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Debt-financed demand percent of aggregate demand 25 20 15 Percent 10 5 0 0 5 Great Depression including Government Great Recession including Government 10 15 20 25 0 1 2 3 4 5 6 7 8 9 10 11 12 Years since peak rate of growth of debt (mid-1928 & Dec. 2007 resp.) Modelling Minskys Financial Instability Hypothesis: From Implicit to Explicit Money Steve Keen University of Western Sydney Debunking Economics www.debtdeflation.com/blogs www.debunkingeconomics.com www.cfesi.org 13 Typical neoclassical forecast in 2007 – OECD Chief Economist Jean-Philippe Cotis 2007 – “the current economic situation is in many ways better than what we have experienced in years… – Our central forecast remains indeed quite benign: • a soft landing in the United States, • a strong and sustained recovery in Europe,… • In line with recent trends, sustained growth in OECD economies would be underpinned by strong job creation and falling unemployment.” (p. 9) • Based on OECD “small macroeconomic model” And all’s well… until 2008 • “the past two decades has seen not only significant improvements in economic growth and productivity but also a marked reduction in economic volatility… dubbed "the Great Moderation.” (Bernanke 2004) Great Moderation to Great since Recession US Inflation and Unemployment 1970 16 15 Inflation Inflation Unemployment Unemployment 14 U-6 Measure 12 Percent Percent p.a. 10 10 8 5 6 4 02 0 Inflation Unemployment U-6 Measure 52 • Whoa! • Did anybody get the number of that Black Swan?… • Nope: 0 • “Nobody could have seen it coming…” 70 74 7620 78 803082 84 92 94 70 96 98 80 100 10290 104 106 108 110 0 72 10 4086 88 50 90 60 100 110 Year Year “Nobody could have seen it coming…” Inflation Unemployment • “The Queen asked me: ‘If these things were so large, how come everyone missed them? Why did nobody notice it?’.” • When Garicano explained that at “every stage, someone was relying on somebody else and everyone thought they were doing the right thing”, she commented: “Awful.” Debt to GDP • As obvious as the nose on a swan’s face to some of us… • A debt-driven boom and collapse Why WE did see “It” coming! • At least 12 anticipated & warned of Great Recession (Bezemer 2009, 2010, 2011) • Common themes Bezemer 2009 Analyst Dean Baker Wynne Godley Fred Harrison Michael Hudson Eric Janszen Stephen Keen Jakob Brøchner Madsen Kurt Richebächer Nouriel Roubini Peter Schiff Robert Shiller • “Distinction between financial wealth and real assets… • Concern with debt as the counterpart of financial wealth… • Growth in financial wealth and the attendant growth in debt can become a determinant (instead of an outcome) of economic growth … • Recessionary impact of the bursting of asset bubbles… • Emphasis on the role of credit cycles in the business cycle…” Credit in a Boom/Depression Pair • Expanding debt in Boom, deleveraging in Depression US Debt to GDP Ratios 320 300 280 Private Debt Government Debt 260 240 220 200 180 160 140 120 100 80 60 40 20 0 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 Change in private debt now • $4 trillion boost (+28%) 2008; $2.5 trillion cut (-18%) 2010 7 10 7 10 GDP 7 10 GDP plus Change in Debt 7 10 7 including Government Debt 10 7 10 7 10 7 10 7 10 7 10 7 10 7 10 7 10 7 10 7 10 7 10 7 10 7 10 7 10 7 10 7 10 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 +28% 2 1.95 1.9 1.85 1.8 1.75 1.7 1.65 1.6 1.55 1.5 1.45 1.4 1.35 1.3 1.25 1.2 1.15 1.1 1.05 1 -18% US $ billion Aggregate Demand in the USA, 1986-2011 Change in private debt “Then” • $8.5 billion boost (+9%) 1928; $9.2 billion cut (-18%) 1933 US Aggregate Demand GDP 1920-1940 +9% 110000 100000 $ million 90000 80000 70000 60000 40000 1920 1922 1924 1926 1928 1930 Year -18% 50000 GDP alone + Change in Private Debt + Change in Public Debt 1932 1934 1936 1938 1940 Change in private debt now • Slowdown in debt growth explains the inexplicable now… Great Moderation to Great Recession 15 2008 12.5 10 7.5 • Define debt5 financed 2.5 aggregate demand 0 2.5 as ChangeInDebt 5 1980 1985 1990 1995 2000 2005 2010 2015 Great Moderation to Great Recession 0 1 2 3 4 2008 U-3 Unemployment Debt % Agg. Demand 