Just Bank­ing Pre­sen­ta­tion

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I’m just unwind­ing back at my hotel after this 23 day, 4 coun­try, 7 city trip; an exhaust­ing but worth­while expe­ri­ence (made all the more chal­leng­ing by either Heathrow or Qan­tas los­ing my bag for 8 days on my arrival!).

The Just Bank­ing con­fer­ence organ­ised by the Friends of the Earth Scot­land was a fit­ting finale. I won’t write too much about it here–I’m too tired–but I’m sure Beth and friends will do a good write-up. For now, here is a screen record­ing of my pre­sen­ta­tion and the Pow­er­point slides; later we’ll add the video as well.

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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  • Great talk — short and punchy. I was par­tic­u­larly happy to see that you addressed the com­mon fal­lacy about banks charg­ing of inter­est lead­ing to unsus­tain­able debt growth. This think­ing seems to come about mainly from the pop­u­lar doc­u­men­taries “Money as Debt” by Paul Grignon and “The Money Mas­ters” by Bill Still — both avail­able on YouTube — and per­haps Ellen Brown’s book “Web of Debt”. It’s an easy and appeal­ing fal­lacy for the public/99% to fall into.

  • alain­ton

    Hah psy­chic as after Zero­hedge posted Grignon’s doc­u­men­tary today http://www.zerohedge.com/news/money-debt (which really should be called money as credit) was going to post a short rebut­tal to this idea that credit based money cre­ates a ‘gap’ between loan and repay­ment of loan +inter­est which requires an ever increas­ing level of debt to fill. 

    There were a lot of cam­paign­ers in the 1930s who held sim­i­lar the­o­ries’ Kenyes called them ‘mon­e­tary cranks’ but still said that had use­ful things to say.

    One of these was Major Dou­glas. His orig­i­nal A+B the­ory (that what work­ers at a firm get paid in wages not enough to buy the goods they pro­duce) got shot out of the water (it didnt take into account value added by pro­duc­ers of inter­me­di­ate goods) so he devel­oped a bank­ing ‘gap’ the­ory iden­ti­cal to the mod­ern day ‘mon­e­tary cranks’ such as Grignon.

    This idea became pop­u­lar amongst cam­paign­ers then in 1933 a major debate (no pun intended) was organ­ised between the Dou­glas and Hawtry — famous econ­o­mist and friend of Keynes.

    The fact that it is Hawry is impor­tant because he set out in detail in 1919 the mod­ern credit the­ory of money — that it is endoge­nous and cre­ated ‘out of thin air’ by banks.

    The debate was writ­ten up here http://douglassocialcredit.com/resources/archives/douglas_hawtrey_debate.pdf and is a must read because the argu­ments today are just the same. 

    Where Hawtry set out in ver­bal form an argu­ment very sim­i­lar to Steves above — indeed Dou­glas use­fully sketches out the two com­pet­ing the­o­ries in a quite remark­able dia­gram on mon­e­tary flow (p267).

    Hawtrys main argu­ment was over the ‘wheel of pro­duc­tion’ — early on a pro­ducer repay­ing a loan has goods unsold so they have to pay back more on the loan than they receive in income from goods sold. Later on in this is reversed. If it is a good invest­ment at the end of the process the banker and the debtor have both made a profit received from inflow of money from else­where in the econ­omy — balenced by an net increase to the econ­omy in goods or ser­vices. The real econ­omy is richer at the end of the period through the goods/services pro­duced.

    This didn’t try to dis­guise fluc­tu­a­tions in demand or finan­cial insta­bil­ity. In fact Hawtrys the­ory of credit based insta­bil­ity was greatly expanded by Min­sky. The basic point — as put in the debate — was that Hawrty though Dou­glas had con­fused the con­se­quences of insta­bil­ity and depres­sion for a per­ma­nent and for all time weak­ness.

