IS-LM (with endoge­nous money)”

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Paul Krug­man posted on a famil­iar topic yesterday—the fail­ure of most infla­tion hawks to admit that they were wrong—and included praise for one such hawk who has indeed changed his mind and said so:

There’s an inter­est­ing con­trast with one of the real intel­lec­tual heroes here, Narayana Kocher­lakota of the Min­neapo­lis Fed, who has actu­ally recon­sid­ered his views in the light of over­whelm­ing evi­dence. In our polit­i­cal cul­ture, this kind of switch is all too often made into an occa­sion for gotchas: you used to say that, now you say this. But learn­ing from expe­ri­ence is a good thing, not a sign of weak­ness. (“A Tale of Two Fed Pres­i­dents”)

If this was all there was to the arti­cle, I would have fin­ished the (as usual) enjoy­able read, and moved on to the next link from Twit­ter. But then there was this state­ment:

Look, some of us came into the cri­sis with a more or less fully formed intel­lec­tual frame­work — extended IS-LM (with endoge­nous money) — and sub­stan­tial empir­i­cal evi­dence from Japan…

Huh? “extended IS-LM (with endoge­nous money)”??? Paul has of course exposited on and pro­moted IS-LM many times in the past. But “with endoge­nous money”? Nor­mally this is some­thing he has derided. In the past, his per­spec­tive has been “IS-LM with Loan­able Funds”, not “with Endoge­nous Money”.

Now I could be read­ing too much into this phrase. As Nick Rowe said in the very intel­li­gent and civil dis­cus­sion on his excel­lent post “What Steve Keen is maybe try­ing to say”, the phrase can mean dif­fer­ent things to dif­fer­ent peo­ple:

I don’t find the “exoge­nous vs endoge­nous money” dis­tinc­tion help­ful in this con­text, sim­ply because dif­fer­ent peo­ple seem to mean many dif­fer­ent things by that. (Nick Rowe)

Paul could mean some­thing quite dif­fer­ent to what I mean by “endoge­nous money” too, and I could be read­ing far too much into this sin­gle phrase (heck, it could even be a typo!). But if he is shift­ing his posi­tion in the “money and banks don’t mat­ter” and “money and banks are cru­cial” debate, even a lit­tle, that’s some­thing to be applauded in pre­cisely the same man­ner in which he praised Kocher­lakota for mov­ing on infla­tion. And if not—if he meant some­thing entirely dif­fer­ent to the inter­pre­ta­tion I put on that statement—well then doubt­less we’ll find out. We’ll surely get a clar­i­fi­ca­tion in due course.

What­ever that clar­i­fi­ca­tion turns out to be, this unex­pected phrase has moti­vated me to pub­lish, ahead of sched­ule, a model com­par­ing Loan­able Funds to Endoge­nous Money that I promised to pro­vide in the dis­cus­sion on Nick’s blog:

If the lender is a non-bank, then the repay­ment of a debt lets the lender spend because both debt and loan are on the lia­bil­ity side of the bank­ing system’s ledger; but if the lender is a bank, then the repay­ment of the loan takes money out of cir­cu­la­tion (I pre­fer that expres­sion to “destroys money”) because the debt is on the asset side of the ledger. That’s the essen­tial dif­fer­ence between Loan­able Funds & Endoge­nous Money, which I’m try­ing to illus­trate in a pair of very sim­ple mod­els that I’ll post on my blog shortly—and link to Nick’s dis­cus­sion here. (A com­ment by me on Nick Rowe’s post)

I have since devel­oped that pair of mod­els; there’s much more analy­sis needed before I’m will­ing to pub­lish an aca­d­e­mic paper on the topic, but here’s what I think is the sim­plest pos­si­ble model con­trast­ing Loan­able Funds—in which banks, money and (except dur­ing a liq­uid­ity trap) pri­vate debt don’t mat­ter to macroeconomics—and Endoge­nous Money—in which banks, debt and money are cru­cial to macro­eco­nom­ics at all times.

