Download Misunderstanding the Great Depression, making the next one worse

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.)
The crisis in economics & economic theory
Steve Keen
University of Western Sydney
Debunking Economics
www.debtdeflation.com/blogs
www.debunkingeconomics.com
13
Macroeconomics Before the Crisis: Triumphalism
• “Macroeconomics was born as a distinct field in the
1940's, as a part of the intellectual response to the
Great Depression.
• The term then referred to the body of knowledge and
expertise that we hoped would prevent the recurrence of
that economic disaster.
• My thesis in this lecture is that macroeconomics in this
original sense has succeeded:
• Its central problem of depression prevention has been
solved, for all practical purposes, and has in fact been
solved for many decades.”(Lucas 2003)
Macroeconomics Before the Crisis: Triumphalism
• “As it turned out, the low-inflation era of the past two
decades has seen not only significant improvements in
economic growth and productivity
• but also a marked reduction in economic volatility, both in
the United States and abroad, a phenomenon that has
been dubbed “the Great Moderation”.
• Recessions have become less frequent and milder, and
quarter-to-quarter volatility in output and employment
has declined significantly as well.
• The sources of the Great Moderation remain somewhat
controversial, but as I have argued elsewhere, there is
evidence for the view that improved control of inflation
has contributed in important measure to this welcome
change in the economy.” (Bernanke 2004)
Macroeconomics Before the Crisis: Triumphalism
• “there has been enormous progress and substantial
convergence…
• Facts have a way of eventually forcing irrelevant theory
out (one wishes it happened faster), and good theory also
has a way of eventually forcing bad theory out.
• The new tools developed by the New-Classicals came to
dominate.
• The facts emphasized by the New-Keynesians forced
imperfections back in the benchmark model. A largely
common vision has emerged…
• The state of macro is good…” (Blanchard 2008, 2009)
– Published as working paper 1 year after crisis began!
And then there was an exogenous shock…
• From “The Great Moderation”…
• To “The Great Contraction”
15
12.5
300
Unemployment
Inflation
Debt
10
250
Percent
7.5
5
200
2.5
0
 2.5
5
1980
• & “The Jobless Recovery”
0 150
Unemployment
Inflation
1985
1990
1995
2000
2005
www.debtdeflation.com/blogs
2010
100
2015
Macroeconomics After the Crisis: Evasion
• “These models were designed to describe aggregate
economic fluctuations during normal times when markets
can bring borrowers and lenders together in orderly
ways, not during financial crises and market breakdowns.”
(Sargent in Rolnick 2010)
• “Are … standard macroeconomic models … significantly
flawed? I think the answer is a qualified no…
• Most of the time, including during recessions, serious
financial instability is not an issue. The standard models
were designed for these non-crisis periods, and they have
proven quite useful in that context.” (Bernanke 2010)
• “It is important to start by stating the obvious, namely,
that the baby should not be thrown out with the
bathwater.” (Blanchard, Dell'Ariccia and Mauro 2010)
Macroeconomics After the Crisis: Evasion
• Permanently negative random exogenous shocks?…
• “the Great Recession began in late 2007 and early 2008
with a series of adverse preference and technology
shocks in roughly the same mix and of roughly the same
magnitude as those that hit the United States at the
onset of the previous two recessions…
• The string of adverse preference and technology shocks
continued, however, throughout 2008 and into 2009.
Moreover, these shocks grew larger in magnitude, adding
substantially not just to the length but also to the
severity of the great recession…” (Ireland 2011; see also
McKibbin and Stoeckel 2009)
Monetary Macroeconomic Realism
• Non-neoclassical economic realism:
– Endogenous crisis, not exogenous shock
– Growth of private debt caused “Great Moderation”
– Slowdown in growth of debt caused “Great Recession”
– Crisis will continue until deleveraging ends
• Neoclassical macro incapable of analysing these factors
• Key problem: blindsided by “exogenous money” fallacy…
The exogenous money fallacy
• Individuals/companies have two sources of spending:
– Income
– Increase in debt
