing Ponzi debt, which pri­mar­ily finances the pur­chase of exist­ing assets.

Neoclassical Misinterpretations of Fisher, Minsky & Banking

How do you mis­in­ter­pret me? Let me count the ways…”

There are so many ways in which neo­clas­si­cal econ­o­mists mis­in­ter­pret non-neo­clas­si­cal thinkers like Fisher and Min­sky that I could write a book on the topic. This sec­tion focuses on just one facet of how they get it wrong: by ignor­ing banks, and treat­ing loans as trans­fers from “savers” to “spenders” with no bank in between.

This is pre­cisely how Krug­man mod­els debt in his recent paper:

In what fol­lows, we begin by set­ting out a flex­i­ble-price endow­ment model in which “impa­tient” agents bor­row from “patient” agents, 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… (Krug­man and Eggerts­son 2010, p. 3)

This is debt with­out banks—and with­out the endoge­nous cre­ation of money—and it explains why neo­clas­si­cal econ­o­mists don’t think that the level of pri­vate debt mat­ters.

With that vision of debt, a change in the level of debt isn’t impor­tant, because the borrower’s increase in spend­ing power is coun­ter­acted by the lender’s fall in spend­ing power. Here’s the lend­ing process as neo­clas­si­cals like Krug­man see it:

Assets Deposits (Lia­bil­i­ties)
Action/Actor Patient Impa­tient
Make Loan +Lend –Lend

Krug­man there­fore reas­sures his blog read­ers that there’s noth­ing to worry about when pri­vate debt lev­els rise or fall:

Peo­ple think of debt’s role in the econ­omy as if it were the same as what debt means for an indi­vid­ual: there’s a lot of money you have to pay to some­one else. But that’s all wrong; the debt we cre­ate is basi­cally money we owe to our­selves, and the bur­den it imposes does not involve a real trans­fer of resources.

That’s not to say that high debt can’t cause prob­lems — it cer­tainly can. But these are prob­lems of dis­tri­b­u­tion and incen­tives, not the bur­den of debt as is com­monly under­stood. (Krug­man 2011)

That would be reas­sur­ing if true, since we could then ignore data like this:

Unfor­tu­nately, real lend­ing is bet­ter described by the next table:

Bank Assets Bank Deposits (Lia­bil­i­ties)
Action/Actor Patient Impa­tient
Make Loan +Lend –Lend

In the real world, a bank loan increases “Impatient“‘s spend­ing power with­out reduc­ing “Patient“‘s, so that the level of pri­vate debt does mat­ter.

Applying Minsky to Macroeconomic Data

In par­tic­u­lar, the rate of change of debt mat­ters because that tells us how much of demand is debt financed. When you add the change in debt to GDP, you get total aggre­gate demand, and that makes it exceed­ingly clear why the eco­nomic cri­sis occurred: the growth of debt col­lapsed, and took the econ­omy with it:

Since change in debt is part of aggre­gate demand, the accel­er­a­tion of debt—the rate of change of its rate of change—affects change in aggre­gate demand. This in turn has impacts on the change in employ­ment.

It also impacts on change in asset prices. The rela­tion­ship between accel­er­at­ing debt and ris­ing asset prices is clear even in the very volatile world of the stock mar­ket:

It is unde­ni­able in the prop­erty mar­ket:


Since asset mar­ket volatil­ity is dri­ven by the accel­er­a­tion of pri­vate debt, the Min­skian solu­tion to insta­bil­ity in finance mar­kets is to some­how sever the link between debt and asset prices. I put for­ward two ideas.

Jubilee Shares

Cur­rently, shares last for the life of the issu­ing com­pany, and 99% of the trade on the stock mar­ket is in the sec­ondary mar­ket. The Jubilee Shares pro­posal would allow shares to last for­ever as now when pur­chased on the pri­mary issue mar­ket, but would have them switch to a defined life of (say) 50 years after a lim­ited num­ber of sales on the sec­ondary mar­ket (say 7 sales). This would encour­age pri­mary share pur­chases, and also make it highly unlikely that any­one would use bor­row money to buy Jubilee shares on the sec­ondary mar­ket.