A monetary model of Loanable Funds

My start­ing point is Krugman’s descrip­tion of the essence of lend­ing as being a trans­fer between Patient and Impa­tient agents:

Think of it this way: when debt is ris­ing, it’s not the econ­omy as a whole bor­row­ing more money. It is, rather, a case of less patient people—people who for what­ever rea­son want to spend sooner rather than later—borrowing from more patient peo­ple. (Paul Krug­man, 2012, pp. 146–47. Empha­sis added)

In the New Key­ne­sian model of a liq­uid­ity trap that he and Eggerts­son devel­oped (Gauti B. Eggerts­son and Paul Krug­man, 2012), lend­ing was for the pur­poses of con­sump­tion, and while there was debt, there were nei­ther banks nor money:

We assume ini­tially that bor­row­ing and lend­ing take the form of risk-free bonds denom­i­nated in the con­sump­tion good. (Gauti B. Eggerts­son and Paul Krug­man, 2012, p. 1474)

My model of Loan­able Funds embeds this vision of lend­ing as being a trans­fer from Patient to Impa­tient agents in a mon­e­tary model of the economy—one in which all trans­ac­tions involve the trans­fer of money in bank accounts—and one in which “Patient agents” and “Impa­tient agents” are both cap­i­tal­ists, who need money to hire work­ers and also buy inputs from each other. Though the bank­ing sec­tor exists in this model it is entirely pas­sive: it is just where “Patient agents” deposit their cash, and lend­ing is seen as a trans­fer from the deposit accounts of the Patient agents to the deposit accounts of the Impa­tient agents.

I also treat lend­ing as being pri­mar­ily for pro­duc­tion rather than con­sump­tion. Both Patient and Impa­tient agents are cap­i­tal­ists who need money to hire work­ers and buy inputs for pro­duc­tion (as well as for con­sump­tion) from each other. The basic finan­cial oper­a­tions are:

  • An ini­tial deposit of 90 by the Patient agents and loan to the Impa­tient agents of 10, both of which are stored in bank accounts;
  • Lend­ing by the Patient Agents to the Impa­tient Agents;
  • Pay­ment of inter­est;
  • Repay­ment of the debt;
  • Hir­ing of work­ers by both groups of agents;
  • Con­sump­tion by all agents from both Patient and Impa­tient.

The oper­a­tions are shown below in Table 1, fol­low­ing the con­ven­tions in the Min­sky pro­gram that assets are shown as pos­i­tives, lia­bil­i­ties and equity are shown as neg­a­tives, the source of any flow is a pos­i­tive and its des­ti­na­tion is a neg­a­tive: these con­ven­tions ensure that all rows have to sum to zero to be cor­rect in account­ing terms (the pro­gram also sup­ports the account­ing approach of using DR and CR).

Table 1: Finan­cial trans­ac­tion in Loan­able Funds on bank­ing system’s ledger

Assets

Lia­bil­i­ties

Equity
Reserves Patient Impa­tient Work­ers NWBank
Ini­tial con­di­tions 100 –90 –10 0 0
Lend money Lend –Lend
Pay Inter­est –Int Int
Repay Loans –Repay Repay
Patient hires work­ers WagesP –WagesP
Impa­tient hires work­ers WagesI –WagesI
Worker con­sume from Patient –ConsWP ConsWP
Worker con­sume from Impa­tient –ConsWI ConsWI
Patient buys inputs/consumes ConsP –ConsP
Impa­tient buys inputs/consumes –ConsI ConsI
Bankers buy inputs/consume ℗ –ConsBP ConsBP
Bankers buy inputs/consume (I) –ConsBI ConsBI

 

Loans them­selves don’t turn up on the bank­ing sector’s ledger because they are trans­fers between the Patient and Impa­tient agents. Instead loans are assets of the Patient agents and a lia­bil­i­ties of the Impa­tient agents. Table 2 shows Loans from the Patient agents’ per­spec­tive, while Table 3 shows the same oper­a­tions from the Impa­tient agents’ per­spec­tive.

