Macroeconomics of Loanable Funds & Endogenous Money compared using Minsky

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The mainstream economic idea that banks are just intermediaries between savers and investors is a fantasy, but given that fantasy, their argument that the level and rate of change of private debt are not macroeconomically significant (except at the “Zero Lower Bound”) is correct. But in the real world, the role of the level and rate of change of private debt is crucial. I illustrate this by building a Minsky model of Loanable Funds and converting it to the real world of Endogenous Money. Then I explain how credit growth plays an essential role in aggregate demand and income, and how this is consistent with the truism that Expenditure equals Income.

Powerpoint Slides. Minsky files (right-click to save to your PC): Loanable Funds; Endogenous Money.

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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25 Responses to Macroeconomics of Loanable Funds & Endogenous Money compared using Minsky

  1. Tim Ward says:

    If banks were simply intermediaries, then all the money they lent out from deposits would have to come from somewhere. The Government doesn’t create enough money, to create all the money in the deposits. Depositors received the money from someone else. No one else creates money. The trail leads right back to the banks. It must be the banks that are creating the money. (Aside from the government created money, which is small compared to the banks.) Ordinary people and non-financial firms don’t create money, they pass it along in transactions. The bulk of money stock has to be created by the banks. All other entities are involved in flows. (beside the gov., which is involved in stock creation and flows) It seems that a stock-flow view points directly at the banks as creators of the greater part of money.

  2. Tim Ward says:

    Oops. Made a mistake there. “All other entities are involved in flows.” Well, the entities hold stock of money in accounts. But they don’t create any.

  3. Bhaskara II says:

    The value of learning Capitalism and Accounting.

    “Andrew Carnegie, Industrial Philanthropist”, p. 21, third paragraph.

    p. 32 explains where he was taught to be a capitalist. He was encouraged to buy corporate stock with a loan from his boss.

  4. Bhaskara II says:

    Bought stock on credit, when due borrowed from banker. Woundation of Carnegies wealth.

    p. 35.

  5. Bhaskara II says:

    Bought stock on credit, when due borrowed from banker. It was the foundation of Carnegies wealth.

    p. 35.

  6. Bhaskara II says:

    This I had learned in a facinating business labor history class that covered many of the robber barrons and the 1930s.

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  8. Bhaskara II says:

    If one wants to see quantitatively some of Andrew Carnegie´s spectacular success of buying stock with large returns and dividends on can look at this page and hit control-f and $ enter to search for monetary ammounts.

    One stock he buys for $217 and it pays $5000 in dividends within 2 years!

    There is no mention of him selling stock until,

    Carnegie sells out to Morgan.
    Carnegie allows J.P. Morgan to buy him out for $480 million, a move which allows Morgan to create US Steel, and makes Carnegie the richest man in the world.”

  9. Bhaskara II says:

    Of course there is an Indian technological link with western steel from ancient to modern times. Estamated from 2000 B.C.

  10. Bhaskara II says:

    Jim Rogers mentions too much debt at 3m20ss.

  11. DemandSider says:

    Three questions,

    1) While Mr. Keen affirms the value of trade surplus vis a Japan and The PRC, from what I have heard from him on the internet, he doesn’t seem as anti trade deficit as Keynes was. Even if the most egalitarian money disbursement program were implemented, won’t most of that end up, ultimately, in a PRC, state owned bank, rather than in the hands of some value added creator in a democracy?

    2) Along those same lines, isn’t aid for Walmart’s human resource budget just making outsourcing to The PRC profitable for it’s shareholders? Could this PRC state owned economy outlet chain, the largest American employer, even be viable or profitable without American tax payers subsidizing the difference between cost of living and and their real wage? Could someone please explain to me why they believe The U.S. is NOT subsidizing our ever growing trade deficit with a communist dictatorship?

    3) Is there a specific metric to determine at what point in The American decline The PRC will decide that dropping the tar baby dollar is the wiser option? Would Sharia Wahhabi Saudi Arabia have to collapse and elect democratic socialists for that to happen?

    Any replies would be welcome.

    Any replies would be welcome. Thank you.

  12. Bhaskara II says:

    Ni hao ma?, (How are you? in Manderin)

    In General,

    Jim Rogers says the Chinese people are some of the best capitalists in the world. He says in this centry the best gift he can give his children is a good command of Manderin.

    There is much more important things than money.

    1) Their economists might be very well better than the United States economists. Judging by results. Now if they just stuck dollars in the bank they would get the same results that you would if you put money in the bank for 10 years. Loss of purchasing power. That is not what skilled capitalists would do or want. All that money signifies China`s real contributions to the US and the world that has not been collected on yet.

    Money in the bank is a monetary asset. With all the problems of monetary assets. There are infinately more possible assets to choose from. One is capital and it is often a productive asset. Where monetary assets are not a productive asset. But factories, education, businesses, roads, transportation, trade, and people do.