Property Income Limited Leverage

Cur­rently lend­ing to buy prop­erty is allegedly based on the income of the borrower—which gives bor­row­ers an incen­tive to actu­ally want higher lever­age over time. “The PILL” would limit the amount that can be lent to some mul­ti­ple (say 10 times) of the income gen­er­at­ing capac­ity of the prop­erty itself.

End of Synopsis

There’s much more detail in the paper itself, and when the con­fer­ence is held my talk on it will also be avail­able on the INET web­site.

Attending the conference

The con­fer­ence itself has only 300 invi­tees, and INET had over­whelm­ing demand from stu­dents for the 25 places they reserved for them. Rather than let­ting the over 500 other appli­cants miss out, these other appli­cants can watch the con­fer­ence live from a spe­cial live video broad­cast room at the Adlon Hotel, right next to the con­fer­ence venue itself in Berlin. Click here for details if you’re one of those 563 appli­cants.

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

    Is a clas­si­cal recipe for war”

    Rub­bish. a few Govt jour­nal entries to reduce poverty and unem­ploy­ment and improve liv­ing stan­dards will not cause a war.

  • cen­ter­line

    How pri­vate inter­ests profit from the cre­ation of pub­lic debt?

    Just to scratch the sur­face.… First there is a div­i­dend paid to the pri­vate par­ties. That is chump change though. Next up is prox­im­ity. For exam­ple, spec­u­la­tion in var­i­ous mar­kets based on insider infor­ma­tion, abil­ity to influ­ence poli­cies for pri­vate gains, abil­ity to bor­row at rates no one else has access to, etc. Also, there is con­trol. Just take a look at how cam­paigns for politi­cians are run now or how leg­is­la­tion is han­dled, etc. It all bows down to money inter­ests. When you have this level of con­trol over a nation’s gov­ern­ment, the pos­si­bil­i­ties are end­less in how wealth can be extracted. 

    The “leak­age” is fairly sig­nif­i­cant and can­not be ignored. Nor can the desire to con­trol the sys­tem for the sake of power and greed. Pub­lic and pri­vate debts are tied together is so many unin­tended ways. It seems you guys rou­tinely miss this when you boil the world down to bal­anc­ing dou­ble-entry account­ing entries on a 2 dimen­sional ledger paper.

  • cen­ter­line

    Rub­bish. a few Govt jour­nal entries to reduce poverty and unem­ploy­ment and improve liv­ing stan­dards will not cause a war.”

    Really? As if the effects on one cur­rency have no real effects on another? On inter­na­tional trade? On the prices of com­modites and stan­dards of liv­ing at home and else­where?

    In a closed sys­tem, you may be right. The prob­lem is that this is not a closed sys­tem and we aren’t quite yet liv­ing in a one gov­ern­ment, one cur­rency world.

  • TruthIs­ThereIs­NoTruth

    Blis­sex — re your reme­dies com­ment.

    Don’t cloud the the­o­ret­i­cal fan­tasy with prac­ti­cal con­sid­er­a­tion. It’s fairly obvi­ous that the tax and reg­u­la­tory sys­tem is the most prac­ti­cally appro­pri­ate mech­a­nism for influ­enc­ing eco­nomic activ­ity. But what fun would that be. Here’s an anal­ogy — run­away elec­tri­cal train, we can either switch off the mains or super­man can fly down from the clouds and flex his mus­cles. Remem­ber now, we’ve got a movie to make.

  • Steve Hum­mel

    The prob­lem with the econ­omy and the money sys­tem is that peo­ple are not sov­er­eign, gov­ern­ments, pro­duc­ers and Banks are. If you’d rem­edy this prob­lem so that indi­vid­u­als didn’t have to rely upon a job to sur­vive you would be free to elim­i­nate waste and anti-social pro­duc­tion left and right. And no, pro­duc­tion would not suf­fer in any way, tech­nol­ogy already makes many jobs actu­ally redun­dant, bor­ing or utterly mean­ing­less, plus the actual waste of resources is so preva­lent that we miss most of it. Waste is the dark energy of the eco­nomic world, its hard for those hung up on employ­ment to keep the econ­omy half assed going to rec­og­nize that.……with tech­nol­ogy increas­ingly reduc­ing human effort and even human input all the time, job­less “recov­er­ies are the new norm. 

