Di chi è la sovranità monetaria ?

Sul sito della scuola austriaca in Italia c'è la ^traduzione dell'analisi di Friedman e la Grande Depressione del recente libro di David Stockman#http://vonmises.it/2013/09/18/milton-friedman-un-keynesiano-dacqua-dolce-i-parte^ sull'america (Stockman era ministro del bilancio nei primi anni di Reagan, a 32 anni, poi ha fatto soldi con investimenti e private equity e ora attacca tutto il sistema ed è molto acuto e radicale e sa un sacco di cose anche dall'interno, cioè conosce il sistema oltre a studiare e scrivere. E Stockman è "austriaco" come punto di vista) --------------------- Quando il professor Friedman aprì il vaso di Pandora: le operazioni sul mercato aperto della FED ovvero l'inizio del "sostegno" dello Stato alle Banche In fin dei conti, Friedman abbandonò il gold standard per una rilevante ragione statalista. Proprio come Keynes, era afflitto dall’ambizione dell’economista di prescrivere la via verso un maggior reddito nazionale e una maggiore prosperità, con l’indicazione degli strumenti interventisti e, quindi, le ricette con cui ottenere tutto ciò. L’unica differenza con Keynes fu l’origine: quella dell’inglese, essenzialmente fiscalista mentre Friedman si concentrò sulle operazioni sul mercato aperto condotte dalla banca centrale quale mezzo per raggiungere la domanda aggregata e il reddito nazionale ottimali. C’erano imponenti e molteplici ironie in quella presa di posizione. Egli pose a carico della banca centrale il compito attivo e moralmente giustificato di comprare il debito del governo tramite la conduzione delle sue operazioni sul mercato aperto. Certo, Friedman disse che la FOMC avrebbe dovuto comprare bond e azioni ad un tasso non superiore al 3% annuale, ma quel limite era una debole barriera. In realtà, non può essere negato che fu il professor Friedman, il fustigatore del Grande Governo, ad indicare ai banchieri centrali repubblicani la via per favorire lo stesso in vari modi. Sotto i loro auspici, la FED si rimpinzò presto delle emissioni di debito del Tesoro e tramite ciò alleviò dall’inconveniente di finanziare più spesa con più imposte. Secondo Friedman la democrazia avrebbe prosperato in un sistema di libero mercato: aveva perfettamente ragione. Tuttavia il suo strumento preferito di promozione della prosperità, la gestione da parte della FED dell’offerta di moneta, fu molto più anti-democratica dei metodi di Keynes. L’attivismo fiscale politico era, almeno, soggetto alle deliberazioni del parlamento e, in un qualche generico senso, al giudizio elettorale da parte della cittadinanza. Al contrario, i dodici membri della FOMC sono quanto di più vicino ad un non eletto politburo sia possibile ottenere nel sistema di governo americano. Quando, a tempo debito, la FOMC si schierò esattamente dalla parte dei debitori, dei proprietari di immobili e degli speculatori finanziari a leva – contro i risparmiatori, i salariati, gli uomini d’affari utilizzatori del capitale di rischio – questi ultimi non trovarono alcun riparo dalle sue azioni politiche. La più sconveniente conseguenza del profondo statalismo implicito nelle teorie monetarie di Friedman, comunque, sta nel fatto che egli lo pose del tutto in contrasto con la visione dei fondatori della FED. Come è stato visto, Carter Glass e il professor Willis assegnarono al sistema di Federal Reserve l’umile missione di liquidare passivamente i buoni collaterali che le banche commerciali le avessero presentato. Di conseguenza, la differenza fra una “ banca del banchiere” che offre un servizio di operazioni di sconto e una banca centrale impegnata in continue operazioni sul mercato aperto è fondamentale e rilevante, non semplicemente una questione di tecnica. Facilitando il miglior allineamento della liquidità fra attivi e passivi dei bilanci dei depositi bancari a riserva frazionaria, l’originario operato della “banca di riserva” del 1913 avrebbe presumibilmente migliorato l’efficienza del sistema bancario, la stabilità e l’utilizzo delle riserve a livello di sistema. In breve, sotto l’originario modello di servizio di operazioni di sconto, l’occupazione nazionale, i prezzi di produzione e il PIL erano un risultato spontaneo del libero mercato, non un artificio della politica statale. Al contrario, operazioni sul mercato aperto inevitabilmente conducono ad un’economia nazionale pianificata e alla determinazione del PIL e di altri aggregati macroeconomici. La verità è che non c’è altra ragione per controllare M1 che quella di guidare la domanda, la produzione e l’occupazione da Washington. Perché il professore libertario, che fu così ostile a tutti i progetti e le attività del governo, sperò di rafforzare quello che anche lui avrebbe potuto considerare come un incipiente politburo monetario con tali massicci poteri di pianificare e gestire l’economia nazionale, anche se tramite un lontano e apparentemente non intrusivo meccanismo di manipolazione di M1? Non c’è che una risposta: Friedman fraintese profondamente la Grande Depressione e concluse erroneamente che l’indebita considerazione nei confronti delle regole del gold standard, avuta dalla FED durante il 1929-1933, causò il fallimento nel condurre un’aggressiva politica di acquisti sul mercato aperto del debito pubblico e, perciò, impedì la prevezione della profonda caduta di M1 durante i 45 mesi successivi al crash. Tuttavia l’evidenza storica è chiarissima: non ci fu mancanza di liquidità né fallimento della FED nel compiere il suo lavoro di “banca del banchiere”. In verità, le 600 banche appartenenti al Federal Reserve System non fecero un massiccio uso del servizio di sconto durante questo periodo e a nessuno, che avesse presentato buoni collaterali, fu negato l’accesso alle riserve di prestito. Di conseguenza, le banche commerciali non furono per nulla forzate nella loro capacità di fare prestiti o di generare conti correnti ( M1 ). Ma dall’alto piedistallo della sua cattedra all’Università di Chicago, tre decenni dopo, il professor Friedman concluse: il sistema bancario avrebbe dovuto in ogni caso essere inondato di nuove riserve. E questa accademica conclusione post facto andò dritta al cuore della tematica delle operazioni sul mercato aperto. Le operazioni di sconto erano il meccanismo tramite cui i banchieri del mondo reale volontariamente creavano nuove riserve nel sistema per favorire l’espansione di prestiti e depositi. Al contrario, l’acquisto sul mercato aperto di bond fu lo strumento tramite cui i novelli pianificatori centrali dalla FED immisero riserve nel sistema bancario, a prescindere dal fatto che fossero richieste o meno dalle banche membri. Friedman si schierò così dalla parte dei pianificatori centrali, affermando che il mercato dell’epoca fosse sbagliato e che le centinaia di banche, che già avevano riserve in eccesso, avrebbero dovuto essere immerse di maggiori e ancora maggiori riserve, finchè non avessero iniziato a prestare e a creare depositi in accordo con i dettami del gospel monetarista. Non c’è bisogno di dire che i dati storici mostrano la falsità di questa affermazione e il fallimento di questo esercizio, condotto dalla Fed di Bernanke, nel mondo reale – un significativo esempio di “trappola di liquidità”. L’errata critica di Friedman alla FED dell’epoca della Depressione spalancò le porte alla pianificazione centrale monetaria La verità storica è che la missione principale della FED di quell’epoca, cioè di scontare i valori dei prestiti delle banche, è stata eseguita in modo coerente, effettivo e completo da parte delle dodici banche, durante i 45 mesi cruciali fra il crash del mercato azionario nell’ottobre del ’29 e l’insediamento di Franklin Delano Roosevelt nel marzo del ’33. Inoltre, la documentata mancanza di domanda da parte delle banche membri per prestiti tramite operazioni di sconto non fu dovuta all’adozione, da parte della FED, di un tasso di interesse eccessivamente alto. In realtà, il tasso di sconto della FED diminuì progressivamente: dal 6% pre crash al 2,5% nel ’33. Ancor più importante, le riserve in eccesso nel sistema bancario crebbero drammaticamente durante questo periodo di 45 mesi, implicando proprio l’opposto della politica monetaria restrittiva. Prima del crash del mercato finanziario (settembre ’29) le riserve in eccesso nel sistema bancario ammontavano a 35 milioni; poi crebbero a 100 nel gennaio del 1931 e infine a 525 milioni nel gennaio del 1933. In breve, l’espansione per dieci delle riserve in eccesso (cioè quelle inattive) nel sistema bancario fu una drammatica prova della mancanza di sete di liquidità del mercato stesso; ciò nonostante questo fu completamente inondato. La sola missione incompiuta della FED fu quella che il professor Friedman le assegnò 30 anni dopo l’accaduto: mantenere un arbitrario livello di M1 immettendo riserve nel sistema bancario, tramite l’acquisto sul mercato aperto del debito dello zio Sam. Poiché questo accadde durante lo stesso periodo (45 mesi) in cui l’offerta di moneta ( M1 ) diminuì di circa il 23%, le riserve in eccesso crebbero di dieci volte tanto. Tecnicamente parlando, questo significa che il moltiplicatore monetario era crollato. Come è stato visto, comunque, la grande diminuzione dei conti correnti (il volume di M1) non implicò una stretta nell’offerta di moneta: fu, semplicemente, il risultato aritmetico della contrazione di circa il 50% dei prestiti commerciali durante quel periodo.

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Ciao Giovanni. Sarà che ho avuto la fortuna di avere grandi insegnanti in quella che era ai tempi l'ottima facoltà di Economia de La Sapienza, e leggendo queste cose che per me sono abbastanza naturali mi sento rinfrancato dopo aver subìto e combattuto per anni il dilagare del pensiero accademico americano. Comunque colgo l'occasione per suggerirti pubblicamente di intitolare, o almeno sottotitolare, il tuo saggio: "Se oggi Keynes fosse al mondo taglierebbe solo le tasse". Lo trovo eccellente!

Oggi c'era sul sito dell'economista canadese Nick Rove (neoclassico) una discussione in cui è intervenuto Steve Keen e altri come Scott Fullwiler (MMT), Steve Roth (neoclassico), Luis Enriques... su cosa sia la moneta nel senso di chiarire chi la crea, le banche o lo stato. Anche il Paul Krugman, l'economista più letto al mondo è dovuto entrare negli ultimi due mesi sul tema sul New York Times a difendersi dopo esser stato sommerso di fischi e attacchi. ^August 24, 2013, Paul Krugman, "Commercial Banks As Creators of “Money”"#http://krugman.blogs.nytimes.com/2013/08/24/commercial-banks-as-creators-of-money/?_r=0^ in cui riprova per la quarta volta credo quest'anno a difendere la posizione dell'economia accademica, quella dei libri di testo, per la quale le banche non creano veramente moneta e se le creano non importa e in ogni caso tutta la questione della moneta, del credito e delle banche non è rilevante ed è meglio parlare d'altro. Nei suoi pezzi precedenti Krugman si era letteralmente coperto di ridicolo, bastava leggere i commenti dei suoi stessi lettori (bisogna dare atto che al NT Times blog non censurano) e nell'ultimo del 24 agosto ha provato di nuovo a spiegare se le banche creano moneta citando un saggio di Tobin del 1961 e dando una spiegazione più ambigua Steve Keen lo ha di nuovo sistemato ieri in ^"Tobin's lesson on logic and banks, Steve Keen", 3 Sept#http://www.businessspectator.com.au/article/2013/9/3/global-news/tobins-lesson-logic-and-banks^ assieme a Nathan Tankus e dozzine di altri Ci sono letteralmente centinaia di discussioni del genere ora nei blog economici di lingua inglese, sulle implicazioni del fatto che se io presto soldi a te o una cassa di credito cooperativo presta soldi la moneta nell'economia non aumenta, ma se una banca presta soldi la moneta aumenta. Dato che con la moneta puoi spendere ne segue che la Domanda o Spesa = Reddito + variazione del Debito. Ma il reddito a sua volta è espresso da una quantità di moneta, giusto ? Da cui segue che nel corso del tempo la moneta si crea essenzialmente come debito, perchè se vai indietro di 80 anni ad esempio e ci pensi un attimo, da dove è arrivata la moneta dall'inizio, generazione dopo generazione ? La Produzione di beni e servizi o PIL è ovviamente alla fine uguale alla Domanda (se questa cala la produzione cala). E la Domanda = Moneta X servizi o beni + variazione di Debito. In entrambi i termini entra la moneta, ma se vai all'indietro l'equazione ti dice che è il debito, una somma di moneta che si accumula sotto forma di domanda. Ovviamente però c'è anche quello che dice Mosler che lo stato quando va in deficit crea moneta per i privati, che è vero anno per anno, e quindi i deficit che si accumulano sono moneta che finisce in mano alle famiglie. Ma lo stato dal 1981 si indebita anche lui, crea moneta che gli viene subito prestata. Come fai quadrare i concetti allora con la contabilità e l'esperienza pratica e capire come funziona veramente ? Non è così semplice!! Nota: Mosler sa queste cose e semplifica quando viene in Italia per sottolineare che il Deficit Pubblico non costa niente, e crea moneta, ma la crea sotto forma di BTP e BOT 1) nell'Economia che studi oggi, ad esempio alla Bocconi o alla London School o ad Harvard dove hanno il Blanchard e Giavazzi come testo (oppure il Krugman e Wells o il Mankiw...) che è diciamo l'85% di quello che senti come "Economia" il problema è risolto così: quando si parla di moneta è sempre "cash", soldi contanti, la cui quantità è controllata dalla Banca Centrale, la quale vigila che i politici non ne stampino molta rovinandone il valore. Poi però trovi un piccolo paragrafo (neanche un capitolo!) che dice che "le banche la possono moltiplicare", prestando la stesso cifra, ridotta del 10%, se il tizio che riceve i soldi la rideposita (cosa che avviene nel 90% dei casi) e così poi varie volte fino a quando ogni volta riducendo del 10% di riserva obbligatoria non va a zero per cui da 100 di deposito puoi prestare circa 700. Questa sembra una storia interessante, una moltiplicazione del denaro... uno magari vorrebbe saperne di più, ma negli altri 32 capitoli del testo dimenticano questa storia e parlano sempre come se la moneta sia cash sotto il materasso che qualcuno ha ricevuto e deposita in banca e la Banca Centrale vigila che non se ne stampi molta. Le banche tornano ad essere intermediari che prestano i risparmi di uno ad un altro che vuole indebitarsi. (E il "moltiplicatore" del Credito che hanno al paragrafo del capitolo 26 ? Non compare più e così anche nei modelli avanzati econometrici... desparecido) 2) nell'economia "Austriaca" (che conta per un 3% del totale di questo che senti in giro) si parla di moneta come se fosse Oro, o legata all'oro e che dovrebbe tornare all'Oro e che qualunque forma di moneta cartacea senza una base di oro è destinata alla svalutazione, inflazione e crisi. Si discute molto bene il credito creato dalle banche che si moltiplica e crea le crisi e si dice che queste dovrebbero fallire come le imprese normali e che dato che moltiplicano i soldi senza avere niente per ripagarli meritano di saltare per aria. La loro soluzione è tornare all'Oro e lasciar fallire le banche, non molto pratica... 3) nella MMT e altri post-keynesiani "pro-deficit pubblici" che conta per un 12% (così i totali sono a 100) si parla del deficit pubblico appunto che crea moneta per i privati, in modo assolutamente corretto, rovesciando di 180 gradi la superstizione che lo stato abbia bisogno di prendere soldi dai cittadini con le tasse per spendere una moneta che può creare. In Italia ad esempio si da però l'impressione tra chi ha portato quelli della MMT qui che le banche siano secondarie, non contino molto per la moneta, che siano intermediari che prestano i risparmi di uno ad un altro che vuole indebitarsi. 