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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  • Tim Ward

    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.

  • Tim Ward

    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.

  • Bhaskara II

    The value of learn­ing Cap­i­tal­ism and Account­ing.

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

    https://books.google.com/books?id=vgi3OveS4b4C&printsec=frontcover&dq=andrew+carnegie&hl=es&sa=X&redir_esc=y#v=onepage&q=work%20hours&f=false

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

  • Bhaskara II

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

    p. 35.

  • Bhaskara II

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

    p. 35.

  • Bhaskara II

    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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  • Bhaskara II

    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!

    http://www.pbs.org/wgbh/amex/carnegie/timeline/timeline2.html

    There is no men­tion of him sell­ing stock until,

    1901
    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.”

  • Bhaskara II

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

    https://en.wikipedia.org/wiki/Wootz_steel
    https://en.wikipedia.org/wiki/Steel#Wootz_steel_and_Damascus_steel
    https://en.wikipedia.org/wiki/Ferrous_metallurgy

  • Bhaskara II

    Jim Rogers men­tions too much debt at 3m20ss.

    http://www.youtube.com/embed/1yVWUQYDbH4

  • Bhaskara II
  • Demand­Sider

    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.

  • Bhaskara II

    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.

    http://blogs.wsj.com/chinarealtime/2011/06/09/jim-rogers-chinas-not-going-to-be-communist-ever-again/

    http://esbuzz.net/trends/video/jim-rogers-china-isnt-communist

    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.

  • Bhaskara II

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

  • Bhaskara II

    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.
    http://www.youtube.com/embed/fZHGFXcKcb

  • Bhaskara II
  • Bhaskara II

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

  • Bhaskara II

    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! 

    Seguir

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

  • Bhaskara II

    The inter­net has served me some poor evi­dence on Noah. An inter­est­ing resem­lence:

    http://hoocher.com/El_Greco/Portrait_of_a_Cardinal_ca_1600.jpg
    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.
    from: http://hoocher.com/El_Greco/El_Greco.htm

    https://41.media.tumblr.com/d0bd1c502381a75d3fc8259c32c09c45/tumblr_mpe982V6qx1qk185eo1_400.jpg
    http://2.bp.blogspot.com/-NQeUDj3_TN0/VjYayqlLImI/AAAAAAAAFOU/hpwpIlrQ7vo/s250/fez1.jpg

  • Bhaskara II

    Is he work­ing on mod­ern cen­sor­ship?

  • Demand­Sider

    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.

    https://en.wikipedia.org/wiki/List_of_government-owned_companies_of_China

    (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.

  • Bhaskara II
  • Bhaskara II

    Demand­Sider,

    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.

  • Demand­Sider

    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: 

    https://en.wikipedia.org/wiki/List_of_government-owned_companies_of_China

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

  • athabas­can81

    Steve
    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.

    http://www.sciencedirect.com/science/article/pii/S1057521914001070