Ponzi Maths–Part 1

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This is an unplanned post that part­ly pre-empts what I’ll be writ­ing in the Feb­ru­ary Debt­watch Report, where I will explain in full my the­o­ry of mon­ey cre­ation in a pure cred­it econ­o­my. So this is some­what out of sequence, and will undoubt­ed­ly be bad­ly explained com­pared to what I put togeth­er for Feb­ru­ary. 

I will also have to fin­ish this in a lat­er post–probably in the first cou­ple of days of the New Year–because Syd­ney’s fire­works beck­on, and we have to be on board the cruis­er we’re watch­ing them from at 7pm.  But what is here is part of a long-promised expla­na­tion of my mod­el of mon­ey cre­ation. In a cou­ple of days I’ll pub­lish the punch line, which is a new­ly devel­oped mod­el of a Ponzi Scheme.

Debunking Economics eBook available

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Click here to buy the Debunking Economics eBook from Mobipocket

Click on the cov­er to buy the eBook

Debunk­ing Eco­nom­ics was first pub­lished in 2001 by Plu­to Press (Aus­tralia) and Zed Books (UK). There has been renewed inter­est in it since I began warn­ing of the impend­ing finan­cial cri­sis, and I decid­ed to release the book in elec­tron­ic for­mat to make it more acces­si­ble (the hard copy can still be pur­chased, if your book­shop will order it, from Zed Books UK, or online from Ama­zon).

I have gone with the (free) Mobipock­et Read­er format–which runs on PCs and PDAs as well as eBook Read­ers like Ama­zon’s Kin­dle. The eBook priced at US$10 (about a third of Ama­zon’s paper­back price).

The World’s Biggest Ponzi Scheme?

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Two days ago the FBI indict­ed Bernie Mad­off, prin­ci­pal of Bernard L. Mad­off Invest­ment Secu­ri­ties LLC, on secu­ri­ties fraud. Though the case has yet to run, in the indict­ment the FBI report­ed that Mad­off con­fessed that his was “basi­cal­ly a giant Ponzi Scheme”  that may have lost some extreme­ly high net worth indi­vid­u­als over US$50 bil­lion.

Mad­of­f’s firm was famous for return­ing con­stant pos­i­tive results, even on a month by month basis, for decades. As Hen­ry Blod­get on Yahoo’s Tech Tick­er reports below, many Wall Street pro­fes­sion­als were incred­u­lous of these results, but invest­ed in his firm anyway–because they thought his returns must be com­ing from him exploit­ing his “mar­ket mak­er” role on the Nas­daq to do insid­er trad­ing.

How the ‘Experts’ Missed the Crash: Philosophical Flaws, No Sense of History

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Uni­ver­si­ty of Texas Eco­nom­ics Pro­fes­sor James Gal­braith is a son of the great US Insti­tu­tion­al econ­o­mist John Ken­neth Gal­braith, and a lead­ing non-ortho­dox econ­o­mist in his own right. He has devel­oped high­ly inno­v­a­tive meth­ods to mea­sure eco­nom­ic inequal­i­ty that are well doc­u­ment­ed here; he is a stri­dent crit­ic of con­ven­tion­al eco­nom­ics; and he has been as active in the USA as an ana­lyst of and com­men­ta­tor on this finan­cial cri­sis as I have in Aus­tralia. His many inter­views on the top­ic are linked from this site.

I do not know anyone who predicted this course of events…

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Sev­er­al peo­ple have com­ment­ed on the speech by Glenn Stevens (for inter­na­tion­al read­ers, Stevens is the Gov­er­nor of Aus­trali­a’s cen­tral bank, the Reserve Bank of Aus­tralia) yes­ter­day in which he com­ment­ed, inter alia, that:

I do not know any­one who pre­dict­ed this course of events. This should give us cause to reflect on how hard a job it is to make gen­uine­ly use­ful fore­casts. What we have seen is tru­ly a ‘tail’ out­come – the kind of out­come that the rou­tine fore­cast­ing process nev­er pre­dicts. But it has occurred, it has impli­ca­tions, and so we must reflect on it.”