• Neoclassical theory counts the first, ignores the second
– Debt transfers money from saver to borrower
– Only distribution of debt matters, not aggregate level
• Fisher's “Debt Deflation” theory ignored:
• “because of the counterargument that debtdeflation represented no more than a redistribution
from one group (debtors) to another (creditors).
• Absent implausibly large differences in marginal
spending propensities among the groups … pure
redistributions should have no significant macroeconomic effects…” (Bernanke 2000)
The exogenous money fallacy
• “Ignoring the foreign component, or looking at the world
as a whole, the overall level of debt makes no difference
to aggregate net worth—one person's liability is another
person's asset…
• In what follows, 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.”
(Krugman and Eggertsson 2010)
• “the debt we create is basically money we owe to
ourselves, and the burden it imposes does not involve a
real transfer of resources.
• That’s not to say that high debt can’t cause problems —
it certainly can. But these are problems of distribution
and incentives, not the burden of debt as is commonly
understood.” (Krugman 2011)
The exogenous money fallacy
• 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)
The endogenous money reality
• Logically & Empirically false
– Lending is not “transfer from saver to borrower”
– But money creation “out of nothing”
• “Even though the conventional answer to our question is not
obviously absurd, yet there is another method of obtaining
money for this purpose, which … does not presuppose the
existence of accumulated results of previous development…
• This method of obtaining money is the creation of
purchasing power by banks…
• It is always a question, not of transforming purchasing
power which already exists in someone's possession, but of
the creation of new purchasing power out of nothing…”
(Schumpeter, 1934)
• New debt net source of new investment & speculation
Actual “endogenous money” process
• Entrepreneur approaches bank for loan
• Bank grants loan &
creates deposit
simultaneously
• Alan Holmes, Senior
V-P, New York Fed
• “In the real world,
banks extend credit,
creating deposits in
the process, and look
for the reserves
later.” (1969)
• New loan puts additional spending power into circulation
• Aggregate demand exceeds demand from income alone
• Neoclassical macro wrong to ignore change in debt
“Endogenous money” changes everything
• Explains why dynamics of debt caused boom and bust
• Aggregate demand = Income + Change in Debt
– Income (mainly) finances consumption
– Change in debt (mainly) finances:
• Investment (new factories, innovation)
• Speculation (gambling on asset prices)
• Spent on
– New goods and services (the real economy)
– Financial claims on existing assets (the FIRE economy)
• Call this Net Asset Turnover:
– Price of assets (DJIA, Case-Shiller Index)
– Times quantity (Number of shares, houses)
– Annual turnover (% sold each year)
“Endogenous money” changes everything
• Aggregate accounting balance is not “Walras’ Law”
– “Aggregate Demand is Aggregate Supply”
• But “Walras-Schumpeter-Minsky Law”
– Income + Change in Debt = GDP + NAT
• Growth accounting balance is
– Change in Income;
– Plus Acceleration in Debt (Change in the change…)
– Equals
– Change in GDP plus
– Change in NAT
• Most of which is Change in Share & House Prices
“Endogenous money” changes everything
• Basic Logic:
2
d
Y  D  GDP  NAT
dt
NAT  PA  QA  TA
d
d
d
d
Y  2 D  GDP   PA  QA  TA 
dt
dt
dt
dt
“Endogenous money” changes everything
• Since accelerating debt causes asset price bubbles
– Bubbles must burst, because acceleration must end
– Just like a car can’t accelerate forever
• At maximum velocity, acceleration is zero
• Applying this to:
– Why the economy boomed from 1993-2007
– Why it crashed in 2007
– Why asset markets crashed as well
Boom & Bust: debt-charged growth & collapse
• Rising private debt boosted demand by $4 trillion at peak
• Falling debt cut demand by $2.8 trillion at trough
• From $18.3 to $11.5 trillion in just 2 years
US $ million p.a.
US Aggregate Demand
210
7
1.910
7
1.810
7
1.710
7
1.610
7
1.510
7
1.410
7
1.310
7
1.210
7
1.110
7
110
7
910
6
810
6
710
6
610
6
GDP
Plus change in Private Debt
Plus change in Government Debt
6
510
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
www.debtdeflation.com/blogs
Partial Government Rescue