    Lib­er­a­tion from wage slav­ery is a deeper and more impor­tant problem/goal than unemployment/production/asset infla­tion etc. These need to be addressed, yes, most espe­cially asset infla­tion, but until you deal with the wage slavery.…how can one even say the sys­tem is free with­out being pre­ten­sious. Its this unrec­og­nized cog­ni­tive dis­so­nance that lies at the heart of the cur­rent cri­sis and the neg­a­tive effects of eco­nom­ics as a whole.

    Sys­tems were made for Man, not Man for Sys­tems. When we begin to tai­lor our eco­nomic and mon­e­tary sys­tems on that insight is when the vec­tor toward col­lapse of all human and nat­ural sys­tems will begin to change direc­tion.

  • cen­ter­line

    Steve — sorry being so much of pain today. But, too many posts just rub my fur the wrong way.

    Krug­man, from what I have read over the last few years, seems to ignore a basic real­ity that every­one else knows… that there is an imbal­ance in the notion that one mans debt is another mans asset. In essence, ignor­ing that a wealth trans­fer mech­a­nism exists within the sys­tem in the prof­i­teer­ing from the cre­ation of gov­ern­ment debt and the endoge­nous cre­ation of money. 

    The trans­fer I wager is expo­nen­tial in nature — off­set only by expo­nen­tial growth — which is clearly not sus­tain­able.

    Try­ing to explain this way using dou­ble-entry account­ing a la Account­ing 101 class = fail. I fear for the pro­fes­sion of eco­nom­ics, but on this course will not regret is pass­ing. Engi­neer­ing of some sort is bound to replace it in time.

  • mahaish

    mmt sup­ports endoge­nous money, steve,

    they might have a prob­lem with rj’s defence of krug­man .

  • mahaish

    ran­dal wray on finan­cial insta­bil­ity,

    talk alot about min­sky

  • Dra­gunov

    Hey Steve. A bit of a digres­sion, but I’m hop­ing you can write a piece on Aus­trian eco­nom­ics some­time. Your book had a decent layperson’s intro­duc­tion to Sraf­fian and Marx­ist eco­nom­ics but skipped over the argu­ments and method­ol­ogy of the Aus­tri­ans. Maybe you can just give your thoughts on this post if you’re busy.

  • Steve Hum­mel

    Icon­o­clasm like insta­bil­ity is a good, espe­cially after long peri­ods of ortho­doxy and cor­rup­tion have reeked havoc on human sys­tems and human pop­u­la­tions. This is the rea­son I and many oth­ers are drawn to Steve’s think­ing and work. But there’s icon­o­clasm and then there’s icon­o­clasm. There’s the­o­ret­i­cal icon­o­clasm and then there’s philo­soph­i­cal icon­o­clasm. The lat­ter is what Human­ity is really long­ing for and that is in fact most needed with the con­verg­ing economic/financial/monetary/energy and eco­log­i­cal crises con­fronting us. 

    What if the real prob­lem is a fail­ure to look and ques­tion deeply enough, to fail to work and act quickly enough and the fail­ure to ignore cri­tique from every expected and unex­pected direc­tion because dis­as­ter is still dis­as­ter for our prog­eny even if it is 50 years off instead of 5. Par­a­digm change is NECESSARY. That is the REAL truth. Philo­soph­i­cal change FIRST. Let the­o­ret­i­cal and pol­icy changes fol­low from there. As Aris­to­tle said, “We learn by doing.” The world will not end if indi­vid­u­als are sov­er­eign instead of slaves…yes slaves. 

    Demon est Deus inver­sus, The devil is God upside down. Inse­cu­rity, scarcity, hope­less­ness, apa­thy and enslave­ment to exter­nal con­di­tions can­not be bet­ter than secu­rity, actual and poten­tial abun­dance, hope, love and indi­vid­ual lib­erty and self deter­min­ism. Yes, I am a crazy per­son, but I’m a look­ing crazy per­son even more than I am a think­ing crazy per­son. I tilt at wind­mills, but I have an 18 year old son who I would pre­fer to have a long and fruit­ful life instead of a neo-feu­dal strug­gle, an eco­log­i­cally chaotic and per­ilous dystopia or even a civ­i­liza­tion killing nuclear reac­tion to NOT mak­ing deep enough changes. 