3) i) nella MMT e altri post-keynesiani "pro-deficit pubblici" che contano per un 12% ... c'è un gruppo minoritario che insiste sull'INSIDE MOMNEY cioè moneta creata dalle banche, le quali non aspettando di ricevere un deposito di 100 per prestare, come anche nella storia del moltiplicatore di cui sopra, semplicemente creano un deposito che per loro è sia una passività che un attività e espande il loro bilancio e anche la moneta Le banche non sono intermediari che prestano i risparmi di uno ad un altro che vuole indebitarsi, ma creano moneta. A differenza della MMT dura e pura vedono il credito come il motore dell'economia, non i deficit pubblici perchè questi sono finanziati con debito e non con moneta QUANTA MONETA ALLORA CREANO LE BANCHE COI PRESTITI E QUANTA MONETA CREA LO STATO COI DEFICIT ? Questo è il problema che ho cercato di approfondire per scrivere questo libro (Nota nei blog economici italiani ho trovato un totale di interventi di.... Zero) e ho notato che è il tema del momento, che tutti ne parlano. Questo post allora di Nick Rove (tra le centinaia che trovi) è bello perchè vedi un economista accademico neoclassico che finalmente "traduce" nello strano modo di pensare degli economisti di oggi il semplice fatto che LE BANCHE CREANO MONETA, non prestano i soldi di uno ad un altro. Ho Ricopiato qui l'intera cosa in inglese originale (cosa che è contro le regole del forum) anche per non perderla ------------- ^"What Steve Keen is maybe trying to say, Nick Rove"#http://worthwhile.typepad.com/worthwhile_canadian_initi/2013/08/what-steve-keen-is-maybe-trying-to-say.html^ Or maybe not. But either way I'm going to say it. .... 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. Here's the intuition: 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. It doesn't matter for this story what that "something" was that changed and started the whole thing rolling. It might have been: a change in the central bank's behaviour; a change in commercial banks' behaviour; or some change from outside the banking system. We know that a sensible central bank would eventually do something else to stop the whole thing rolling before aggregate planned nominal expenditure gets too big for consistency with the inflation or whatever target. Because there is a supply-side and Phillips Curve out there somewhere. If this process doesn't stop by itself, the central bank will make it stop. This is not a long run story. It won't explain long run increases in money or debt. And it is not a story about all growth in income, because it is perfectly possible to have income growth where planned and expected and actual expenditure and income are all the same. It's a demand-side story of the transition from one growth path to another, where expectations may be false during that transition. 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. We are talking about what Old Keynesians talk about when they zig-zag slowly to the equilibrium point in the Keynesian Cross diagram. We are talking about what monetarists talk about when they talk about the hot potato process where the actual stock of money is greater than the quantity of money demanded. 23, 2013 at 03:09 AM If Steve Keen is saying what Nick thinks he is saying, then what Steve is saying is much the same as what MMTers say: i.e. that hot potatoes are important. Or put another way, the above lot have all tumbled to something that was obvious to the average street sweeper all along, namely that if someone wins on the lottery, they’re liable to spend some of their winnings. Or have I missed something? Posted by: Ralph Musgrave | August 23, 2013 at 04:09 AM Alex: "Nick, couldn't you also "prove" this identity by constructing it for individuals, and then aggregating?" I've been wondering about that. A better way to say what you just said: what assumptions would I need to make to ensure that that equation holds? Clearly I need to assume that each individual has a coherent plan, given his expected income (that his plan does not violate his budget constraint). At the individual level, that equation wouldn't hold, because an individual could also be planning to buy or sell things like land or used goods or non-monetary financial assets. The question is whether those things would cancel out in aggregate. And they might not, because if everyone were (say) planning to sell $1,000 worth of land, in aggregate their plans would be inconsistent. Which brings me to TMF's point: "1) Should the definition of aggregate demand (AD) include financial assets? I think Keen includes it in his definition of AD." Or include things like land too. Well it might be more useful to redefine "AD" that way, but in this post I wanted to stick to the conventional definitions of everything, because I wanted to make sure I got a version that did not violate NIA identities, which are expressed in terms of those conventional definitions. TMF: "2) If I save $100 in "money" taking it out of circulation and you borrow the $100 and spend it on goods/services, isn't AD unchanged?" Yep, which goes back to Say's Law. Except that if you decide to save more, that might lower interest rates to persuade me to spend more, which might affect borrowing from banks. David: Hey! I did use math! There are three equations in this post, and I used algebra to substitute the second equation into the first, to derive the third. I just wrote them out longhand, writing "equals" instead of "=". And I wrote: "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." which makes the important math point that it matters whether "E" appears to the right or left of the summation operator! Evan: and maybe we are all better off if you don't see me struggle with math too! (Especially trying to write it in Typepad.) Ralph: I think that misses something. Money is unique in being the medium of exchange. Almost anything is wealth. Posted by: Nick Rowe | August 23, 2013 at 05:41 AM I believe Steve Keen is aware of your second problem. It looks like he means increase in net credit, and change in debt is only a proxy for this, and it's not clear how good a one. Your first point is trickier. You're doing different accounting based on different assumptions. Try something simple. People borrow a Billion dollars of new bank money this year. They spend the money on goods and services tracked by GDP. GDP increases. But you say, they'll get this billion back as income "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 is what happens when you believe in representative agents. You can drown in a lake with an average depth of 1 foot. The borrowers aren't necessarily the people who will be getting the money back as earnings, nor are they acting in timeless simultaneity. Where then does the money go? Some of it adds to the inflation component of NGDP, some adds to asset prices not tracked by NGDP, some counteracts certain underlying deflationary trends (cheap imports, decreasing labor share...), and some is spread over an increasing population. This is exactly what we've seen. People borrow to compensate for wage stagnation and to run up the value of assets, and the pain is lessened by low import prices. I can buy a DVD player for $30, an air conditioner for $100 (it will soon cost more to recycle one than to buy one) and a 32" flat screen TV for $250. OTOH I hope I never need a plumber. The question is, what happens when you turn off the tap. In NIPA accounting net credit works invisibly, but it still works. Timeless NIPA accounting can't be applied to equations with explicit time without some sort of modification. You wouldn't ask how many kilowatts are in a megawatt hour, would you? Posted by: Peter N | August 23, 2013 at 08:37 AM "We know that a sensible central bank would eventually do something else to stop the whole thing rolling before aggregate planned nominal expenditure gets too big for consistency with the inflation or whatever target." I don't quite understand how this bit fits into Keen's model. He thinks that bank lending drives up and becomes increasing part of AD over time during a boom period but this eventually become unsustainable, then loans start not getting renewed causing downward pressure on AD and a recession. Keens shows charts to back this theory up showing debt/gdp ratios increasing in the lead up to 2008 and then declining afterwards. However this all seems to happen during a period where the CB was indeed targeting inflation and NGDP was growing at a steady 5% annually. Posted by: Ron Ronsom | August 23, 2013 at 09:28 AM Luis, "I don't really understand why money demand subtracts from things." It allows planned expenditure to go unrealized. Just because you demand a loan from a bank does not mean that you get one. Nick's equation: "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." Aggregate planned nominal expenditures could exceed national income plus the amount of loans the banking system is willing to make. If everyone planned on spending $1 billion dollars today, the banking system may not be willing to extend enough credit to make it happen. Posted by: Frank Restly | August 23, 2013 at 09:31 AM Nick: I don’t get your rebuttal of my August 23, 2013 at 04:09 AM point. Posted by: Ralph Musgrave | August 23, 2013 at 11:16 AM Frank, No, that's not what Nick is talking about. The reason money demand subtracts from things is that if I borrow $100, but I do so because I want to walk around with $100 in my pocket rather than having a specific plan for what to do with that $100, then aggregate demand won't go up. (If I do spend the $100 at the store the next day AD will go up.) Posted by: Alex Godofsky | August 23, 2013 at 11:28 AM Alex, Okay, gotcha. Nick is referring to liquidity preference (demand for the most liquid of assets). It would kind of strange for someone to borrow money without a planned purchase for that money. Not saying it never happens, just that it would be quite unusual. Posted by: Frank Restly | August 23, 2013 at 11:53 AM Frank, in a sense I "borrow" money without a planned purchase for it all the time - when I visit the ATM to refill my wallet. I have a very literal money demand - I want to hold a physical stock of money purely for the liquidity value. More generally, you probably won't see people taking out actual loans just to hold on to the cash, but when you introduce multiple people you can get the same effect. My employer might borrow money to pay my salary, and when I receive my salary I don't have any specific plan for what to do with it so I let it sit in my bank account. Posted by: Alex Godofsky | August 23, 2013 at 01:22 PM Alex Godofsky, "in a sense I "borrow" money without a planned purchase for it all the time - when I visit the ATM to refill my wallet. I have a very literal money demand - I want to hold a physical stock of money purely for the liquidity value." In what sense is that borrowing? Posted by: W. Peden | August 23, 2013 at 03:49 PM Ron, NGDP doesn't include transactions that are not value added - no purchase of goods already accounted for, capital gains, borrowing etc. There's nothing to make any level of debt incompatible with steady NGDP growth per se. That requires some other part of your economic model. This comes back to the economic blog perennials that asset inflation isn't inflation, and whether central banks should target asset inflation when CPI inflation or NGDP is on target(depending on your preference of target). Posted by: PeterN | August 23, 2013 at 04:11 PM W Peden: In the sense that I am selling a slightly-less-liquid interest-bearing asset (deposits) for a slightly-more-liquid non-interest-bearing asset (currency). Posted by: Alex Godofsky | August 23, 2013 at 04:51 PM Solipsinomics? Single agent Si wants to buy a DVD player. Si goes to the bank and gets $100 in a deposits (a bank liability). Through the magic of fractional reserve banking, the bank creates a $100 deposit liability for Si and an offsetting $100 asset (the loan) which it holds on its books against Si. With the deposits (skipping over steps involved with exchanging deposits for currency and back), Si buys a DVD player from Si the manufacturer. Si as manufacturer, hires Si as an employee to make the DVD player, paying Si with the money customer Si payed for it. This payment is income to Si employee, which Si employee/customer deposits in the bank. At some future time Si and the bank may decide cancel the banks deposit liability and loan asset. The loop is closed, GDP = GDI = GDE = $100, and Si is his own grandpa. Does this sound about right, sarcasm aside? Posted by: Peter N | August 23, 2013 at 05:22 PM Alex Godofsky, I still don't see how moving from one asset to another constitutes "borrowing". No new liabilities have been incurred by you. If you placed cash in a bank account, then this is borrowing, but on the part of the bank. Posted by: W. Peden | August 23, 2013 at 05:55 PM Peter N, Good point. The money supply and total loans could be going up in parallel. If most of this new money goes towards increased spending on asset that don't count for NGDP (rather than final goods, that do) then this could indeed lead to increasing debt/gdp ratios while NGDP growth stays on trend. In fact its quite possible that in a boom you could well see banks becoming more leveraged by lending more against existing assets and this new money then drives up asset prices while NGDP is little affected. If the CB targets NGDP growth this may dampen things down enough in terms of final sales but not necessarily in terms of bank leverage or asset price inflation. So if Nick's view of what Keane says is correct then one can make something of a case that if the CB is only looking at NGDP it might miss other bad things that are happening in the economy until they cause a crisis that affects NGDP negatively and drives the economy into a ZLB scenario. Posted by: Ron Ronsom | August 23, 2013 at 06:33 PM Ron, You also have to consider purchases of low cost foreign goods reducing CPI inflation, while the recycled money fuels the fire. The problem is you have so many trends reaching their Stein's law endpoints at the same time: Demographics The China credit cycle The European banking crisis The problem of the Euro A hypertrophied financial system The rise of our robot masters Who knows in what order these train wrecks will occur? Posted by: PeterN | August 23, 2013 at 09:57 PM Peter N -- exactly. CPI has been an unreliable indicator for a long time. This point is not made enough. It's impossible to separate the recent spate of credit bubbles from the fact that, increasingly, preferred monetary gauges are not working correctly. Posted by: Andre Mouton | August 24, 2013 at 01:18 PM Back from canoeing, in case anyone is still reading. Drive 3 hours from the capital city, paddle a few hours, get your own private beach, on what might as well be your own private lake too, swim in water probably clean enough to drink, and all for $8 per person per night. Canada eh! Andrew: "Nick an interesting post though trying a bid too hard to squeeze into a neoclassical box a profoundly disequailibrium process." But I did keep saying "this is a disequilibrium process"! Expectations falsified, money demand not equal to quantity of money, that's diequilibrium. "The 'minus the increase in money demanded' (surely this dimensionally should be a flow as the units are dollars/time?)" Yes, it's a flow. I said that. Quantity of money demanded is a stock, that has the units $, and the amount by which it is increasing per month is a flow, with units $/month. Ron: ""We know that a sensible central bank would eventually do something else to stop the whole thing rolling before aggregate planned nominal expenditure gets too big for consistency with the inflation or whatever target." I don't quite understand how this bit fits into Keen's model." It doesn't. I think this theory can work for a short run increase in *bank* credit, starting from a recession, but I don't think it does work as a long run theory of *all* debt. PeterN @5.22: that sounds about right. Except: "At some future time Si and the bank may decide cancel the banks deposit liability and loan asset." We are not sure when that future time will be. Because Si has been surprised to find: he's got a job and is earning $1,000 per month more income than he expected; he has $1,000 more in his chequing account than he expected. He will revise his plans in the light of those surprises. He might pay back the loan, or he might decide to spend more. It will depend on whether he thinks this is a temporary or permanent change. Posted by: Nick Rowe | August 27, 2013 at 08:43 AM Steve: "I find it significant that out-of-the-boxers Steve Keen and Ed Lambert are the only people I know of who are trying to define demand rigorously and formulaically -- and potentially usefully. Or am I wrong on that?" Do you mean deriving (and empirically estimating) an aggregate demand *function*? In mathematical form? If so, yes, you are wrong on that. Most first and second year macro texts mainly do a diagrammatic exposition, but it's a simple matter to put those diagrams into equations and derive an aggregate demand function. Sometimes this is done in the main text, and sometimes it's in an appendix. And various types of econometricians use various different ways to try to put real world numbers into those functions. How useful this mathematisation