Explaining Richard Koo to Paul Krugman

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A sudden eruption, and the surprise of realising that the world he understands is not the one he actually inhabits. – Paolo Bacigalupi, The Windup Girl

This time really is different.

Stock markets are crashing after a runaway boom. Again. And the financial sector is peddling complex derivative products. Again. (Check out the US satirical rag The Onion’s brilliant take on this: Financial Sector Thinks It’s About Ready To Ruin World Again)

But whereas previous periods of Wall Street mayhem have been preceded by a Main Street boom, this one hasn’t. We’ve re-entered a period of financial market volatility with unemployment still within cooee of its peak during the 1990s recession (see figure 1– which doesn’t factor in the changes in the definition of unemployment since 1990, and the fall in the participation rate during this downturn).

Figure 1: A Wall Street boom without a Main Street recovery

Read more: http://www.businessspectator.com.au/article/2013/6/24/economy/gasping-krugman%E2%80%99s-ocean-theory#ixzz2X7BUcGTL

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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8 Responses to Explaining Richard Koo to Paul Krugman

  1. Pingback: Explaining Richard Koo to Paul Krugman | Fifth Estate

  2. Steve Hummel says:

    Explaining C. H. Douglas to Richard Koo, Paul Krugman, et al:

    You cannot omit or abstract out the context within which every dollar that enters or re-enters (that is re-circulates back into) the economy. And that context is the world of commerce itself which has effects that must be accounted for. Those effects are costs. Furthermore the relationships between those costs and their relationship to total costs also have meanings and effects…and those effects cannot be ignored. The ratio relationship between labor costs and total costs for any given period of time will show a scarcity of total individual incomes to total prices needing to be liquidated if production is to clear. This is the ongoing underlying reality of commerce and of the entirety of the productive process itself from initial production of a product or service to its consumption by an individual and only by an individual at retail sale…because that is where and with whom all costs are once and for all finally concluded, and so correctly may be and should be summed.

    No matter how much money is re-circulated or how many times money is re-circulated back through commerce/the economy this effect of cost is applied to it….and results in a simultaneous individual monetary scarcity in comparison to total prices once again, and throughout the entirety of the productive

    Hence not only is there “no free lunch” in economics…the individual is shortchanged continually as well. Thus A will not pay for A + B, and P = In < Pr (The act of Production equals a scarcity of total individual incomes in ratio to total prices that are created and need to be liquidated for the market to clear).

    These are basic, ongoing and destabilizing economic realities that cannot be remedied without raising individual incomes in a manner that does not also raise the costs of commerce. The only way this can be accomplished is an ongoing direct payment to individuals first instead of only injecting money into
    the economy which will result in additional costs.

    Again and by the actual physics of the productive process, the fact of money's re-circulation is irrelevant as shown above because no matter how much money is re-circulated there is also more than that amount in prices that is simultaneously created and must to be liquidated….if the economy is to be stable. The SEEMING monetary effect of Velocity is actually completely and merely a creature of the continual injection of loans into the economy because the moment that continuous injection slows or stops a recession or depression occurs. That is 1.0 correlation.

  3. Steve Hummel says:

    Post to Azizonomics who is a regular poster here also:

    Azizonomics: The problem is velocity is actually wholly a creature (and an inadequate one at that) of the continual build up of debt, and QE is just another even more inadequate means of re-stoking that palliative during a depression like we find ourselves in presently. Better that we did something
    actually different and much, much more effective like issuing a citizen’s dividend in perpetuity which solves both the liquidity problem for the individual and the solvency problem for businesses and the economy as a whole.

    This is anathema to the private Banks whose bottom line would be dramatically reduced by a credit creating agency that issued that additional GIFT of money. More monetary Grace, less lending….that is the correct, enlightening and un-hypnotized way forward.

  4. Steve Hummel says:

    It isn’t that the re-circulation of money does not occur, it’s that its re-circulation is irrelevant to the resolution of the actual most basic economic problem we face which is the continual creation by the productive process itself of a scarcity of total individual incomes in ratio to the total prices simultaneously created…and needing to be liquidated…if the economy is to be stable. If money, no matter what amount re-circulating, still creates this scarcity of incomes to prices the moment it is a part of the productive process….then the most basic flaw exists somewhere in the productive process itself not necessarily in the tool of money or an aspect money creation. Economists and financiers must resolve this most basic of problems. Economists are supposedly problem solvers so let them resolve this most basic problem of the economic system. Banks and financiers certainly have the right to exist, but they do not have the right to enforce a system which dominates and ultimately enslaves the individual.

    Continuously equate the rate of flow of total incomes with the rate of flow of total prices and you will have created the equivalent of the “Holy Grail” of economics…equilibrium. If that means new thinking and new policies, then so be it. If it means a break up of the monopoly on credit creation as well as the broadening of the kind of credit that is created and the purposes for which credit itself is granted, so be IT…as well.

  5. Brian Stobie says:

    Steve, the file ‘LFvEM.mky’ linked in the article gives me an error “xml_pack:XML file truncated?” when loading it into Minsky 1.D017.
    Tried downloading it twice, same result ?

  6. Steve Keen says:

    There could have been a file upload corruption problem Brian. Does the other file load OK? You can swap from one to the other very easily by rearranging the lending entries on the Godley table, and flicking the switch on LM on the palette.

  7. Brian Stobie says:

    Thanks – The other file does work OK – I tried again after updating to 1.D018 – same problem. However, I’ll rearrange the entries as you did in your Bordeaux video.

  8. Pingback: More debate about who predicted the Great Recession, and lessons learned | Fabius Maximus

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