    Within Hawtrys state­ment is a ver­sion of Steve’s Credit Accel­er­a­tor’

    what is com­monly called an expan­sion of credit is really a device for induc­ing a release of cash, while a con­trac­tion of credit is a device for induc­ing an absorp­tion of cash…the real sigb­nif­i­cance of the power of the banks to cre­ate or extin­guish money is that it enables them to bring about the release or absorp­tion of cash

    Note the ‘Keyn­sian’ solu­tion in the final para of Hawtry’s state­ment — which reflected the debates going on between Keynes and Hawtry at the time (1933)

    Dou­glass response — well I think the dia­gram and his writ­ings show he still held to a fal­la­cious loan­able funds view of bank lend­ing. His ‘fac­tory 2’ argu­ment is inter­est­ing antic­i­pat­ing how the sec­ond world war would end the Great Depres­sion — pro­duc­ing goods not intended to be sold but pay­ing work­ers and boost­ing effec­tive demand. Hawr­tys response was that yes this would work but it sim­ply showed how to restore par­ity in an econ­omy not that there is an inevitable ‘gap’ for all time and for­ever.

    Dou­glas is inter­est­ing because his the­ory is really Marx’s (or rather Proudhon’s) the­ory of sur­plus value seen in mon­e­tary cir­cuit form — a gap in pur­chas­ing power lead­ing to break­down. And flawed, but very enlight­en­ing, for the same rea­sons. The grain of truth in both being how a unequal dis­tri­b­u­tion in wealth can lead to unsuit­able increases in debt. Dou­glas at the end rightly chided Hawtry for pre­sum­ing a ‘Scot­tish’ Adam Smith view of the world where all credit goes towards increas­ing pro­duc­tion.

    There are issues though with viewing/modelling the whole econ­omy as one bank, as this hides issues con­cern­ing the overnight posi­tion of the banks of con­sumers spend­ing money on the goods and ser­vices pro­duced. They do suf­fer a very short term ‘gap’ though it is one that can eas­ily be filled — if there posi­tions arnt bal­anced — by bor­row­ing (net) from banks that have an overnight sur­plus — the banks hold­ing prof­its.

  • alain­ton

    Quick fol­low up on how Hawtrys treat­ment of depre­ci­a­tion above fits within Steve’s con­cept of net asset turnover.
    Hawtry argued that depre­ci­a­tion wouldnt cre­ate a ‘gap’ as at from its pur­chase the owner would need to set aside fund­ing for its replace­ment and when replaced that fund­ing would be released — so the net effect on effec­tive demand would be zero. Of course account­ing con­ven­tion is to depre­ci­ate the cap­i­tal good over its life­time (in real not nom­i­nal terms) so that at any time you would be able to cal­cu­late its poten­tial sale price and value to the firm as an asset.
    Imag­ine then if invest­ment ceased and cap­i­tal goods depre­ci­ated, such as dur­ing a depres­sion. This hurts the bal­ance sheets of the firms as in terms of the account­ing equa­tion a-l+oe it is going in the neg­a­tive direc­tion. But if that firm sold the old machin­ery there would be no change to net assets as net assets sold on one bal­ance sheet would be bal­anced by net gains on another firms.
    So net depre­ci­a­tion is a cost to firms and reduces prof­its — think of it as entropy’s fac­tor return. The more durable the cap­i­tal good the higher the rate of profit.
    Imag­ine the rare case of cap­i­tal goods that appre­ci­ate, per­haps an antique wine press. Their bal­ance sheet posi­tion is enhanced.
    So net depre­ci­a­tion set­ting aside of pro­vi­sions which has the effect of reduc­ing the amount of credit demanded at the point of replace­ment.
    So from that line of think­ing you need to add a net depre­ci­a­tion clause to Steve’s Wal­ras- Min­sky demand equa­tion (Stephen Kin­sel­las mod­els include net depre­ci­a­tion) as it is not dou­ble count­ing — either from net asset turnover or change in debt. And if any­one says asset value on a bal­ance sheet is a stock and the demand equa­tion is a flow, as the depre­ci­a­tion pro­vi­sion is a diver­sion from prof­its to top up the ever falling asset value stock level it always has an equiv­a­lent flow level- their is no stock flow con­fu­sion.