is is debatable, but they've been doing it since before we were born. Posted by: Nick Rowe | September 03, 2013 at 04:17 PM A very quick response Nick. Given that we use different languages to express our economics, I think you've provided a pretty good characterization of my argument. I'm very pleased about that, given that there has been so much non-communication involved in this overall issue until now. I'll leave any discussion of differences of opinion to later. I also note the caveats about bringing math in here, but Matheus Grasselli has recently done a comprehensive analysis of the stock-flow mathematics in one of my models to show that the statement that "effective demand of the non-bank public is income plus change in debt" is accounting-consistent with "income = expenditure" when the banking sector and the non-bank sector are lumped together. Matheus's blog is here: http://fieldsfinance.blogspot.com/2013/08/accounting-identities-for-keen-model.html and the PDF is here: http://ms.mcmaster.ca/~grasselli/keen2011_table.pdf The issue of whether rising debt adds to demand then comes down to whether loans turn up on the asset or the liability side of the banking system ledger. If we treat banks as mere intermediaries as in the Loanable Funds model, then all lending occurs on the liability side of the ledger, and changes in the level of debt have no impact on aggregate demand--as Krugman has repeatedly argued. If however loans turn up on the asset side of the banking ledger, then the change in debt does add to demand via the money creation mechanism you note. I think the empirical issue here is obvious--bank loans do occur on the asset side of the banking system's ledger--so that rising private debt does add to effective demand (to revive an old term, as Nathan Tankus first recommended). So integrating banking into macroeconomics significantly alters it from a macroeconomics in which banks (and normally also debt and money) are omitted. Posted by: ProfSteveKeen | September 03, 2013 at 05:00 PM Having done a more considered re-read, I very happily stand by my first reaction to your post: you've done a very good job of providing a Rosetta Stone between standard Neoclassical macroeconomics, and the perspective on endogenous money macroeconomics that I put forward (along with Richard Werner, Michael Hudson, Dirk Bezemer, Matheus Grasselli and a few others--and I hasten to add that it is still a minority position even within Post Keynesian economics). This is a first Nick, and I have to sincerely thank you for it. It is truly appreciated. Cheers, Steve Keen Posted by: ProfSteveKeen | September 03, 2013 at 05:22 PM Ecomedian, "this is why the MMT "all money flows from government spending" concept is a fallacy." No, we don't say anything of the sort and never have. That would be obviously false, as Nick noted. Obviously a misinterpretation somewhere in there, either by you or by whomever you heard it from if that is the case. Posted by: Scott Fullwiler | September 03, 2013 at 06:17 PM Ecomedian, "this is why the MMT "all money flows from government spending" concept is a fallacy." I'm not sure this is right, but perhaps: Much popular MMT tends to display things in a three-sector model -- government, private domestic, and rest of world. Or even a two-sector model: government and private assuming a closed economy. This I think for simplicity of explanation. In those sectoral models, it very much looks like any additional money in the private sector comes from government (or trade surpluses). It emphasizes that the private sector can't acquire net new *financial* assets except when there are injections from those sectors. But that is very far from the full scope of MMT, which in my opinion is best viewed via a four-sector model: private nonfinancial, financial, government, ROW -- or even better five sectors, splitting out private nonfinancial into households and firms. In those models we very much perceive banks, firms, and households as agencies in the economic process. None of these sectoral models is wrong, but they give different impressions of how economies work. Posted by: Steve Roth | September 03, 2013 at 09:24 PM Steve, you don't need four or five sectors in MMT to demonstrate private sector creation of 'horizontal money'. Posted by: Philippe | September 03, 2013 at 09:42 PM Nick: I've been hard-pressed to find a function whose inputs are national accounting measures. They all seem to built on unobservables (or at least unobserveds) like MPC or autonomous consumption. I've been really hard pressed to see a graph of aggregate demand over time that has as observational basis in measures from the national accounts. Maybe my googling's just been insufficient, but if such things are out there they sure are talked about rarely. I just feel like if we're going to use the term, we should have some formulaic definition in mind, based on observed measures, so we can look at the actual derived measure and see how it behaves over time relative to our surmises and other measures. Posted by: Steve Roth | September 03, 2013 at 09:44 PM ProfSteveKeen said: "the statement that "effective demand of the non-bank public is income plus change in debt" is accounting-consistent with "income = expenditure" when the banking sector and the non-bank sector are lumped together." Does effective demand include financial assets? Yes/No Does income include financial assets? Yes/No Posted by: Too Much Fed | September 04, 2013 at 12:00 AM ProfSteveKeen said: "I think the empirical issue here is obvious--bank loans do occur on the asset side of the banking system's ledger--so that rising private debt does add to effective demand (to revive an old term, as Nathan Tankus first recommended). So integrating banking into macroeconomics significantly alters it from a macroeconomics in which banks (and normally also debt and money) are omitted." I believe you are actually getting at the idea that the capital requirement becomes a capital multiplier. Thoughts? Posted by: Too Much Fed | September 04, 2013 at 12:04 AM Nick's post said: "Luis Enrique: (quoting Steve Keen) """In a credit-based economy, aggregate demand is therefore the sum of income plus the change in debt"" What that misses is that some debt has nothing to do with the creation of money, and doesn't have any obvious effect on either the supply or demand for money, or on AD. Like if I borrow $100 from TMF." I save $100. I lend $100 to Nick Rowe (Nick Rowe borrows $100 from me). I believe Steve Keen would call me saving $100 negative debt. Nick Rowe borrowing $100 from me would be called positive debt. Minus $100 plus positive $100 equals zero. Posted by: Too Much Fed | September 04, 2013 at 03:10 AM Too Much Fed, The implied assumption is that in borrowing $100, you have some purchase in mind before borrowing. With that assumption - you are going to immediately spend that $100 - aggregate demand is lifted. The unknown is whether your lender (TMF, Nick, or whoever) had any purchase in mind before instead lending that money to you. "Minus $100 plus positive $100 equals zero." If I pay $100 for apples to Joe, Joe pays $100 for oranges to Nick, and Nick pays $100 for bananas to me, the net money transferred is $0 but the flow of money is positive. Measures of economic activity (like GDP) measure flows not net transfers. Posted by: Frank Restly | September 04, 2013 at 07:59 AM Re your statement quoted below Too Much Fed, that is a classic example of "Loanable Funds"--"Patient agent lends to impatient agent". In this case there is no new money creation and the borrower's additional spending power is cancelled out by the lender's lower spending power. But a bank lending is the creation of an asset on one side of its ledger and a liability on the other--not a transfer of money and hence spending power but a creation of money and hence spending power. This is the essential difference between Loanable Funds and Endogenous Money. Loanable Fund shows loans as a minus for one agent (fall in money held by lender) and a plus for another (rise in money held by borrower), which cancel out: in mathematical language, this is a conservative system. Endogenous Money shows loans as a plus for one agent (increase in loan assets held by bank) and a plus for another (increase in money held by borrower). The same accounting balance applies, but in math-speak this is a dissipative system with a creation of money and hence spending power. ------------- Quoting Too Much Fed: Nick's post said: "Luis Enrique: (quoting Steve Keen) """In a credit-based economy, aggregate demand is therefore the sum of income plus the change in debt"" What that misses is that some debt has nothing to do with the creation of money, and doesn't have any obvious effect on either the supply or demand for money, or on AD. Like if I borrow $100 from TMF." I save $100. I lend $100 to Nick Rowe (Nick Rowe borrows $100 from me). I believe Steve Keen would call me saving $100 negative debt. Nick Rowe borrowing $100 from me would be called positive debt. Minus $100 plus positive $100 equals zero. Posted by: ProfSteveKeen | September 04, 2013 at 08:58 AM Too Much Fed, Starting with the equation of exchange: MV = PQ = Income * ( 1 - Liquidity Preference ) + Change in Debt with Respect to time MV = PQ = I * ( 1 - LP ) + dD/dt The assumption here is that new debt that is taken on is immediately spent meaning the liquidity preference for borrowed funds is 0. Income is capital income (interest payments for loans not retained by banks) plus income from the production and sale of goods. Income (I) = Debt * ( 1 - % Retained by banking sector ) * Interest Rate + MV I = D * ( 1 - %RET ) * %INT + MV MV = [ D * ( 1 - %RET ) * %INT + MV ] * ( 1 - LP ) + dD/dt Money (M) expands whenever banks retain the loans that they make. And so M can really be said to be equal to the total of loans retained by the banking sector. When a bank securitizes and sells a loan, it pulls money out of circulation. M = D * %RET D * %RET * V = [ D * ( 1 - %RET ) * %INT + MV ] * ( 1 - LP ) + dD/dt Letting Debt (D) be an exponential function of time ( D = exp ( f(t) )) %RET * V = [ ( 1 - %RET ) * %INT + %RET * V ] * ( 1 - LP ) + f'(t) %RET * V * LP = [ ( 1 - %RET ) * %INT ] * ( 1 - LP ) + f'(t) V = [ [ ( 1 - %RET ) * %INT ] * ( 1 - LP ) + f'(t) ] / LP * %RET As the % retainage of loans by the banking sector approaches %100 the velocity of money is reduced to: V = f'(t) / LP - Loanable funds model Posted by: Frank Restly | September 04, 2013 at 09:04 AM ProfSteveKeen, "This is the essential difference between Loanable Funds and Endogenous Money. Loanable Fund shows loans as a minus for one agent (fall in money held by lender) and a plus for another (rise in money held by borrower), which cancel out..." But whether that cancelling out of money applies to measures of economic activity would depend on the liquidity preference of the lending agent. If agent 1 has $100 but is not inclined to spend it any time soon, while agent 2 will spend the money as soon as it is lent to him then aggregate demand is increased by transferring that money (through a lending process) from an agent with a high liquidity preference (low marginal propensity to consume) to an agent with a low liquidity preference (high marginal propensity to consume). Posted by: Frank Restly | September 04, 2013 at 09:27 AM Yes that's still an issue Frank: the fact that additional money creation adds to demand doesn't make variations in spending propensities (either between agents or over time) irrelevant, though I think the empirical evidence would show that the former is at least an order of magnitude more important than the latter. Conventional theory has focused only on the latter, which is why Bernanke dismissed Fisher's "Debt Deflation Theory of Great Depressions": "Fisher's idea was less influential in academic circles, though, because of the counterargument that debt-deflation represented no more than a redistribution from one group (debtors) to another (creditors). Absent implausibly large differences in marginal spending propensities among the groups, it was suggested, pure redistributions should have no significant macro-economic effects…" (Bernanke 2000, p. 24) However there's no doubt that Fisher was in fact talking about the former effect: "the payment of a business debt owing to a commercial bank involves consequences different from those involved in the payment of a debt owing from one individual to another. A man-to-man debt may be paid without affecting the volume of outstanding currency; for whatever currency is paid by one, whether it be legal tender or deposit currency transferred by check, is received by the other, and is still outstanding. But when a debt to a commercial bank is paid by check out of deposit balance, that amount of deposit currency simply disappears." (Fisher, Booms and Depressions) Posted by: ProfSteveKeen | September 04, 2013 at 10:37 AM ProfSteveKeen, "Fisher's idea was less influential in academic circles, though, because of the counterargument that debt-deflation represented no more than a redistribution from one group (debtors) to another (creditors). Absent implausibly large differences in marginal spending propensities among the groups, it was suggested, pure redistributions should have no significant macro-economic effects…" (Bernanke 2000, p. 24) Probably a bit off topic, but what liquidity preference and disposition of debt does Bernanke assume for banks / bankers during the early twentieth century? I would presume that things were a lot different back then - banks / bankers tended to be large net creditors with a high liquidity preference. These days most loans originated by banks are sold off in the form of certificates of deposit / securitized loans and the financial sector as a whole tends to be a large borrower (at least until recently). Also, the redistribution effect has negative consequences when loans are secured by real property. Farm land that is borrowed against becomes property of bank when the loan fails. Bank does not have resources to maintain said farm land. There is an efficient disposition of real goods that gets distorted when loans secured by those real resources fail. Posted by: Frank Restly | September 04, 2013 at 11:07 AM Steve (Keen): Thanks! I'm really glad we're sorta on the same page with this. I figured we might be, but I wasn't sure. A lot of this, yes, is a question of translation. On that subject, 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. My preferred distinction is between those who believe The Law of Reflux ("the stock of money is determined by the quantity of money people want to hold at the rate of interest set by the banking system, because any excess would immediately return to the banks, so there cannot be an excess supply of money"), and those who don't. Tobin in "Commercial banks as creators of money" was supporting The Law of Reflux, which became the New Orthodoxy against the Old Orthodoxy of the textbooks. Most New Keynesians, and many (not all) Post Keynesians (I think) agree with the Law of Reflux. Those of us who reject it are a weird bunch, who don't necessarily agree on anything else. At the root of the disagreement is a disagreement over whether money is just like other assets or is fundamentally different from other assets. If money were just like other assets, you get the Law of Reflux, and banks as suppliers of money being no different from the suppliers of any other asset, with the quantity of money being determined by supply and demand just like any other asset. I had a quick read of Matheus's accounting framework, but didn't find it helpful for me. Too many sectors. I'm thinking of a way to express it more simply. Posted by: Nick Rowe | September 04, 2013 at 11:11 AM I've been fixating on the same thinking as Fisher that SK quotes above. http://worthwhile.typepad.com/worthwhile_canadian_initi/2013/08/what-steve-keen-is-maybe-trying-to-say.html?cid=6a00d83451688169e2019aff2fb6fc970c#comment-6a00d83451688169e2019aff2fb6fc970c But concentrating on the spending behavior of the actors (on newly produced real goods and services), rather than the quantity of currency. Mostly simply illustrated by: o When a people repay debts to people, the repayers are likely to spend less, while repayees are likely to spend more. (You could say they're both optimizing intertemporal spending/consumption, that their incentives and reaction functions are symmetrical.) o When a people repay debts to financial institutions, the repayers are likely