25 20 15 10 5 6 0 5 0 7 8 9 10 11 1975 0 30 1980 1985 1990 1995 2000 2005 2010 5 10 15 20 25 30 2015 Debt-financed Percent Demand • Unemployment falls when debt rises… Unemployment Rate (inverted) GDP ChangeInDebt 1975 0 Inflation Unemployment Change in private debt “Then” Roaring Twenties to Great Depression 30 25 20 1930 Inflation Unemployment 15 10 5 0 0 5 10 1920 0 2 4 6 8 10 12 14 0 16 18 20 22 24 26 28 1920 1922 1924 1926 1928 1930 1932 1934 1936 Roaring Twenties to Great Depression 1938 1940 1938 0 30 26 22 18 14 10 6 2 2 6 10 14 18 22 26 30 1940 1930 Unemployment Debt % Agg. Demand 1922 1924 1926 1928 1930 1932 1934 1936 Debt-financed Percent Demand Debt to GDP • Same process applied in Roaring Twenties and Great Depression… The Credit Accelerator • Since AD = GDP + DDebt DDDebt CreditAccelerator • Then DAD = DGDP + DDDebt GDP – “Credit Impulse” (Biggs et al. 2010) • Change in GDP dominant factor in change in employment • But Credit Impulse made this recession “Great” Acceleration of private debt & change in employment, USA 10 5 0 Percent p.a. 0 5 10 15 20 25 30 1955 Acceleration of private debt Change in Private Employment 1960 1965 1970 1975 1980 1985 Year 1990 1995 2000 2005 2010 2015 The Credit Impulse • Negative impulse this time worse than Great Depression 100 10 50 5 0 0 00 50 5 100 10 150 -15% 15 20 200 -25% 250 25 Acceleration/Deceleration of Debt Change in Unemployment Annual Change in Unemployment & Debt Acceleration 300 30 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 105 110 115 Year • Unemployment Unemployment Credit Impulse Credir Impulse That’s why the US is in a crisis • Driving asset prices as well as GDP… Mortgage debt dynamics in the USA Mortgage Acceleration & Real House Price Change 20 VB End 2 10 0 0 2 0 4 10 6 8 1992 Mortgage Acceleration House Price Change 1994 1996 1998 2000 2002 2004 2006 www.debtdeflation.com/blogs 2008 2010 20 2012 CPI-adjusted House Price Change percent p.a. Mortgage Acceleration (percent of GDP) p.a. 4 Why Neoclassical economists didn’t see It coming • DSGE the dominant modelling framework today • Like IS-LM before it, non-monetary model • Seen as superior to IS-LM because it is based on micro: – “Dynamic Stochastic General Equilibrium” model… • “simple, analytically convenient, and has largely replaced the IS-LM model as the basic model of fluctuations in graduate courses… • Unlike the IS-LM model, it is formally, rather than informally, derived from optimization by firms and consumers.” (Blanchard 2009) • This is not an advantage: it is instead a fallacy – Robert Solow on DSGE modelling… Solow rejects DSGE • “The prototypical real-business-cycle model goes like this. There is a single, immortal household—a representative consumer—that earns wages from supplying labor. It also owns the single price-taking firm… • This is nothing but the neoclassical growth model… • [When I built it] … It was clear … what I thought it did not apply to, namely short-run fluctuations ... the business cycle... • Now ... an article today [on the] 'business cycle' … will be ... a slightly dressed up version of the neoclassical growth model. • The question I want to circle around is: how did that happen?” Solow: SMD conditions invalidate DSGE • “Suppose you wanted to defend the use of the Ramsey model as the basis for a descriptive macroeconomics. What could you say? ... • You could claim that … there is no other tractable way to meet the claims of economic theory. • I think this claim is a delusion. • We know from the Sonnenschein-Mantel-Debreu theorems that…” (Solow 2008) • Sonnenschein-Mantel-Debreu: demand curve for a single market can have any (polynomial) shape at all – Even study of a single market can’t be reduced to study of a single utility-maximizing agent – Yet DSGE macro models the whole economy as a single utility-maximizing agent SMD: “Anything goes” for market demand curves • SMD Conditions (Sonnenschein 1973): – Market demand curves do not obey the „Law of Demand“ – Even if summing „well behaved“ individual demand curves P Crusoe P q Friday P q Market Q • Proof by contradiction: – Assume market demand curves do obey Law of Demand – Derive