Table 2: Lend­ing, repay­ment and inter­est from the Patient agents’ per­spec­tive

Assets

Equity
Patient Loans NWPatient
Ini­tial con­di­tions 90 10 –100
Lend money –Lend Lend
Pay Inter­est Int –Int
Repay Loans Repay –Repay

Table 3: Lend­ing, repay­ment and inter­est from the Impa­tient agents’ per­spec­tive

Assets

Lia­bil­ity

Equity
Impa­tient Loans NWPatient
Ini­tial con­di­tions 10 –10 0
Lend money Lend –Lend
Pay Inter­est –Int Int
Repay Loans –Repay Repay

 

The Min­sky pro­gram (click here for the lat­est beta build) is pri­mar­ily designed for numer­i­cal simulation—and I’ll get to that shortly—but it also gen­er­ates the dynamic equa­tions in the model, and they are instruc­tive enough for those who don’t suf­fer the MEGO effect (“My Eyes Glaze Over”) when look­ing at equa­tions (if you do, skip most of this and just check the sim­u­la­tions below). The equa­tions of motion of the key accounts in this model (click here to down­load the model) are shown in Equa­tion . The first four equa­tions describe the dynam­ics of money in this model; the last equa­tion describes the dynam­ics of debt.

The key points from these equa­tions are:

  • The total amount of money in the sys­tem is the sum of the four accounts Impa­tient, Patient, Work­ers and NWBank (for “Net Worth of the Bank­ing sec­tor”, which is zero in this model), and this doesn’t change: the sum of the first 4 equa­tions is zero:

  • The total amount of money in the firm sec­tor is the sum of the first two accounts—Patient and Impatient—and the annual turnover of this amount is the annual GDP of this model. It is unaf­fected by lend­ing, repay­ment and debt ser­vice, so GDP is also unaf­fected by lend­ing, repay­ment and debt ser­vice:

  • Finally, the dynam­ics of debt in this model are

This struc­ture means that, no mat­ter what behav­ioral rela­tions are used to model lend­ing, repay­ment, con­sump­tion, etc., changes in the level of debt have no impact on the macro­econ­omy. This is con­firmed by the rela­tions I used to sim­u­late this model, which used sim­ple time con­stants to spec­ify all flows. In Fig­ure 1 I ran the model with a time con­stant of 7 years for lend­ing and 9 years for repay­ment until the debt to GDP ratio sta­bi­lized at 0.24 (which took about 60 years), and then altered time constants—firstly sim­u­lat­ing a slump in lend­ing, then a boom, and finally a return to the ini­tial rates. The level of debt and the debt to GDP ratio var­ied dra­mat­i­cally, but GDP sailed on undis­turbed. So if Loan­able Funds accu­rately char­ac­ter­ized actual lend­ing, banks, money and (except dur­ing a liq­uid­ity trap) debt would indeed by irrel­e­vant to macre­oe­co­nom­ics.

Fig­ure 1: Sim­u­la­tion of Loan­able Funds

Endoge­nous Money pro­po­nents, on the other hand, insist that most lend­ing is not between non-banks, but from banks to non-banks, and that this makes all the dif­fer­ence in the world. That is eas­ily illus­trated by mak­ing just 3 sim­ple changes to this model:

  • Lend­ing is shown as being a flow from Banks to Impa­tient Agents;
  • Inter­est pay­ments go not from Impa­tient to Patient but from Patient to the NWBank; and
  • When the model is sim­u­lated, lend­ing is related to the cur­rent level of lend­ing rather than to the amount of money in the Patient Agents’ accounts.

So what dif­fer­ence did these sim­ple struc­tural changes make? A lot.

A monetary model of Endogenous Money

The mon­e­tary sys­tem from the bank­ing sector’s point of view is shown in Table 4: Loans are now an asset of the bank­ing sec­tor, while lend­ing, repay­ment and debt ser­vice are all rela­tions between the Impa­tient agents and the bank­ing sec­tor. The dif­fer­ences of this model with Loan­able Funds are high­lighted in bold in the Table (click here to down­load the model).

Table 4: Finan­cial trans­ac­tion in Endoge­nous Money on bank­ing system’s ledger

Assets

Lia­bil­i­ties

Equity
Reserves Loans Patient Impa­tient Work­ers NWBank
Ini­tial con­di­tions 90 10 –90 –10 0 0
Lend money Lend –Lend
Pay Inter­est Int –Int
Repay Loans –Repay Repay
Patient hires work­ers WagesP –WagesP
Impa­tient hires work­ers WagesI –WagesI
Worker con­sume from Patient –ConsWP ConsWP
Worker con­sume from Impa­tient –ConsWI ConsWI
Patient buys inputs/consumes ConsP –ConsP
Impa­tient buys inputs/consumes –ConsI ConsI
Bankers buy inputs/consume ℗ –ConsBP ConsBP
Bankers buy inputs/consume (I) –ConsBI ConsBI