    Finally, remem­ber that true par­a­digm changes are evo­lu­tion­ary, inclu­sive and trans­for­ma­tional. Man is Man, but he has poten­tial that he is not uti­liz­ing and actu­al­iz­ing. Reac­tions tend to destroy struc­ture, but par­a­digm changes renew and include them. Profit and work are wor­thy eco­nomic pur­poses, but destruc­tive pri­mary ones. Facil­i­tat­ing the meet­ing of goods and ser­vices with con­sumers is a deeper and more ade­quate pri­mary pur­pose under which profit and work can fit quite well and even be trans­formed.

  • RJ

    Debt has two sides (an asset and a lia­bil­ity) and is sim­ply cre­ated by jour­nal entries.

    Pri­vate debt mat­ters as does non mon­e­tary sov­er­eign Govt debt. Mon­e­tary sov­er­eign Govt debt by itself is com­pletely and utterly irrel­e­vant. Yet this is what many so called experts focus on. 

    What mat­ters is the amount of money and finan­cial assets required for con­sump­tion and sav­ings. Too much money going into con­sump­tion causes prob­lem. Too lit­tle = unem­ploy­ment. Too much into sav­ings with­out Govt bonds might cause asset infla­tion.

    A level of debt is needed to keep the econ­omy tick­ing over and to meet our sav­ings require­ments. An imbal­ance between pri­vate and mon­e­tary sov­er­eign Govt debt can cause issues. As can too much or too lit­tle Govt bonds. Or the banks hold­ing too many Govt bonds etc.

    This is where the research should be directed. It isn’t in large part because most econ­o­mists do not under­stand (in fact they are clue­less) how our money and bank­ing sys­tem works. Or what debt (or money) is and the rela­tion­ship to money.

  • Debt has two sides (an asset and a lia­bil­ity) and is sim­ply cre­ated by jour­nal entries.”

    There is more than one def­i­n­i­tion of debt. 

    It is utterly vital to main­tain flex­i­bil­ity over terms. Try­ing to rail­road a par­tic­u­lar def­i­n­i­tion is not going to help if who­ever you are talk­ing to has a dif­fer­ent view­point.

    Half the bat­tle with eco­nom­ics seems to be work­ing out what world-view and there­fore what under­ly­ing nor­ma­tive assump­tions the per­son you are talk­ing to has. Then you have to tai­lor the dis­cus­sion to that.

  • Pingback: My paper for INET’s Berlin 2012 Conference Read… « zumoit()

  • cen­ter­line

    The basic premise that a sim­ple jour­nal entry is the magic answer to the finan­cial woes of nations is about as absurd as it gets. Like­wise, view­ing the world of debts and assets in such a 2 dimen­sional and sta­tic man­ner com­pletely misses the mark (real­ity). There are many dif­fer­ent types of debts with dif­fer­ent terms, mech­a­nisms of creation/destruction, etc. — hasn’t Steve been point­ing out that accel­er­a­tion and veloc­ity mat­ter? Heck, mod­ern eco­nom­ics to date has com­pletely ignored endo­ge­neous money cre­ation! What does that tell you about the “sci­ence” of eco­nom­ics. It is not sci­ence (yet). It is dogma passed off as a sci­ence because lim­ited math­e­mat­ics are involved. 

    Even more dis­turb­ing is that most peo­ple don’t even stop to ask about the nature of debt and why debt cre­ation con­tin­ues to morph and move out­side of reg­u­lated space. Chas­ing it with new eco­nomic think­ing in the man­ner I have seen so far is akin to foren­sics herein. 

    Con­sid­er­ing that money is a key com­po­nent of the fab­ric of soci­ety, it is painfully clear how dan­ger­ous the pro­fes­sional of eco­nom­ics is to world peace and pros­per­ity.

