Krug­man Apol­o­gises!

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Sorry, that was a belated April Fool’s joke. He hasn’t, of course—though there has been an apol­ogy of sorts from Nick Rowe, which is duly noted and accepted.

The best Krug­man could man­age is the fol­low­ing update to his orig­i­nal dia­tribe “Oh My, Steve Keen Edi­tion”:

Update update: Ah, so Keen didn’t mean DSGE — a term that refers only to New Key­ne­sian mod­els — when he said DSGE; he meant New Clas­si­cal, which he some­how regards as the under­ly­ing prin­ci­ples for mod­els that aren’t New Clas­si­cal at all. OK. Any­way, enough of that. I’m all for lis­ten­ing to heretics when they offer insights I can use, but I’m not find­ing that at all in this con­ver­sa­tion, just word games and con­tin­ual insis­tence that the mem­bers of the sect have insights denied to us lesser mor­tals. Time to move on.

Gee, thanks Paul. So I’m play­ing word games, am I—and you’re not? Let’s take a closer look.

Click here for this post inPDF

Marking Krugman

Paul, your com­pre­hen­sion of my piece failed on at least two counts.

Fig­ure 1: Krugman’s Last Word

Firstly, in the excerpt you quote, I refer to “under­ly­ing prin­ci­ples to the DSGE mod­els that now dom­i­nate Neo­clas­si­cal macro­eco­nom­ics”. Some­how you read that as being a state­ment about “about New Key­ne­sian mod­els”.

No it wasn’t Paul: I was refer­ring to the gen­eral class of post-IS-LM neo­clas­si­cal mod­els, which includes the “Fresh­wa­ter” New Clas­si­cal mod­els about which you have made such a song and dance in the past—contrasting their unre­al­ity and con­ser­vatism with your real­is­tic pro­gres­sive­ness. Remem­ber “Fresh­wa­ter Rage”, “How did Econ­o­mists get it so wrong?” or “Dis­agree­ment among econ­o­mists”? You might dis­like them Paul, but they’re your Neo­clas­si­cal cousins, and it was their “pure” the­ory, which forms the foun­da­tion for your NK mod­els, to which I referred in that excerpt.

Yes, I know that Mark Thoma claimed in a Tweet that New Clas­si­cal mod­els weren’t DSGE models—and that by impli­ca­tion, DSGE was reserved for NK mod­els exclu­sively and there­fore my Fail grade was wrong. I’ll get to that later.

Sec­ondly, directly below the sec­tion you quote, I con­tin­ued as fol­lows:

If that were actu­ally the real world, then not only would there not be a cri­sis now, there would never have been a Great Depres­sion either—and reces­sions would sim­ply be minor sta­tis­ti­cally unpre­dictable but inevitable events when the major­ity of shocks hit­ting the econ­omy were neg­a­tive, and they would rapidly be resolved by adjust­ments to rel­a­tive prices (wages included, of course).

So econ­o­mists like Krugman—who describe them­selves as “New Keynesians”—have tweaked the base case to derive mod­els that “ape” real-world data, with “sticky” prices rather than per­fectly flex­i­ble ones, “fric­tions” that slow down quan­tity adjust­ments, and imper­fect com­pe­ti­tion to gen­er­ate less-than-opti­mal social out­comes.

This is Ptole­maic Eco­nom­ics: take a model that is utterly unlike the real world, and which in its pure form can’t pos­si­bly fit real world data, and then add “imper­fec­tions” so that it can appear to do so.

So Paul, not only did I dis­tin­guish between NC mod­els and NK ones, I even men­tioned you by name in that sec­tion as some­one who has added imper­fect com­pe­ti­tion, sticky prices and so on to that base NC model. And yet you implied that I was a moron who didn’t even know that NK mod­els include imper­fect com­pe­ti­tion, sticky prices and so on—and you won­der why you got a Fail?

Oh all right, yes I’ll con­sider Thoma’s argu­ment. I see that’s what you’re claim­ing in your attempt to weasel out of an apol­ogy:

so Keen didn’t mean DSGE — a term that refers only to New Key­ne­sian mod­els — when he said DSGE

Fig­ure 2: Thoma’s Tweet

So you and Thoma believe that DSGE mod­els exclu­sively refer to NK mod­els? Frankly I think that’s like a wrin­kled pea claim­ing that it’s unre­lated to a smooth one: they’re still both peas. And the Wikipedia entry on DSGE mod­els—which I’m sure has been checked over pretty care­fully by fans of Neo­clas­si­cal economics—makes no such dis­tinc­tion. In fact, it treats RBC/NC and NK as schools of DSGE mod­el­ling, pre­cisely as I do:

Schools of DSGE mod­el­ing

At present two com­pet­ing schools of thought form the bulk of DSGE mod­el­ing.[1]

Real busi­ness cycle (RBC) the­ory builds on the neo­clas­si­cal growth model, under the assump­tion of flex­i­ble prices, to study how real shocks to the econ­omy might cause busi­ness cycle fluc­tu­a­tions. The paper of Kyd­land and Prescott (1982) is often con­sid­ered the start­ing point of RBC the­ory and of DSGE mod­el­ing in gen­eral.[2] The RBC point of view is sur­veyed in Coo­ley (1995).