conditions under which this is true – Contradict initial assumption • Therefore they don‘t obey the „Law“ of Demand Neoclassical reaction • A very few reacted rationally: – Alan Kirman 1989 • “If we are to progress further we may well be forced to theories in terms of groups who have collectively coherent behavior. • Thus demand and expenditure functions if they are to be set against reality must be defined at some reasonably high level of aggregation. • The idea that we should start at the level of the isolated individual is one which we may well have to abandon.” • But most didn’t know about these conditions at all… Mark Thoma in 2010 • Mark Thoma said... “One thing I learned from it is that I need to read the old papers by Sonnenschein (1972), Mantel (1974), and Debreu (1974) since these papers appear to undermine representative agent models… • I need to learn the full extent to which this work undermines the whole microfoundations approach • I didn't understand that extent to which representative agent models are an analytical convenience to work around this problem (the DSGE theorists who understood this kept quiet about it).” • Some that did—even those that discovered them— reacted irrationally… Representative agent madness instead • Gorman 1953 – “we will show that there is just one community indifference locus through each point if, and only if, the Engel curves for different individuals at the same prices are parallel straight lines… – The necessary and sufficient condition quoted above is intuitively reasonable. • It says, in effect, that an extra unit of purchasing power should be spent in the same way no matter to whom it is given.” • Intuitively reasonable? – No, it’s intuitively false! • Real consequence: even behavior of a single market an emergent phenomenon… Macro an “emergent property” • Real meaning of SMD conditions – Macroeconomic behavior an “emergent property” of interaction of agents in a complex system • Cannot deduce behavior of macroeconomy from behavior of utility-maximizing individuals • Cannot reduce macroeconomics to “applied microeconomics” • But that is what DSGE models do! • Fallacy of “Strong Reductionism” – Believe “macroeconomics is applied microeconomics” – But SMD conditions prove otherwise • “macroeconomics cannot be applied microeconomics” Fallacy of Strong Reductionism • Can’t deduce even market behavior from model of individual behavior – Let alone deduce macro behavior from individual • Common knowledge in real sciences: Anderson, “More is Different”, Science (1972) – The behavior of large and complex aggregates of elementary particles, it turns out, is not to be understood in terms of a simple extrapolation of the properties of a few particles. – Instead, at each level of complexity entirely new properties appear, and the understanding of the new behaviors requires research which I think is as fundamental in its nature as any other.” Fallacy of Strong Reductionism • “one may array the sciences … “The elementary entities of science X obey the laws of science Y” X Solid state or many-body physics Chemistry Molecular biology Cell biology … Psychology Social sciences Y Elementary particle physics Many-body physics Chemistry Molecular biology … Physiology Psychology • But this hierarchy does not imply that science X is “just applied Y”. At each stage entirely new laws, concepts, and generalizations are necessary, requiring inspiration and creativity to just as great a degree as in the previous one. Psychology is not applied biology, nor is biology applied chemistry.” (Anderson 1972) • And “macroeconomics is not applied microeconomics” Macro model must be able to generate Depression • Minsky 1982 – “Can “It”—a Great Depression—happen again…? – To answer these questions it is necessary to have an economic theory which makes great depressions one of the possible states in which our type of capitalist economy can find itself… – The abstract model of the neoclassical synthesis cannot generate instability. – When the neoclassical synthesis is constructed, capital assets, financing arrangements that center around banks and money creation, constraints imposed by liabilities, and