    Neilw’s last post above is more on the path I have been point­ing out here after hav­ing become frus­trated see­ing more X=Y+Z dri­vel with­out look­ing at the nature of the vari­ables them­selves.

  • Steve Hum­mel

    Profit in aggre­gate i.e. macro-eco­nom­i­cally speak­ing, is really just waste, no? So if you uti­lize a mech­a­nism like a com­pen­sated (to retail­ers) retail dis­count (to con­sumers) you’ve got bal­ance. See­ings how this price dis­count is on or after retail sale it is in no way actu­ally cen­tral plan­ning. It is sim­ply enabling indi­vid­u­als to decide what they want to pur­chase and then elim­i­nat­ing the dross for con­sumers while also mak­ing retail­ers whole and enabling them to pay their bills and make a mar­gin of profit on a micro-eco­nomic level.

  • Steve Hum­mel

    True price is the cost of pro­duc­tion. Banks cre­ate money ex nihilo and other than a rea­son­able amount of profit (and rea­son­able profit is prob­a­bly much less than they make now) the rest could eas­ily be can­celed out as waste with the above mech­a­nism. For instance, if a bank dis­trib­utes $200k for a mort­gage and there is a 20% dis­count dur­ing that period of pro­duc­tion the bank dis­counts the loan to $160k to the con­sumer. They of course are com­pen­sated back that $40k, but most of that is can­celled out either in their expenses, their rea­son­able profit or returned to their reserves. Mean­while The infla­tion­ary aspect of the asset is negated so far as the con­sumer is con­cerned, profit remains a part of the sys­tem, reserves are main­tained as well as macro-eco­nomic bal­ance.

  • I cer­tainly hope they would Mahaish.

  • Then you’d bet­ter read him more care­fully RJ.

  • RJ

    Here is a good arti­cle from Roger Mitchell web­site. Most still have not woken up it the impact of this change

    Yet eco­nom­ics is sim­ple, and that sim­plic­ity can be under­stood by young peo­ple, if not by adults. So here is the first attempt.

    Before August 15, 1971, the United States gov­ern­ment was on a gold stan­dard. This meant, the U.S. gov­ern­ment needed to own gold before it could pay its bills.

    It didn’t pay its bills with gold. No, it paid with dol­lars. But unless it owned gold, the U.S. was not allowed to cre­ate its own dol­lars. That was the law. No gold, no dol­lars to pay bills.

    And when the gov­ern­ment didn’t have enough gold to make dol­lars to pay its bills, it had to get dol­lars from some­one else. Either it had to bor­row dol­lars, or it to levy taxes.

    Not being able to cre­ate dol­lars, when­ever you want to, is called being “mon­e­tar­ily non-sov­er­eign.” You and I are mon­e­tar­ily non-sov­er­eign. We can’t just cre­ate dol­lars. We can’t pay our bills unless we obtain dol­lars from some­one else. Our states, coun­ties and cities are mon­e­tar­ily non-sov­er­eign. They have to obtain dol­lars from taxes or bor­row­ing. They are not allowed to make dol­lars out of thin air. That is the law.

    On August 15, 1971, Pres­i­dent Nixon announced that the U.S. would change the law. No longer would we need to have gold. The fed­eral gov­ern­ment would sim­ply cre­ate dol­lars with­out hav­ing gold. No gold. No prob­lem. Pres­i­dent Nixon made us MONETARILY SOVEREIGN.

    And this changed every­thing.

    Today, in Amer­ica, only the fed­eral gov­ern­ment is Mon­e­tar­ily Sov­er­eign. Only the fed­eral gov­ern­ment can cre­ate dol­lars out of thin air. The fed­eral gov­ern­ment is unique.

    Here is how you and I pay our bills:

    Per­sonal Income (salary, invest­ments)
    + Per­sonal Bor­row­ing
    Per­sonal dol­lars avail­able to pay our bills

    In order to pay our bills, we need to have a source of dol­lars. We are mon­e­tar­ily non-sov­er­eign

    And states, coun­ties and cities pay their bills the same way the same way:

    State Income (taxes)
    + State Bor­row­ing
    State dol­lars avail­able to pay state bills

    Yes, the states, coun­ties and cities also need a source of dol­lars, to pay their bills. They too are mon­e­tar­ily non-sov­er­eign.

