Are We "It" Yet

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Farmer Brown's picture
Farmer Brown
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Are We "It" Yet

In case anyone has missed this, this is Steve Keen's latest paper, which he recently presented in NYC.  I'm only part of the way through it, but IMO this is an absolute must-read.

Are We "It" Yet :   http://www.debtdeflation.com/blogs/wp-content/uploads/papers/KeenAreWeIt...

Besides very stimulating discussions on monetary theory, which may or may not be the favorite topic de jour for some, there are some jaw-dropping charts showing the near perfect correlation between debt and unemployment, debt/gdp, and the impossibility of our current circumstance due to there being nowhere else to transfer our credit bubble.

And, just in case there is anyone who has any doubts that we are just in the beginning phases of GDII, this paper will remove them.   So, if you want to continue living in lala land, don't click on the link.  I doubt that applies to anyone aroud here, though.

 

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rickets
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Re: Are We "It" Yet

Love this paper...thanks Farmer Brown.  Velocity of money as a whole - not just he money out there as a whole.  What an important distinction.

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darbikrash
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Re: Are We "It" Yet

It's great stuff. He also has a video of the same topic which he presented in NY last week.

Video of Talk

What I like about his site is the transparency and his willingess to describe his methods and assumptions. Also, for the armchair economist, you can download his systems modeling software for free and put in your own state variables. I downloaded it and have been playing with it for a week or so. The ability to graphically visualize the flows in a dynamic system is truly impressive.

He calls himself a research economist, and is not cliaming to have all the answers, but seems truly interested in advancing the knowledge base for modern economic theory.

Free download

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Re: Are We "It" Yet

I don't know about others but understanding the contents of this paper is way over my head.  If there is a summary -- I did not see one in the paper  -- of the conclusions of this paper somewhere for us simple minded folks I would be interested in reading it. (With or without this paper I have no doubt we are in the Greater Depression.)

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etsan
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Re: Are We "It" Yet
hucklejohn wrote:

I don't know about others but understanding the contents of this paper is way over my head.  If there is a summary -- I did not see one in the paper  -- of the conclusions of this paper somewhere for us simple minded folks I would be interested in reading it. (With or without this paper I have no doubt we are in the Greater Depression.)

Same for me. Its hard for me to understand a lot of the stuff there because i'm so new to all of this.

rickets's picture
rickets
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Re: Are We "It" Yet

Totally oversimplified: - I think he is discussing the velocity of money in sum (so how much money is moving in total each X periods of time).  That velocity is more important than the amount of money in the system.  In other words, if there is a huge spike up in money like the last couple years - it means nothing if its parked at the fed and not moving.  On the flip side, if there is not much money but is rapidly moving thats the same as a lot of money not moving fast.  In sum - printing money does not mean more total money moving.

Then, he discusses how the level of total credit relative to GDP is a huge factor.  The higher the level of credit or debt to GDP the less velocity of each additional dollar printed. 

Thats my overly simplified take on it anyway.  Please correct me if anyone understood this differently.

 

 

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JAG
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Re: Are We "It" Yet

Dr. Keen is a genius.

Great dig FB....Jeff

 

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ashvinp
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Re: Are We "It" Yet

Thanks for the link, I always enjoy reading Keen's analysis and missed this one.

After reading this, I think I have a better understanding of what you guys were talking about in terms of a debt money system being sustainable if the interest payments flow back through the system in their entirety. Keen seems to believe the system becomes unsustainable once a Ponzi finance dynamic is introduced, so that there is demand for financing both purchases of commodities/assets and also speculation on asset prices. I'm still not sure whether he believes ponzi finance is inherent in the design of a finance-based economy, but that was my impression of Minsky's FIH.

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JAG
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Re: Are We "It" Yet

I got a chance to reread this paper, and a few points really stood out to me.

I thought it was interesting that Keen attributed the lack of any sustained deflationary forces in the economy to Bernanke's QE. Its the first time that anything that I've read (from a credible source) recognized Bernanke's efforts as actually being effective, even if its only temporary.

Here some credit may be due to “Helicopter Ben”.6 Though Bernanke and Greenspan clearly played a role in encouraging private debt to reach the heights it did, it is certainly conceivable that his enormous injection of base money into the system in late 2008 averted a nascent deflation....