New-Key­ne­sian DSGE mod­els build on a struc­ture sim­i­lar to RBC mod­els, but instead assume that prices are set by monop­o­lis­ti­cally com­pet­i­tive firms, and can­not be instan­ta­neously and cost­lessly adjusted. The paper that first intro­duced this frame­work was Rotem­berg and Wood­ford (1997). Intro­duc­tory and advanced text­book pre­sen­ta­tions are given by Galí (2008) and Wood­ford (2003). Mon­e­tary pol­icy impli­ca­tions are sur­veyed byClar­idaGalí, and Gertler (1999).” (Wikipedia Entry)

So I won’t accept Thoma’s excuse for your behaviour—and nor do some of his own fol­low­ers, judg­ing by his sub­se­quent Tweets.

Fig­ure 3: Thoma’s sub­se­quent Tweets

You should also read that Wikipedia entry, by the way—it includes some crit­i­cisms of DSGE mod­el­ling by your senior Robert Solow that you clearly haven’t paid atten­tion to (Robert M. Solow, 2003, 2001, 2008). I know you don’t like read­ing what other peo­ple write—“I Don’t Care” I think you said—but that’s why you make mis­takes like the one you’ve made here. Since I know from your past form that my advice here is prob­a­bly falling on deaf ears, here’s Solow as quoted in the crit­i­cal sec­tion of the Wikipedia entry. At least read that; I’ll wait:

Con­tro­versy

The United States Con­gress hosted hear­ings on macro­eco­nomic mod­el­ing meth­ods on July 20, 2010, to inves­ti­gate why macro­econ­o­mists failed to fore­see the Finan­cial cri­sis of 2007–2010Robert Solow blasted DSGE mod­els cur­rently in use:

I do not think that the cur­rently pop­u­lar DSGE mod­els pass the smell test. They take it for granted that the whole econ­omy can be thought about as if it were a sin­gle, con­sis­tent per­son or dynasty car­ry­ing out a ratio­nally designed, long-term plan, occa­sion­ally dis­turbed by unex­pected shocks, but adapt­ing to them in a ratio­nal, con­sis­tent way… The pro­tag­o­nists of this idea make a claim to respectabil­ity by assert­ing that it is founded on what we know about micro­eco­nomic behav­ior, but I think that this claim is gen­er­ally phony. The advo­cates no doubt believe what they say, but they seem to have stopped sniff­ing or to have lost their sense of smell alto­gether.’ (Solow’s state­ment to Con­gress, July 2010)

Now stop com­plain­ing about the mark: frankly, get­ting a fail for this essay is the least of your wor­ries. You seem to have alien­ated a large part of your peer group by this behaviour—who are you going to have lunch with after this per­for­mance? Butta­fuc­cin­who (yes, his nick­name sounds rude, but at present you’re in no posi­tion to accuse some­body else of rude­ness), for exam­ple, seems unlikely to ever want to play ball with you again:

I’m cer­tainly not in a posi­tion to deter­mine who’s right and wrong, and frankly don’t really care, but did you even read Keen’s post? Two para­graphs below the part you excerpted: “So econ­o­mists like Krugman—who describe them­selves as “New Keynesians”—have tweaked the base case to derive mod­els that “ape” real-world data, with “sticky” prices rather than per­fectly flex­i­ble ones, “fric­tions” that slow down quan­tity adjust­ments, and imper­fect com­pe­ti­tion to gen­er­ate less-than-opti­mal social out­comes.”

Is there a four-let­ter word for some­one crit­i­cizes another per­son in a very pub­lic forum with­out read­ing what they’ve writ­ten? Or would a seven-let­ter word fit bet­ter? (Butta­fuc­cin­who)

No, that isn’t all. I believe your gang calls itself “New Key­ne­sian”, doesn’t it?

Well I am going to ban you from using that term in future: find another one.

Why? Well, for starters, the Post Key­ne­sian gang claims that you’re den­i­grat­ing their gang by claim­ing to be related to them, when you’re not. And I’ve done a bit of Tal­mu­dic research and found that they’re right: the SLIME model you use—what? Oh, sorry, yes I meant IS-LM, my apologies—anyway, the IS-LM model wasn’t devel­oped by Keynes at all.