 

 

The equa­tions of motion of this sys­tem are:

There are three sig­nif­i­cant ways in which this model dif­fers from Loan­able Funds:

  • The total amount of money in the sys­tem is, as before, the sum of the four accounts Impa­tient, Patient, Work­ers and NWBank (for “Net Worth of the Bank­ing sec­tor”, which is not zero in this model), and this now is altered by the change in debt:

  • The total amount of money in the firm sec­tor is the sum of the first two accounts—Patient and Impatient—and the annual turnover of this amount is the annual GDP of this model. It is also altered by lend­ing, repay­ment and debt ser­vice, and there­fore so is GDP:

  • Finally, the dynam­ics of debt in this model are the same as in Loan­able Funds, but now this is also iden­ti­cal to the dynam­ics of the money sup­ply:

I sim­u­lated the model for 250 years with con­stant para­me­ters (it took that long for the debt to GDP ratio to sta­bi­lize at 0.32), and then repeated the exper­i­ment of a slump in lend­ing fol­lowed by a boom and then a return to nor­mal­ity. The results in Fig­ure 2 shows how dif­fer­ent an Endoge­nous Money view of the world is to Loan­able Funds.

Firstly, in Endoge­nous money, the growth of debt is not macro­eco­nom­i­cally neuteal but causes GDP to grow: rather than the change in debt being irrel­e­vant to the macro­econ­omy as in Loan­able Funds, in Endoge­nous Money it alters the level of demand. Sec­ondly, alter­ations in the rate of change of debt had dras­tic effects on the econ­omy: a decline in lend­ing caused a slump and an increase in lend­ing caused a boom.

Fig­ure 2: Sim­u­la­tion of Endoge­nous Money

IS-LM and Endogenous Money?

If—and it’s a big if—this phrase sig­ni­fies a shift in how Krug­man mod­els IS-LM, then it will surely mean some­thing very dif­fer­ent to what I’ve shown above. For starters, it’s likely to be an equi­lib­rium model, when as Nick Rowe rightly con­cluded, my story is a dis­e­qui­lib­rium one (some­thing that Hicks argued long ago can’t be done with IS-LM—see (John Hicks, 1981)):

We are talk­ing about a Hayekian process in which indi­vid­u­als’ plans and expec­ta­tions are mutu­ally incon­sis­tent in aggre­gate. We are talk­ing about a dis­e­qui­lib­rium process in which people’s plans and expec­ta­tions get revised in the light of the sur­prises that occur because of that mutual incon­sis­tency. (Nick Rowe)

Of course, it could sig­nify no more than a rebadg­ing of Krugman’s estab­lished approach—or even a typo. We’ll have to await an elab­o­ra­tion. But I do hope that it does sig­nify a fur­ther thaw­ing in the rela­tions between ortho­dox econ­o­mists and those from the non-ortho­dox end of the spec­trum after Nick Lowe’s recent con­tri­bu­tion.

Nick’s post—a reminder

As I acknowl­edged in “An out­break of com­mu­ni­ca­tion”, Nick’s post accu­rately stated my argu­ments on the cre­ation of aggre­gate (or effec­tive) demand via the cre­ation of money by loans from the bank­ing sys­tem to the pub­lic:

So with that very big caveat under­stood, here’s what I think Steve Keen is maybe try­ing to say:

Aggre­gate planned nom­i­nal expen­di­ture equals aggre­gate expected nom­i­nal income plus amount of new money cre­ated by the bank­ing sys­tem minus increase in the stock of money demanded. (All four terms in that equa­tion have the units dol­lars per month, and all are refer­ring to the same month, or what­ever.)

And let’s assume that peo­ple actu­ally realise their planned expen­di­tures, which is a rea­son­able assump­tion for an econ­omy where goods and pro­duc­tive resources are in excess sup­ply, so that aggre­gate planned nom­i­nal expen­di­ture equals aggre­gate actual nom­i­nal expen­di­ture. And let’s recog­nise that aggre­gate actual nom­i­nal expen­di­ture is the same as actual nom­i­nal income, by account­ing iden­tity. So the orig­i­nal equa­tion now becomes:

Aggre­gate actual nom­i­nal income equals aggre­gate expected nom­i­nal income plus amount of new money cre­ated by the bank­ing sys­tem minus increase in the stock of money demanded.