Ross Gittins finally comes aboard

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Ross Git­tins final­ly comes aboard the debt-defla­tion train, with an arti­cle in today’s (Decem­ber 8 2008) Syd­ney Morn­ing Her­ald enti­tled “It’s not infla­tion that did us in, it’s the bor­row­ing”. For non-Aus­tralian read­ers, Ross has been a reg­u­lar eco­nom­ic com­men­ta­tor for Syd­ney’s lead­ing news­pa­per for about forty years.

His eco­nom­ic posi­tion in the past could be described as pre­dom­i­nant­ly neo­clas­si­cal, with occa­sion­al dash­es of Key­ne­sian­ism, the odd infre­quent jibe at the unre­al­is­tic assump­tions under neo­clas­si­cal eco­nom­ics, and a social­ly con­cerned ori­en­ta­tion that was crit­i­cal of both income inequal­i­ty and exces­sive con­sumerism.

UK steps in the right direction

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The UK Gov­ern­ment has tak­en the first ten­ta­tive steps towards a solu­tion to this cri­sis with its deci­sion today to give stressed bor­row­ers an inter­est repay­ment hol­i­day of up to two years (New scheme to help peo­ple at risk of repos­ses­sion).

The scheme is lim­it­ed in scope to house­holds that suf­fer “a sig­nif­i­cant and tem­po­rary loss of income as a result of the eco­nom­ic down­turn to defer a pro­por­tion of the inter­est pay­ments on their mort­gage for up to two years”. It also guar­an­tees banks that the deferred pay­ments will ulti­mate­ly be made.

DebtWatch No 29 December 2008

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What’s Real­ly Going On? or…

Why Did I See it Com­ing and “They” Did­n’t?

Part 2: The Mod­els

But this long run is a mis­lead­ing guide to cur­rent affairs. In the long run we are all dead. Econ­o­mists set them­selves too easy, too use­less a task if in tem­pes­tu­ous sea­sons they can only tell us that when the storm is long past the ocean is flat again.” (Keynes, A Tract on Mon­e­tary Reform, 1924)

In last mon­th’s Debt­watch, I explained why the data side of why the “Finan­cial Insta­bil­i­ty Hypoth­e­sis” enabled me to pre­dict this cri­sis, long before con­ven­tion­al “neo­clas­si­cal” econ­o­mists had any idea it was approach­ing.

Technical problems with the blog

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Dear Sub­scribers,

There is some tech­ni­cal glitch affect­ing the blog at present that delays approval of new posts, and often results in mul­ti­ple post­ings from the same post. I know these would be irri­tat­ing to receive, but they are the fault of either the under­ly­ing soft­ware (Word­Press) or my ISP host, or both.

Once I have time to get to the bot­tom of this, I will repair it. In the mean­time, please accept my apolo­gies for the blog’s ten­den­cy to crowd your email inbox with spu­ri­ous mul­ti­ple posts.

Can the USA debt-spend its way out?

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Reports that the USA gov­ern­men­t’s total finan­cial com­mit­ments from the finan­cial cri­sis now top US$5 tril­lion raise the obvi­ous ques­tion “Can they afford it?”.

The answer isn’t obvi­ous. Some econ­o­mists, from a range of schools of eco­nom­ic thought, argue that the gov­ern­ment sec­tor (lump­ing the Trea­sury and the Fed­er­al Reserve togeth­er) has a lim­it­less capac­i­ty to pay debt as a con­se­quence of its sta­tus (espe­cial­ly since the US dol­lar is still the world’s reserve cur­ren­cy).

I don’t dis­pute the capac­i­ty of the gov­ern­ment sec­tor to issue debt. But if it is to ser­vice that debt then there are finan­cial issues for both the gov­ern­ment and tax­pay­ers if the debt it takes on is huge.