to spend less, but repayees are unlikely to spend more. Banks as lenders don't behave the way people as lenders behave. Their incentives and reaction functions are completely different. You can construct a model wherein portfolio/interest-rate effects mean bank lenders can be treated *as if* they're people lenders (or transparent intermediaries between people lenders). This pretty much is the mainstream model. But that model seems to bear a challenging burden of proof against the first-order fact: when you pay down your credit-card debt, your credit card company doesn't spend more. Nick: you often say people have two ways to get rid of money: buy more stuff or sell less stuff. But you haven't really answered me on the third way: paying down their debt to the financial sector. i.e. using their debit cards instead of their credit cards. Reflux. Posted by: Steve Roth | September 04, 2013 at 12:02 PM "This is the essential difference between Loanable Funds and Endogenous Money. Loanable Fund shows loans as a minus for one agent (fall in money held by lender) and a plus for another (rise in money held by borrower), which cancel out: in mathematical language, this is a conservative system. Endogenous Money shows loans as a plus for one agent (increase in loan assets held by bank) and a plus for another (increase in money held by borrower). The same accounting balance applies, but in math-speak this is a dissipative system with a creation of money and hence spending power." Finally! Finally! Finally! I would also say it is even simpler than that. Loanable funds is a 100% capital requirement. Endogenous money is a less than 100% capital requirement. This is getting very interesting now! Posted by: Too Much Fed | September 04, 2013 at 12:14 PM Nick, comment in spam? Thanks! Posted by: Too Much Fed | September 04, 2013 at 12:20 PM Try again. "This is the essential difference between Loanable Funds and Endogenous Money. Loanable Fund shows loans as a minus for one agent (fall in money held by lender) and a plus for another (rise in money held by borrower), which cancel out: in mathematical language, this is a conservative system. Endogenous Money shows loans as a plus for one agent (increase in loan assets held by bank) and a plus for another (increase in money held by borrower). The same accounting balance applies, but in math-speak this is a dissipative system with a creation of money and hence spending power." Finally! Finally! Finally! I would also say it is even simpler than that. Loanable funds is a 100% capital requirement. Endogenous money is a less than 100% capital requirement. This is getting very interesting now! Posted by: Too Much Fed | September 04, 2013 at 12:21 PM Nick's post said: "I had a quick read of Matheus's accounting framework, but didn't find it helpful for me. Too many sectors. I'm thinking of a way to express it more simply." Let me try. Let’s say I save $100,000 in demand deposits at an old bank. Someone else wants to start a new bank. They sell me $100,000 in bank stock (bank capital). The reserve requirement is 0%, and the total capital requirement is 10%. I believe that means the capital requirement is 5% for mortgages and is 10% for ordinary loans. This example will be all mortgages. Assets new bank = $100,000 in central bank reserves Liabilities new bank = $0 Equity new bank = $100,000 of bank stock Because they are 1 to 1 convertible to currency, I consider demand deposits both medium of account (MOA) and medium of exchange (MOE). I am told that by accountants that the new bank equity destroys the demand deposit. M in MV = PY falls by $100,000. The bank now makes 20 mortgages for $100,000 each. The 20 people use the demand deposits to buy 20 homes for $100,000 each from 1 home builder. Assets new bank = $100,000 in treasuries plus $2,000,000 in loans Liabilities new bank = $2,000,000 in demand deposits Equity new bank = $100,000 of bank stock $100,000 / ($2,000,000 * .5) = .10 The home builder sets up a checking account at the new bank. So 20 checking accounts at the new bank were marked up and then marked down by $100,000 each, while the home builder’s checking account was marked up by the $2,000,000. Let's assume the home builder keeps spending with demand deposits with people who have a checking account at the same bank. No currency and no central bank reserves are involved in this example. 1) M in MV = PY rises by $2,000,000. 2) Overall, I saved $100,000 in MOA/MOE, and the borrowers “dissaved” $2,000,000 in MOA/MOE for a difference of $1,900,000 in MOA/MOE. That difference is why banks and bank-like entities matter. Now raise the capital requirement to 100%. I save $100,000, and now the bank can only make $100,000 in loans for "dissaving". No new MOA or MOE is created. I'm going to say a 100% capital requirement is loanable funds. Anybody know what Krugman would say about my example? Posted by: Too Much Fed | September 04, 2013 at 12:35 PM SK misrepresents Bernanke. It is clear that Bernanke is dismissing the academic circles of the time, not Fisher. Posted by: D R | September 04, 2013 at 12:36 PM So what does Bernanke say about banks and repayment(s) of loans to them? Posted by: Too Much Fed | September 04, 2013 at 12:44 PM "No currency and no central bank reserves are involved in this example." That is not quite right. It depends. The new bank might buy treasuries with $100,000 in central bank reserves. "Assets new bank = $100,000 in treasuries plus $2,000,000 in loans" That would be $100,000 in central bank reserves if the new bank did not buy treasuries. Posted by: Too Much Fed | September 04, 2013 at 12:59 PM Immediately following SK's quote of Bernanke: "However, the debt-deflation idea has recently experienced a revival... According to the agency approach, which has come to dominate modern corporate finance, the structure of balance sheets provides an important mechanism... "From the agency perspective, a debt-deflation that unexpectedly redistributes wealth away from borrowers is not a macroeconomically neutral event... "If the extent of debt-deflation is sufficiently severe, it can also threaten the health of banks and other financial intermediaries..." http://fraser.stlouisfed.org/docs/meltzer/bermac95.pdf Posted by: D R | September 04, 2013 at 01:14 PM Steve Roth:] "when you pay down your credit-card debt, your credit card company doesn't spend more" When you repay your debt + interest, doesn't credit card company/bank equity increase? Posted by: Philippe | September 04, 2013 at 02:02 PM Too Much Fed, "M in MV = PY falls by $100,000." Not necessarily. The $100,00 in reserves held by the new bank are also part of M. They might not have existed before the old bank paid the new bank $100,000. Posted by: Philippe | September 04, 2013 at 02:11 PM "Anybody know what Krugman would say about my example?" Too Much Fed: "Let's assume the home builder keeps spending with demand deposits with people who have a checking account at the same bank. No currency and no central bank reserves are involved in this example." Krugman: "yes, commercial banks, unlike other financial intermediaries, can make a loan simply by crediting the borrower with new deposits, but there’s no guarantee that the funds stay there — [this] refutes, in one fell swoop, a lot of the nonsense one hears about how said mechanics of bank lending change everything about the role banks play in the economy." That's probably what he would say. Posted by: Philippe | September 04, 2013 at 02:16 PM @Phillipe: "When you repay your debt + interest, doesn't credit card company/bank equity increase?" Interest, absolutely yes. Or at least to the extent that it's not offset by expenses, hence is profit, which adds to shareholder equity. Principal, no. Posted by: Steve Roth | September 04, 2013 at 04:20 PM "The $100,00 in reserves held by the new bank are also part of M." MV = PY I consider M to be currency plus demand deposits because that is what circulates in the real economy along with 1 to 1 convertibility. The banking system needs to be viewed two different ways. 1) Loan creation (maybe even destruction) with a reserve requirement that is not 100% and with a capital requirement that is not 100%. 2) Payment settlement Let's use my example from above. Start in equilibrium. Each individual bank has the amount of bank reserves (vault cash plus central bank reserves) it needs/wants. The whole banking system is in balance. The central bank overnight rate is on target. My demand deposit and central bank reserves "move" to the new bank. The whole banking system is still in balance. The new bank has excess central bank reserves, and the old bank has a deficit of the same amount. The loans get made. The old bank is able to get the home builder to move $100,000 in demand deposits to the old bank. The demand deposit and central bank reserves "move" to the old bank. The old bank and new bank are now in balance. The banking system as a whole is in balance. Balance sheet new bank: Assets new bank = $2,000,000 in loans Liabilities new bank = $1,900,000 in demand deposits Equity new bank = $100,000 of bank stock Now assume the home builder moved all $2,000,000 to the old bank instead of $100,000. The old bank would have $1,900,000 in excess central bank reserves, and the new bank would have a deficit of $1,900,000 in central bank reserves. The banking system overall is still in balance. The new bank should be able to "borrow" central bank reserves in the overnight market or attract demand deposits. Next, change my assumption of 0% reserve requirement to 10%. Now the banking system as a whole could be short of bank reserves (vault cash and central bank reserves) and the new bank could be short of bank reserves even though the home builder keeps the demand deposits in its checking account or only spends with an entity at the same new bank. For Krugman, I'm saying whether the "funds" stay at the new bank or move to another bank does not really matter. It is the capital multiplier that matters. The reserve requirement could matter, but it does not the way the system is working now. Posted by: Too Much Fed | September 04, 2013 at 04:41 PM @Phillipe: "When you repay your debt + interest, doesn't credit card company/bank equity increase?" The interest payment only, not principal, will increase the credit card company equity. It is unlikely the credit card company will increase spending on goods/services. However, it might try to make more credit card loans. Steve Roth, I'm going to "borrow" your website address for identity. Maybe I won't get put in spam as much. Posted by: Too Much Fed | September 04, 2013 at 04:48 PM Nick, comments in spam? Posted by: Too Much Fed | September 04, 2013 at 04:50 PM Two quick comments. Nick, I'm delighted that you've provided a way for us to communicate on this issue, and I agree that Endogenous Money has been given a lot of different meanings, so the two words themselves don't convey a lot. On the reflux issue, I start from a definition of money as the sum of the liabilities of the banking sector to the non-bank public. An expansion of those liabilities (via the issuance of new loans) expands money, while a contraction (via loan repayment) reduces it, both with obvious effects on the level of economic activity. I think that's more the issue than whether or not there can or cannot be an excess supply. On this front, I've recently used the Minsky software (downloadable from https://sourceforge.net/projects/minsky/) that I've developed thanks to an INET grant to juxtapose the Endogenous Money/Reflux-Loanable Funds perspectives with a simple model which, with four keystrokes, can be converted from a model of one concept to a model of the other. If you're interested, I'd like to set out this model and discuss it with you (whether on or offline) and see whether it clarifies the issues being debated. Too Much Fed, I know that Bernanke went on to develop an interpretation of debt-deflation from his perspective, but this was focusing upon asymmetric information and the financial accelerator rather than the disequilibrium and quantity issues that were at the heart of Fisher's analysis. Posted by: ProfSteveKeen | September 04, 2013 at 10:20 PM "I consider M to be currency plus demand deposits because that is what circulates in the real economy" Ok, but say for example you started a new bank and the Fed decided to just give you a $1 reserve balance as a gift for some reason. You now have a $1M reserve balance at the Fed. Do you have more money that you had before? Of course! You have $1M in reserves, and reserves are money. Posted by: Philippe | September 05, 2013 at 07:36 AM *should have been: "the Fed decided to just give you a $1M reserve balance" Posted by: Philippe | September 05, 2013 at 07:39 AM Shorter SK: I know BB tried to formalize Fisher's debt-deflation ideas, but I don't like the way he went about it. So I'll keep using a quote in which BB observed that academics dismissed Fisher to say BB himself dismissed of Fisher. Apologies if this is uncivil, but... that's just awful. Posted by: D R | September 05, 2013 at 10:26 AM D R, Formalizing debt-deflation would require looking at debt as a legal claim on more than money. Ben is partially right, deflation would simply be a transfer of monetary wealth from debtor to lender with no aggregate effect (assuming the propensity to spend is equal among both creditor and lender). But when lending is secured against real property, then that real property can be transferred without regard to whether the new owner can or will use those it productively. Cab driver borrows from farmer using taxi cab as collateral. Farmer borrows from cab driver using farm tractor as collateral. Both default on loan - cab driver gets a farm tractor and farmer gets a taxi cab. Posted by: Frank Restly | September 05, 2013 at 01:25 PM Steve: let me translate that into my own words: If I sell my computer to my bank, the money supply expands. If I then buy that computer back from my bank, the money supply contracts. Similarly: If I sell my IOU to the bank (if i take out a loan), the money supply expands. If I then buy that IOU back from the bank (if I repay the loan), the money supply contracts. In the real world, banks buy and sell a lot of other people's IOUs, but don't buy and sell many other things, like computers. But the principle is exactly the same. We can even imagine banks that only buy and sell land (and rent out that land to farmers) in exchange for the money they create when they buy land and destroy when they sell land. and in that imaginary world, if banks set a price on which they would buy or sell land, would the stock of money be determined by the demand for money or by the demand to hold land? Would it be possible to have a state of affairs in which people were holding more money than they wished to hold but exactly the amount of land they wished to hold? I say it is possible. Back in the real world, we can translate that question as: Would it be possible to have a state of affairs in which people were holding more money than they wished to hold but have exactly the amount of bankloans they wished to have? I say it is possible. Does the demand for money eventually adjust to the supply of money created by the demand for loans/land? Or does the demand for loans/land immediately adjust to the demand for money? What's special about banks is not what they buy with the money they create, but that they create money. And thinking about banks as buying and selling computers or land can help us make that distinction more clearly. Posted by: Nick Rowe | September 05, 2013 at 02:00 PM Frank says: "Ben is partially right, deflation would simply be a transfer of monetary wealth from debtor to lender with no aggregate effect (assuming the propensity to spend is equal among both creditor and lender)." I don't see your point, here. Bernanke says this was the argument that academics used to use in order to dismiss Fisher. Either they did use that argument and Bernanke is correct, or they did not use that argument and Bernanke is wrong. Unless I missed it, Bernanke does not say that the old view itself is logical or illogical-- let alone correct or incorrect. However, Bernanke quite expressly goes on at length explaining that the old argument is outdated and modern thought on debt-deflation is different. I don't see anything which suggests that he is partially incorrect. He certainly dismisses neither Fisher nor debt-deflation. If anything, it could be read as a defense of debt-deflation against the old view, no?

