To carry out the original scenario, the unsold orange and apple can be planted in the ground to produce more apples and oranges next season. The earth is analogous to a savings account, and the next year’s extra fruit is the interest that it pays.
It sounds like what you’re saying is it doesn’t matter how much money people set aside. What matters is whether they make things that last a long time, or are productive or useful in the future.
Building a highway, for example, would be an example of saving.
Setting money aside, instead of building the highway, would not be an example of saving.
Hellestal:
Ok, well let me go back to the hypothetical for a minute. Let’s leave money out of it, and let me see if I can recapitulate what you’re saying.
So Abel and Bart are consuming all they produce, but Abel wants to build a fruit-picker. So he goes to Bart and says, “Hey, I’m going to make this machine, but I want to keep eating while I’m doing it. So I want you to give me half of what you produce. We’ll each of us consume half of what we were getting before, but at the end of it we’ll have this marvelous machine.”
So it’s saving, in the sense of consuming less, that frees up the labor necessary to produce a new machine.
I get that.
I’d make an observation about the scenario, though, which is that it’s really the idea for the machine that drives progress here. Without that, eating less would have accomplished nothing.
Also, and maybe more importantly, the eating less was necessary only because there was no spare labor that could be brought to bear on creating the machine.
If Abel and Bart were able to produce a day’s food in less than a day’s work, there’d be no reason for anyone to eat any less.
To put it differently, saving creates unemployment, under this scenario, (Abel loses his job) which in turn frees up labor to work on the machine (Abel builds the fruit-picker).
If the situation were different - if the supply of labor was more than the demand (meaning there was already unemployment, before people started saving) an increase in the savings rate would only make the situation worse (create more unemployment.)
I thought we established that they’re not the same thing? New goods and services are produced without any spending going on: people make their own food, raise their own children, fix and maintain their own houses, etc. lots of new goods and services; no spending.
Yes. Saving creates unemployment. The newly unemployed are free to work on investment projects. But unemployment doesn’t create investment projects, any more than fuel creates fire. And if there’s already a supply of idle capacity, adding more won’t help things. In fact, in the real world unemployment sours demand, which discourages investment.
Labor is, I think, the most important real resource. It’s strange to talk about saving, in order to free up labor for investment, when we already have more unemployment than we want. I’d argue we don’t need to worry about running out of labor for investment until unemployment is substantially less than it is.
I didnt bring up MMT here. Do you remember me from that thread however many months ago? Or was it something I said?
The way I’d say it is there’s two kinds of money: commercial bank money and central bank money. Commercial bank money is liabilities on commercial banks. Central bank money is federal reserves and currency. From the point of view of ordinary people they’re mostly indistinguishable. But from a banker’s pov there’s a difference: banks use Fed money (central bank money) when they make transactions with each other. If they run out, they’re broke. As far as ABC bank is concerned, bank deposits are just liabilities. They can’t use them to pay their bills. They need Fed money for that.
Attracting deposits is just a way of obtaining Fed money. If somebody moves $100 from ABC bank to XYZ bank, the Fed credits XYZ’s reserve account and debits ABC’s by the same amount. If ABC doesn’t have $100 in its reserve account, then it’s (theoretically) in trouble. (In practice it borrows the money it needs from another bank. But there’s still a cost involved.)
From the pov of individual banks, they’re competing for Fed money. But attracting deposits only transfers Fed money from one bank’s reserve account to another. It doesn’t create more of it. For the system as a whole, the amount available is whatever the Fed provides.
There is no loanable funds market, and how much people save has nothing to do with how much banks can lend. Lending is constrained by assessments of credit-worthiness, people’s willingness to borrow, and (to a lesser extent) government regulations.
I don’t think they’re little shortcuts. The cumulative effect leads to fundamental misunderstandings and to counter-productive policy choices.
He didn’t lose his job. He changed jobs. This was a shift in employment, but he never went unemployed.
The point you’re striking at is true, though. In the real world, this is a trickier process, so an attempt to save more doesn’t necessarily succeed so quickly or painlessly. A sudden attempt to save more can cost us jobs, without those jobs being replaced immediately. Just because we attempt to save does not mean that we successfully save as a society. That is the paradox of thrift, and it’s one of the driving forces of recession.
All of that is spending. You have made a list of people spending up and down all over the place, and then you somehow switch gears and seem to think that none of it is spending.
I can be alone on an island by myself, and I will still be spending. When I go picking bananas, I am spending. When I go fishing in the ocean, I am spending. When I repair my hut, I am spending. Income = expenditure, by definition. We already have that established. You still seem to be caught up on money, as if handing over green pieces of paper is the only way anyone can spend.
All costs are opportunity costs. That is to say, the term “opportunity cost” is itself a redundancy because there no other kinds of costs. When I act as Robinson Crusoe and go fishing on my solitary isle, I am paying a price. The price that we all pay, every time, is what we give up to do what we choose to do. I can’t pick bananas when I’m fishing. I can’t repair my hut when I’m fishing. This is the stuff I have to give up in order to fish, and the most valuable of those forsaken choices is the very definition of cost. It does not require trade. It has nothing to do with handing over pieces of paper to other people.