  • alain­ton

    Final point — is there still a ‘gap’ if money only turns over once in a cycle? — Steve said above the fact that it turns over more than once, gen­er­at­ing growth each time, inval­i­dates it. How­ever Hawtrys argu­ment, shows that even with his hid­den assump­tion of con­stant veloc­ity and money turn­ing over once there still wouldn’t be a gap.
    Ques­tion­ers to Dou­glas did say the veloc­ity issue inval­i­dated his argu­ment. He argued back if V increased so would T and as each sale would equal pur­chase they can­cel out in the national bal­ance sheet — very dodgy argu­ment because of course M+delta Debt .V=P.T=aggregate demand, so a boost in money from a change in debt — if it increases the rate of trans­ac­tions can also induce a mul­ti­plier effect in the veloc­ity of money and the more times it cir­cu­lates the more oppor­tu­nity for profit.

  • koonyeow

    Title: Account­ing Dif­fer­ence Between Notes And Deposits

    When the bank makes a loan to the firm and hands over the notes to the firm, whether the notes trans­form into a deposit depend on where the firm parks those notes. If the firm parks those notes within its own premises, no deposit is cre­ated. If the firm parks those notes in the bank, then a deposit is cre­ated and those notes remain in the bank’s vault. There can be a flow among deposits, among notes hold­ers or a com­bi­na­tion of both. The bal­ance sheet treat­ment for notes and deposits is actu­ally quite dif­fer­ent. Below is the spe­cial case where all the lent notes are parked out­side of the bank:

  • Lyon­wiss

    If you lis­ten care­fully to “Money as Debt” by Paul Grignon or read Hawtrey (Cur­rency and Credit) or Schum­peter (The­ory of Eco­nomic Devel­op­ment) or Holmes (Oper­a­tional con­straint…), they do not con­fuse credit with cash (only real form of money M0). 

    For exam­ple, a bank deposit is debt (or credit to depos­i­tors) , NOT money. That’s why a bank can lend with­out money, which it typ­i­cally does not have much of, nore does it cre­ate (not cash or notes), any time (@ Koonyeow April 21, 2012 at 9:44 pm). 

    Much of the debate (too much) comes from an abuse of lan­guage (con­fus­ing debt with money). Lever­age and endoge­nous credit cre­ation are the issues, not money, for which gov­ern­ment nor­mally has con­trol (but can lose it).

    Nobody really under­stand it, because the the­ory of money must include a coher­ent account of ALL of the fol­low­ing: credit defaults, sov­er­eign defaults, bank runs, coun­ter­feit­ing, black mar­kets, mon­e­tary pol­icy effec­tive­ness (or oth­er­wise), bank reg­u­la­tion, quan­ti­ta­tive eas­ing etc. Every­thing I’ve read so far is defi­cient: blind men feel­ing the ele­phant.

  • I’m a lit­tle con­fused with the idea that banks can cre­ate money from noth­ing. If indi­vid­ual banks can cre­ate money why do they bother tak­ing deposits at all or bor­row­ing on the gobal whole­sale mar­kets? They wouldn’t need any of it or have to pay inter­est to me or the whole­sale sup­pli­ers. As long as they have some of their own cash, bonds , shares etc.. (from invest­ments and inter­est they recieve) And meet their cap­i­tal require­ments. But the fact they do take deposits and bor­row on mar­kets seems to sug­gest they only re-loan exist­ing money. As Hugh Stret­ton has stated in his book, indi­v­d­ual banks don’t cre­ate money the bank­ing sys­tem as a whole does. Can some clar­ify steves ideas with the above facts? Cheers.

  • Lyon­wiss

    @ Peter (fishpm) April 22, 2012 at 12:01 am

    Most peo­ple just quote from author­ity with­out really under­stand­ing what is really being said. By not defin­ing key words care­fully, econ­o­mists lit­er­ally do not know what they are talk­ing about. You are right in ask­ing ques­tions, which are rhetor­i­cal accord­ing to me.