• Government debt also creates money
– “Fiat” rather than Credit
• Government deficit partially offset private deleveraging
• From $18.7 to $13 trillion in 2 years
• Without government deficit, aggregate demand would be
– $1 trillion lower
– $300 billion less than GDP
• Politicians obsess on government debt, but…
Partial Government Rescue
• Rise in government debt 30% GDP
• Dwarfed by 47% fall in private debt
USA Debt to GDP Ratios
320
300
280
Private Debt
Public Debt
260
Percent of GDP
240
220
200
180
160
140
120
100
80
60
40
20
0
1920
1930
1940
1950
1960
1970
1980
1990
www.debtdeflation.com/blogs
2000
2010
2020
“The Great Recession”
• Fall in debt-financed demand drove unemployment
30
0
25
1
20
2
15
3
10
4
5
5
0
06
5
7
 10
8
 15
9
 20
 25
Debt Change
Unemployment
10
11
 30
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
www.debtdeflation.com/blogs
Unemployment (Inverted)
Debt Change p.a. Percent GDP
USA Change in Debt & Unemployment (Corr=-0.92)
“The Great Recession”
• Acceleration drives change in unemployment
15
 30
10
 20
5
 10
00
0
5
10
 10
20
 15
30
 20
40
 25
 30
1990
Debt Change
Unemployment
1992
1994
1996
50
1998
2000
2002
2004
2006
www.debtdeflation.com/blogs
2008
2010
2012
60
2014
Unemployment (Inverted)
Debt Acceleration p.a. % of GDP
Debt Acceleration & Unemployment Change (Corr=-0.74)
Stock market boom and bust
• Debt acceleration drives asset prices—up and down
15
45
10
30
5
15
0
0
5
 15
 10
 30
 15
 45
 20
 60
 25
Debt Acceleration
Annual change in DJIA
 75
 30
 90
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
www.debtdeflation.com/blogs
Annual change in CPI-deflated DJIA
Debt acceleration p.a. as % of GDP
Debt acceleration & Share Price Change (Corr=.24)
Housing bubble and bust
• More obvious for mortgage debt & house prices:
8
24
7
21
6
18
5
15
4
12
3
9
2
6
1
3
0
00
1
3
2
6
3
9
4
 12
5
 15
6
7
Mortgage Acceleration
Annual change in DJIA
 18
 21
8
 24
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
www.debtdeflation.com/blogs
Annual change in CPI-deflated Case-Shiller Index
Mortgage Debt acceleration p.a. as % of GDP
Debt acceleration & House Price Change (Corr=.79)
From facts to theory…
• Neoclassical failure to foresee crisis inevitable:
• “The preferred model has a single representative
consumer optimizing over infinite time with perfect
foresight or rational expectations, in an environment that
realizes the resulting plans more or less flawlessly through
perfectly competitive forward-looking markets for goods
and labor, and perfectly flexible prices and wages.
• How could anyone expect a sensible short-to-mediumrun macroeconomics to come out of that set-up?...
• I start from the presumption that we want
macroeconomics to account for the occasional aggregative
pathologies that beset modern capitalist economies…
• A model that rules out pathologies by definition is
unlikely to help.’” (Solow [Nobel Prize Winner!] in 2003)
Towards a monetary macroeconomics
• All methodological choices of neoclassical macro wrong:
– Disequilibrium & dynamics, not equilibrium & statics
– Social classes, not isolated individuals
– Money not barter
• Foundations: Marx, Schumpeter, Sraffa, Keynes, Fisher,
Kalecki, Minsky, Goodwin, Graziani
• Integrated in Minsky’s Financial Instability Hypothesis
• Focus: a model that can generate a Great Depression:
– Anything else isn’t a model of capitalism
The Financial Instability Hypothesis
• Hyman Minsky, 1982:
– “Can “It”—a Great Depression—happen again?
– And if “It” can happen, why didn’t “It” occur in the
years since World War II?
– These are questions that naturally follow from both
the historical record and the comparative success of
the past thirty-five years.
– 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 Financial Instability Hypothesis
•
•
•
•
•
•
•
•
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
Rising expectations leads to “The Euphoric Economy”…
The Financial Instability Hypothesis
• 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
– 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 Financial Instability Hypothesis
• Boom turns to bust
• Ponzi financiers first to 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
– Modeling Minsky…
Keen 1995 Model Foundations: Nonlinear dynamics
• Growth Cycle model (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 & Endogenous Money…
• Goodwin model:
1 d  1