the problems associated with knowledge about uncertain futures are all assumed away. – For economists and policy-makers to do better we have to abandon the neoclassical synthesis.” A tentative, but not-bankrupt, alternative • A Minskian macroeconomics must: – Treat the economy as inherently monetary; – Model it dynamically; – Consider social classes rather than isolated agents; – Consider rational but not prophetic behavior; – Have endogenous creation of money by banking sector; – Give credit and debt have pivotal roles; and – Be able to generate a Great Depression as a feasible state of the core model • First, Minsky’s verbal model… Minsky’s FIH: dynamic-disequilibrium-debt model • • • • Economy in historical time Debt-induced recession in recent past Firms and banks conservative re debt/equity, assets Only conservative projects are funded – Recovery means most projects succeed • Firms and banks revise risk premiums – Accepted debt/equity ratio rises – Assets revalued upwards… • “Stability is destabilising” – Period of tranquility causes expectations to rise… • Self-fulfilling expectations – Decline in risk aversion causes increase in investment – Investment expansion causes economy to grow faster The Euphoric Economy • Asset prices rise: speculation on assets profitable • Increased willingness to lend increases money supply – Money supply endogenous, not controlled by CB • Riskier investments enabled, asset speculation rises • The emergence of “Ponzi” financiers – Cash flow less than debt servicing costs – Profit by selling assets on rising market – Interest-rate insensitive demand for finance • Rising debt levels & interest rates lead to crisis – Ponzi “investments” inherently loss-making – Rising rates make conservative projects speculative – Non-Ponzi investors sell assets to service debts – Entry of new sellers floods asset markets – Rising trend of asset prices falters or reverses The Assets Boom and Bust • Ponzi financiers go bankrupt: – Can no longer sell assets for a profit – Debt servicing on assets far exceeds cash flows • Asset prices collapse, increasing debt/equity ratios • Endogenous expansion of money supply reverses • Investment evaporates; economic growth slows • Economy enters a debt-induced recession – Back where we started... • Process repeats once debt levels fall – But starts from higher debt to GDP level • Final crisis where debt burden overwhelms economy • My work: converting this from verbal description to mathematical model… Theoretical dynamics of debt: Minsky + Circuit • Monetary model of capitalism built from combination of: – Goodwin’s growth cycle – Minsky’s Financial Instability Hypothesis – Circuit theory of endogenous money creation • Product: “Monetary Circuit Theory”—MCT • Physical side: Goodwin put into mathematical form Marx’s “growth cycle” model in Capital I, Ch. 25: – “The mechanism of the process of capitalist production removes the very obstacles that it temporarily creates. The price of labor falls again to a level corresponding with the needs of the selfexpansion of capital, whether the level be below, the same as, or above the one which was normal before the rise of wages took place…” Keen 1995 Model Foundations: Nonlinear dynamics • Inherently cyclical growth (Goodwin 1967, Blatt 1983) • Capital K determines output Y via the accelerator: K 1/3 Accelerator K 1/3 Y Y Goodwin's cyclical growth model Accelerator 1.50 • Y determines employment L via productivity a: l / 1 a r Y l Labour Productivity / 1 a r l 1 / r LabourPopulation Productivity N .96 "NAIRU" + 10 * L l WageResponse / 100 N r 1 Population + Initial Wage 1/S + Integrator L Employment Wages 1.25 L l 1.00 • L determines employment rate l via population N: .75 PhillipsCurve dw/dt l .50 0 2 4 6 Time (Years) 8 10 • l determines rate of change of wages w via Phillips Curve + .96 "NAIRU" 10 WageResponse * Pi * W Goodwin's cyclical growth model 1.3 PhillipsCurve I dK/dt dw/dt 1.2 1.1 Wages + - Y w L • Integral of w determines W (given initial value) 1 3 Initial Capital Initial Wage dw/dt + 1/S + Integrator + 1.0 .9 w 1/S + Integrator L * W .8 .7 .9 • Y-W determines profits P and thus Investment I… Y W + - Pi I dK/dt • Closes the loop: .95 1 Employment 1 Initial Capital dK /dt 1/S + + 1.05 Modelling Minsky with Implicit Money… • Debt essential to introduce Minsky – “Debt seems to be the residual variable in financing decisions. Investment increases debt, and higher earnings tend to reduce debt.” (Fama & French 1997) – “The source of financing most correlated with investment is long-term debt… These correlations confirm the impression that debt plays a key role in accommodating year-by-year variation in investment.” (Fama & French 1998) • Nonlinear investment function of rate of profit: – Low—invest nothing; – Medium—invest as much as earn; – High—invest more than earn Modelling Minsky with Implicit Money… • Important (normal) feature of dynamic modelling: increasing generality of model makes it more realistic – No need for absurd assumptions to maintain fiction of equilibrium, coherent micro/macro behaviour, etc. • Exponential form: – Investment=Profit at profit rate of 3% – Investment>Profit at profit rate > 3% – Investment<Profit at profit rate < 3% – Slope of change at 3%=2 – Minimum investment –1% output (depreciation) Modelling Minsky with Implicit Money… • Investment increases debt; profit decreases it • Debt rises if investment exceeds profits • Debt also increases due to interest on outstanding debt… 0.03 Initial Debt 0 Investment Profit + - 1/S r + + * / l r Debt Output • Profit net of both wages and interest payments: Profit Output • And the whole model is: + + Wages Interest Modelling Minsky with Implicit Money… • Notice debt becomes negative • Capitalists accumulate • Equilibrium is stable in Fisher’s sense… Capital Output Productivity l / r Employment Population l / r Employment Rate Graphs Output Profit 0.03 Initial Debt 0 Investment Profit 1 + - + + Wages Interest r + + 1/S * / l r Debt Output Debt/Output Debt 0 0 -25000000000 -1 -2 0 -50000000000 100 200 Time (Years) 300 400 0 200 Time (Years) 400 Modelling Minsky with Implicit Money… • “we may tentatively assume that, ordinarily and within wide limits, all, or almost all, economic variables tend, in a general way, towards a stable equilibrium” (Fisher 1933) • But this stability is… – “so delicately poised that, after departure from it beyond certain limits, instability ensues” (Fisher 1933: 339). • Start further from equilibrium, system is unstable: Modelling Minsky with Implicit Money… • Higher initial Capital level of unemployment leads to disaster… • Inverse tangent route to chaos • Existence of equilibrium depends on 7.5 initial 5.0 conditions • Higher initial 2.5 level, apparent 0 0 stability then collapse… Output Productivity l / r Employment Population l / r Employment Rate Graphs Investment Profit Output + + Wages Interest 0.03 r Profit Debt * 134 Output l / r Initial_Population Debt Debt/Output 750000 500000 250000 0 50 100 Time (Years) 150 0 50 100 Time (Years) 150 Modelling Minsky with Implicit Money… • Nonlinear model can be – Locally stable around equilibrium • “linear” component of system dominates) but – Globally unstable • past a certain range, nonlinear overwhelm linear • Below one, a^3 is less than a^2 is less than a… • Above 1, a^3 is bigger than a^2 is bigger than a… – Start too far from equilibrium, a debt-induced collapse • Inspired a “rhetorical flourish” in 1995 paper Modelling Minsky with Implicit Money… Output Output A Great Moderation? Followed by a breakdown • Keen, 1995: 9 1 10 500 • “This vision of a capitalist economy with finance requires 8 108 400 us to go beyond that habit of mind which Keynes 8 6 10 300 described so well, 4 108 200 • the excessive reliance on the (stable) recent past as a 2 108 100 guide0 to5 the 10 future. 15 20 25 30 250 260 270 280 290 300 Year Year should warn • The chaotic dynamics explored in this paper Employment Cycle with Debt a period of relative Wage Share Cycle with Debt us against accepting tranquility in a 1.0 capitalist economy 0.9 0.9 • as anything other than a lull before the storm.” 