 

Figure 7

 

....Whether this success can continue is now a moot point: the most recent inflation data suggests that the success of “the logic of the printing press” may be short-lived. The stubborn failure of the “V-shaped recovery” to display itself (insert Lazear 2009 reference) also reiterates the message of Figure 7: there has not been a sustained recovery in economic growth and unemployment since 1970 without an increase in private debt relative to GDP. For that unlikely revival to occur today, the economy would need to take a productive turn for the better at a time 

that its debt burden is the greatest it has ever been.

 

Keen's accounting for Ponzi finance in his economic model is quite fascinating. 

What was missing in my original Minsky model was Ponzi finance. Put simply, this is debt financed speculation on asset prices, which we can now see as the driving force behind the accumulation of debt in the last two decades, and the consequent inflation of asset prices. In my original model, all debt was related to the construction of new capital equipment, which is inherently a non-Ponzi behavior. I introduced a simulacrum of Ponzi finance ((Keen 2009)), with additional debt being taken on when the rate of growth exceeds a threshold level, without adding to the capital stock (the 4th equation in (0.1)).10 This simulates speculation on asset prices, though without explicitly modeling asset prices themselves. 

 

That generated a model in which stability was destabilizing, and in which the level of debt that triggered a breakdown was rather closer to the current empirical record.

I know of no other economic models that factor in this kind of speculative behavior, but my education is limited here. Indeed, Keen's model seems to be the most realistic that I have seen. Whether or not that means it is a viable predictive tool remains to be seen, but personally I think its very prudent to give some serious attention to Keen's  "Scary Minsky's Model". 

And of course, Keen blew the old "there is not enough money to pay the interest on the debt"  argument out of the water ( A hat tip to diarmidw for bringing this to our attention in another thread) with his pure credit-money model:

The yearly wages of workers and gross interest earnings bankers can be calculated from the simulation, and they in part explain why, in contrast to the conventional belief amongst Circuitist writers, capitalists can borrow money, pay interest, and still make a profit. Though only $100 million worth of notes were created, the circulation of those notes generates workers’ wages of $151 million per annum (given the parameter values used in this simulation), 1.5 times the size of the aggregate value of notes in circulation.

 

And lastly, Keen's observation that QE should be directed at households (the debtors) rather than the banks, because the money multiplier effect of fractional reserve banking is severely muted by a debt saturated private sector, is interesting. I wonder if the Fed will follow in the Australian Central Bank's footsteps and bailout the consumer with QE 2? If so, I can only imagine the response from the gold bugs, lol.

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ashvinp
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Re: Are We "It" Yet
JAG wrote:

And lastly, Keen's observation that QE should be directed at households (the debtors) rather than the banks, because the money multiplier effect of fractional reserve banking is severely muted by a debt saturated private sector, is interesting. I wonder if the Fed will follow in the Australian Central Bank's footsteps and bailout the consumer with QE 2? If so, I can only imagine the response from the gold bugs, lol.

It seems to me that any QE directed at households would have to be in the form of debt-free monetary infusions in order to be productive for the economy. Any additional debt taken on by consumers, even debt subsidized by the government, would probably be unproductive in an economy saturated with debt. So it wouldn't really be QE (with an "understanding" assets will be repurchased eventually), but the government literally cutting checks to consumers. Of course this would raise serious problems in terms of inflation, moral hazard, energy use and the environment, so I wouldn't recommend it and would prefer a deleveraging process.

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ashvinp
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Re: Are We "It" Yet

Here is an audio presentation that Dr. Keen gave about this most recent paper, explaining his excellent modelling of finance-based economies - http://www.debtdeflation.com/blogs/2010/07/14/new-york-debtwatch-talk-modelling-debt-deflation/

What was most interesting about this particular presentation was the Q&A session after the talk, when Dr. Keen briefly comments on 3 important issues that I had never really heard him incorporate into any of his analysis (always hoping he would) - 1) Public debt saturation (a big difference between now and the 1930s), 2) Peak Oil, and 3) Climate Change. I am greatly pleased to know that Keen is not only an economic genius whose done excellent work on debt deflation dynamics, but he also recognizes and thinks about the impact of what he calls the "ecological" side of the equation. Ultimately, he admits that he believes we need some combination of capitalism/socialism to deal with the economic/ecological issues, which fits my personal views pretty well. I'm also really glad he recognized the sense of urgency we all should have, as he compared our situation to a Star Trek movie (or show?) in which we have to solve several different convering crises in the last minute. On top of that, he admitted that it was unlikely we will actually be successful in "solving" these crises and will have to learn through painful experience and eventually come out on the other side of a new type of world.

Simply remarkable.

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