Noth­ing in the above vio­lates any national income account­ing iden­tity. (Nick Rowe)

This is, from my per­spec­tive, the essence of the sig­nif­i­cance of Endoge­nous Money. If this wasn’t true—if the cre­ation of new money by the bank­ing sys­tem didn’t some­how impact on actual income and demand—then by Occam’s Razor, there would be no macro­eco­nomic sig­nif­i­cance to Endoge­nous Money, and we’d be bet­ter off ignor­ing the bank­ing sec­tor in macro­eco­nom­ics, as the model of Loan­able Funds does. Nick pro­vided an excel­lent ver­bal state­ment of this—and a log­i­cal argu­ment behind it which I think any econ­o­mist should be able to fol­low, regard­less of his/her school of thought:

Start with aggre­gate planned and actual and expected income and expen­di­ture all equal. Now sup­pose that some­thing changes, and every indi­vid­ual plans to bor­row an extra $100 from the bank­ing sys­tem and spend that extra $100 dur­ing the com­ing month. He does not plan to hold that extra $100 in his chequing account at the end of the month (the quan­tity of money demanded is unchanged, in other words). And sup­pose that the bank­ing sys­tem lends an extra $100 to every indi­vid­ual and does this by cre­at­ing $100 more money. The indi­vid­u­als are bor­row­ing $100 because they plan to spend $100 more than they expect to earn dur­ing the com­ing month.

Now if the aver­age indi­vid­ual knew that every other indi­vid­ual was also plan­ning to bor­row and spend an extra $100, and could put two and two together and fig­ure out that this would mean his own income would rise by $100, he would imme­di­ately revise his plans on how much to bor­row and spend. Under full infor­ma­tion and fully ratio­nal expec­ta­tions we couldn’t have aggre­gate planned expen­di­ture dif­fer­ent from aggre­gate expected income for the same com­ing month.

But maybe the aver­age indi­vid­ual does not know that every other indi­vid­ual is doing the same thing. Or maybe he does know this, but thinks their extra expen­di­ture will increase some­one else’s income and not his. Aggre­gate expected income, which is what we are talk­ing about here, is not the same as expected aggre­gate income. The first aggre­gates across indi­vid­u­als’ expec­ta­tions of their own incomes; the sec­ond is (someone’s) expec­ta­tion of aggre­gate income. It would be per­fectly pos­si­ble to build a model in which indi­vid­u­als face a Lucasian sig­nal-pro­cess­ing prob­lem and can­not dis­tin­guish aggregate/nominal from individual-specific/real shocks.

So at the end of the month the aver­age indi­vid­ual is sur­prised to dis­cover that his income was $100 more than he expected it to be, and that he has $100 more in his chequing account than he expected to have and planned to have. This means the actual quan­tity of money is $100 greater than the quan­tity of money demanded. And next month he will revise his plans and expec­ta­tions because of this sur­prise. How he revises his plans and expec­ta­tions will depend on whether he thinks this is a tem­po­rary or a per­ma­nent shock, which has its own sig­nal-pro­cess­ing prob­lem. And these revised plans may cre­ate more sur­prises the fol­low­ing month. (Nick Rowe)

 

Eggerts­son, Gauti B. and Paul Krug­man. 2012. “Debt, Delever­ag­ing, and the Liq­uid­ity Trap: A Fisher-Min­sky-Koo Approach.” Quar­terly Jour­nal of Eco­nom­ics, 127, 1469–513.

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

Krug­man, Paul. 2012. End This Depres­sion Now! New York: W.W. Nor­ton.

 

 

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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  • If the lender is a non-bank, then the repay­ment of a debt lets the lender spend because both debt and loan are on the lia­bil­ity side of the bank­ing system’s ledger;”

    You have to be care­ful here — because of the buffer­ing effect of the bank­ing trans­ac­tion sys­tem.

    So if you have a clas­sic build­ing soci­ety, or other finan­cial insti­tu­tion like a pay­day lender, with­out a cen­tral bank account, but with an account at a clear­ing bank. The clear­ing bank will then have a float­ing charge over the assets cre­ated by the build­ing soci­ety.