0.8 W ages Share of Output EmploymentRate O u t[4 4 9 ]= 0.8 0.7 0.6 0 50 100 150 200 250 300 Year 0.7 0.6 0 50 100 150 200 250 300 Year Modelling Minsky with Implicit Money… • Finally, government: – Minsky: government spending works by • Giving firms a cash flow during slump, thus letting them pay off their debts; • Restraining cash flow during boom, thus attenuating euphoric expectations – Model: government pays subsidy (can be negative) to firms, where change in subsidy is a function of the rate of employment… – Constant parameters means model government “resolute” against unemployment • Actual governments have clearly shifted on this… dG L Y g dt N Modelling Minsky with Implicit Money… • Government Subsidy: – Constant if Unemployment = 5% – Increasing if Unemployment > 5% – Reducing if Unemployment < 5% E_rate 0.95 0 -0.5 Output Exponential: x, y, slope at (x,y), min. 0 * + + 1/S • Profit now net of wages, interest, & government subsidy… Profit Output + + - Wages Interest G Modelling Minsky with Implicit Money… • Cyclical instability – depending on slope of government reaction function 1.05 Limit Cycle 1.1 1.00 1.0 .95 .9 .90 .8 .85 .7 .80 .6 .725 .85 .975 1.1 .6 0 Wage Share Employment rate 2.0 1.5 1.0 .5 100 200 300 0 0 400 100 Time (Years) Debt/Output 4 .80 200 300 400 Time (Years) Government spending to output .55 2 .30 0 -2 0 .05 100 200 Time (Years) 300 400 -.20 0 100 200 Time (years) 300 400 Modelling Minsky with Endogenous Money… • Monetary Foundation Graziani “Circuit Theory” (1989) – “The starting point of the theory of the circuit, is that a true monetary economy is inconsistent with the presence of a commodity money. – A commodity money is by definition a kind of money that any producer can produce for himself. But an economy using as money a commodity coming out of a regular process of production, cannot be distinguished from a barter economy. – A true monetary economy must therefore be using a token money, which is nowadays a paper currency” • Endogeneity of money supply well established – But ignored by neoclassical modellers Skip Neoclassical attitude to banks Neoclassical Theory wrong from first principles • Neoclassical vision of money & debt: – “Patient agent” lends to “Impatient agent” – Bank as intermediary – No change in aggregate demand – E.g., Krugman trying to explain why distribution of debt matters—while assuming aggregate level doesn’t: • “we begin by setting out a flexible-price endowment model in which “impatient” agents borrow from “patient” agents, but are subject to a debt limit.” – A crisis? • “If this debt limit is, for some reason, suddenly reduced, the impatient agents are forced to cut spending” (2010, p. 3) Neoclassical Theory wrong from first principles • Patient lends to Impatient • • • • • Patient’s spending power goes down Impatient’s spending power goes up No change in aggregate demand Banks mere intermediaries (ignored in analysis) Versus reality: new spending power endogenously created Monetary Circuit Theory • Basic process of endogenous money creation • Entrepreneur approaches bank for loan • Bank grants loan & creates deposit simultaneously • Alan Holmes, Senior Vice-President New York Fed, 1969: • “In the real world, banks extend credit, creating deposits in the process, and look for the reserves later.” (1969, p. 73) • New loan puts additional spending power into circulation • Modeling this using strictly monetary framework: Explicitly Monetary Minsky Model • Input financial relations in Table: Assets Liabilities Equity d ReservesReserve A Loan F Firm Deposit Worker Deposit Bank Equity dt Lend -AB A FL d V BV d Record Loan dt Loan L rA VFr G A Interest B dt BT d B r F r F H Pay Interest B ddt T L L D D D B -B Record FirmDeposit A -BB C D E F G BV FL d dt Wages C FL Y Inv r -C V r L r Consumption D+E -D -E ddt WorkerDeposit C D B -F Repay Loan F d dt FD rD FD rL FL W L V FL B T H D Y Inv r Record -F dt V r L r B H d Money NewBankEquity G B HDE d H D rD H D W L dt Record dt G H • System of dynamic equations derived automatically: • Placeholders replaced by behavioural functions: Explicitly Monetary Minsky Model • Coupled with physical output model via – Price equation (derivation in Keen 2010) d 1 P dt P 1 W P 1 a • Monetary “Phillips curve” including all 3 factors in Phillips – Unemployment – Rate of change of unemployment – Cost of