Yes, I know you know it was devel­oped by Hicks, but it wasn’t as an inter­pre­ta­tion of Keynes—it was a “Wal­rasian” model devel­oped before Hicks had read Keynes at all. Look, Hicks says so right here:

that model was already in my mind before I wrote even the first of my papers on Keynes.’ (John Hicks, 1981, p. 140; empha­sis added)

And he also traces the model to Wal­ras, not Keynes

the idea of the IS-LM dia­gram came to me as a result of the work I had been doing on three-way exchange, con­ceived in a Wal­rasian man­ner. I had already found a way of rep­re­sent­ing three-way exchange on a two-dimen­sional dia­gram (to appear in due course in chap­ter 5 of Value and Cap­i­tal). As it appears there, it is a piece of sta­t­ics; but it was essen­tial to my approach (as already appears in “Wages and Inter­est: the Dynamic Prob­lem”) that sta­tic analy­sis of this sort could be car­ried over to “dynam­ics” by rede­f­i­n­i­tion of terms. So it was nat­ural for me to think that a sim­i­lar device could be used for the Keynes the­ory.’ (Hicks 1981, p. 141–142)

So at best,you’re a Hick­sian econ­o­mist. But actu­ally, even that won’t do, because Hicks dis­owned IS-LM in that same paper, on the basis that macro­eco­nom­ics can’t be mod­elled as an equi­lib­rium process:

I accord­ingly con­clude that the only way in which IS-LM analy­sis use­fully survives—as any­thing more than a class­room gad­get, to be super­seded, later on, by some­thing better—is in appli­ca­tion to a par­tic­u­lar kind of causal analy­sis, where the use of equi­lib­rium meth­ods, even a dras­tic use of equi­lib­rium meth­ods, is not inap­pro­pri­ate…

When one turns to ques­tions of pol­icy … the use of equi­lib­rium meth­ods is still more sus­pect. … There can be no change of pol­icy if every­thing is to go on as expected—if the econ­omy is to remain in what (how­ever approx­i­mately) may be regarded as its exist­ing equi­lib­rium. It may be hoped that, after the change in pol­icy, the econ­omy will some­how, at some time in the future, set­tle into what may be regarded, in the same sense, as a new equi­lib­rium; but there must nec­es­sar­ily be a stage before that equi­lib­rium is reached. There must always be a prob­lem of tra­verse. For the study of a tra­verse, one has to have recourse to sequen­tial meth­ods of one kind or another.’ (Hicks 1981, p. 152–153)

So I think you could call your­self some­thing like “Old Hick­sians”; that would be OK. Or maybe “New Wal­rasians” when you do that DSGE thing.

Yes, I know you don’t like either of those names. But, to coin a phrase, “I Don’t Care”.

References

Hicks, John. 1981. “Is-Lm: An Expla­na­tion.” Jour­nal of Post Key­ne­sian Eco­nom­ics, 3(2), 139–54.

Solow, Robert M. 2003. “Dumb and Dumber in Macro­eco­nom­ics,” Festschrift for Joe Stiglitz. Colum­bia Uni­ver­sity:

____. 2001. “From Neo­clas­si­cal Growth The­ory to New Clas­si­cal Macro­eco­nom­ics,” J. H. Drèze, Advances in Macro­eco­nomic The­ory. New York: Pal­grave,

____. 2008. “The State of Macro­eco­nom­ics.” The Jour­nal of Eco­nomic Per­spec­tives, 22(1), 243–46.

 

 

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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  • RickW

    James Rickards has placed his sen­ate tes­ti­mony on his blog. It makes some good points on bank­ing and money per­ti­nent to the SK/PK debate:
    http://www.currencywarsbook.com/2012/03/rickards-testimony-before-senate-banking-committees-subcommittee-on-economic-policy/

    I have extracted some of the text:
    Quote
    The Impact of Fed Pol­icy on Retire­ment Income Secu­rity

    The Fed’s pol­icy of finan­cial repres­sion, imple­mented in part through its cur­rent zero rate pol­icy is based on flawed eco­nomic the­ory and rep­re­sents an assault on savers for the ben­e­fit of bankers and other lever­aged investors.

    A neo-Key­ne­sian school that places all of its bets on the idea of “aggre­gate demand” dom­i­nates the Fed’s under­stand­ing of eco­nom­ics. Aggre­gate demand is the sum of spend­ing of all kinds includ­ing con­sump­tion, invest­ment (exclud­ing inven­to­ries), gov­ern­ment spend­ing and spend­ing on net exports. This spend­ing can be fueled by income or debt.

    When pri­vate spend­ing is too low, gov­ern­ment spend­ing can be used as a sub­sti­tute. When pri­vate incomes are too low, debt can be sub­sti­tuted for income. When pri­vate debt is too low, gov­ern­ment debt can be sub­sti­tuted for pri­vate debt. In the neo-Key­ne­sian view, gov­ern­ment bor­row­ing and spend­ing step in when pri­vate bor­row­ing and spend­ing are inad­e­quate to fill the poten­tial aggre­gate demand in the econ­omy.