We’ve said this before, but we don’t really care about money. We care about resources. I mean, okay, there are some rich folks who spend their life playing Bankster: The Game, and for some reason, they think the most fun they can have is to run up the score for its own sake. But that’s the exception, not the rule. Generally, we only care about money for what it can give us. It simplifies the description but it is not even remotely necessarily. There can easily be income and expenditure in a world where no dollars/euros/golden pirate ducats have ever existed.
This might sound completely pendantic to the point of absurdity, and if so, go ahead and ignore me here and use whatever definition is most useful. But this isn’t true by the previous identities I’ve been using.
Saving is defined in economics as the act of building investment goods. Saving cannot possibly create unemployment. People building factories happen to be employed in the job of building factories. Attempting to save can cause unemployment. There will be no unemployment if the attempt is successful, just a change in the composition of employment. People will change jobs, not lose jobs.
I remember.
The barter thing seems entirely innocuous to me.
The myth of the money multiplier process is more serious, but the one thing it’s got going for it is a clear indication of the limits of the system. I have yet to encounter a theory of endogenous money where the writers have any clue about what those limits actually are in reality, and how they are enforced.
The most sophisticated heterodox thinker I’ve ever encountered, by far, is Steve Keen and even he doesn’t yet have central banking in his model. (And in my own opinion, he’s a terrible communicator. I’d pay big bucks for someone to translate his idiosyncratic rants into plain econo-speak so that I didn’t have to listen to him.)
Let me see if I understand what you are saying. The conventional wisdom and the reality agree that their is a positive relationship between the number of deposits (and assets in the form of financial instruments, which are also savings) and the amount of investment spending in the economy. The conventional wisdom and the reality agree that there are determinants that would tend to shift that relationship. However, whereas the model shows a nice neat line, in reality it’s some Lovecraftian 7-dimentional vibrating string of a monstrosity that we reduce to a line? Because I can live with that simplification. A third of my kids are in calculus and a third I have to teach how to take 10% of a number. I can hint to the math kids that there’s more going on without confusing the others too much. I am ok with simplifying if I tell them what I am doing. I don’t like to lie.
The longer I teach economics, the bigger a role the business cycle comes to play in my teaching. It’s all about production, production, production, and actual vs potential. I also feel very strongly that we should call the AS/AD model the “output model” because that’s what matters there. All the other models are named after the quantity on their X-axis and calling it AS/AD (as the textbooks and AP both do) really blurs why it matters.
This I shall have to think about. I do tell the kids that I am teaching them economics, not the actual economy, but I’d like to be able to at least tell them that alternate models exist.
This is an easy fix. Instead of saying “Prehistoric people did this but it didn’t work for more advanced economies” I can say “Anyone over 5 quickly figures out that the barter system sucks. Why? (predicable discussion) Ok, well, this is what prehistoric people did. But that didn’t work as economies started spreading over larger areas, why? (predictable discussion) Ok, so we need something else . . .”
It’s a balancing game, isn’t it? I try so hard to never lie, but if you don’t simplify somewhat, they won’t see the big picture, and it’s the big picture that makes the details interesting. It’d be like starting biology with the Krebs cycle.
One more question. Mankiw defines fiat money as having value because the government says so. But that’s not why, right? Zimbabwe said their currency had value, but that didn’t give it value. It’s not money if no one will take it. Fair tickets (the ones you use to buy food and rides and can’t be sold back to the fair) aren’t given value by the government, but they have value and are money; people certainly exchange them and buy them and sell them. We may trust fiat money because the government trusts it, but it’s the social agreement, not the government itself, that makes it money, right?
I don’t have Mankiw in front of me, but I would shorten it to this:
Money has Acceptance if [people are in fact willing to exchange services of products for it of their own free choice.
Money has Validity if the Government accepts it and requires its acceptance by its citizens or subjects.
Money has Value if the nature of the economy supports a useful exchange of goods and services - i.e., enough are produced for the money to have some use.
Its possible for money to have some, all or none of these. And all of this is a dramatic shortening of concepts I don’t at all claim to be expert on.
I like your Lovecraftian description. But let’s see if we can get a slightly better handle on it than that.
Here’s the thing we have to keep in our heads about conventional economics models: the methodology is comparative statics. That is to say: we start in one equilibrium. Equilibrium is static, no change. The system is fine where it is, it’s not jiggling about in a crazy manner. But then? Something outside the system happens, an “exogenous” change. If you watch Doctor Who, it’s a little like those Weeping Angels. They’re just frozen statues when you’re looking at them, but if you glance away and then look back, they’re in a new position. What new position? A new equilibrium, of course. Frozen again. They’re stuck in a new comfortable position that won’t change until the next mysterious exogenous movement.
We have our static equilibrium before the change, and our static equilibrium after the change, and the model shifts from one to the other whenever we blink. How did it traverse the distance? We don’t bother with that. Sure, we explain the reasoning behind the shift. It’s not totally random, there is a causal logic here. But as far as the model is concerned, there are two pictures: BEFORE and AFTER. We don’t sully our hands with the nitty gritty process of getting from one to the other.