living adjustment d 1 d 1 d W W Ph P dt dt P dt Explicitly Monetary Minsky Model • Full system of 14 coupled differential equations Financial Sector FL( t) BV( t) d BV( t) dt RL r( t) d BT( t) dt BT( t) rL FL( t) rD FD( t) rD HD( t) B BV( t) LC r( t) FL( t) BV( 0) BV0 BT( 0) BT0 FL( 0) FL0 d FL( t) dt LC r( t) d FD( t) dt BV( t ) FL( t) BT( t) HD( t ) W ( t) Yr( t) rD FD( t) rL FL( t) P( t) Yr( t ) Inv r( t ) LC r( t ) RL r( t) B W a( t ) FD( 0) FD0 d HD( t) dt HD( t) W ( t) Yr( t ) rD HD( t) W a( t ) HD( 0) HD0 RL r( t ) P( t) Yr( t) Inv r( t ) Physical output, labour and price systems Level of output Employment Rate of Profit Rate of employment Rate of real economic growth Kr( t) Yr( t ) L( t) Yr0 v Yr( t) L( 0) a( t ) P( t) Yr( t) W ( t ) L( t ) rL FL( t) rD FD( t ) r( t ) v P( t) Yr( t ) d ( t) dt g( t) Yr( 0) ( t) [ g( t) ( ) ] Inv r( t) v r( 0) L0 r0 ( 0) 0 g ( 0) g0 Explicitly Monetary Minsky Model • Generates both “Great Moderation” & “Great Depression” Inflation, Unemployment and Debt 25 500 Inflation Unemployment Debt to GDP 15 400 10 5 300 0 0 5 200 10 15 100 20 25 0 10 20 30 40 50 0 60 Debt to GDP Ratio Percent Inflation & Unemployment Percent 20 Explicitly Monetary Minsky Model • Fits stylized facts of crisis Unemployment, Inflation & Debt (smoothed) 15 3 12.5 2.5 Percent 7.5 5 2 2.5 0 2.5 5 1980 0 1.5 Unemployment Inflation Debt to GDP 1985 1990 1995 2000 Year 2005 2010 1 2015 Ratio to GDP 10 Explicitly Monetary Minsky Model • Approach extensible to multiple commodity model FinancialSystem FLA1( t ) d BR( t) dt RL prA ( t ) d FLK1( t) dt d FLK2( t) dt BR( t) RR prK( t) BR( t) RR prK( t) BR( t) d FLC1( t) dt RR prC( t ) BR( t) d FLC2( t) dt RR prC( t ) d FLA1( t) dt d FLA2( t) dt RR prA ( t) RR prE( t ) RL prK( t ) FLC1( t) RL prC( t ) FLC2( t) RL prC( t ) RL prA ( t) FLA2( t) RL prA ( t) RL prE( t) FLE2( t) RL prE( t) FLK2( t) NM prK( t) FLC1( t ) NM prC( t) FLC2( t ) NM prC( t) 2 BR( t) FLK1( t) NM prK( t) FLA1( t) FLE1( t) 2 BR( t) RR prE( t) RR prK( t) NM prA ( t ) NM prE( t) FLA2( t ) RL prA ( t) FLC1( t) RL prC( t) FLC2( t) RL prC( t ) FLE1( t) RL prE( t) FLE2( t ) RL prE( t) FLK1( t) RL prK( t) FLK2( t) RL prK( t) FLA2( t ) FLE2( t) NM prA ( t ) NM prE( t) 2 BR( t ) RR prA ( t) FLA1( t ) FLE1( t) FDA1( t) FDC1( t) FDE1( t) FDK1( t) FDK2( t) FLK1( t) FLK1( t) BI( t) FDA1( t) FDC1( t) FDE1( t) FDK1( t) FDK1( t) FDK1( t ) FDK1( t) FDK2( t) HD( t) rL FLK1( t ) LK1( t) W M ( t) FDK1( t) rD FDK1( t) KA LK1( t) W M ( t ) KC LK1( t ) W M ( t) KE LK1( t) W M ( t) RR prK( t) pr prA ( t ) pr prC( t) pr prE( t ) pr prK( t ) pr prK( t) RL prK( t) NM prK( t) 2 KBC KAC KCC KEC CKA CKC CKE KKC KKC 2 KWC BR( t) RR prK( t) d FDC1( t) dt RR prC( t) d FDC2( t) dt RR prC( t) d FDA1( t) dt RR prA ( t) BR( t ) BR( t ) BR( t) BR( t) d FDA2( t) dt RR prA ( t) d FDE1( t) dt RR prE( t ) d FDE2( t) dt RR prE( t ) d BI( t) dt FLK2( t) d FDK2( t) dt d HD( t) dt BR( t) FLK1( t) RL prK( t ) d FDK1( t) dt BR( t) BR( t) d FLE2( t) dt RR prA ( t) RR prE( t ) RR prC( t) BR( t) BR( t) d FLE1( t) dt 2 BR( t ) BR( t) BR( t) FDA2( t) rL FLK2( t ) LK2( t) W M ( t) pr prA ( t ) FDC2( t) pr prC( t) FDE2( t) pr prE( t ) FDK1( t ) pr prK( t) FDK2( t) pr prK( t) FLK2( t) RL prK( t) FLK2( t) NM prK( t) BI( t) 2 KBC FDA2( t) KAC FDC2( t) KCC FDE2( t) KEC FDK2( t) CKA FDK2( t) CKC FDK2( t ) CKE FDK1( t) KKC FDK2( t) KKC HD( t) 2 KWC FDK2( t) rD FDK2( t) KA LK2( t) W M ( t ) KC LK2( t ) W M ( t) KE LK2( t) W M ( t) FDC1( t) FLC1( t) FLC1( t) BI( t) FDA1( t) FDC1( t) FDC1( t ) FDC2( t) FDC1( t) FDE1( t) FDC1( t) FDK1( t) HD( t) rL FLC1( t) LC1( t) W M ( t) FDC1( t) rD FDC1( t ) AC LA1( t) W M ( t) CA LC1( t ) W M ( t) CC LC1( t) W M ( t) CC LC2( t ) W M ( t) CE LC1( t) W M ( t) EC LE1( t ) W M ( t) KC LK1( t) W M ( t ) pr prC( t) RL prC( t) NM prC( t) 2 CBC CAC CCA CCC CCC CCE CEC KCC CKC 2 CWC rL FLC2( t) LC2( t) W M ( t) FDC2( t) pr prC( t) rL FLA1( t ) LA1( t) W M ( t ) rL FLA2( t ) LA2( t) W M ( t ) rL FLE1( t) LE1( t ) W M ( t) rL FLE2( t) LE2( t ) W M ( t) FDA1( t ) pr prA ( t) FDA2( t ) pr prA ( t) FDE1( t) pr prE( t ) FDE2( t) pr prE( t ) FLC2( t) RL prC( t) FLA1( t) RL prA ( t) FLA2( t) RL prA ( t) FLE1( t) RL prE( t) FLE2( t) RL