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 a professional economist 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 debts accumulated in Australia, and our very low rate of inflation.
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15 Responses to IS-LM (with endogenous money)”

  1. NeilW says:

    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.

  2. TruthIsThereIsNoTruth says:

    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.

  3. TruthIsThereIsNoTruth says:

    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.)

  4. Steve Hummel says:

    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.

  5. TruthIsThereIsNoTruth says:

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

  6. Pingback: Paul Krugman, Nick Rowe and an Endogenous Money Model | Credit Writedowns

  7. Steve Hummel says:

    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.

  8. Steve Hummel says:

    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.

  9. ceviche says:

    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.

  10. Pingback: IS-LM and Endogenous Money | Colectivo Burbuja

  11. Steve Hummel says:

    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.

  12. Steve Hummel says:

    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.

  13. Steve Hummel says:

    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.

  14. Steve Hummel says:

    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.

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