  • Derek R

    Peter asked:
    If indi­vid­ual banks can cre­ate money why do they bother tak­ing deposits at all or bor­row­ing on the global whole­sale mar­kets?

    One part answer is that although indi­vid­ual banks are allowed to cre­ate “vir­tual” money (ie entries on books or in data­bases) they are not allowed to cre­ate mon­e­tary tokens (ie notes and coins). So as long as some peo­ple want to with­draw cash, the banks have to seek notes and coins from some source. One source is from depos­i­tors. Another is by bor­row­ing them from the cen­tral bank (which is allowed to cre­ate mon­e­tary tokens).

    Another part of the answer con­cerns the con­di­tions under which banks are allowed to “cre­ate money from noth­ing”. A bank is only allowed to do this when it can find a third party who will agree to owe it a debt at least as great as the amount of money it cre­ates. In other words it can only “cre­ate money out of noth­ing” to use as part of a loan to some­one else. And of course the loan costs it most of the newly cre­ated money. It only gets to keep any fees and inter­est that have been agreed with the bor­rower.

    A third part of the answer again con­cerns the con­di­tions under which banks are allowed to “cre­ate money from noth­ing”. In some coun­tries, but not all, a bank is not allowed to cre­ate money unless it has a cer­tain amount of money in reserve. The laws of the coun­try con­cerned may spec­ify that a bank may loan no more than 5 times the amount of money that it cur­rently has in reserve, for instance. Some banks will lit­er­ally take that as a hard limit and will stop mak­ing loans once they reach that limit. How­ever the vast major­ity will make the loans and then check to see whether they have a large enough reserve. If they do not they will bor­row those reserves on the global whole­sale mar­kets. Pro­vided that they can do so at a lower cost than the profit they are mak­ing on their own loans this makes eco­nomic sense to them. How­ever because it is bor­row­ing, this in itself will allow the banks from whom the reserve-chal­lenged banks are bor­row­ing, to “cre­ate money out of noth­ing” in order to ful­fill the loans.

    And I think that Hugh Stret­ton is wrong: indi­vid­ual banks do cre­ate money. The above describes how.

  • koonyeow

    Title: A Response to Peter

    I think one of the con­fu­sions is the words money and deposit. For a pri­vate sec­tor worker like me, money usu­ally means the notes and coins you have plus your deposit with (usu­ally) a com­mer­cial bank. Gen­er­ally (but not ver­i­fied by me yet), notes and coins are cre­ated by cen­tral banks. Deposits on the other hand come into exis­tence in two ways:

    1. You hand over your notes or coins to your com­mer­cial bank. Your notes or coins decrease but your deposit increases;
    2. The com­mer­cial bank makes a loan to you. Your deposit increases (and so does your debt). How­ever, no notes or coins are cre­ated is this process.

    When you wrote banks can cre­ate money from noth­ing, the more tech­ni­cal state­ment is com­mer­cial banks can cre­ate deposits from noth­ing if there is no reserve require­ment.

    Com­mer­cial banks need to take deposit because of reserve require­ment by the cen­tral bank. It is quite dif­fi­cult using words to describe the process. It will be eas­ier if you know how to read cen­tral and com­mer­cial banks bal­ance sheets (Flow of Funds for the U.S.).

    Steves’s model is a bit tricky because there is no dis­tinc­tion between notes and deposits. Steve’s model is endoge­nous nonethe­less. In fact, his model works equally well even with­out the phys­i­cal notes, whereby loans cre­ate deposits and deposits cir­cu­late among deposits hold­ers.

  • LCTesla

    It seems to me that the cor­rect inter­pre­ta­tion is that there is money cre­ation going on, but the fact that this money is asso­ci­ated with a loan that will destroy the money again upon repay­ment makes the money in ques­tion more ephemeral than reg­u­lar money. It’s pres­ence in the econ­omy, in as far as repay­ment is expected by the mar­ket, is tem­po­rary rather than per­ma­nent. The effect of this, in turn, is that under ordi­nary con­di­tions it only has the power to bid up asset prices rather than con­sumer prices.