prE( t) FLC2( t) NM prC( t) FLA1( t ) NM prA ( t ) FLA2( t ) NM prA ( t ) FLE1( t) NM prE( t ) FLE2( t) NM prE( t ) BI( t) 2 CBC BI( t ) 2 CBA BI( t ) 2 CBA BI( t) 2 CBE BI( t) 2 CBE FDA2( t) CAC FDA1( t ) CAA FDA1( t ) CAA FDA1( t) CAE FDA2( t) CAE FDC2( t) CCA FDA2( t) CAA FDA2( t) CAA FDE1( t ) CEA FDE2( t ) CEA FDC1( t) CCC FDC2( t) CCC FDA1( t) CAC FDA2( t) CAC FDC1( t) CCE FDC2( t) CCE FDC2( t) CCE FDC1( t ) CCA FDC2( t ) CCA FDE1( t ) CEC FDE2( t ) CEC FDE2( t) CEC FDA1( t) CAE FDA2( t) CAE FDE1( t) CEE FDE1( t) CEE FDC2( t) KCC FDE1( t ) CEA FDE2( t ) CEA FDE2( t) CEE FDE2( t) CEE FDK2( t) CKC FDA1( t) KAC FDA2( t) KAC FDE1( t ) KEC FDE2( t ) KEC 2 CWC FDK1( t) CKA FDK2( t) CKA FDK1( t) CKE FDK2( t) CKE HD( t) HD( t) HD( t) HD( t) LA1( t) W M ( t) LA2( t) W M ( t) LC1( t ) W M ( t ) LC2( t) W M ( t) LE1( t ) W M ( t) LE2( t) W M ( t) LK1( t) W M ( t) LK2( t ) W M ( t ) HD( t ) rD HD( t) CWA CWC CWE KWC HD( t) HD( t) HD( t) 2 CWA HD( t) HD( t) 2 CWE FDC2( t) rD FDC2( t ) AC LA2( t) W M ( t) CA LC2( t ) W M ( t) CC LC1( t) W M ( t) CC LC2( t ) W M ( t) CE LC2( t) W M ( t) EC LE2( t ) W M ( t) KC LK2( t) W M ( t ) 2 CWA 2 CWE FDA1( t) rD FDA1( t) AA LA1( t) W M ( t) AA LA2( t) W M ( t) AC LA1( t) W M ( t) CA LC1( t) W M ( t ) AE LA1( t) W M ( t) EA LE1( t) W M ( t) KA LK1( t ) W M ( t) FDA2( t) rD FDA2( t) AA LA1( t) W M ( t) AA LA2( t) W M ( t) AC LA2( t) W M ( t) CA LC2( t) W M ( t ) AE LA2( t) W M ( t) EA LE2( t) W M ( t) KA LK2( t ) W M ( t) FDE1( t) rD FDE1( t ) AE LA1( t) W M ( t ) EA LE1( t) W M ( t) CE LC1( t) W M ( t) EC LE1( t) W M ( t) EE LE1( t ) W M ( t) EE LE2( t) W M ( t) KE LK1( t ) W M ( t ) FDE2( t) rD FDE2( t ) AE LA2( t) W M ( t ) EA LE2( t) W M ( t) CE LC2( t) W M ( t) EC LE2( t) W M ( t) EE LE1( t ) W M ( t ) EE LE2( t) W M ( t) KE LK2( t ) W M ( t ) BI( t ) BI( t) BI( t ) BI( t) rL FLA1( t) rL FLA2( t) rL FLC1( t ) rL FLC2( t) rL FLE1( t) rL FLE2( t) rL FLK1( t) rL FLK2( t) FDA1( t) rD FDA1( t ) FDA2( t) rD FDA2( t) FDC1( t) rD FDC1( t) FDC2( t ) rD FDC2( t ) FDE1( t) rD FDE1( t ) FDE2( t) rD FDE2( t ) FDK1( t) rD FDK1( t ) FDK2( t) rD FDK2( t) HD( t ) rD HD( t) CBA CBC CBE KBC Production system Capital 1 KK1( 0) Capital Stock d KK1( t) Capital 2 KK10 KK2( 0) FDK1( t) KK1( t ) d KK2( t ) KK20 FDK2( t) KK2( t ) 0 Explicitly Monetary Minsky Model • Basic system generates multisectoral limit cycle 2 20 The Rate of Profit in a Monetary Multisectoral Model of Production 25 30 35 t Change in Nominal Credit and Nominal GDP 15 50 40 GDP Debt Percent change p.a. Profit/Capita (Percent) 10 100 prK( t ) 100 prC( t ) 100 prA( t ) 5 100 prE( t ) 0 Capital Goods Consumer Goods Agriculture Energy 5 0 20 40 60 t Years 80 100 40 30 30 20 20 10 10 20 25 30 35 0 40 Explicitly Monetary Minsky Model • Monetary and income distribution dynamics Income Distribution Limit Cycles Bank Assets & Liabilities 100 7 110 Loans Deposits Bank Reserves (RHS) 7 6 110 110 6 5 110 110 5 110 20 25 30 35 Wages Share of Output 95 30 Wages Profit Interest 25 90 20 85 15 80 10 75 5 70 0 65 5 60 10 10000 55 94 96 98 100 Employment Rate • Minsky modelling approach clearly “works” – How to make it more accessible? • INET funding to develop GUI program “Minsky” 102 15 104 Capitalist & Banker Shares 8 110 Making Monetary Dynamics Accessible • Prototype “QED” already available – http://www.debtdeflation.com/blogs/qed/ Minskian Prognosis • Deleveraging till Ponzi debt overhang eliminated – (USA, 50-100% of GDP from 300% peak) • Continued shortfall of aggregate demand • Government deficits attenuate decline • But less effective given private sector deleveraging – However austerity will make it worse • Private debt abolition a better policy (Hudson, Graeber) – Long term decline from honouring debts that were dishonourably created • We are in a Great Depression • And bad economic thinking helped us get here… Minskian Prognosis • “To conclude, evidence-based macro research needs to replace faith-based models. • Theory needs to be applied in a less heavy handed and exclusionary manner, and data should be used to discriminate between theories.” (Muellbauer 2010, p. 27) • Amen! 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