    2) Do you beleive that the Chinese people are NOT contributing to or subsidising the US?

    By the way if you look at the history of science and technology the chinese, Indian, and new world people have contributed a lot to the world.

    3) I got stuck on 3. ; ) OOoo baby.

  13. Bhaskara II says:

    1) PRC sticking dollars in the bank for a decade would be directly subsidising the US Government.

  14. Bhaskara II says:

    Non sequiter that might be interesting:

    Google images of:
    contribution of chinese civilization
    contribution of chinese technology

    Have not watched this video but it covers some of the technology I have read about.

  15. Bhaskara II says:

    If I was reared Chinese I would be a much better capitalist than I am.

  16. Bhaskara II says:

    Re: Keen tweet

    “Noah” sounds like an inquisitor.

    Steve Keen ?@ProfSteveKeen 15 hHace 15 horas
    Steve Keen Retwitteó Noah Smith
    Sorry I didn’t invite you to my inaugural lecture Noah!


    Noah Smith
    @MikaelThesleff @UnlearningEcon I find them to be the most occultish, more so than MMTers or Austrians.

  17. Bhaskara II says:

    The internet has served me some poor evidence on Noah. An interesting resemlence:
    Portrait of a Cardinal: ca 1600
    The sitter is usually identified as Cardinal Don Fernando Nino de Guevera (1541-1609), Grand Inquisitor and, from 1601, Archbishop of Seville. The painting was executed ca. 1600, when Inquisitor-General, and certainly before he became Archbishop of Seville. He is one of a number of eminent ecclesiastics of Toledo portrayed by El Greco, and it is one of his finest portraits. The splendor and richness of color is appropriate to the character and rank of the sitter. The frontal turn of the pose concentrates attention on the figure. El Greco suggests the cardinal’s personality through the emphasis on his prominent glasses, the compulsive gesture of his left hand, the animated, nervous brushwork, and the singular colour range. The painting is signed on the creased paper on the floor.

  18. Bhaskara II says:

    Is he working on modern censorship?

  19. DemandSider says:

    Thanks for all the replies, but state owned gas, oil, coal, ships and shipping, solar panel manufacturing, vehicle manufacturing; train and railway manufacturing; civil engineering; telecommunications; banking; media, etc doesn’t really look like capitalism to me. (Actually, it’s the opposite, as profit taking, especially during the low value added stage, is often punishable by death). Neither do the socialist subsidies we pay to Walmart’s human resources budget so they can profitably destroy our value added sectors through outsourcing.

    (Sorry about the hackneyed wikipedia link, but The PRC’s State Asset Commission killed the English language link to their state owned corporation list. Up till then, I’d been spreading it all over the internet to show what a joke “free trade” is. South Korea, wisely, never published the list for it’s 300 or so state owned corporations, for obvious reasons))

    Here’s a very brief narrative of recent American economic history:

    The extension of petrodollar exclusivity to all of OPEC began in 1975, which also happens to be the last time The U.S. enjoyed a manufacturing trade surplus. Of course, that’s not a coincidence. Artificial demand for dollars obviated the need for trade surplus through high value added wealth creation, so the middle class could be sacrificed to the mythical god of “free trade”, and banks could enjoy unprecedented profits with there new dollar on steroids.

    And so, The Saudi Wahhabi Sharia Sunnis, The State-Owned Assets Supervision & Administration Commission and the FIRE sector Axis Powers smote the smelly, laboring barbarians, democracy, and free speech with their mighty dollar and rode to ultimate victory. The end.

    P.S. I know some neoliberal Luddite will try to blame technology for job loss. I would hope they could curb their MBA, or whatever their business degree, for just a bit and imagine the unemployment we’d have in a world of 7.5 billion people with bronze age technology.

    OK. Have at it.

  20. Bhaskara II says:


    What you descirbe is government. The capitalist description was of the people.

    “Jim Rogers says the Chinese people are some of the best capitalists in the world. ”

    I would probably have been much more sucessful if I had studied business in Hong Kong.

  21. DemandSider says:

    Oh, we have plenty of capitalists here, as well. They’re pursuing apprenticeships in urban, independent pharmaceutical sales for lack of living wage, value added opportunities. They don’t have that problem here:

    P.S. Did you know “The Simpsons” animation is a South Korean government owned enterprise? This is what neoliberals call, “free trade”.

  22. athabascan81 says:

    Firstly, thank you for helping me markedly improve my understanding of macroeconomics over the past few years. As a process engineer I am very comfortable with Minsky. I also feel a much better appreciation of banking. I discovered the following in my internet research which may be of interest to you and your readers. It is a report on a practical experiment in taking out a loan by a recognized academic. Enjoy.

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