Kim Hill Interview
May26
on May 26, 2012
at 2:19 pm
Kim Hill interviewed me about Debunking Economics on her Radio New Zealand National program "Saturday Morning” today. It was probably the most in-depth interview I’ve yet done on the topics covered by the book. This was my first experience of Kim as an interviewer, and I can recommend her program unreservedly after it.
You can also download the podcast from here:
I expect something like this will have to be tried when the ecology is obviously near-terminally screwed by over-production:
IF Steve. There have been many end of world predictions in the past. All wrong as I predict the current ones will be.
I have to side strongly with Steve on that one, RJ.
The difference between now and then is that then development into higher levels of resource utilization efficiency was more of a chosen path.
Today for the general point Steve makes it is more of the only path.
The expansion into natural resources has always been with us linked to population growth and trans-formative capability — yes.
But this is dramatically different now.
Cliffy
We will be fine in 50 or 100 years from now. But there will still be people predicting the end (very likely for similar reasons) and trying to make money from it.
@LCTesla
The simplest answer to your question is that like any other capitalist firm banks use money to make more money.
You and I cannot make money out of thin air if we are broke, but a well capitalised bank can.
Banks in the jargon ‘endogenously’ create money through a journal entry, the debtor is credited the loan and the bank has a journal asset in the form of regular repayments with interest to realise a profit. In a very evocative phrase Schumpeter used the term ‘out of thin air’ but it has confused people ever since because it is rather created out of money soaked air.
It is useful to consider how banks learned they could do this — fiat banking — learning that they had money in their vaults which at times of growth was accumulating. All deposit with a bank was a liability to them, the money wasnt theirs, but they learned that as they paid out loans the money they needed to keep on hand on any day was much less than in their vault. The more money stored in their vaults the less the likelihood that any individual customer, unless the loan amount was very large, would exhaust the vault. Hence banks learned that they could lend out far more than they had in their vault in any particular day. If any any day they did receive unusually large withdrawls they could always borrow short term from other banks. This always works fine and dandy until their is a financial crisis and a run on banks, hence the need recognised since the 16th Century (in theory) for a central bank to act as lender of last resort.
Most of the confusion about banks comes from failure to define stock /flow relationships in time.
Keen / Wilson have developed a model of ‘potential lending capacity’ based on these cash flow constraints here http://www.debtdeflation.com/blogs/2012/01/11/guest-post-a-double-entry-view-on-the-keen-circuit-model/
It has been around in verbal form for 150 years but this is I think the first attempt to formalise it in accounting/mathematical terms (quite astonishing really it took so long).
It needs to develop further the lending capacity will depend on future inflows from profitable loans, but will also depend on starting equity in founding the bank which is then lent out, lending capacity can also be extended by attracting deposits which are then lent out on fiat terms. If lending capacity temporarily as a stock variable hits negative but the bank has future sound income streams then its creditworthiness will enable it to borrow short term. So the mantra you here so often on the net that the conventional wisdom that banks are reserve constrained in lending is wrong and instead they are equity constrained is only partially true. It is true for a newly formed bank but in the long run banks potential lending capacity is determined by profits on equity put to use (loan repayments) & reserves & bank creditworthiness. Reserves will depend on what deals they can offer potential savers which in the long run is dependent on profitability, similarly bank creditworthiness is long run dependent on profitability. So I would say the long run constraint on bank lending is bank profitability– rather than equity or reserves etc. by themselves. Although banks have many ways of manipulating the appearance of short run profitability to attract investment in financial products which is the source of many of our woes.
Banks are like any other business, profit=cost of production-sale price
Only here we are talking of the cost of money to banks and costs of risks of default whilst sale price is the loan interest rate.
The classical economist thought if the rate of profit was higher amongst one sector was higher than another capital would flow to the higher sector. Thought for the day, what happens if the higher profit sector is the FIRE sector and the lower profit sector the real economy? Answers on a postcard.
“It is useful to consider how banks learned they could do this – fiat banking – learning that they had money in their vaults which at times of growth was accumulating.”
Money is BANK CREDIT. It is today and always has been
There is not some (mythical) real money and bank credit created if the bank has enough of this real money.
Real money = bank credit. Notes and coins are a token to represent bank credit (or real money).
The banks and treasuries money = Central bank reserves
RJ
Your usual incantation is not an argument just an only an incantation; shorn of all historical context or causality as to how that social relationship arose.
I would rather say that all money is credit money but that historically credit money has had many sources. Fiat banking credit money being just one of them, today we also have vertical state money and back in time specie. Your argument does not work as an historical argument.
So we agree that today real money is bank credit
So what do you think real money was then in the past. What are these sources.
Coins?? Even coins that had some metal value were valued based on the credit link not the metal value
The other option is central bank reserves. But this can not be spend in the real economy. Try for example opening an account at your local central bank. I doubt if you will have much luck today. Likewise in the past
Tally sticks were just an example of a debt based money system.
Hey RJ (aka Kiwi) — have you worked out what a negative balance means yet? Maybe you’d like to respond to me post on “that” other forum.
Great interview Dr. Keen. In the past I’ve mostly agreed with your analysis, but this detailed interview really filled in my mental gaps and provided the most cogent explanation of economics I’ve ever heard.
I’d like to offer a corollary to your notion of jubilee shares: once shares can no longer be traded they are not worthless, but rather they will have reached their true value which will be paid as dividends to the shareholder. The true value of shares is dividends from real profits of a thriving enterprise, not value extracted by speculating on the gullability of a future share buyer.
That’s precisely the idea g yas. Cheers, Steve
Title: Steve — The Potential Einstein of Economics
Wasn’t it Einstein’s obsession with spacetime that gave us the more truthful understanding of spacetime.
Saving means redundancy, like having two lungs and two kidneys, so that we are more robust against the unexpected.
Savings is a misnomer, both here and in general in macroeconomics. What matters for robustness is how much of the money in existence is debt-based versus government based, and whether it is financing real investment of Ponzi Schemes