    That’s the way it is, and that’s the way it always has been. So nat­u­rally, many peo­ple think the fed­eral gov­ern­ment works the same way. And once it did, but now it doesn’t. Not after 1971. Here’s what the fed­eral gov­ern­ment does with any money it receives:

    Fed­eral Bor­row­ing
    + Fed­eral Tax­ing
    Dol­lars destroyed

    What??! The fed­eral gov­ern­ment destroys all that tax money you and your par­ents send it?? And the gov­ern­ment even destroys all the money it bor­rows??

    That’s right. etc

  • RJ

    Money is noth­ing more than a series of jour­nal entries. Always backed by debt. We just need more Govt debt to solve our cur­rent prob­lems.

    Very sim­ple. But econ­o­mists need to keep it com­plex to jus­tify their exis­tence.

  • cen­ter­line

    Dammit Steve. How dare you and so many oth­ers make eco­nom­ics so com­plex as RJ has so mas­ter­fully pointed out! I feel so betrayed! 

    (Just kid­ding. And I either have to assume RJ is very igno­rant — or very smart and loves the fric­tion. I wager it is the lat­ter. Made me smile though. For that I say thank you. Cheers).

  • mahaish

    no probs steve,

    infact bill mitchell (mmt) tends to have the good prof krug­man in the cross hairs alot, and his aim is pretty good, just like yours steve.

    this is one of many exam­ples, and the dis­cus­sion of the mechan­ics of bank­ing is par­tic­u­larly rel­e­vant and very much in tune with hor­i­zon­tal endoge­nous money.

    steve “indi­ana jones” keen in his acubra and karki pants hunt­ing down all sorts of neo clas­si­cal prey, ehh 😉

  • Pingback: Why Krugman is wrong, and how. The importance of debt. | Bursting bubbles & myths()

  • Steve Hum­mel


    Money is ali­i­i­itle bit more com­pli­cated than that. Its def­i­nitely more com­pli­cated than it has to be, thats true. Num­ber one in a pri­vate mon­e­tary sys­tem sov­er­eign inter­est does build up to redicu­lous amounts which neces­si­tate equally redicu­lous tax­a­tion which exac­er­bates an inher­ent gap in pur­chas­ing power enforced by cost account­ing con­ven­tions like the fact that labor is not the only cost of busi­ness thus enforc­ing scarcity of that very pur­chas­ing power. Now there are cranks that focus only on inter­est as the prob­lem here and I under­stand that this is not where the real prob­lem exists because of the time vari­ant between inter­est and money gen­er­ated by the wheel of com­merce and num­ber of times that pay­rolls are gen­er­ated in a years time.…however, the scarcity of pur­chas­ing power is again inher­ent in every financial/productive cycle so that price will always exceed the “grasp” of effec­tive demand. Keynes, as I pointed out a ways back acknowl­edged this gap. 

    The trick with money is chang­ing to a Dis­trib­u­tive mon­e­tary and finan­cial sys­tem and so fill­ing the micro-eco­nomic gap in pur­chas­ing power with a div­i­dend and bal­anc­ing the macro-econ­omy with a dis­count mech­a­nism. This threads the nee­dle between the sup­possed irrec­on­cil­able posi­tions of polit­i­cal par­ties in a re-dis­trib­u­tive money sys­tem and solv­ing all kinds of prob­lems inher­ent in that scarcity dri­ven mind­set. Cre­at­ing this suf­fi­ciency and main­tain­ing it can open doors we’ve never been through eco­nom­i­cally, eco­log­i­cally, psy­cho­log­i­cally and cul­tur­ally. Thats a goal worth pur­su­ing.

  • RJ

    Num­ber one in a pri­vate mon­e­tary sys­tem sov­er­eign inter­est ”

    In you are refer­ring to inter­est that can not be paid back. No it does not build up as I believe Steve along with oth­ers have pointed out. Inter­est recy­cles

    The inter­est that can not be paid back so banks can own the world is fic­tion