    That means the clear­ing bank essen­tially offers an infi­nite intra­day over­draft to the build­ing soci­ety — which allows the build­ing soci­ety to (fig­u­ra­tively) advance loans in the morn­ing, and back­fill the deposits in the after­noon via Trea­sury Processes in the same way that the clear­ing bank does. And it is the advanc­ing the loans first and back­fill­ing in an asyn­chro­nous man­ner — con­nected only by a tar­get inter­est rate mar­gin — that causes the for­ward demand impulse of endoge­nous money. 

    For there to be any loan­able funds effect of sub­tract­ing from demand first and then advanc­ing demand via a loan or credit, there has to be some­body in the bank­ing sys­tem who is pre­pared to say ‘no’ to the asyn­chro­nous option — and force seri­al­i­sa­tion of the process in time. 

    And I don’t see that hap­pen­ing any­where any more. 

    It used to do, for exam­ple when build­ing soci­eties had ‘so much to lend’ each month and invited offers on that basis. But since the advent of com­put­er­i­sa­tion and the use of Trea­sury processes ISTM that sec­ondary lenders oper­ate pretty much like pri­mary ones.

  • JKH
  • TruthIs­ThereIs­NoTruth

    NeilW,

    I think you are sort of cor­rect, but might be a bit mis­lead­ing in the con­text of the post. Banks will gen­er­ally run a gen­er­ous liq­uid­ity buffer and the set­tle­ment period for most loans allows plenty of time to matu­rity match the loan fund­ing.

    While the role of the clear­ing bank you describe is not incor­rect, banks view this source of fund­ing as clean­ing up the very mar­ginal trans­ac­tions, par­tic­u­larly in trad­ing, and only if other fund­ing cant be obtained.

  • TruthIs­ThereIs­NoTruth

    had to rush off, to fin­ish the pre­vi­ous post.

    It is not to say banks will exactly matu­rity match their fund­ing, it is more a case of match­ing the desired cap­i­tal and liq­uid­ity strat­egy. But it’s cer­tainly not the case that a bank lends you money for a home loan and then goes to the rba to clear it. This was a pic­ture which for a while was being por­trayed by the ‘banks lend money out of thin air’ argu­ment (which may well be the case in a sys­temic sense, but this was extremely poorly under­stood and mis­rep­re­sented by the pro­po­nents of the argu­ment.)

  • Steve Hum­mel

    This was a pic­ture which for a while was being por­trayed by the ‘banks lend money out of thin air’ argu­ment (which may well be the case in a sys­temic sense, but this was extremely poorly under­stood and mis­rep­re­sented by the pro­po­nents of the argu­ment.)

    This is very true. Con­flat­ing and advo­cat­ing INDIVIDUAL virtues like fru­gal­ity (espe­cially its exces­sive and puri­tan­i­cal form, aus­ter­ity) and SYSTEMIC eco­nomic pol­icy as a solu­tion is utterly mis­taken.

    Scarcity as both an indi­vid­ual and sys­temic mon­e­tary con­cept must be cor­rectly iden­ti­fied as the real source of eco­nomic dis­e­qui­lib­rium, and mod­ern profit mak­ing economies must embrace the con­cept of indi­vid­ual mon­e­tary grace the free gift. The failure/irrelevance of veloc­ity the­ory cou­pled with the accel­er­at­ing pace of tech­no­log­i­cal inno­va­tion will cre­ate increas­ing economic/monetary insta­bil­ity unless this trans­form­ing idea becomes more real in the minds of econ­o­mists. Reform is not suf­fi­cient to solve the prob­lem. Trans­for­ma­tive ideas and poli­cies are required.

  • TruthIs­ThereIs­NoTruth

    SH, what’s the antonym for you make sense?

  • Pingback: Paul Krugman, Nick Rowe and an Endogenous Money Model | Credit Writedowns()

  • Steve Hum­mel

    Appar­ently you don’t even like it when I agree with you about some­thing. Reminds me of an ex-wife who even after I said I was sorry…the rant just kept right on com­ing.