  • cen­ter­line

    Thank you Steve for the sim­ple expla­na­tion regard­ing the effect of inter­est gen­er­ated on bank loans. I believe this is con­sis­tent with what Andrew pointed out pre­vi­ously regard­ing it’s flow through nor­mal mon­e­tary cir­cuits.

    I hate to say it but I still have my reser­va­tions though that the behav­ior is entirely benign. I wish I recalled more of dif­fer­en­tial equa­tions — but I do not use this in my career and have for­got­ten most of it.

  • cen­ter­line

    OK. I am back. Had to. Was bug­ging me too much. 

    The sys­tem of equa­tions, when run in a sim­u­la­tion appeared sta­ble. And the expla­na­tion is the dif­fer­ence between stock and flow — with a mon­e­tary cir­cuit (bank­ing oper­a­tions) for inter­est. What I won­der is the sen­si­tiv­ity to the veloc­ity of money. What if it was slowed (or accel­er­ated) by effects out­side the sys­tem of equa­tions?

    I am not assert­ing that the inter­est alone is the prob­lem. I am just won­der­ing if it is “part” of it. The con­cept that banks can cre­ate money and ben­e­fit from it is an unsta­ble premise short of 100% reg­u­la­tion. Maybe, just maybe, this is mis­taken dis­tinc­tion between cause and effect.

  • Steve Hum­mel

    Micro­eco­nomic cost account­ing is the lost/missed/forgotten dis­ci­pline in eco­nomic the­ory.

    Labor costs (pur­chas­ing power) are not all busi­ness costs, but prices reflect ALL costs. 

    Money in the cur­rent mon­e­tary sys­tem, whether cre­ated by Banks or Cen­tral Banks can­not cur­rently be cre­ated with­out cost. 

    Money does not actu­ally cir­cu­late. It oper­ates in an account­ing cycle from the Banks to pro­duc­ers to retail­ers then back to the Banks, pro­duc­ers and retail­ers and yet incur­ring addi­tional cost with each redis­tri­b­u­tion thereof.

    The quan­tity the­ory of money and the veloc­ity of its “cir­cu­la­tion” is an illu­sion. It describes the re-cycling of money and the exchanges from hand to hand of prod­ucts and ser­vices, but not the addi­tional costs asso­ci­ated with each re-cycling through the cost­ing (Bank/producer/retailer) sys­tem, and that includes a model of mul­ti­ple banks because, after­all, banks even though their func­tion be the cre­ation of money (credit) itself, are busi­nesses too, and so must also abide by cost account­ing convention.…at least under the cur­rent sys­tem.

    The nor­mal func­tion­ing of the econ­omy is sim­i­lar to the illu­sion of fly­ing, which is actu­ally con­trolled falling, and is depen­dent upon growth and expan­sion to avoid col­lapse. Inter­est is not the cause of our mon­e­tary prob­lems, it is one of the inevitable cost­ing effects. The cause is the neces­sity of bor­row­ing to avoid utter aus­ter­ity, par­tic­u­larly by indi­vid­u­als, in order to keep the econ­omy “up in the air.” The fact that rel­a­tively few indi­vid­u­als, either because they make a lot of money or because they are will­ing to endure aus­ter­ity by fore­go­ing con­sump­tion, are not forced to bor­row is anec­do­tal.

    Cen­tral Bank injec­tions and Bank cre­ation of debt tend to obscure the gap or inher­ent deficit of pur­chas­ing power enforced by cost account­ing con­ven­tion, but as pre­vi­ously said they still incur addi­tional cost. Over the long term unpaid and rolled over Cen­tral Bank credit injec­tions re-inforce an unnec­es­sary re-dis­trib­u­tive cost to indi­vid­u­als and busi­nesses in the form of taxes. The con­tin­u­ous rise of Bank credit has the same effect on pur­chas­ing power and re-inforce­ment of re-dis­trib­u­tive tax­a­tion. A pub­lic Dis­trib­u­tive mon­e­tary sys­tem with a man­dated peri­odic div­i­dend and a retail dis­count (even if vol­un­tary) elim­i­nates these reduc­tions of pur­chas­ing power and their “neces­sity.”