    Through its focus on aggre­gate demand, the Fed has lost sight of the role of sav­ings in the econ­omy and the pow­er­ful link­ages between sav­ings and invest­ment. There is a real mul­ti­plier effect from pri­vate invest­ment on GDP com­pared to the illu­sory mul­ti­plier effect of increased gov­ern­ment spending.[v]

    In the Fed’s view, sav­ings are the enemy of aggre­gate demand since any pri­vate sav­ings rep­re­sent a reduc­tion in spend­ing for a given level of income. The result is a war on savings.[vi] The Fed’s pol­icy is to drive savers either to con­sume more due to wealth effects or fear of infla­tion or to invest in riskier assets such as stocks in order to earn returns in excess of infla­tion. The goal is either to increase veloc­ity directly through con­sump­tion or indi­rectly through wealth effects. Retirees and savers who protest that infla­tion is erod­ing the real value of their sav­ings are told, in effect, to invest in stocks if they want pos­i­tive real returns.”
    End Quote

    There are points on infla­tion but it is pri­mar­ily about expec­ta­tion due to money sup­ply whereas I take the view that inno­va­tion can/is create/ing an alter­na­tive real­ity.
    Ten years ago I could not have imag­ined my energy util­ity would be pay­ing me for my power con­nec­tion.
    Ten years ago I could not imag­ine a five seater car that uses 5L/100km.
    Ten years ago it would have been beyond belief that you could buy a fully func­tion­ing lap­top com­puter for under AUD300.
    My first 4Mb com­pact mem­ory card cost me AUD32 12 years ago. Today I can get 16Gb for the same price — maybe even larger mem­ory and it fits on a theub­nail rather than palm of the hand.
    Ten years ago LCD TVs were prob­a­bly on some draw­ing board but not in shops — my 24” ana­logue TV of the day required two peo­ple to lift it. A 32” LCD TV today costs 1/4 of that set bought 15 years ago, and 1/10th the cost of a 32” LCD TV bought 4 years ago. The LCD can be car­ried in one hand.
    My fist Kodak dig­i­tal cam­era 14 years ago cost AUD895. My last Kodak cam­era is 1/4 of the weight, takes pho­tos with 10 times the res­o­lu­tion; includ­ing movies. It cost AUD90. My pho­tos today have neg­li­gi­ble cost. Prior to dig­i­tal cam­eras a photo cost 60c.
    I made my first inter­net pur­chase a lit­tle over 10 years ago. Today I do the major­ity of my shop­ping on-line look­ing across the globe at no extra cost over my ISP costs.

    Point of all this is that I believe I enjoy greater util­ity today with the same cost of liv­ing as I had 10 years ago. I have adapted and made choices with investment/purchases that I felt were pru­dent.

    There is no doubt that com­mod­ity prices have increased but we can do a lot more with those com­modi­ties pound-for-pound now than we did 10 years ago.

    There are many exam­ples of how tech­nol­ogy has advanced. If terms of elec­tric energy, the local util­ity pays me 60c/kWh for what my pan­els pro­duce. That is a lot higher than the cost of elec­tric­ity 10 years ago. To max­imise my out­put I try to min­imise my inter­nal con­sump­tion. The LED globes I have installed use about 30% of the power for the light out­put of a com­pact flu­oro, which, in turn, use about 30% of the power for the same light out­put as an incan­des­cent lamp. So the 60c/kWh is expen­sive on an energy basis but, in terms of the light it can pro­duce, it is cheaper than it was 20 years ago. How do you mea­sure infla­tion — the cost of energy or the cost of light­ing. Like­wise my cur­rent car costs less per km than the car I bought 10 years ago despite the ris­ing fuel costs. It is more lux­u­ri­ous and more com­fort­able. Should the fuel infla­tion be mea­sured in terms of litres or kms. 

    Peo­ple believe the cost of food has gone up. Look­ing at the major­ity of the pop­u­la­tion I would argue that the cost of glut­tony in devel­oped coun­tries has gone up. If food infla­tion is mea­sured in weight then it has risen. In terms of sus­te­nance and healthy choices it has come down. I can buy a lit­tle less weight of fruit and nuts for my money than I did 10 years ago but then if I eat fewer I am health­ier.

    If we do not adapt we will die. We need an eco­nomic sys­tem that encour­ages adap­tion not one that strength­ens the sta­tus quo. Min­sky is the best prospect I have seen for a tool to test pol­icy options to achieve this objec­tive. Indi­vid­u­als need to be encour­aged to adapt and reduce their expec­ta­tion of gov­ern­ments being able to pro­vide for them. Inno­va­tion needs to be placed ahead of spec­u­la­tion.

  • RJ

    Lyon­wiss
    April 7, 2012 at 9:42 pm | #

    @ RJ April 7, 2012 at 9:25 pm

    You talk typ­i­cal non­sense: “In Greece trade deficits means sav­ing will flow out of Greece.” A trade deficit means an income deficit rel­a­tive to the exter­nal sec­tor. Ignor­ing the cur­rent account, this means Greece has a sav­ings deficit and there­fore for­eign sav­ings will flow INTO Greece.”

    A trade deficit means goods flow into Greece. And to pay for these goods money flows out. Greece is now just like a house­hold that buys good. And uses sav­ings to pay for these goods (or ser­vices).

    If you could just use com­mon sense you would know your logic above is hope­lessly flawed.