Oggi c'era sul sito dell'economista canadese Nick Rove (neoclassico) una discussione in cui è intervenuto Steve Keen e altri come Scott Fullwiler (MMT), Steve Roth (neoclassico), Luis Enriques... su cosa sia la moneta nel senso che se la crea le banche o lo stato. Anche Krugman è dovuto entrare negli ultimi due mesi sul tema sul New York Times a difendersi dopo esser stato sommerso di fischi e attacchi ^Tobin's lesson on logic and banks, Steve Keen 3 Sep#http://www.businessspectator.com.au/article/2013/9/3/global-news/tobins-lesson-logic-and-banks^ Ci sono letteralmente centinaia di discussioni del genere ora nei blog economici di lingua inglese ------------- ^"What Steve Keen is maybe trying to say"#http://worthwhile.typepad.com/worthwhile_canadian_initi/2013/08/what-steve-keen-is-maybe-trying-to-say.html^ Or maybe not. But either way I'm going to say it. There's a fine line somewhere between: just fixing obvious typos in what someone actually said; and totally changing what they actually said. Or maybe there is no line, and it's just a continuous slope. Anyway, I'm going to cross that fine line here, and go a long way down that slope. But I don't really care. Because ideas are more important than our fallible attempts to express them. So while it would be sorta neat if Steve said "That's exactly what I was trying to say!", it probably won't happen, and it doesn't really matter, and it's much more important if people say "Saying it that way makes sense". Because it does make sense, if we say it this way. 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. Here's the intuition: 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. It doesn't matter for this story what that "something" was that changed and started the whole thing rolling. It might have been: a change in the central bank's behaviour; a change in commercial banks' behaviour; or some change from outside the banking system. We know that a sensible central bank would eventually do something else to stop the whole thing rolling before aggregate planned nominal expenditure gets too big for consistency with the inflation or whatever target. Because there is a supply-side and Phillips Curve out there somewhere. If this process doesn't stop by itself, the central bank will make it stop. This is not a long run story. It won't explain long run increases in money or debt. And it is not a story about all growth in income, because it is perfectly possible to have income growth where planned and expected and actual expenditure and income are all the same. It's a demand-side story of the transition from one growth path to another, where expectations may be false during that transition. 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. We are talking about what Old Keynesians talk about when they zig-zag slowly to the equilibrium point in the Keynesian Cross diagram. We are talking about what monetarists talk about when they talk about the hot potato process where the actual stock of money is greater than the quantity of money demanded. I have blogged about this before. And again before that. Posted by Nick Rowe on August 22, 2013 in Macro, Monetary policy, Nick Rowe | Permalink Digg This Save to del.icio.us Comments Feed You can follow this conversation by subscribing to the comment feed for this post. Nick, In your discussion each individual, at the beginning of each month, make a financial decision about how the rest of the month will go for him. Would I be correct in interpreting you as implying that there are two factors in his decision, how much consumption he wants and how much money demand. First, he considers how much of a flow of goods he wants to consume based on an implicit "consumption function." Second, he considers how much money he wants to hold as stock based on an implicit "money demand function." When these two function collide he makes a decision. In summary, he must make a decision about how much he wants as stock AND as flow, each determined by their own "function." More of one necessarily means less of the either, either to him or somebody else from whom he gets the money to hold as stock or purchase as flow. Did I get that right? Posted by: JoeMac | August 22, 2013 at 04:44 PM Nick, this looks fascinating... this and your last post. When I get the chance I'm plan to go through them very carefully.... rather than the cursory treatment I'm given them now. Thanks for posting! (plus your links to those old posts that I overlooked) Posted by: Tom Brown | August 22, 2013 at 06:46 PM I believe this is what Keen said/says. From: http://www.debtdeflation.com/blogs/2012/01/28/economics-in-the-age-of-deleveraging/ "In a credit-based economy, aggregate demand is therefore the sum of income plus the change in debt, with the change in debt spending new money into existence in the economy. This is then spent not only goods and services, but on financial assets as well—shares and property. Changes in the level of debt therefore have direct and potentially enormous impacts on the macroeconomy and asset markets, as the GFC—which was predicted only by a handful of credit-aware economists (Bezemer 2009)—made abundantly clear." aggregate demand = income plus change in debt Possible better terms. Consumption goods plus investment goods plus financial assets = income plus change in debt Posted by: Too Much Fed | August 22, 2013 at 09:40 PM Comment in spam? Posted by: Too Much Fed | August 22, 2013 at 09:43 PM JoeMac: I don't think we have to treat those as separate decisions. Tom: thanks! I'm not sure if Steve Keen's followers will respond the same way. Oh well. TMF: Yep. That's what he actually said. But you can immediately see two problems with it: 1. The National income accounting problem, because if people actually buy the goods they demand, aggregate demand will equal income. 2. Some debt does not involve money. If I borrow $100 from you (and you are not a bank) debt goes up my $100, but there is no money creation. And it's not obvious whether this causes AD to go up or down, because we don't know whether it was caused by my increased desire to spend or your increased desire to save. Posted by: Nick Rowe | August 22, 2013 at 10:23 PM Nick, couldn't you also "prove" this identity by constructing it for individuals, and then aggregating? planned nominal expenditure equals expected nominal income plus money borrowed from the banking system minus increase in the stock of money demanded The reason I suggest this is that it's weird to imagine that individuals form expectations about aggregate bank lending or aggregate money demand. (I know that's not what your identity says, but it took me a couple moments to figure that out.) Posted by: Alex Godofsky | August 22, 2013 at 10:50 PM Nick's post said: "1. The National income accounting problem, because if people actually buy the goods they demand, aggregate demand will equal income. 2. Some debt does not involve money. If I borrow $100 from you (and you are not a bank) debt goes up my $100, but there is no money creation. And it's not obvious whether this causes AD to go up or down, because we don't know whether it was caused by my increased desire to spend or your increased desire to save." 1) Should the definition of aggregate demand (AD) include financial assets? I think Keen includes it in his definition of AD. 2) No "money" creation, OK. If I save $100 in "money" taking it out of circulation and you borrow the $100 and spend it on goods/services, isn't AD unchanged? Posted by: Too Much Fed | August 22, 2013 at 11:13 PM Heaven forbid should anyone try to use math here. Let's just keep on trying to guess what we all meant! Posted by: David | August 22, 2013 at 11:58 PM +1 David. Seems fitting given Noah's (somewhat bizarre) recent post, and Krugman's (exactly on point) reply. Posted by: Evan | August 23, 2013 at 03:08 AM Also, we've all seen Keen's struggles with basic math before, so maybe we are all better of if he avoids trying to use it. Posted by: Evan | August 23, 2013 at 03:09 AM If Steve Keen is saying what Nick thinks he is saying, then what Steve is saying is much the same as what MMTers say: i.e. that hot potatoes are important. Or put another way, the above lot have all tumbled to something that was obvious to the average street sweeper all along, namely that if someone wins on the lottery, they’re liable to spend some of their winnings. Or have I missed something? Posted by: Ralph Musgrave | August 23, 2013 at 04:09 AM ""In a credit-based economy, aggregate demand is therefore the sum of income plus the change in debt" this always sounds to me rather like assuming V is a constant in MV=PY, so changing M changes PY. I think he's getting at the point that credit creation via banks increases the money supply, and puts money in people's hands they can spend without having earned it first, which is fair enough, I think that is part of the process whereby AD may rise, but what's the velocity of this "change in debt"? I may have misunderstood him. Posted by: Luis Enrique | August 23, 2013 at 04:31 AM this is a great post and I think what you describe actually happens. But I think the claim "This is not a long run story" could potentially be modified, depending on what you think happens on the supply side. Suppose there is a persistent (decade-long) credit expansion, the usual story about people funding spending by borrowing, extracting equity from property. Isn't there a coherent story in which this "demand pull" draws forth a supply side response (more investment, more labour supply, perhaps innovation)? So the CB wouldn't necessarily slam on the brakes (perhaps also because cheap imports were interfering within inflation data). So not a long long-run story but perhaps a decade-long story? I am trying to figure out whether standard mainstream macro is missing anything important by abstracting from all this. According to my shaky understanding of mainstream macro, if for some reason - animal spirits - people want to consume more today than they did yesterday, the required supply side response (increase in labour supply and investment?) just happens smoothly and simultaneously, the model doesn't worry about breaking the process down into granular time and explaining how somebody can spend more one period than they earn, how different agents' expectations adjust as they observe what the actions of other agents mean for their own incomes etc. It's all just rolled up. So this omission means mainstream macro won't be telling any stories about credit expansion fuelled booms. But mainstream macro spends most of its time studying monetary and fiscal policy responses to negative shocks, and doesn't worry too much about fleshing out the detail of those shocks. I cannot guess whether the answers to those questions would change if mainstream macro introduced this role for banks. Everybody is busy trying to add the financial sector to macro models, but I am less sure about this aspect of the financial sector. Posted by: Luis Enrique | August 23, 2013 at 05:05 AM Alex: "Nick, couldn't you also "prove" this identity by constructing it for individuals, and then aggregating?" I've been wondering about that. A better way to say what you just said: what assumptions would I need to make to ensure that that equation holds? Clearly I need to assume that each individual has a coherent plan, given his expected income (that his plan does not violate his budget constraint). At the individual level, that equation wouldn't hold, because an individual could also be planning to buy or sell things like land or used goods or non-monetary financial assets. The question is whether those things would cancel out in aggregate. And they might not, because if everyone were (say) planning to sell $1,000 worth of land, in aggregate their plans would be inconsistent. Which brings me to TMF's point: "1) Should the definition of aggregate demand (AD) include financial assets? I think Keen includes it in his definition of AD." Or include things like land too. Well it might be more useful to redefine "AD" that way, but in this post I wanted to stick to the conventional definitions of everything, because I wanted to make sure I got a version that did not violate NIA identities, which are expressed in terms of those conventional definitions. TMF: "2) If I save $100 in "money" taking it out of circulation and you borrow the $100 and spend it on goods/services, isn't AD unchanged?" Yep, which goes back to Say's Law. Except that if you decide to save more, that might lower interest rates to persuade me to spend more, which might affect borrowing from banks. David: Hey! I did use math! There are three equations in this post, and I used algebra to substitute the second equation into the first, to derive the third. I just wrote them out longhand, writing "equals" instead of "=". And I wrote: "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." which makes the important math point that it matters whether "E" appears to the right or left of the summation operator! Evan: and maybe we are all better off if you don't see me struggle with math too! (Especially trying to write it in Typepad.) Ralph: I think that misses something. Money is unique in being the medium of exchange. Almost anything is wealth. Posted by: Nick Rowe | August 23, 2013 at 05:41 AM Luis Enrique: (quoting Steve Keen) """In a credit-based economy, aggregate demand is therefore the sum of income plus the change in debt"" What that misses is that some debt has nothing to do with the creation of money, and doesn't have any obvious effect on either the supply or demand for money, or on AD. Like if I borrow $100 from TMF. Plus, in an economy with excess supply of goods, actual income will always equal AD, regardless of whether debt or money is increasing. The reason it can't be a long run story is that it requires people to be consistently surprised on the upside. Every month, for month after month, their income is higher than they expected it to be. Posted by: Nick Rowe | August 23, 2013 at 05:50 AM If you promise to pay me $100, and then I take the note to a bank and factor it in exchange for $95 of bank-created money, then unquestionably money has been created. People create lendable collateral all the time independent of monetary policy--this is why the MMT "all money flows from government spending" concept is a fallacy. Posted by: Ecomedian | August 23, 2013 at 06:28 AM Hi Nick, yep I see that, I think when Keen writes "debt" he does not have personal borrowing or whatever in mind, I assumed he meant net credit creation via the banking system, or something similar, so that he is talking about money creation. Maybe I assume wrong. I don't quite follow the requiring people to be consistently surprised thing. I guess some people might keep getting nice surprises, but I had in mind an expansion in which each year planned nominal expenditure equals aggregate expected nominal income plus amount of new money created by the banking system, and the "new money created by the banking system" is a positive for say 10 years in a row, or something. So aggregate household debt rises 10 years in a row. Each year people are spending more than they earn and that's greasing the wheels of demand expansion and accompanying supply side response. Does that story really necessitate that people are surprised by their realised income 10 years in a row? Posted by: Luis Enrique | August 23, 2013 at 06:36 AM Ecomedian: "this is why the MMT "all money flows from government spending" concept is a fallacy." Do they say that? If so, yes they are wrong. Luis Enrique: Consider an equilibrium where money growth is a fully-anticipated and constant 50% per year. The quantity of money demanded would also be growing at 50% per year, so the right hand side of my equation would be zero, which is compatible with AD and actual income equalling aggregate expected income, so the left hand side would be zero too. Posted by: Nick Rowe | August 23, 2013 at 07:04 AM OK, thanks Nick. I don't really understand why money demand subtracts from things, will have to go away and digest. Posted by: Luis Enrique | August 23, 2013 at 07:31 AM TooMuchFed This post deserves a longer reply but in response to TOOMUchFeds point There is no exante exposte accounting identity problem see this talk by Steve at last years Seminar at the fields institute http://www.youtube.com/watch?v=pOxZixjorho Basically ex ante is before the credit creation, then credit is an instantaneous creation of money, then looking backwards ex poste you need to account for that creation of money. The fields institute has modelled this using Lebeseque integration - see this nice diagram on my webpage http://andrewlainton.wordpress.com/2012/12/06/some-notes-on-pontus-rendahls-review-of-keensian-economics/ because of Carethedory's theorum any model using Lebesque integration can be modelled using ODEs which is what Keen uses. On your second point, no Steve is not talking about mercentile 'credit' only net creation of money through financial assets. This is important for example he agrees with me and Werner that treasury bonds Iexcept when purchased by central bank money creation) do not lead to net credit creation - they are simply transfer payments. Nick an interesting post though trying a bid too hard to squeeze into a neoclassical box a profoundly disequailibrium process. The 'minus the increase in money demanded' (surely this dimensionally should be a flow as the units are dollars/time?) I think comes from my comments to him that this 'flow' i.e. change to the rate of savings (increase or decrease in idle balances) should form part of the equations, as it did from at least one historical precursor of this theory. (you know the wepage im talking about you commented on it). I think the big gap in your treatment is whether debt finances an increase in investment - growth - or increase in asset prices. Youve left out Steve's Minksyian influence. If the former then whether or not the increase in income is fully anticipated there will be an increase in net wealth. Also the change in debt can be negative, people paying back debts leads to net decreases in money. However if peoples real incomes have grown because of productive investment then the real cost of debt servicing will fall and people will be better off despite the deflationary effect of deleveraging. I see Steve's theory very much as a theory of growth