    Let’s try again. Try­ing to make indi­vid­ual moral judg­ments fit into sys­temic sit­u­a­tions that call for the oppo­sites of those (actu­ally con­fused) judgments.…won’t work. They par­tic­u­larly won’t work when aus­ter­ity is con­fused with fru­gal­ity. This is what the gar­den vari­ety mon­e­tary reform­ers who rant on about “money out of thin air” do. Actu­ally ex nil­hilo money is fine if you address the real under­ly­ing prob­lem (sys­temic scarcity of total indi­vid­ual pur­chas­ing power (not to be con­fused with total money) and you are not hemmed in by habit­ual pet hates like “cen­tral plan­ning!!!!!!” but instead under­stand that adult, respon­si­ble and actual con­trol of the eco­nomic and money sys­tems is required sim­ply because they are fundamentally.…broken.

  • Steve Hum­mel

    The physics of eco­nom­ics and money sys­tems is cost. This is why cost account­ing is so sig­nif­i­cant. It gets to the nitty gritty of where the prob­lem lies. If total costs exceed total indi­vid­ual incomes right at the ini­tial cre­ation of a prod­uct or ser­vice, and that ele­men­tal fact is also true at every com­mer­cial stop the product/service makes on its jour­ney up to and includ­ing retail sale to an indi­vid­ual, and also when­ever it re-enters the economy.…how can total indi­vid­ual incomes ever equate with total prices? Veloc­ity the­ory is flimsy in view of the empir­i­cal evi­dence just sighted and despite the fol­low­ing, but if the above is true veloc­ity would have to be god knows 20 or 30 to be even be close to ade­quate. I sug­gest eco­nom­ics focus on the empir­i­cal evi­dence to be found in the cost account­ing data of any enter­prise and worry less about the abstrac­tions of the­ory less. The dis­ci­pline would be closer to being a sci­ence and get­ting a bet­ter grasp of more fun­da­men­tal real­i­ties would enable us to dis­pense with a lot of the things that tend to con­fuse everyone.…including econ­o­mists.

  • ceviche

    Steve, is Rowe’s state­ment
    ”…amount of new money cre­ated by the bank­ing sys­tem minus increase in the stock of money demanded” really con­sis­tent with your model?
    I would have thought that ‘new money cre­ated…’ rep­re­sents loans from banks to bor­row­ers (for the pur­pose of expen­di­ture by them) and that is pre­cisely that which is the “increase in the stock of money demanded” IN THAT PERIOD.

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  • Steve Hum­mel

    There is a 100% cor­re­la­tion between recessions/depressions, the slow down in lend­ing and the drop off in the veloc­ity of money. Doesn’t that point at veloc­ity largely if not entirely representing/being the amount of money bor­rowed?

    That then would mean that the cost account­ing empir­i­cal real­ity that total INDIVIDUAL incomes (effec­tive demand).…not being all costs, and yet all costs must go into price.…as a fun­da­men­tal real­ity of commerce/the econ­omy. That would also mean that the econ­omy not only is NOT tend­ing toward equi­lib­rium, but for the indi­vid­ual (and for busi­nesses as a result), is rad­i­cally mon­e­tar­ily unsta­ble.

    And of course, the solu­tion to this scarcity is the equal­iz­ing of total INDIVIDUAL incomes with total prices via a direct and con­se­quently com­mer­cially cost­less pay­ment of money to the indi­vid­ual. Think uni­ver­sal div­i­dend.

    Then, because com­mer­cial life is an adven­ture and costs may indeed go up for legit­i­mate rea­sons, and also because (espe­cially) in a profit mak­ing eco­nomic sys­tem where effec­tive demand is not scarce the ten­dency will be to increase prices…a pol­icy of equat­ing the cost of con­sump­tion (spend­ing) and the cost of pro­duc­tion (prices) via a dis­count to con­sumers equal to the ratio of cost of con­sump­tion over cost of pro­duc­tion would do just that.…mathematically. Of course the amounts of their dis­counts to con­sumers would be rebated back to par­tic­i­pat­ing mer­chants so they could be whole on their over­heads and mar­gins and so the sys­tem would truly and finally be free to oper­ate on all cylin­ders in per­pe­tu­ity and the price reduc­ing effect of inno­va­tion would also not be sab­o­taged so that prices would be free to go down with­out eco­nomic harm. Even­tu­ally money would grav­i­tate toward its most ratio­nal and sane form, that of a ticket for the dis­tri­b­u­tion of pro­duc­tion.