  
 dt
v
1 d
 P    
 dt
• Debt essential element to introduce Minsky
• For debt, essential that capitalists wish to invest more
than they earn
– “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) d
dt
D  I 
Modelling Minsky & Endogenous Money…
• Results in 3-dimensional system:
d
   w      
Wages share of output
dt
 k  

d
Employment ratio
  
    
dt
 v

Debt to output ratio
 k  

d
d  k      d  
 
dt
 v

• Equilibrium of system locally stable but globally unstable
– “Inverse tangent” route to chaos
Sensitive dependence on initial conditions..
• Outcome depends on initial conditions:
– Close to equilibrium, convergence;
– Far from equilibrium, divergence into debt-induced
depression:
Basic Minsky Model: Divergence
Basic Minsky Model: Convergence
3
1.1
2.5
1
2
c ( t)
 c ( t)
0.9
 d( t)
 d( t)
0.8
1.5
1
0.7
Employment Rate
Employment Rate
0.5
Wages Share of Output
Wages Share of Output
0.6
0
20
40
60
80
100
0
0
20
40
60
t
t
Years
Years
80
100
Sensitive dependence on initial conditions..
• Debt dynamics behind very different outcomes:
Basic Minsky Model: Divergence
19.131
• 1995 model
included
Government as
“homeostatic
stabilizer”
• Current work—
converting to
strictly monetary
model
20
18
16
14
12
10
d.c ( t )
d.d( t )
8
6
4
2
0
2
Employment Rate
Wages Share of Output
 3.313
4
0
0
5
10
15
20
25
30
35
40
45
50
t
Years
55
60
65
70
75
80
85
90
95
100
T
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
• Graziani, Circuit Theory
– “any monetary payment must therefore be a triangular
transaction, involving at least three agents, the payer,
the payee, and the bank. Real money is therefore
credit money.” (Graziani, 1989, p. 3)
• Strictly monetary model developed from double-entry
bookkeeping
Explicitly Monetary Minsky Model
• Input financial relations in Table:
Assets
Liabilities
d
ReservesReserve
  A Loan
F
Firm Deposit Worker Deposit
dt
Lend
-A
A
d
Record
Loan
Loan
 A F G A
Interest
B
dt
Pay Interest
-B
d
Record
FirmDeposit  A -BB  C  D  E  F  G
dt
Wages
-C
C
Consumption
D+E
-D
d
WorkerDeposit
 C  D -F
Repay Loan
F
dt
Record
-F
d Money
NewBankEquity
G
BE
Record
G
dt
Equity
Bank Equity
B
-E
• System of dynamic equations derived automatically:
• Illustrating this in Mathcad…
Explicit Money Minsky Model
• Strictly monetary macro model developed
FL( t)
BV( t)
d
BV( t)

•dt Linked
via
 V  r( tto
)  production
 L  r( t ) 
– nonlinear investment,
BT( t) lending & debt repayment
d
BT( t) rL FL( t)  rD FD( t)  rD HD( t) 
B
functions
dt
BV( t)
FLpricing
( t)
–
Dynamic
equation
d
FL( t)

 P( t )  YR( t)  Inv   r( t) 
 L  r( t) 
 V  r( t) 
dt
– Generalized
(3 factor) “Phillips curve”
BV( t )
FL( t)
BT( t)
HD( t)
W ( t)  YR( t )
d
As
Phillips
but
FD( t) rD• FD
( t)  in
rL FLoriginal
( t) 

papers

 P(ignored
t)  YR( t)  Inv   rby
( t)  
 L  r( t) 
 V  r( t) 
B
W
a( t )
dt
neoclassicals
HD( t )
W ( t)  YR( t )
d
–
Complex
nonlinear
dynamic system results…
HD( t) rD HD( t) 

Financial Sector
dt
W
a( t )
Physical output, labour and price systems
Rate of change of capital stock
Level of output
d
KR( t )
dt
YR( t)
KR( t)  g ( t)
KR( t)
v
YR( t)
Full 11-equation ODE
system in Mathcad…
Explicitly Monetary Minsky Model
• New monetary macroeconomics can explain the crisis
Model output
Smoothed
US Data
15
Unemployment
Inflation
Debt to GDP
10
250
7.5
5
200
2.5
0 150
0
 2.5
5
0
1980
5 198510
15
20 1995
25
1990
30
2000 35
40
2005
www.debtdeflation.com/blogs
452010 50
100
55
2015
Debt to
to GDP
GDP
Debt
Inflation
Inflation &
& Unemployment
Unemployment
12.5
300
Multi-sectoral extension
• Extended to multiple sectors with
– Input-output relations in financial flows table
– Replicated “Goodwin” cycle model of production
• Currently implemented as multiple columns in 2D matrix
• Objective: represent as multidimensional “hypercube”
"Type"
0
1
1
1
1
1
1
1
1
1
1