  • RJ

    And here’s an artilce from a MMT / mon­e­tary sov­er­eignty site that explains the exact point that Lyon­wise is con­fused about. Unfor­tu­nately so too are many econ­o­mists and politi­cians.

    roger­mitchell site

    Mitchell’s laws: The more bud­gets are cut and taxes increased, the weaker an econ­omy becomes. To sur­vive long term, a mon­e­tar­ily non-sov­er­eign gov­ern­ment must have a pos­i­tive bal­ance of pay­ments. Aus­ter­ity = poverty and leads to civil dis­or­der. Those, who do not under­stand the dif­fer­ences between Mon­e­tary Sov­er­eignty and mon­e­tary non-sov­er­eignty, do not under­stand eco­nom­ics.”

    NB Greece is mon­e­tary non-sov­er­eign

  • alain­ton

    RJ
    Your entirely miss­ing the cap­i­tal structure/interest rates issue.

    Sec­toral bal­ances only get you so far — even­tu­ally you have to deal with time, the length of loan peri­ods, pay­back peri­ods for pro­duc­tion and invest­ment and cap­i­tal struc­ture — and for that sim­ple arith­metic wont work.

  • Steve Hum­mel

    @RickW

    Inno­va­tion needs to be placed ahead of spec­u­la­tion.”

    So true. And one of the biggest ways to free inno­va­tion, par­tic­u­larly in the man­u­fac­tur­ing sec­tor but in all other areas as well is to end the NECESSITY (but not the need of course, that not being pos­si­ble yet) of employ­ment in order to sur­vive. Leisure which is the active engage­ment of the indi­vid­ual in a self deter­mined activ­ity (not idle­ness, its oppo­site which is a social vice) is a sorely missed and needed goal which despite what you cor­rectly say in your post is still being inhib­ited by the finan­cial author­i­ties usurpa­tion of the CONSUMER finan­cial par­a­digm.

  • alain­ton

    There has finally been some dis­cus­sion, and account­ing con­fu­sion on the web around the Walras-Schumpeter-Minsky’s Law law

    http://slackwire.blogspot.co.uk/2012/04/case-of-keen.html

    Peo­ple try­ing to get their head round Walras-Schumpeter-Minsky’s Law esp. issue of dimen­sions. Nick Rowe chips in. They kind of work it out towards the end once they realise the equa­tion is in con­tin­u­ous time but still issue of treat­ment of assets.

    Also on ter­mi­nol­ogy http://fictionalbarking.blogspot.co.uk/2012/03/steve-keen-terminology-and-walras.html

    Again not an issue with con­tin­u­ous time – Lavoie con­fus­ing stocks and flow! Of all peo­ple.

    Defence here http://rwer.wordpress.com/2012/03/29/keen-krugman-and-national-accounting/

    The asset stock issue in a dif­fi­cult one as it is effec­tively a mea­sure of how the val­u­a­tion of the asset stock adjusts at an instant in time given an injec­tion of credit at that instant. It is a resid­ual.

    Im with Stephen Kin­sella that this log­i­cally must include a depre­ci­a­tion ele­ment.

    Ok sim­ple model — an oil well pro­duces 60 bar­rels of oil a a minute, 60 con­sumers demand exactly 1 bar­rel each a minute (sim­ple con­tin­u­ous pro­duc­tion).

    1 con­sumer instead of con­sum­ing the oil stock­piles it (saves it). Now if pro­duc­tion was con­tin­u­ous and demand steady if they then dumped this oil after 60 min­utes they would prob­a­bly lose money — as oil released onto the mar­ket would dou­ble.

    But imag­ine that 20 con­sumers did this, and what more pop­u­la­tion was ris­ing and pro­duc­tion was falling? 

    Depend­ing on the inter­est rate it might be ratio­nal to bor­row money and stock­pile then release. 

    This applies to any asset — houses for exam­ple — inter­est­ing case of joint pro­duc­tion — we are util­isng it as a hous­ing ser­vice, but at any time could release the cap­i­tal value of the asset, if we die or sell and move abroad.

    It needs a bit of lin­ear alge­bra to work out I think rather than a sim­ple NAT approach.

  • Steve Hum­mel

    Gross income is NOT net pur­chas­ing power for the same period. Yes, even­tu­ally pur­chas­ing power gets to where it is shown in the graph, but that entails time…and fur­ther finan­cial cycles push­ing the inher­ent pur­chas­ing power deficit by cost account­ing con­ven­tion also into the future. Since there is no veloc­ity in say a monthly retail cycle of sales and there is no cir­cu­la­tion of money in retail sales, but rather sim­ply an account­ing cycle from Banks to pro­duc­ers to indi­vid­u­als and then back to the Banks…a non-inter­est bear­ing citizen’s div­i­dend could be issued to indi­vid­u­als to close that pur­chas­ing power gap with gen­eral hap­pi­ness and other pos­i­tive micro and macro­eco­nomic effects result­ing. Also, every month, retail­ers vol­un­tar­ily agree to dis­count their prices (and are com­pen­sated back the same amount) based on the national for­mula of total cost of con­sump­tion over total cost of pro­duc­tion mak­ing sure that these approx­i­mately bal­ance and any cost push or demand pull infla­tion is negated for the con­sumer.