  • Steve Hum­mel

    The dif­fi­cult thing about change is mostly just the deci­sion to actu­ally change itself. This is espe­cially true when the change that needs to be made is one that simul­ta­ne­ously trans forms the entire discipline/body of thought.…and also leaves many if not most of the structures/basics of that discipline/body of thought vir­tu­ally intact. So it would be if a change in the con­sumer finan­cial par­a­digm of loan only were com­ple­mented by the addi­tion of a pol­icy of indi­vid­ual mon­e­tary grace, the free gift. This sim­ple and sin­gu­lar change would utterly trans­form eco­nom­ics and eco­nomic the­ory. It would also leave profit, free enter­prise, pri­vate prop­erty etc. com­pletely unchanged. And actu­ally, incor­po­rat­ing indi­vid­ual mon­e­tary grace in a world of abun­dance made immi­nently possible/necessary due to the accel­er­a­tion of tech­no­log­i­cal innovation.…would evolve and so insure the the sta­bil­ity and even the survival.…of profit mak­ing eco­nomic sys­tems. After all…if a profit mak­ing sys­tem not only now can­not ratio­nally cre­ate enough jobs/individual incomes for the sys­tem to func­tion prop­erly, but with the accel­er­a­tion of innovation/efficiency will only make the sys­tem less able to be bal­anced, then with­out evo­lu­tion it is inevitable that such a sys­tem will devolve into either a social­ist or a fas­cist work state.

    Trans­for­ma­tive ideas.…are trans­for­ma­tive. Let us have them.

  • Steve Hum­mel

    Regard­ing your bet on Aus­tralian hous­ing prices:

    You’d right even when you’re wrong.…if you’d cog­nite on the fact that, ulti­mately, the finan­cial par­a­digm is what is impor­tant. Aus­tralia did good by the first home buy­ers credit. How­ever, they will not ulti­mately do good.…unless that momen­tary pol­icy of mon­e­tary grace, the free gift is gen­er­al­ized and per­pet­u­ated for the con­sumer, rel­a­tively speak­ing, that is for a mid­dle class lifestyle whether one works or not. 

    Do you not see that fact when you look at the Aus­tralian hous­ing market.…and then extrap­o­late it out­ward to the mar­kets in gen­eral? Sup­ple­ment­ing indi­vid­ual pur­chas­ing power directly is necessary…no mat­ter whether the end price of a prod­uct is $1,000,000 or $100. You’ve advo­cated a mod­ern jubilee which is wis­dom. Just make it per­ma­nent and math­e­mat­i­cally equi­l­li­brat­ing policy…and the sys­tem will flow as freely as truly free mar­ket the­ory can be.

    As I say on your blog, mon­e­tary grace and actual and unob­tru­sive, adult con­trol of the money sys­tem as ideas and as a policies…are pow­er­fully trans­for­ma­tive. Let us have them.…in per­pe­tu­ity. You really should have the faith.…as in con­fi­dence to acknowl­edge that truth.

  • Steve Hum­mel

    The time for trans­for­ma­tive changes never arrives for the self inter­ested or the ter­mi­nally ortho­dox, and gen­er­ally, even for those only slightly too cozy with long held ideas. Habit is actu­ally the worst enemy of present time expe­ri­ence and will­ing­ness and abil­ity to look, not the two for­mer obvi­ous flaws. 

    The truth is indi­vid­ual mon­e­tary grace prob­a­bly could have been imple­mented in the first cen­tury AD as well as now. In fact the prob­lem­atic abstrac­tions of feu­dal­ism, cap­i­tal­ism and social­ism prob­a­bly would not have be-dev­iled mankind’s his­tory at all if such would have been the case. Trans­for­ma­tive ideas are transformative…no mat­ter how or when they are imple­mented.
    *****************************************************************************

    Sci­ence as a dom­i­nant mind­set is so passé. Of course, so is reli­gion. It’s Wis­dom that we’ve always needed, and up until now, fool­ishly believed was unre­al­is­tic. But now the eco­nomic and mon­e­tary sys­tems require it, so how can one sit back and say that we must progress grad­u­ally or even deny the need for it alto­gether? Oh ye of lit­tle faith, repent! For the king­dom of mon­e­tary Grace is at hand! 

    By the way Wis­dom encom­passes and eth­i­cally inte­grates both the sci­en­tific and the reli­gious mind­set.