"Name"
"BR"
"LK1" "LK2" "LC1" "LC2" "LA1" "LA2" "LE1" "LE2"
"DK1"
"DK2"

"Symbol"
BR( t)
FLK1( t) FLK2( t) FLC1( t) FLC2( t) FLA1( t) FLA2( t) FLE1( t) FLE2( t)
FDK1( t)
FDK2( t)


0
A1
A2
A3
A4
A5
A6
A7
A8
0
0
"Compound Interest"
0
0
0
0
0
0
0
0
0
B1
B2
 "Deposit Interest"

"Wages"
0
0
0
0
0
0
0
0
0
C1
C2

"Household
Interest"
0
0
0
0
0
0
0
0
0
0
0

 "Inv Dem K"
0
0
0
0
0
0
0
0
0
( E1  E2)  ( E3  E5  E7)
( E2  E1)  ( E4  E6  E8)
 "Inv Dem C"
0
0
0
0
0
0
0
0
0
0
0

0
0
0
0
0
0
0
0
0
0
0
 "Inv Dem A"
 "Inv Dem E"
0
0
0
0
0
0
0
0
0
0
0

"IntSec Dema K"
0
0
0
0
0
0
0
0
0
0
0

0
0
0
0
0
0
0
0
0
F1
F2
 "IntSec Dema C"
S1  
"IntSec Dem A"
0
0
0
0
0
0
0
0
0
G1
G2

"IntSec
Dem
E"
0
0
0
0
0
0
0
0
0

H1

H2


I9  I10
I9  I10
"Cons K"
0
0
0
0
0
0
0
0
0
( I1  I2)  ( I3  I5  I7) 
( I2  I1)  ( I4  I6  I8) 

2
2


"Cons C"
0
0
0
0
0
0
0
0
0
J1
J2
(


"Cons A"
0
0
0
0
0
0
0
0
0
K1
K2



"Cons E"
0
0
0
0
0
0
0
0
0
L1
L2


"Pay Int"
0
M1
M2
M3
M4
M5
M6
M7
M8
M1
M2

N1  N2  N3  N4  N5  N6  N7  N8
N1
N2
N3
N4
N5
N6
N7
N8
N1
N2
 "Repay Loans"
 "Recycle Res"
( O1  O2  O3  O4  O5  O6  O7  O8)
O1
O2
O3
O4
O5
O6
O7
O8
O1
O2