    Of course the com­mer­cial finan­cial par­a­digm remains the same, although beings how there is now suf­fi­cient pur­chas­ing power to liq­ui­date pro­duc­tion as it comes to mar­ket means that pro­duc­ers don’t have to export as much to find the demand they’ve been try­ing to find, and if they do, fine, but it is fac­tored into the national cost of pro­duc­tion increas­ing the dis­count in the next period of retail sales. The national econ­omy is more free flow­ing and indi­vid­u­als are more eco­nom­i­cally free, alot of wasted pro­duc­tion which is nor­mally charged entirely to the con­sumer is elim­i­nated, and no more money is actu­ally cre­ated because of the dis­count on prices. 

    Yes, undoubt­edly more sav­ings, but most of that will undoubt­edly re-enter the retail mar­ket when con­sumers use it to pur­chase out­right or finance less when buy­ing big ticket items like autos/down pay­ments on mort­gages etc. And if sav­ings get very high, no mat­ter because sav­ings are a cost of con­sump­tion and that low­ers the dis­count to con­sumers.

    With rea­son­able rules and regs espe­cially on lever­aged spec­u­la­tion any sav­ings used for those pur­poses can also be han­dled.

    Yes, Banks will lose a large part of their con­sumer finance mar­ket, poor things, but there will be more sav­ings for them to invest 🙂 hope­fully in the actu­ally pro­duc­tive seg­ment 🙁 instead of in the Rus­sion Rul­lete of MBS, CDS, god knows what 🙁 and most every­one will actu­ally be more cred­itable 🙂 while suf­fi­cient pur­chas­ing power also makes for lower inter­est rates on any con­sumer loans. 🙁 

    Ah, poetic jus­tice.

  • mahaish

    come on rj,

    you do believe in the causal process of endoge­nous money right ?

    read what war­ren mosler has to say on the topic.

    http://moslereconomics.com/wp-content/powerpoints/7DIF.pdf

  • mahaish

    In doing so, the money earned by savers but not yet spent decreases in value,”

    depends on the inter­nal demand for the cur­rency, and thats up to the gov­ern­ment and its will­ing­ness to improve the net assett posi­tion of the pri­vate sec­tor by run­ning larger fis­cal deficits and reduc­ing the unem­ploy­ment rate. as riskw has pointed out , the env­ioron­ment is defla­tion­ary not infla­tion­ary.

    there isnt any­where near enough avail­able cur­rency in the sys­tem to gen­er­ate infla­tion.

    cen­tral banks and trea­suries around the world are pil­ing up reserves and under­tak­ing liq­uid­ity swaps, but that doesnt trans­late into avail­able cur­rency that can drive some kind of high inl­fa­tion­ary process

  • mahaish

    both rj and lyon­wiss are right,

    under a sin­gle cur­rency frame­work,

    a trade deficit means an out­lflow euros into trade sur­plus nations.

    those cumila­tive euro deposit bal­ances have to be neu­tralised by the var­i­ous domes­tic sur­plus nation cen­tral banks , in order to man­age inter bank liq­uid­ity the inter­est rate tar­get­ing frame­work, and also because the neo clas­si­cal text books the cen­tral bankers read say so.

    so those cumila­tive euro cur­rency sur­pluses get re invested back into deficit coun­try finan­cial assetts.

    its no coin­ci­dence that other than national cen­tral banks, its ger­man and french banks that have the great­est exposire to sov­er­eign default by greece and the other pigs.

    now if it was only the euro zone cen­tral banks deal­ing in these assetts, we wouldnt have a prob­lem, but the bond mar­ket has been allowed to get their gready paws on these assetts, and place bets on the deriv­a­tives that have been cre­ated on these assetts.

    its been one huge liq­uid­ity swap, and cer­tain invest­ment banks and hedge funds have been short­ing these assetts through var­i­ous deriv­a­tive expo­sures, because they know that maas­tre­icht and EU regs restricts cen­tral bank sup­ply, both at the domes­tic econ­omy and EU level 

    the mar­ket were bet­ting that the eu gov­ern­m­nts were a rab­ble, and they would not be pre­paired to defend there finan­cial bal­ance sheet posi­tion.

    and now we have a dis­as­ter

    thats how this whole euro zone mess started

  • Lyon­wiss

    @ RJ April 7, 2012 at 11:13pm

    Here is an ele­men­tary account­ing iden­tity which MMT makes a lot of noise about:

    (S-I) + (T-G) = (M-X) + F

    The LHS is the domes­tic sec­tor, the first term is net sav­ings, the sec­ond term is gov­ern­ment bud­get. If net sav­ing > 0, gov­ern­ment bud­get 0. For sim­plic­ity, assume the domes­tic sec­tor is in bal­ance, ie LHS=0. If M>X, then there is a trade deficit and F<0 or neg­a­tive cap­i­tal accu­mu­la­tion. The trade deficit is financed by for­eign cap­i­tal inflow, typ­i­cally in for­eign loans. 

    Your state­ment “In Greece trade deficits means sav­ing will flow out of Greece” makes no sense, because it ignores all the other items in the national account. If you mean sav­ings are used to pay for the trade deficits ie assert­ing that S=(M-X), then F=0, imply­ing no net cap­i­tal flow. 