in the classical 'expanding the market' tradition. Your treatment has the lucasian advice of real things only happening to the economy if their are 'surprises' or 'shocks'. Of course some spending from credit will not lead to an increase in production, it may simply run down inventory, but this is no blow to Keen Credit Cycle theory, after all Hawtry developed a very similar theory where almost identical equations were expressed verbally involving the building up and running down of normal buffer stock inventories. Posted by: Andrew Lainton | August 23, 2013 at 08:15 AM Dear all: I'm off canoeing for a few days, in the wild places where even cellphones don't work. Have fun, play nice, and if your comment doesn't appear it probably means it has gone into spam, and will be fished out later. Posted by: Nick Rowe | August 23, 2013 at 08:19 AM I believe Steve Keen is aware of your second problem. It looks like he means increase in net credit, and change in debt is only a proxy for this, and it's not clear how good a one. Your first point is trickier. You're doing different accounting based on different assumptions. Try something simple. People borrow a Billion dollars of new bank money this year. They spend the money on goods and services tracked by GDP. GDP increases. But you say, they'll get this billion back as income "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 is what happens when you believe in representative agents. You can drown in a lake with an average depth of 1 foot. The borrowers aren't necessarily the people who will be getting the money back as earnings, nor are they acting in timeless simultaneity. Where then does the money go? Some of it adds to the inflation component of NGDP, some adds to asset prices not tracked by NGDP, some counteracts certain underlying deflationary trends (cheap imports, decreasing labor share...), and some is spread over an increasing population. This is exactly what we've seen. People borrow to compensate for wage stagnation and to run up the value of assets, and the pain is lessened by low import prices. I can buy a DVD player for $30, an air conditioner for $100 (it will soon cost more to recycle one than to buy one) and a 32" flat screen TV for $250. OTOH I hope I never need a plumber. The question is, what happens when you turn off the tap. In NIPA accounting net credit works invisibly, but it still works. Timeless NIPA accounting can't be applied to equations with explicit time without some sort of modification. You wouldn't ask how many kilowatts are in a megawatt hour, would you? Posted by: Peter N | August 23, 2013 at 08:37 AM "We know that a sensible central bank would eventually do something else to stop the whole thing rolling before aggregate planned nominal expenditure gets too big for consistency with the inflation or whatever target." I don't quite understand how this bit fits into Keen's model. He thinks that bank lending drives up and becomes increasing part of AD over time during a boom period but this eventually become unsustainable, then loans start not getting renewed causing downward pressure on AD and a recession. Keens shows charts to back this theory up showing debt/gdp ratios increasing in the lead up to 2008 and then declining afterwards. However this all seems to happen during a period where the CB was indeed targeting inflation and NGDP was growing at a steady 5% annually. Posted by: Ron Ronsom | August 23, 2013 at 09:28 AM Luis, "I don't really understand why money demand subtracts from things." It allows planned expenditure to go unrealized. Just because you demand a loan from a bank does not mean that you get one. Nick's equation: "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." Aggregate planned nominal expenditures could exceed national income plus the amount of loans the banking system is willing to make. If everyone planned on spending $1 billion dollars today, the banking system may not be willing to extend enough credit to make it happen. Posted by: Frank Restly | August 23, 2013 at 09:31 AM Nick: I don’t get your rebuttal of my August 23, 2013 at 04:09 AM point. Posted by: Ralph Musgrave | August 23, 2013 at 11:16 AM Frank, No, that's not what Nick is talking about. The reason money demand subtracts from things is that if I borrow $100, but I do so because I want to walk around with $100 in my pocket rather than having a specific plan for what to do with that $100, then aggregate demand won't go up. (If I do spend the $100 at the store the next day AD will go up.) Posted by: Alex Godofsky | August 23, 2013 at 11:28 AM Alex, Okay, gotcha. Nick is referring to liquidity preference (demand for the most liquid of assets). It would kind of strange for someone to borrow money without a planned purchase for that money. Not saying it never happens, just that it would be quite unusual. Posted by: Frank Restly | August 23, 2013 at 11:53 AM Frank, in a sense I "borrow" money without a planned purchase for it all the time - when I visit the ATM to refill my wallet. I have a very literal money demand - I want to hold a physical stock of money purely for the liquidity value. More generally, you probably won't see people taking out actual loans just to hold on to the cash, but when you introduce multiple people you can get the same effect. My employer might borrow money to pay my salary, and when I receive my salary I don't have any specific plan for what to do with it so I let it sit in my bank account. Posted by: Alex Godofsky | August 23, 2013 at 01:22 PM Alex Godofsky, "in a sense I "borrow" money without a planned purchase for it all the time - when I visit the ATM to refill my wallet. I have a very literal money demand - I want to hold a physical stock of money purely for the liquidity value." In what sense is that borrowing? Posted by: W. Peden | August 23, 2013 at 03:49 PM Ron, NGDP doesn't include transactions that are not value added - no purchase of goods already accounted for, capital gains, borrowing etc. There's nothing to make any level of debt incompatible with steady NGDP growth per se. That requires some other part of your economic model. This comes back to the economic blog perennials that asset inflation isn't inflation, and whether central banks should target asset inflation when CPI inflation or NGDP is on target(depending on your preference of target). Posted by: PeterN | August 23, 2013 at 04:11 PM W Peden: In the sense that I am selling a slightly-less-liquid interest-bearing asset (deposits) for a slightly-more-liquid non-interest-bearing asset (currency). Posted by: Alex Godofsky | August 23, 2013 at 04:51 PM Solipsinomics? Single agent Si wants to buy a DVD player. Si goes to the bank and gets $100 in a deposits (a bank liability). Through the magic of fractional reserve banking, the bank creates a $100 deposit liability for Si and an offsetting $100 asset (the loan) which it holds on its books against Si. With the deposits (skipping over steps involved with exchanging deposits for currency and back), Si buys a DVD player from Si the manufacturer. Si as manufacturer, hires Si as an employee to make the DVD player, paying Si with the money customer Si payed for it. This payment is income to Si employee, which Si employee/customer deposits in the bank. At some future time Si and the bank may decide cancel the banks deposit liability and loan asset. The loop is closed, GDP = GDI = GDE = $100, and Si is his own grandpa. Does this sound about right, sarcasm aside? Posted by: Peter N | August 23, 2013 at 05:22 PM Alex Godofsky, I still don't see how moving from one asset to another constitutes "borrowing". No new liabilities have been incurred by you. If you placed cash in a bank account, then this is borrowing, but on the part of the bank. Posted by: W. Peden | August 23, 2013 at 05:55 PM Peter N, Good point. The money supply and total loans could be going up in parallel. If most of this new money goes towards increased spending on asset that don't count for NGDP (rather than final goods, that do) then this could indeed lead to increasing debt/gdp ratios while NGDP growth stays on trend. In fact its quite possible that in a boom you could well see banks becoming more leveraged by lending more against existing assets and this new money then drives up asset prices while NGDP is little affected. If the CB targets NGDP growth this may dampen things down enough in terms of final sales but not necessarily in terms of bank leverage or asset price inflation. So if Nick's view of what Keane says is correct then one can make something of a case that if the CB is only looking at NGDP it might miss other bad things that are happening in the economy until they cause a crisis that affects NGDP negatively and drives the economy into a ZLB scenario. Posted by: Ron Ronsom | August 23, 2013 at 06:33 PM Ron, You also have to consider purchases of low cost foreign goods reducing CPI inflation, while the recycled money fuels the fire. The problem is you have so many trends reaching their Stein's law endpoints at the same time: Demographics The China credit cycle The European banking crisis The problem of the Euro A hypertrophied financial system The rise of our robot masters Who knows in what order these train wrecks will occur? Posted by: PeterN | August 23, 2013 at 09:57 PM Peter N -- exactly. CPI has been an unreliable indicator for a long time. This point is not made enough. It's impossible to separate the recent spate of credit bubbles from the fact that, increasingly, preferred monetary gauges are not working correctly. Posted by: Andre Mouton | August 24, 2013 at 01:18 PM Back from canoeing, in case anyone is still reading. Drive 3 hours from the capital city, paddle a few hours, get your own private beach, on what might as well be your own private lake too, swim in water probably clean enough to drink, and all for $8 per person per night. Canada eh! Andrew: "Nick an interesting post though trying a bid too hard to squeeze into a neoclassical box a profoundly disequailibrium process." But I did keep saying "this is a disequilibrium process"! Expectations falsified, money demand not equal to quantity of money, that's diequilibrium. "The 'minus the increase in money demanded' (surely this dimensionally should be a flow as the units are dollars/time?)" Yes, it's a flow. I said that. Quantity of money demanded is a stock, that has the units $, and the amount by which it is increasing per month is a flow, with units $/month. Ron: ""We know that a sensible central bank would eventually do something else to stop the whole thing rolling before aggregate planned nominal expenditure gets too big for consistency with the inflation or whatever target." I don't quite understand how this bit fits into Keen's model." It doesn't. I think this theory can work for a short run increase in *bank* credit, starting from a recession, but I don't think it does work as a long run theory of *all* debt. PeterN @5.22: that sounds about right. Except: "At some future time Si and the bank may decide cancel the banks deposit liability and loan asset." We are not sure when that future time will be. Because Si has been surprised to find: he's got a job and is earning $1,000 per month more income than he expected; he has $1,000 more in his chequing account than he expected. He will revise his plans in the light of those surprises. He might pay back the loan, or he might decide to spend more. It will depend on whether he thinks this is a temporary or permanent change. Posted by: Nick Rowe | August 27, 2013 at 08:43 AM Yes the loan probably won't be repaid. In fact let's assume that Si borrows an additional $100 every month. The questions are 1) how is the effect of the additional credit distributed between RGDP, CPI inflation and inflation of assets not part of GDP. 2) what happens when instead of borrowing Si has to start repaying the loans. This is the Steve Keen question stripped down to its most basic possible form. The mechanism is certainly of great interest, but first it would be nice to agree on the effects as stylized fact. Of course the bank may securitize the loans and sell them, but I think poor Si has worked hard enough. Single agent models within NIPA can get extremely perverse warping time, space and motivation. As far as debt goes, net credit is net credit. This should be observable. It's effects may be subject to debate, but not its existence. Posted by: Peter N | August 27, 2013 at 12:31 PM I found this searching Google. Take a look at 2008: Posted by: Peter N | August 27, 2013 at 09:38 PM Damn I wish I'd gotten here earlier for this discussion. Couple of points: Do we need to add "planned borrowing/paybacks" to the equation? Think about both aggregate planned borrowing and planned aggregate borrowing? If planned borrowing goes up, does this increase demand (planned expenditure)? Ceteris paribus, you'd have to say yes. "Nothing in the above violates any national income accounting identity." Actually that equation can't be right or wrong, because demand is not an accounting measure. You'll never find "demand" in that national accounts, in balance sheets, income statements, or flows of funds. In its general form it's a curve, not an amount. You can't put a curve in an accounting identity. "Demand" is an expression of what people, at a given moment in time, *would* buy over the ensuing period at various price points. It's a formula (often expressed as a curve), not an amount. And there's no simple accounting measure that can tell us what "demand" was at a given moment, with that moment's given price point -- what people at that moment wanted to buy over the ensuing period. Nick accommodates Steve's effort to construct demand as such, but I think that effort (by both) results in part of the disconnect. Here's a way to frame the question: "Looking back: what was aggregate demand on July 31, 2010?" That could be an amount (given prices at that moment). And one could construct a formula trying to suss out the answer, built from national account data now available post hoc, describing that moment. Now, in the simplest S/D construct, if you know the price point at that moment and assume that it will remain unchanged over the ensuing period, you can specify demand as an amount -- an output from the formula, a point on the curve. Talking short term as Nick does here, that's an okay assumption. But what we're really asking: what's the formula? Looking back we can ask, what was demand on August 12, 2011? A single accounting measure can't answer that. For instance, GDP can't be the answer. The amount sold might be affected by short supply. So "demand" was higher than satisfied demand (GDP). So what combination of accounting measures (available now, looking back, post-hoc) can we use to suss out that answer? How much did people at that moment *want* to buy over the ensuing period at that moment's price point? We might get the best feel for that number using measures both preceding and succeeding that moment. You could come up with any number of formulas, using any number of measures. Steve's formula is problematic because it doesn't specify what dates we're looking at to determine "demand" at that moment. Preceding six months' GDP/debt change? Succeeding six months? (Google "instantaneous flow" to see thoughts on what surrounding flow-over-time measures can be used to derive such an instantaneous measure, and what formulas can be used to derive it.) I'm kind of taken with Ed Lambert's work here (effectivedemand.typepad.com), because he seems to (at least intuitively and implicitly) understand this conceptual situation. His formula and chosen measures might be singular or idiosyncratic, but I would expect such a formula to be so. It's trying to construct an economic measure ("demand" at a given point in time) from an infinite menu of available accounting measures -- stock measures describing that moment, and flow measures describing periods surrounding that moment -- and an infinite number of possible formulas combining those measures. "GDP plus new debt" is insufficiently specified unless you say "GDP plus new debt *over some specified periods* relative to the moment at which you're trying to estimate 'demand'. Demand is an economic concept describing people's desires, not an accounting measure. But we might be able to create an effective, useful estimate/measure of demand at a given moment by combining accounting measures using a formula. It would be especially great if the accounting measures used were all antecedent to the "demand moment." Then we could estimate in semi-real-time what "demand" is right now. I find it significant that out-of-the-boxers Steve Keen and Ed Lambert are the only people I know of who are trying to define demand rigorously and formulaically -- and potentially usefully. Or am I wrong on that? Posted by: Steve Roth | September 03, 2013 at 11:47 AM Steve: "I find it significant that out-of-the-boxers Steve Keen and Ed Lambert are the only people I know of who are trying to define demand rigorously and formulaically -- and potentially usefully. Or am I wrong on that?" Do you mean deriving (and empirically estimating) an aggregate demand *function*? In mathematical form? If so, yes, you are wrong on that. Most first and second year macro texts mainly do a diagrammatic exposition, but it's a simple matter to put those diagrams into equations and derive an aggregate demand function. Sometimes this is done in the main text, and sometimes it's in an appendix. And various types of econometricians use various different ways to try to put real world numbers into those functions. How useful this mathematisation is is debatable, but they've been doing it since before we were born. Posted by: Nick Rowe | September 03, 2013 at 04:17 PM A very quick response Nick. Given that we use different languages to express our economics, I think you've provided a pretty good characterization of my argument. I'm very pleased about that, given that there has been so much non-communication involved in this overall issue until now. I'll leave any discussion of differences of opinion to later. I also note the caveats about bringing math in here, but Matheus Grasselli has recently done a comprehensive analysis of the stock-flow mathematics in one of my models to show that the statement that "effective demand of the non-bank public is income plus change in debt" is accounting-consistent with "income = expenditure" when the banking sector and the non-bank sector are lumped together. Matheus's blog is here: http://fieldsfinance.blogspot.com/2013/08/accounting-identities-for-keen-model.html and the PDF is here: http://ms.mcmaster.ca/~grasselli/keen2011_table.pdf The issue of whether rising debt adds to demand then comes down to whether loans turn up on the asset or the liability side of the banking system ledger. If we treat banks as mere intermediaries as in the Loanable Funds model, then all lending occurs on the liability side of the ledger, and changes in the level of debt have no impact on aggregate demand--as Krugman has repeatedly argued. If however loans turn up on the asset side of the banking ledger, then the change in debt does add to demand via the money creation mechanism you note. I think the empirical issue here is obvious--bank loans do occur on the asset side of the banking system's ledger--so that rising private debt does add to effective demand (to revive an old term, as Nathan Tankus first recommended). So integrating banking into macroeconomics significantly alters it from a macroeconomics in which banks (and normally also debt and money) are omitted. Posted by: ProfSteveKeen | September 03, 2013 at 05:00 PM Having done a more considered re-read, I very happily stand by my first reaction to your post: you've done a very good job of providing a Rosetta Stone between standard Neoclassical macroeconomics, and the perspective on endogenous money macroeconomics that I put forward (along with Richard Werner, Michael Hudson, Dirk Bezemer, Matheus Grasselli and a few others--and I hasten to add that it is still a minority position even within Post Keynesian economics). This is a first Nick, and I have to sincerely thank you for it. It is truly appreciated. Cheers, Steve Keen Posted by: ProfSteveKeen | September 03, 2013 at 05:22 PM Ecomedian, "this is why the MMT "all money flows from government spending" concept is a fallacy." No, we don't say anything of the sort and never have. That would be obviously false, as Nick noted. Obviously a misinterpretation somewhere in there, either by you or by whomever you heard it from if that is the case. Posted by: Scott Fullwiler | September 03, 2013 at 06:17 PM Ecomedian, "this is why the MMT "all money flows from government spending" concept is a fallacy." I'm not sure this is right, but perhaps: Much popular MMT tends to display things in a three-sector model -- government, private domestic, and rest of world. Or even a two-sector model: government and private assuming a closed economy. This I think for simplicity of explanation. In those sectoral models, it very much looks like any additional money in the private sector comes from government (or trade surpluses). It emphasizes that the private sector can't acquire net new *financial* assets except when there are injections from those sectors. But that is very far from the full scope of MMT, which in my opinion is best viewed via a four-sector model: private nonfinancial, financial, government, ROW -- or even better five sectors, splitting out private nonfinancial into households and firms. In those models we very much perceive banks, firms, and households as agencies in the economic process. None of these sectoral models is wrong, but they give different impressions of how economies work. Posted by: Steve Roth | September 03, 2013 at 09:24 PM Steve, you don't need four or five sectors in MMT to demonstrate private sector creation of 'horizontal money'. Posted by: Philippe | September 03, 2013 at 09:42 PM Nick: I've been hard-pressed to find a function whose inputs are national accounting measures. They all seem to built on unobservables (or at least unobserveds) like MPC or autonomous consumption. I've been really hard pressed to see a graph of aggregate demand over time that has as observational basis in measures from the national accounts. Maybe my googling's just been insufficient, but if such things are out there they sure are talked about rarely. I just feel like if we're going to use the term, we should have some formulaic definition in mind, based on observed measures, so we can look at the actual derived measure and see how it behaves over time relative to our surmises and other measures. Posted by: Steve Roth | September 03, 2013 at 09:44 PM ProfSteveKeen said: "the statement that "effective demand of the non-bank public is income plus change in debt" is accounting-consistent with "income = expenditure" when the banking sector and the non-bank sector are lumped together." Does effective demand include financial assets? Yes/No Does income include financial assets? Yes/No Posted by: Too Much Fed | September 04, 2013 at 12:00 AM ProfSteveKeen said: "I think the empirical issue here is obvious--bank loans do occur on the asset side of the banking system's ledger--so that rising private debt does add to effective demand (to revive an old term, as Nathan Tankus first recommended). So integrating banking into macroeconomics significantly alters it from a macroeconomics in which banks (and normally also debt and money) are omitted." I believe you are actually getting at the idea that the capital requirement becomes a capital multiplier. Thoughts? Posted by: Too Much Fed | September 04, 2013 at 12:04 AM Nick's post said: "Luis Enrique: (quoting Steve Keen) """In a credit-based economy, aggregate demand is therefore the sum of income plus the change in debt"" What that misses is that some debt has nothing to do with the creation of money, and doesn't have any obvious effect on either the supply or demand for money, or on AD. Like if I borrow $100 from TMF." I save $100. I lend $100 to Nick Rowe (Nick Rowe borrows $100 from me). I believe Steve Keen would call me saving $100 negative debt. Nick Rowe borrowing $100 from me would be called positive debt. Minus $100 plus positive $100 equals zero. Posted by: Too Much Fed | September 04, 2013 at 03:10 AM Too Much Fed, The implied assumption is that in borrowing $100, you have some purchase in mind before borrowing. With that assumption - you are going to immediately spend that $100 - aggregate demand is lifted. The unknown is whether your lender (TMF, Nick, or whoever) had any purchase in mind before instead lending that money to you. "Minus $100 plus positive $100 equals zero." If I pay $100 for apples to Joe, Joe pays $100 for oranges to Nick, and Nick pays $100 for bananas to me, the net money transferred is $0 but the flow of money is positive. Measures of economic activity (like GDP) measure flows not net transfers. Posted by: Frank Restly | September 04, 2013 at 07:59 AM Re your statement quoted below Too Much Fed, that is a classic example of "Loanable Funds"--"Patient agent lends to impatient agent". In this case there is no new money creation and the borrower's additional spending power is cancelled out by the lender's lower spending power. But a bank lending is the creation of an asset on one side of its ledger and a liability on the other--not a transfer of money and hence spending power but a creation of money and hence spending power. This is the essential difference between Loanable Funds and Endogenous Money. Loanable Fund shows loans as a minus for one agent (fall in money held by lender) and a plus for another (rise in money held by borrower), which cancel out: in mathematical language, this is a conservative system. Endogenous Money shows loans as a plus for one agent (increase in loan assets held by bank) and a plus for another (increase in money held by borrower). The same accounting balance applies, but in math-speak this is a dissipative system with a creation of money and hence spending power. ------------- Quoting Too Much Fed: Nick's post said: "Luis Enrique: (quoting Steve Keen) """In a credit-based economy, aggregate demand is therefore the sum of income plus the change in debt"" What that misses is that some debt has nothing to do with the creation of money, and doesn't have any obvious effect on either the supply or demand for money, or on AD. Like if I borrow $100 from TMF." I save $100. I lend $100 to Nick Rowe (Nick Rowe borrows $100 from me). I believe Steve Keen would call me saving $100 negative debt. Nick Rowe borrowing $100 from me would be called positive debt. Minus $100 plus positive $100 equals zero. Posted by: ProfSteveKeen | September 04, 2013 at 08:58 AM Too Much Fed, Starting with the equation of exchange: MV = PQ = Income * ( 1 - Liquidity Preference ) + Change in Debt with Respect to time MV = PQ = I * ( 1 - LP ) + dD/dt The assumption here is that new debt that is taken on is immediately spent meaning the liquidity preference for borrowed funds is 0. Income is capital income (interest payments for loans not retained by banks) plus income from the production and sale of goods. Income (I) = Debt * ( 1 - % Retained by banking sector ) * Interest Rate + MV I = D * ( 1 - %RET ) * %INT + MV MV = [ D * ( 1 - %RET ) * %INT + MV ] * ( 1 - LP ) + dD/dt Money (M) expands whenever banks retain the loans that they make. And so M can really be said to be equal to the total of loans retained by the banking sector. When a bank securitizes and sells a loan, it pulls money out of circulation. M = D * %RET D * %RET * V = [ D * ( 1 - %RET ) * %INT + MV ] * ( 1 - LP ) + dD/dt Letting Debt (D) be an exponential function of time ( D = exp ( f(t) )) %RET * V = [ ( 1 - %RET ) * %INT + %RET * V ] * ( 1 - LP ) + f'(t) %RET * V * LP = [ ( 1 - %RET ) * %INT ] * ( 1 - LP ) + f'(t) V = [ [ ( 1 - %RET ) * %INT ] * ( 1 - LP ) + f'(t) ] / LP * %RET As the % retainage of loans by the banking sector approaches %100 the velocity of money is reduced to: V = f'(t) / LP - Loanable funds model Posted by: Frank Restly | September 04, 2013 at 09:04 AM ProfSteveKeen, "This is the essential difference between Loanable Funds and Endogenous Money. Loanable Fund shows loans as a minus for one agent (fall in money held by lender) and a plus for another (rise in money held by borrower), which cancel out..." But whether that cancelling out of money applies to measures of economic activity would depend on the liquidity preference of the lending agent. If agent 1 has $100 but is not inclined to spend it any time soon, while agent 2 will spend the money as soon as it is lent to him then aggregate demand is increased by transferring that money (through a lending process) from an agent with a high liquidity preference (low marginal propensity to consume) to an agent with a low liquidity preference (high marginal propensity to consume). Posted by: Frank Restly | September 04, 2013 at 09:27 AM Yes that's still an issue Frank: the fact that additional money creation adds to demand doesn't make variations in spending propensities (either between agents or over time) irrelevant, though I think the empirical evidence would show that the former is at least an order of magnitude more important than the latter. Conventional theory has focused only on the latter, which is why Bernanke dismissed Fisher's "Debt Deflation Theory of Great Depressions": "Fisher's idea was less influential in academic circles, though, because of the counterargument that debt-deflation represented no more than a redistribution from one group (debtors) to another (creditors). Absent implausibly large differences in marginal spending propensities among the groups, it was suggested, pure redistributions should have no significant macro-economic effects…" (Bernanke 2000, p. 24) However there's no doubt that Fisher was in fact talking about the former effect: "the payment of a business debt owing to a commercial bank involves consequences different from those involved in the payment of a debt owing from one individual to another. A man-to-man debt may be paid without affecting the volume of outstanding currency; for whatever currency is paid by one, whether it be legal tender or deposit currency transferred by check, is received by the other, and is still outstanding. But when a debt to a commercial bank is paid by check out of deposit balance, that amount of deposit currency simply disappears." (Fisher, Booms and Depressions) Posted by: ProfSteveKeen | September 04, 2013 at 10:37 AM ProfSteveKeen, "Fisher's idea was less influential in academic circles, though, because of the counterargument that debt-deflation represented no more than a redistribution from one group (debtors) to another (creditors). Absent implausibly large differences in marginal spending propensities among the groups, it was suggested, pure redistributions should have no significant macro-economic effects…" (Bernanke 2000, p. 24) Probably a bit off topic, but what liquidity preference and disposition of debt does Bernanke assume for banks / bankers during the early twentieth century? I would presume that things were a lot different back then - banks / bankers tended to be large net creditors with a high liquidity preference. These days most loans originated by banks are sold off in the form of certificates of deposit / securitized loans and the financial sector as a whole tends to be a large borrower (at least until recently). Also, the redistribution effect has negative consequences when loans are secured by real property. Farm land that is borrowed against becomes property of bank when the loan fails. Bank does not have resources to maintain said farm land. There is an efficient disposition of real goods that gets distorted when loans secured by those real resources fail. Posted by: Frank Restly | September 04, 2013 at 11:07 AM Steve (Keen): Thanks! I'm really glad we're sorta on the same page with this. I figured we might be, but I wasn't sure. A lot of this, yes, is a question of translation. On that subject, 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. My preferred distinction is between those who believe The Law of Reflux ("the stock of money is determined by the quantity of money people want to hold at the rate of interest set by the banking system, because any excess would immediately return to the banks, so there cannot be an excess supply of money"), and those who don't. Tobin in "Commercial banks as creators of money" was supporting The Law of Reflux, which became the New Orthodoxy against the Old Orthodoxy of the textbooks. Most New Keynesians, and many (not all) Post Keynesians (I think) agree with the Law of Reflux. Those of us who reject it are a weird bunch, who don't necessarily agree on anything else. At the root of the disagreement is a disagreement over whether money is just like other assets or is fundamentally different from other assets. If money were just like other assets, you get the Law of Reflux, and banks as suppliers of money being no different from the suppliers of any other asset, with the quantity of money being determined by supply and demand just like any other asset. I had a quick read of Matheus's accounting framework, but didn't find it helpful for me. Too many sectors. I'm thinking of a way to express it more simply. Posted by: Nick Rowe | September 04, 2013 at 11:11 AM I've been fixating on the same thinking as Fisher that SK quotes above. http://worthwhile.typepad.com/worthwhile_canadian_initi/2013/08/what-steve-keen-is-maybe-trying-to-say.html?cid=6a00d83451688169e2019aff2fb6fc970c#comment-6a00d83451688169e2019aff2fb6fc970c But concentrating on the spending behavior of the actors (on newly produced real goods and services), rather than the quantity of currency. Mostly simply illustrated by: o When a people repay debts to people, the repayers are likely to spend less, while repayees are likely to spend more. (You could say they're both optimizing intertemporal spending/consumption, that their incentives and reaction functions are symmetrical.) o When a people repay debts to financial institutions, the repayers are likely to spend less, but repayees are unlikely to spend more. Banks as lenders don't behave the way people as lenders behave. Their incentives and reaction functions are completely different. You can construct a model wherein portfolio/interest-rate effects mean bank lenders can be treated *as if* they're people lenders (or transparent intermediaries between people lenders). This pretty much is the mainstream model. But that model seems to bear a challenging burden of proof against the first-order fact: when you pay down your credit-card debt, your credit card company doesn't spend more. Nick: you often say people have two ways to get rid of money: buy more stuff or sell less stuff. But you haven't really answered me on the third way: paying down their debt to the financial sector. i.e. using their debit cards instead of their credit cards. Reflux. Posted by: Steve Roth | September 04, 2013 at 12:02 PM "This is the essential difference between Loanable Funds and Endogenous Money. Loanable Fund shows loans as a minus for one agent (fall in money held by lender) and a plus for another (rise in money held by borrower), which cancel out: in mathematical language, this is a conservative system. Endogenous Money shows loans as a plus for one agent (increase in loan assets held by bank) and a plus for another (increase in money held by borrower). The same accounting balance applies, but in math-speak this is a dissipative system with a creation of money and hence spending power." Finally! Finally! Finally! I would also say it is even simpler than that. Loanable funds is a 100% capital requirement. Endogenous money is a less than 100% capital requirement. This is getting very interesting now! Posted by: Too Much Fed | September 04, 2013 at 12:14 PM Nick, comment in spam? Thanks! Posted by: Too Much Fed | September 04, 2013 at 12:20 PM Try again. "This is the essential difference between Loanable Funds and Endogenous Money. Loanable Fund shows loans as a minus for one agent (fall in money held by lender) and a plus for another (rise in money held by borrower), which cancel out: in mathematical language, this is a conservative system. Endogenous Money shows loans as a plus for one agent (increase in loan assets held by bank) and a plus for another (increase in money held by borrower). The same accounting balance applies, but in math-speak this is a dissipative system with a creation of money and hence spending power." Finally! Finally! Finally! I would also say it is even simpler than that. Loanable funds is a 100% capital requirement. Endogenous money is a less than 100% capital requirement. This is getting very interesting now! Posted by: Too Much Fed | September 04, 2013 at 12:21 PM Nick's post said: "I had a quick read of Matheus's accounting framework, but didn't find it helpful for me. Too many sectors. I'm thinking of a way to express it more simply." Let me try. Let’s say I save $100,000 in demand deposits at an old bank. Someone else wants to start a new bank. They sell me $100,000 in bank stock (bank capital). The reserve requirement is 0%, and the total capital requirement is 10%. I believe that means the capital requirement is 5% for mortgages and is 10% for ordinary loans. This example will be all mortgages. Assets new bank = $100,000 in central bank reserves Liabilities new bank = $0 Equity new bank = $100,000 of bank stock Because they are 1 to 1 convertible to currency, I consider demand deposits both medium of account (MOA) and medium of exchange (MOE). I am told that by accountants that the new bank equity destroys the demand deposit. M in MV = PY falls by $100,000. The bank now makes 20 mortgages for $100,000 each. The 20 people use the demand deposits to buy 20 homes for $100,000 each from 1 home builder. Assets new bank = $100,000 in treasuries plus $2,000,000 in loans Liabilities new bank = $2,000,000 in demand deposits Equity new bank = $100,000 of bank stock $100,000 / ($2,000,000 * .5) = .10 The home builder sets up a checking account at the new bank. So 20 checking accounts at the new bank were marked up and then marked down by $100,000 each, while the home builder’s checking account was marked up by the $2,000,000. Let's assume the home builder keeps spending with demand deposits with people who have a checking account at the same bank. No currency and no central bank reserves are involved in this example. 