"New
Money"
0
P1
P2
P3
P4
P5
P6
P7
P8
P1
P2

Multi-sectoral extension
0
2
• Generates multi-sectoral limit cycle
20
40
60
80
t
Real Rate of Economic Growth
The Rate of Profit in a Monetary Multisectoral Model of Production
Percent p.a.
10
5
4
30
2
20
0
0 10
Percent of GDP
6
15
0
Capital Goods
Consumer Goods
Agriculture
Energy
5
0
20
40
60
80
Real GDP Growth
Debt to GDP ratio
100
Years
2
20
25
30
35
0
40
Change in Nominal Credit and Nominal GD
50
GDP
Debt
40
hange p.a.
Profit/Capita (Percent)
0
100 GDPNominalChange( t )30
Multi-sectoral extension
• Financial and income distribution dynamics:
Bank Assets & Liabilities
8
Income Distribution Limit Cycles
7
110
100
Loans
Deposits
Bank Reserves (RHS)
110
110
7
6
110
6
5
110
5
20
25
30
35
10000
Wages Share of Output
110
95
30
Wages
Profit
Interest
25
90
20
85
15
80
10
75
5
70
0
65
5
60
 10
55
94
96
98
100
102
Employment Rate
• Reforming economics
– Accessible monetary macroeconomics with Minsky
 15
104
Capitalist & Banker Shares
110
A new tool for dynamic macroeconomics
• Economists still practicing “comparative statics”
– “[We] were doing comparative statics… there are a
variety of problems in economics … where you want to
understand how some kind of shock will affect some
equilibrating variable…
– It’s often helpful to do the analysis in two stages.
First, you ask how some desired quantities would
change holding the equilibrating variable constant;
then you ask how that variable has to change to
restore equilibrium…” (Paul Krugman 2012)
• Useless technique for non-equilibrating real world
– Need to get new students to do dynamics instead
– But current tools unsuitable for economics…
Minsky: dynamic monetary modelling
• E.g., monetary flow model in Vissim:
• Same model in
bookkeeping format:
• Enter “Minsky”
• Melding systems
dynamics with
accounting
Minsky: dynamic monetary modelling
• Very early prototype (Tcl/Tk)
• But can do flowchart modelling…
• Ambition: economic
equivalent of
meteorological modelling…
• And accounting…
Minsky: dynamic monetary modelling
• Table becomes Hypercube
– Twist one way—multiple sectors
– Twist the other—multiple banks
• Multiple tables: trade & finance flows between national
economies
• There’s just one more thing…
Minsky: dynamic monetary modelling
• First INET Grant ($128K) runs out July 2012
• Were going to apply for ARC Linkage Grant $500K
– INET agreed to pay $40K p.a. to this
– Last year 2 rounds, 1st round funding by August
– Jan 10th 2012 ARC says 1 round only funding July 2013!
• We need $ to keep single programmer going till then
– INET will provide $40K if we get additional funding
• Coding assistance in GPL project
• Assistance in both respects needed
Deleveraging for … 2 decades?
• At current rate, get to 1970 debt level by 2025
USA Private Debt to GDP
320
300
280
260
240
Percent of GDP
220
200
180
160
140
120
100
80
Debt to GDP ratio
12.5% p.a. decline
9% p.a. decline
7.9% p.a.
60
40
20
0
1920
1930
1940
1950
1960
1970
1980
1990
www.debtdeflation.com/blogs
2000
2010
2020
2030
Volatility rules
• It hasn’t been—and won’t be—a smooth ride down…
4.510
7
4.2510
7
410
7
3.7510
7
3.510
7
3.2510
7
310
7
 1000000
2.7510
7
 2000000
2.510
7
2.2510
7
5000000
4000000
3000000
2000000
1000000
0
0
Level
Change
Acceleration
7
 3000000
 4000000
210
 5000000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
www.debtdeflation.com/blogs
$ million annualised
$ million
Private US Debt: Level, Change, Acceleration
Acceleration Dynamics
Peak Velocity
Peak Acceleration
• Why asset markets lead… • Why they’re weird…
Why Asset Markets Are Leading Indicators
• Velocity:
1
2
Assets Goods
Distance
addition to
Speed
0.875
1.5
Acceleration
aggregate
demand
0.75
1
• Acceleration
0.625
0.5
– Change in
aggregate
0.5 0
0.5
demand
0.375
 0.5
– Change in
asset
0.25
1
prices
 1.5
0.125
0
2
 1.5
1
 0.5
0
0.5
1
1.5
0 2
2
What about Australia?
• Same basic story: debt-driven boom/bust cycle
Debt to GDP
300
270
Australia
USA
• Higher level than ever before
• But lower than USA
240
210
180
150
120
90
60
30
0
1860
1880
1900
1920
1940
1960
1980
2000
2020
Australia: Crisis? What Crisis?
• We avoided crisis by delaying deleveraging:
Debt to GDP
Australia
155
Australia
USA
FHVB
End
320
310
150
300
145
290
140
280
135
270
130
260
125
250
120
240
115
230
110
220
105
210
100
200
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
www.debtdeflation.com/blogs
USA
160
Australia: Crisis? What Crisis?
• We avoided crisis by delaying deleveraging:
Debt-financed Aggregate Demand
30
AustraliaAustralia
USA USA
plus Government
plus Government
25
20
Percent of GDP
15
10
5
0
0
5
• Plus Government
 15
stimulus…
 10
 20
2008
2008.5
2009
2009.5
2010
2010.5
2011
www.debtdeflation.com/blogs
2011.5
2012
Conclusion
• We are in a different Great Depression
– Higher level of private debt, larger deleveraging
– Different debt distribution—less deflation
US Private Debt to GDP
Percent of GDP
175
“Turning Japanese” rather than 1930 rerun
400
350
150
300
125
250
100
200
75
150
Business
Household
Finance
Total
50
25
0
1920
1930
1940
1950
1960
1970
1980
1990
www.debtdeflation.com/blogs
2000
2010
100
50
0
2020
Total Private Debt
200
Conclusion
• Larger Government significant reason for shallower crisis
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
Years since 1928 & 2008 respectively
11
12
13
Conclusion
• Policy
– Reduce private debt to
reduce scale of crisis
• Theory
– Consign neoclassical
economics to dustbin of
history