    You are very con­fused even about ele­men­tary eco­nom­ics. Sav­ings is sav­ings, not ear­marked for for­eign pay­ments as such.

  • Lyon­wiss

    REPOST due to tech­nol­ogy glitch.

    @ RJ April 7, 2012 at 11:13pm

    Here is an ele­men­tary account­ing iden­tity which MMT makes a lot of noise about:

    (S-I) + (T-G) = (M-X) + F

    The LHS is the domes­tic sec­tor, the first term is net sav­ings, the sec­ond term is gov­ern­ment bud­get. For net sav­ing > 0, gov­ern­ment bud­get 0. For sim­plic­ity, assume the domes­tic sec­tor is in bal­ance, ie LHS=0. If M>X, then there is a trade deficit and F<0 or neg­a­tive cap­i­tal accu­mu­la­tion. The trade deficit is financed by for­eign cap­i­tal inflow, typ­i­cally in for­eign loans. 

    Your state­ment “In Greece trade deficits means sav­ing will flow out of Greece” makes no sense, because it ignores all the other items in the national account. If you mean sav­ings are used to pay for the trade deficits ie assert­ing that S=(M-X), then F=0, imply­ing no net cap­i­tal flow. 

    You are very con­fused even about ele­men­tary eco­nom­ics. Sav­ings is sav­ings, not ear­marked for for­eign pay­ments as such.

  • Lyon­wiss

    REPOST AGAIN. Any­thing after a neg­a­tive inequal­lity (left brace) is deleted until the next right brace. 

    @ RJ April 7, 2012 at 11:13pm

    Here is an ele­men­tary account­ing iden­tity which MMT makes a lot of noise about:

    (S-I) + (T-G) = (M-X) + F

    The LHS is the domes­tic sec­tor, the first term is net sav­ings, the sec­ond term is gov­ern­ment bud­get. For net sav­ing > 0, gov­ern­ment bud­get is neg­a­tive (a deficit), only if RHS = 0,in a closed econ­omy (which you and MMT harp on a lot about, mak­ing false deduc­tions).

    The RHS is the cur­rent account bal­ance of the exter­nal sec­tor, the first term is trade bal­ance and the sec­ond term is net cap­i­tal flow or cap­i­tal accu­mu­la­tion if F>0. For sim­plic­ity, assume the domes­tic sec­tor is in bal­ance, ie LHS=0. If M>X, then there is a trade deficit and F is neg­a­tive or neg­a­tive cap­i­tal accu­mu­la­tion. The trade deficit is financed by for­eign cap­i­tal inflow, typ­i­cally in for­eign loans. 

    Your state­ment “In Greece trade deficits means sav­ing will flow out of Greece” makes no sense, because it ignores all the other items in the national account. If you mean sav­ings are used to pay for the trade deficits ie assert­ing that S=(M-X), then F=0, imply­ing no net cap­i­tal flow. 

    You are very con­fused even about ele­men­tary eco­nom­ics. Sav­ings is sav­ings, not ear­marked for for­eign pay­ments as such.

  • mahaish

    an inter­est­ing piece on the exter­nal accounts and bal­ance of pay­ments.

    please read.

    http://bilbo.economicoutlook.net/blog/?p=17188

    basi­cally , in a non sov­er­eign cur­rency frame­work,

    if net exports are pos­i­tive, means an accumi­la­tion of euro deposit bal­ances in domes­tic bank accounts, 

    and visa versa

    remem­ber we are not talk­ing about a float­ing sov­er­eign exchange rate regime which applies in the mmt frame­work.

  • RJ

    You are very con­fused even about ele­men­tary eco­nom­ics. Sav­ings is sav­ings, not ear­marked for for­eign pay­ments as such.”

    Its you that are badly con­fused and it is not the first time. 

    From Greece’s view­point

    Goods flow in but another coun­try has goods flow­ing out.
    Net finan­cial assets (sav­ings) flow out but another coun­try has a net finan­cial asset inflow. 

    You are mix­ing up view­points. Greece can not FROM THEIR VIEWPOINT have a inflow of an asset (goods) and also an inflow of another asset (sav­ings)

    You really need to stop using formula’s you do not under­stand and start using some com­mon sense.

  • Lyon­wiss

    @ RJ April 8, 2012 at 10:41 pm

    National accounts are about flow of pay­ments not about stock of assets.

  • Lyon­wiss

    @ RJ April 8, 2012 at 10:41 pm

    From Bill Mitchell’s post referred to by Mahaish (April 8, 2012 at 7:40 pm), even MMT under­t­sands basic eco­nom­ics:

    Over­all, when the cur­rent account is in deficit the econ­omy is net bor­row­ing from the rest of the world – tap­ping for­eign sav­ings.”

    Please let’s ter­mi­nate this con­ver­sa­tion.

  • Steve Hum­mel

    Could some­one give me straight­for­ward answers to a cou­ple of ques­tions?