    The solu­tion, even whether you agree with the above analy­sis or not, is a con­tin­ual peri­odic div­i­dend to indi­vid­u­als and an equally peri­odic dis­count to con­sumers cou­pled with the same total amount com­pen­sated back to retail­ers at or directly after retail sale which elim­i­nates any cost push or ten­dency toward goug­ing in the name of demand pull infla­tion. These mech­a­nisms would not only short cir­cuit the neces­sity of most con­sumers to bor­row to avoid aus­ter­ity, but elim­i­nate the need for much of the wasted pro­duc­tion and human effort involved in that pro­duc­tion. Thus finan­cial insta­bil­ity is greatly reduced, mon­e­tary suf­fi­ciency more accu­rately reflects the abun­dant poten­tial of pro­duc­tion, tech­nol­ogy is freed from eco­nomic con­sid­er­a­tion and enabled to reduce cost in an unhin­dered way, and a busi­ness and indi­vid­ual psy­chol­ogy of secu­rity and hope is able to trans­form and begin to replace one of fran­tic pro­duc­tion and equally fran­ti­cally induced con­sump­tion.

  • Robert K

    Mean­while, over at Zero Hedge, one sees that Krug­man has “wet the bed”
    once again. The title, “Krug­man rebuts Spitz­nagel, says Bankers are the
    true vic­tims of QE”. Go have a look, or a laugh, as the mis­un­der­stand­ings
    pro­lif­er­ate like bun­nies.

  • Pingback: Silver Eagle News » In a relatively brief (23 min.) and somewhat wonkish presentation, economist Steve Keen continues his assault on Paul Krugman and neoclassical economics. Keen says economists’ obsession with public debt is a mistake, and th()

  • When the crises comes.…

    The week of 23 April 2012 : The Mil­len­nium Equity and Com­mod­ity Crash

    How the global macro­eco­nomic debt-money-asset sys­tem works.

    This week’s crash deval­u­a­tion is not grounded in ani­mal spir­its nor social psy­chol­ogy nor socio­nom­ics nor mass psy­chol­ogy.

    This is a pre­dictable deter­min­is­tic time based event and an ele­ment of an opti­mal math­e­mat­i­cal self assem­bly process of the global debt-money-asset sys­tem and the rules that gov­ern pos­ses­sion of the system’s assets. Ulti­mately a macro­eco­nomic sys­tem crit­i­cal load of bad debt under­goes inevitable and pre­dictable default as defined by the time based quan­tum math­e­mat­i­cal pat­terned behav­ior.

    Sat­u­ra­tion Macro­eco­nom­ics is a math­e­mat­i­cal sci­ence pri­mar­ily defined by the system’s crit­i­cal mass of bad debt load. That bad debt load pre­vi­ously was used to pro­duce an over­sup­ply of over­val­ued assets. Asset val­u­a­tion crashes occur and eco­nomic reces­sions occur qual­i­ta­tively when too much has been bor­rowed, too much has been pro­duced, and too much has been con­sumed. . The macro­eco­nomic sys­tem is triply sat­u­rated with asset over­val­u­a­tion, asset over­sup­ply, and a sys­tem crit­i­cal load of bad debt.

    The finan­cial indus­try whose pri­mary prod­uct is lever­aged credit and bad debt cre­ation accen­tu­ates asset over­val­u­a­tion within the system’s asset val­u­a­tion quan­tum time based cycles

    The quan­tum process of pat­terned val­u­a­tion growth and decay of com­pos­ite equi­ties and com­modi­ties and the system’s hege­mony coun­ter­vail­ing larger asset class of debt reveal the sta­tus ret­ro­spec­tively, cur­rently, and prospec­tively of the macro­eco­nomic debt-money-asset sys­tem where money and more impor­tantly and sub­stan­tially debt rep­re­sent very large ele­ments of the system’s total assets and sum­ma­tion wealth.