1) M in MV = PY rises by $2,000,000. 2) Overall, I saved $100,000 in MOA/MOE, and the borrowers “dissaved” $2,000,000 in MOA/MOE for a difference of $1,900,000 in MOA/MOE. That difference is why banks and bank-like entities matter. Now raise the capital requirement to 100%. I save $100,000, and now the bank can only make $100,000 in loans for "dissaving". No new MOA or MOE is created. I'm going to say a 100% capital requirement is loanable funds. Anybody know what Krugman would say about my example? Posted by: Too Much Fed | September 04, 2013 at 12:35 PM SK misrepresents Bernanke. It is clear that Bernanke is dismissing the academic circles of the time, not Fisher. Posted by: D R | September 04, 2013 at 12:36 PM So what does Bernanke say about banks and repayment(s) of loans to them? Posted by: Too Much Fed | September 04, 2013 at 12:44 PM "No currency and no central bank reserves are involved in this example." That is not quite right. It depends. The new bank might buy treasuries with $100,000 in central bank reserves. "Assets new bank = $100,000 in treasuries plus $2,000,000 in loans" That would be $100,000 in central bank reserves if the new bank did not buy treasuries. Posted by: Too Much Fed | September 04, 2013 at 12:59 PM Immediately following SK's quote of Bernanke: "However, the debt-deflation idea has recently experienced a revival... According to the agency approach, which has come to dominate modern corporate finance, the structure of balance sheets provides an important mechanism... "From the agency perspective, a debt-deflation that unexpectedly redistributes wealth away from borrowers is not a macroeconomically neutral event... "If the extent of debt-deflation is sufficiently severe, it can also threaten the health of banks and other financial intermediaries..." http://fraser.stlouisfed.org/docs/meltzer/bermac95.pdf Posted by: D R | September 04, 2013 at 01:14 PM Steve Roth:] "when you pay down your credit-card debt, your credit card company doesn't spend more" When you repay your debt + interest, doesn't credit card company/bank equity increase? Posted by: Philippe | September 04, 2013 at 02:02 PM Too Much Fed, "M in MV = PY falls by $100,000." Not necessarily. The $100,00 in reserves held by the new bank are also part of M. They might not have existed before the old bank paid the new bank $100,000. Posted by: Philippe | September 04, 2013 at 02:11 PM "Anybody know what Krugman would say about my example?" Too Much Fed: "Let's assume the home builder keeps spending with demand deposits with people who have a checking account at the same bank. No currency and no central bank reserves are involved in this example." Krugman: "yes, commercial banks, unlike other financial intermediaries, can make a loan simply by crediting the borrower with new deposits, but there’s no guarantee that the funds stay there — [this] refutes, in one fell swoop, a lot of the nonsense one hears about how said mechanics of bank lending change everything about the role banks play in the economy." That's probably what he would say. Posted by: Philippe | September 04, 2013 at 02:16 PM @Phillipe: "When you repay your debt + interest, doesn't credit card company/bank equity increase?" Interest, absolutely yes. Or at least to the extent that it's not offset by expenses, hence is profit, which adds to shareholder equity. Principal, no. Posted by: Steve Roth | September 04, 2013 at 04:20 PM "The $100,00 in reserves held by the new bank are also part of M." MV = PY I consider M to be currency plus demand deposits because that is what circulates in the real economy along with 1 to 1 convertibility. The banking system needs to be viewed two different ways. 1) Loan creation (maybe even destruction) with a reserve requirement that is not 100% and with a capital requirement that is not 100%. 2) Payment settlement Let's use my example from above. Start in equilibrium. Each individual bank has the amount of bank reserves (vault cash plus central bank reserves) it needs/wants. The whole banking system is in balance. The central bank overnight rate is on target. My demand deposit and central bank reserves "move" to the new bank. The whole banking system is still in balance. The new bank has excess central bank reserves, and the old bank has a deficit of the same amount. The loans get made. The old bank is able to get the home builder to move $100,000 in demand deposits to the old bank. The demand deposit and central bank reserves "move" to the old bank. The old bank and new bank are now in balance. The banking system as a whole is in balance. Balance sheet new bank: Assets new bank = $2,000,000 in loans Liabilities new bank = $1,900,000 in demand deposits Equity new bank = $100,000 of bank stock Now assume the home builder moved all $2,000,000 to the old bank instead of $100,000. The old bank would have $1,900,000 in excess central bank reserves, and the new bank would have a deficit of $1,900,000 in central bank reserves. The banking system overall is still in balance. The new bank should be able to "borrow" central bank reserves in the overnight market or attract demand deposits. Next, change my assumption of 0% reserve requirement to 10%. Now the banking system as a whole could be short of bank reserves (vault cash and central bank reserves) and the new bank could be short of bank reserves even though the home builder keeps the demand deposits in its checking account or only spends with an entity at the same new bank. For Krugman, I'm saying whether the "funds" stay at the new bank or move to another bank does not really matter. It is the capital multiplier that matters. The reserve requirement could matter, but it does not the way the system is working now. Posted by: Too Much Fed | September 04, 2013 at 04:41 PM @Phillipe: "When you repay your debt + interest, doesn't credit card company/bank equity increase?" The interest payment only, not principal, will increase the credit card company equity. It is unlikely the credit card company will increase spending on goods/services. However, it might try to make more credit card loans. Steve Roth, I'm going to "borrow" your website address for identity. Maybe I won't get put in spam as much. Posted by: Too Much Fed | September 04, 2013 at 04:48 PM Nick, comments in spam? Posted by: Too Much Fed | September 04, 2013 at 04:50 PM Two quick comments. Nick, I'm delighted that you've provided a way for us to communicate on this issue, and I agree that Endogenous Money has been given a lot of different meanings, so the two words themselves don't convey a lot. On the reflux issue, I start from a definition of money as the sum of the liabilities of the banking sector to the non-bank public. An expansion of those liabilities (via the issuance of new loans) expands money, while a contraction (via loan repayment) reduces it, both with obvious effects on the level of economic activity. I think that's more the issue than whether or not there can or cannot be an excess supply. On this front, I've recently used the Minsky software (downloadable from https://sourceforge.net/projects/minsky/) that I've developed thanks to an INET grant to juxtapose the Endogenous Money/Reflux-Loanable Funds perspectives with a simple model which, with four keystrokes, can be converted from a model of one concept to a model of the other. If you're interested, I'd like to set out this model and discuss it with you (whether on or offline) and see whether it clarifies the issues being debated. Too Much Fed, I know that Bernanke went on to develop an interpretation of debt-deflation from his perspective, but this was focusing upon asymmetric information and the financial accelerator rather than the disequilibrium and quantity issues that were at the heart of Fisher's analysis. Posted by: ProfSteveKeen | September 04, 2013 at 10:20 PM "I consider M to be currency plus demand deposits because that is what circulates in the real economy" Ok, but say for example you started a new bank and the Fed decided to just give you a $1 reserve balance as a gift for some reason. You now have a $1M reserve balance at the Fed. Do you have more money that you had before? Of course! You have $1M in reserves, and reserves are money. Posted by: Philippe | September 05, 2013 at 07:36 AM *should have been: "the Fed decided to just give you a $1M reserve balance" Posted by: Philippe | September 05, 2013 at 07:39 AM Shorter SK: I know BB tried to formalize Fisher's debt-deflation ideas, but I don't like the way he went about it. So I'll keep using a quote in which BB observed that academics dismissed Fisher to say BB himself dismissed of Fisher. Apologies if this is uncivil, but... that's just awful. Posted by: D R | September 05, 2013 at 10:26 AM D R, Formalizing debt-deflation would require looking at debt as a legal claim on more than money. Ben is partially right, deflation would simply be a transfer of monetary wealth from debtor to lender with no aggregate effect (assuming the propensity to spend is equal among both creditor and lender). But when lending is secured against real property, then that real property can be transferred without regard to whether the new owner can or will use those it productively. Cab driver borrows from farmer using taxi cab as collateral. Farmer borrows from cab driver using farm tractor as collateral. Both default on loan - cab driver gets a farm tractor and farmer gets a taxi cab. Posted by: Frank Restly | September 05, 2013 at 01:25 PM Steve: let me translate that into my own words: If I sell my computer to my bank, the money supply expands. If I then buy that computer back from my bank, the money supply contracts. Similarly: If I sell my IOU to the bank (if i take out a loan), the money supply expands. If I then buy that IOU back from the bank (if I repay the loan), the money supply contracts. In the real world, banks buy and sell a lot of other people's IOUs, but don't buy and sell many other things, like computers. But the principle is exactly the same. We can even imagine banks that only buy and sell land (and rent out that land to farmers) in exchange for the money they create when they buy land and destroy when they sell land. and in that imaginary world, if banks set a price on which they would buy or sell land, would the stock of money be determined by the demand for money or by the demand to hold land? Would it be possible to have a state of affairs in which people were holding more money than they wished to hold but exactly the amount of land they wished to hold? I say it is possible. Back in the real world, we can translate that question as: Would it be possible to have a state of affairs in which people were holding more money than they wished to hold but have exactly the amount of bankloans they wished to have? I say it is possible. Does the demand for money eventually adjust to the supply of money created by the demand for loans/land? Or does the demand for loans/land immediately adjust to the demand for money? What's special about banks is not what they buy with the money they create, but that they create money. And thinking about banks as buying and selling computers or land can help us make that distinction more clearly. Posted by: Nick Rowe | September 05, 2013 at 02:00 PM Frank says: "Ben is partially right, deflation would simply be a transfer of monetary wealth from debtor to lender with no aggregate effect (assuming the propensity to spend is equal among both creditor and lender)." I don't see your point, here. Bernanke says this was the argument that academics used to use in order to dismiss Fisher. Either they did use that argument and Bernanke is correct, or they did not use that argument and Bernanke is wrong. Unless I missed it, Bernanke does not say that the old view itself is logical or illogical-- let alone correct or incorrect. However, Bernanke quite expressly goes on at length explaining that the old argument is outdated and modern thought on debt-deflation is different. I don't see anything which suggests that he is partially incorrect. He certainly dismisses neither Fisher nor debt-deflation. If anything, it could be read as a defense of debt-deflation against the old view, no?

--->"Quiz per i più intelligenti (che abbiano letto qui sotto la soluzione di Bossone). Se la Banca d'Italia accredita al Tesoro 100 miliardi in cambio di bonds creati ex-novo che il Tesoro le da in modo che questo possa cancellare l'IMU dimezzare l'IRPEF o cancellare l'IRAP o ridurre le imposte sulla benzina cosa succede a questi 100 mld nel bilancio di Banca d'Italia ? (ripeto; è un quiz per i più intelligenti, i commenti che denotino un quoziente di intelligenza inferiore a 90 verrano cancellati)" ------ Ma c'è il trucco Zibo ? A me pare che anche un'intelligenza medio-bassa che abbia frequentato la 3a ragioneria dovrebbe cavarsela. Banca d'Italia iscrive all'attivo i Titoli che ha acquistato e al passivo l'accredito del conto del Tesoro. I movimenti successivi (ad opera del Tesoro che -immagino- smani per potersi spendere la disponibilità) saranno su quel conto e andranno a pareggiarsi con uscite di cassa o accrediti su altri conti, accesi presso BdI stessa o presso altri istituti. Tra l'altro una volta chiarito che sono irredimibili e non trasferibili cambia poco o nulla che siano con interessi o senza: BdI "posseduta da privati" farebbe più utili nel primo caso e li verserebbe nelle casse del tesoro, come da statuto, con ottima pace dei privati che 'la possiedono'. La cosa si tradurrebbe in una partita di giro.

Sono soldi che effettivamente non essendogli costati niente può rischiare come più le aggrada.

In teoria la Svizzera, visto che investe euro scambiati con franchi che non le sono costati nulla, potrebbe anche investirli in BTP e guadagnarci pure degli interessi...

Probabilissimo. E lo vedi cosa ci succede a non avere la sovranità monetaria?

oramai la SNB avraun 400 miliardi di euro in pancia..eheh che investira in bond AAA dei crucchi, facendo scendere il rendimento..ehehveramente diabolico, anche non volendo chi esporta i capitali aiuta la germania.ahaha

Eh no Pana. Allora non hai capito proprio nulla. Non hanno peggato una sega. In Svizzera fanno invece una cosa molto ganza (grazie appunto alla sovranità monetaria). Siccome esiste una fuga dall' Euro e una corsa verso il Franco Svizzero, per evitare il rafforzamento della propria valuta in pratica i franchi che vengono acquistati ex-euro te li STAMPANO direttamente sotto il naso. Quando vai con i tuoi 100.000 euri a Lugano per farti dare in cambio franchi svizzeri, adottano un sistema complicato di ribilanciamento, ma che in pratica si traduce nel pigiare un bottone e creare elettronicamente dal nulla i franchi che ti danno in cambio (eh sì, loro che hanno sovranità monetaria possono farlo). In questo modo accumulano valuta estera in modo gratuito, e riuscendo nello stesso tempo a tenere inchiodato il cambio, e quindi positiva la bilancia commerciale svizzera. Hai visto un po'? Geniale!

e quindi anche la Svizzera che ha peggato il franco svizzero all euro a 1,20 IN PRAtica e come se avesse adottato l euro ? a bulgaria mi ha colpito perche hanno un debito a solo 18% del PIL eppure adottano feroci misure di austerity , e la privatizzazione ha fatto aumentar i prezzi dell elettricita (strano che perche i testi dicono che la libera concorrenza fa diminuire i prezzi )

Pana, per te e le tue idee fisse (errate) ci vorrebbe un controllore ad ogni passo... "In Bulgaria non hanno leuro e hanno chiaramente detto che non ci vogliono entrare ma allora perche prvatizzano e fanno manovre che arricchiscono l'un percento??" Perchè di fatto è come se l'Euro l'avessero adottato pure loro, dato che hanno ancorato il cambio della loro moneta LEV al marco tedesco e poi all'Euro da circa 15 anni. E, come tutti i paesi più deboli (detti anche periferici, o stupidi al punto tale anche di non ammetterlo), ne sta subendo tutte le nefaste conseguenze.

In Bulgaria non hanno leuro e hanno chiaramente detto che nonci vogliono entrare ma allora perche prvatizzano e fanno manovre che arricchiscono l un percento ?? PREZZI TRIPLICATI dell elettricita !!!! alla faccia della concorrenza del libero mercato Da mesi, i bulgari manifestano la propria rabbia. E anche dopo le elezioni anticipate del 12 maggio, non vedono alcun miglioramento. Le privatizzazione e le politiche fiscali fatte per i ricchi hanno in definitiva impoverito il paese. http://www.marx21.it/internazionale/europa/22641-bulgaria-la-popolazione-respinge-il-nuovo-governo.html

il fund manager del decennio dice "Comprate banche europee" e aggiungo che pure Blackrock inizia a comprare BTP http://www.cnbc.com/id/100979100