    Do the com­mer­cial and the con­sumer finan­cial par­a­digms nec­es­sar­ily HAVE to be the same?

    And are sys­tems made for Man or Man for sys­tems?

  • TruthIs­ThereIs­NoTruth

    do you think there is a finan­cial god who has a grand design sys­tem in place?

    The finan­cial sys­tem has evolved over time. It com­prises of a col­lec­tion of incre­men­tal changes built over a very long time. The sys­tem has evolved to reflect and serve humanity’s social struc­ture, ie the masses work­ing to sur­vive while a nar­row group of indi­vid­u­als live of the work of oth­ers. This man­i­fests itself in more or less sub­tle ways depend­ing on where you are in the world. So the answer to your ques­tion is both.

  • TruthIs­ThereIs­NoTruth

    rj — i think you are con­fus­ing phys­i­cal goods and assets with finan­cial assets. 

    With finan­cial assets, someone’s asset is always some­one else’s lia­bil­ity.

    So Greece is obtain­ing a sur­plus of goods and the money that’s pours in from abroad is an asset for the lender and a lia­bil­ity for Greece.

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  • Steve Hum­mel

    do you think there is a finan­cial god who has a grand design sys­tem in place?”

    No, but I DO think that the cur­rent sys­tems could easliy be a lot more human if we’d align them with our per­sonal val­ues instead of the val­ues of profit or work.

    Actu­ally you answered your own refor­mu­lated hypoth­e­sis not my ques­tions.
    If any­one else wants to give those two ques­tions a try it might be instruc­tive.

    But con­grat­u­la­tions TITINT your answer of “both” is actu­ally cor­rect for my third ques­tion.

    What is more impor­tant the machin­ery of tech­nol­ogy or the accu­mu­lated advance­ment of same?

    One’s answer to the ques­tion shows one’s ori­en­ta­tion, and the cor­rect answer is of course….both. Not acknowl­edg­ing both or per­haps over empha­siz­ing the for­mer over the lat­ter illus­trates one of modernity’s biggest problems…the unwill­ing­ness or inabil­ity to think inte­gra­tively about eco­nom­ics and finance.

  • TruthIs­ThereIs­NoTruth

    Iron­i­cally SH there are anony­mous human beings scat­tered around the world cre­at­ing a sur­plus with hard their labour to give you the lux­ury of time so you could pon­der on these val­ues of pro­duc­tion.

  • Steve Hum­mel

    Whats ironic about that? I’m actu­ally one of those anony­mous peo­ple who not only labors at a job, but also runs his own busi­ness in addi­tion. Look, I’m not here to make any­one wrong, and I’ve been around a lit­tle too long to be put off by any­one mis­tak­enly mor­al­iz­ing to me. 

    I WOULD like to make peo­ple think on a level they are either not accus­tomed to or per­haps pre­fer not to.….because I sin­cerely think it might be edu­ca­tional or even enlight­en­ing.

    Eco­nom­ics, money and finance are wor­thy sub­jects to study, but the phi­los­o­phy under­ly­ing them is actu­ally even more impor­tant and so wor­thy of study itself, no?

    So please I once again invite any­one to actu­ally answer the three ques­tions I have asked:

    Do the com­mer­cial and the con­sumer finan­cial par­a­digms nec­es­sar­ily HAVE to be the same?

    Are sys­tems made for Man or Man for sys­tems?

    And what is more impor­tant the machin­ery of tech­nol­ogy or the accu­mu­lated advance­ment of tech­no­log­i­cal inno­va­tion itself?

  • alain­ton

    There is a very enter­tain­ing dis­cus­sion on the K v K fall­out at Randy Wald­mans inter­flu­dity. http://www.interfluidity.com/v2/3087.html

    He sets out the Salt-water/ Mar­ket Mon­e­tarist and PK posi­tions and then says — and I cant belive im copy­ing this

    When I think about these three groups, I don’t think, High­lander-style, “There can be only one!”. I think “Cool! Let’s put these ideas together.”

    By which he means in terms of cen­tral bank pol­icy — him being dis­trust­ful of ‘the­o­ret­i­cal per­fec­tion’

    Marko responds

    The NGDP-tar­get­ing scam of Sum­ner and oth­ers is an attempt to avoid the holo­caust ( for rightwingers and the cor­po­rate elite ) of a return to FDR/New Deal/Keynes-type pol­icy pre­scrip­tions , as this new look at the data would clearly sug­gest. Tar­get­ing NGDP is a delay­ing tac­tic , designed to allow fur­ther upward trans­fers of incomes –… for as long as pos­si­ble.

    Lis­ten­ing to the NGDP crowd on eco­nomic pol­icy is like lis­ten­ing to Exxon on cli­mate-change pol­icy. It dis­tracts you , slows you down , and pre­vents you from imple­ment­ing a proper solu­tion. And , like the cli­mate-change deniers , they’ll prob­a­bly suc­ceed.

    Brito responds that this is 

    quite pos­si­bly the most pathet­i­cally obnox­ious hyper­bole I have /ever/ encoun­tered

    Im with marko