    When inevitable bad debt default occurs, the system’s numer­a­tor of sur­viv­ing assets have a lower denom­i­na­tor val­u­a­tion of total wealth.

    In the United States over 50 of the 190 tril­lion dol­lar system’s worth includ­ing land and real estate is rep­re­sented by debt.

    The time depen­dent quan­tum pat­terned behav­ior of the rel­a­tive val­u­a­tions of the system’s coun­ter­vail­ing timed based asset val­u­a­tion curves is THE RELEVANT DATA needed to com­pos­itely have a global under­stand­ing of what has hap­pened, what is hap­pen­ing, and what will hap­pen. The asset val­u­a­tion curves time based pat­terned behav­ior dwarfs the rel­e­vance of any GDP growth curve, unem­ploy­ment curve, asset sales curves, wage growth curve, or accu­mu­la­tive US gov­ern­men­tal debt curve.

    None of these lat­ter curves and the many other busy curves and data pro­duced by clas­si­cally trained econ­o­mists are pre­dic­tive of future eco­nomic activ­ity, and ALL are depen­dent on the pat­terned behav­ior of the system’s deter­min­is­tic inter­lock­ing oppo­si­tional coun­ter­vail­ing asset val­u­a­tion curves.

    The non­lin­ear quan­tum pat­terned behav­ior of the macro­eco­nomic system’s coun­ter­vail­ing asset val­u­a­tion curves ele­vates the entity of Sat­u­ra­tion Macro­eco­nom­ics to a sci­ence equiv­a­lent to physics and chem­istry.

    Under­stand­ing this par­a­digm shift con­cept and using the pat­terned sci­ence allows much eas­ier deci­sion mak­ing and clar­ity regard­ing global eco­nomic and fis­cal pol­icy.

  • mike­h1980

    Some­thing not men­tioned above in the “money from noth­ing” dis­cus­sion is that banks are cap­i­tal con­strained. They can­not cre­ate loans ad infini­tum regard­less of what reserve con­straints may or may not be placed on them by their cen­tral bank (and they can meet that con­straint by bor­row­ing reserves if needed after mak­ing loans to credit wor­thy bor­row­ers). At some point they are lim­ited by cap­i­tal, and the reg­u­la­tions they trade under (Basel, APRA in the case of Aus­tralia etc) which gov­ern their abil­ity to lend given the cap­i­tal they have. So at that point the cre­ation of loans and deposits “from noth­ing” is pre­vented. Pre­sum­ably the rea­son why Aus­tralian banks have bor­rowed off­shore is because they have reached that point. There­fore they would bor­row on the global mar­ket and lend locally at a mar­gin (it goes with­out say­ing that this is deemed to be a prof­itable trans­ac­tion).

  • TruthIs­ThereIs­NoTruth

    I’m going to change my mon­icker to TOTBALGET (Take off the­o­ret­i­cal blind­fold and let go of ele­phant tail)

    On a seri­ous note, my cur­rent thoughts on ‘shares jubilee’.

    The GFC showed us how the finan­cial domi­noes are con­nected and how they fall. We started off with some rot­ten domi­noes push­ing over some naive domi­noes. Many legit­i­mate domi­noes were also shaken in what turned out to be a liq­uid­ity cri­sis. In other words, the explo­sion ille­git­i­mate debt turn­ing into fraud­u­lent debt and related deriv­a­tives freez­ing up the entire finan­cial sys­tem. Liq­uid­ity is the oil that makes the sys­tem func­tion, the fric­tion caused from lack of liq­uid­ity sim­ply trans­lates to much higher cost, mar­kets nat­u­rally do a good job of pric­ing in a liq­uid­ity pre­mium, that is investors are happy to enter an illiq­uid mar­ket, but since that means they are com­mit­ing funds to illiq­uid and there­fore hard to access assets, they need to be com­pen­sated. Point is liq­uid­ity is vital to a well func­tion­ing econ­omy and lack of it comes with a price tag. By the way if you want a case study of how insti­tu­tions can not only sur­vive a liq­uid­ity cri­sis but also come out in a stronger posi­tion, look to the Aus­tralian bank­ing sys­tem.

    The jubilee shares is equiv­a­lent to a liq­uid­ity labotomy. It is just as archaic and a crude solu­tion derived from a log­i­cal thread stem­ming from a nar­row the­o­ret­i­cal per­spec­tive. My pre­dic­tion is that it would result in a mea­sur­able reduc­tion of insta­bil­ity at an eco­nomic out­put level tak­ing the global econ­omy back to the mid­dle ages.

  • koonyeow

    Title: A (Bio­log­i­cal) Response to Lyon­wiss (a.k.a. Just for Laughs)

    From Lyon­wiss:

    Nobody really under­stand it, because the the­ory of money must include a coher­ent account of ALL of the fol­low­ing: credit defaults, sov­er­eign defaults, bank runs, coun­ter­feit­ing, black mar­kets, mon­e­tary pol­icy effec­tive­ness (or oth­er­wise), bank reg­u­la­tion, quan­ti­ta­tive eas­ing etc. Every­thing I’ve read so far is defi­cient: blind men feel­ing the ele­phant.

    Truly, but our species were not selected for our epis­te­mo­log­i­cal fit­ness. Our species were selected for our repro­duc­tive fit­ness.

  • Steve Hum­mel

    If there was a per­pet­ual div­i­dend ade­quate for a mid­dle class lifestyle dis­trib­uted to indi­vid­u­als why would there ever be a rea­son to fear a Bank run? Then with the down­siz­ing of the con­sumer credit mar­ket the div­i­dend would effect, plus reg­u­la­tion of Banks to say 8–10:1 and the shoot­ing on sight of any­one who sug­gested some­thing like MBS, CDS etc. 🙂 TBTF and finan­cial insta­bil­ity are beaten back pretty well.

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  • they do not con­fuse credit with cash (only real form of money M0).”

    Cash isn’t real. Cash is a bearer bond for lia­bil­i­ties at some bank. It’s just a receipt for a deposit.

    It’s no more real than a build­ing soci­ety pass­book.

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  • At some point they are lim­ited by cap­i­tal, and the reg­u­la­tions they trade under (Basel, APRA in the case of Aus­tralia etc) which gov­ern their abil­ity to lend given the cap­i­tal they have”

    That’s ‘light­ning strike if you break the rules’ think­ing. Banks cheat and cajole — it’s in their inter­est to do so.

    There is no law with­out enforce­ment, and we’ve seen pre­cious lit­tle of that with the banks. Unless the banks fear some­thing then they will ignore the rules. That’s why reserves don’t act as a restric­tion — the pri­vate banks know the cen­tral bank will not bring the pay­ment sys­tem down to pre­vent them lend­ing.

    There­fore you cre­ate cap­i­tal by lend­ing money into the spend­ing sys­tem, which then effec­tively laun­ders it and uses it to pur­chase cap­i­tal bonds and equity in the banks. And that lever­age cycle will con­tinue until it is no longer prof­itable to pur­chase bank cap­i­tal. So it becomes a mat­ter of price, not quan­tity.

    If you search the Inter­net you’ll find aca­d­e­mic papers describ­ing how banks can push the Basel rules to gain an edge. And that’s before the reg­u­la­tors are lob­bied to death.

    You’ll see over the cycle that cap­i­tal con­straints were repeat­edly weak­ened and weak­ened until we ended up with a crash. Nobody in the sys­tem said stop.

    For a con­straint to be effec­tive it has to be real and enforced con­sis­tently. The rea­son a busi­ness doesn’t invest and run up a huge over­draft is because it knows that the bank will bounce cheques and fore­close.

    And even then some busi­nesses once they have acquired enough ‘sunk cap­i­tal’. How is HMV still trad­ing for exam­ple? Why would any­body fund Twit­ter? It’s all to do with the tug of war between the con­strained and the con­strainer.