For a lot of markets, this doesn’t much matter. We’re not really missing any significant action between the BEFORE and AFTER pictures if a chihuahua commercial makes people want to eat more fast food tacos. But for “loanable funds”? Woof. In order to push out that savings curve and decrease real interest rates, a helluva lot of other stuff has to happen. On the blackboard, it’s just drawing one more graph (or a new line on the same graph). But in reality, all sorts of crazy shit is going on when we shift that curve to the right.
Hell, we’ve made it this far, might as well get into an example.
Let’s introduce Hypothetical Economy Model 2.3. Total income here is 100. 80% of that is consumption, and 20% of that is saving/investment. The “loanable funds” is in equilibrium, which means expected saving equals expected investment. But hey, suddenly all of us want to save more. Instead of spending 80% of our paychecks on consumption, suddenly we spend 79% of our paychecks on consumption. And to introduce the point LinusK has rightly been emphasizing, this attempt to save means that total consumption expenditure is now 79 instead of 80. And income = expenditure. If total consumption expenditure is down a point, then so is total income. Total income is now 99.
Somebody out there took a pay cut.
What about bank balances? Remember, consumption purchases don’t create new money. If I have a few dollars in my bank account, and I swipe my debit card to get a CD at my local indie music shop, that has not really increased the pool of “funds” available for loans. Me and Indie Store Pete use the same bank (or at the very least, the same banking system). All that happens is that a number that used to be marked in my account is now marked in another guy’s account. So if you’re looking at that “saving” curve on the loanable funds graph, it can’t logically represent a pool of funds. If we all decide to save more money, that does not increase the amount of money in the system. In this sense, an attempt to save merely slows the circulation of money. That is all that happens.
Pushing out that S in the “loanable funds” market is actually just saying, hey, instead of using all our resources for consumption, we have a guy who’s not satisfied with his current job. Management is cutting corners. Is there something else available?
Yes. Yes, there is.
Pushing out the curve is actually about people changing jobs. That’s one hellaciously long blink between the BEFORE and AFTER pictures. It simply can’t have anything to do with a pool of personal savings in reality because the pool hasn’t changed.
Sure, individual banks are in intense competition for depositors. However, the banking system as a whole doesn’t give a good god crap about finding depositors. People with money have to stick it somewhere. The difference between the successful bank and the not-so-successful bank is that the successful bank is the one that actually gets to make the loan that pushes total investment in the economy up to 21, so that total income stays at 100: 79 of consumption and 21 of investment. In order for the saving curve to shift outward, somebody has to shift jobs or new people have to enter the labor force. What we want is for those successful banks – “successful” in the sense that they won the deposit struggle to attract customers – to be very, very good at choosing their investment opportunities. Ah, that is not always the case…
Okay, why do we call it “loanable funds”? An illusion. An overpoweringly convincing illusion based on confusing micro and macro. The most bizarre part of this is that from an individual bank’s perspective, the loanable funds model seems entirely correct. In the past, some bankers would apparently deny that they have the power to create new money out of nothing. Why? Because for them, “money” was central bank money, whereas deposits are deposits. If they have an influx of depositors, they will be able to make more loans, so they think, “Oh! People are saving more!” Not quite. It’s just that deposits are being transferred within the system. But if we’re looking at just one bank, it seems to make at least some sense.
Here’s where the central bank makes things interesting. They can conjure up new base money for the system, which gives the impression to all banks that more “savings” is available to lend. That means lower interest rates. But again, we have to think about resources, not just money. What if the economy is at full capacity and people aren’t willing to cut their consumption? Then we end up with inflation and asset bubbles instead of genuine worthwhile investment.
The loanable funds model actually does work as a super-micro model for an individual bank. It’s based on personal experience, which is why it’s so sneakily seductive. If banks suddenly have new funds available, “savings”, then those banks will be more willing to make loans even at lower interest rates. The problem with that idea is that it doesn’t scale. It doesn’t work for the banking system as a whole, at least not without dropping the notion that we’re talking about loanable funds and once again embracing the more sophisticated notion of saving not as a pool of funds, but rather as the creation of new investment goods. But then at the macro level, it’s a misnomer. It shouldn’t be called “loanable funds”. It should be called, well, “we’re not devoting so many resources to consumption so we have more people available to create investment goods”. Or something like that but snazzier. And really, the huge time gap between BEFORE and AFTER at the macro level possibly means such a graph shouldn’t be used at all.
But for an individual bank? If their own micro access to funds becomes easier, then they will loan more at lower interest rates. That is exactly what the graph shows. It’s amazingly frustrating how something so blindingly obvious on the level of an individual institution becomes completely nonsensical when you look at the system as a whole.
That’s why I always, always, always come back to the national income accounting identities. I don’t treat S = I as an equilibrium condition, I use the other approach and treat them as equivalent by definition. Real saving means building factories and things like that. Everything else is pushing paper around. If I didn’t have that notion to clear my head, I wouldn’t be able to make any headway at all when thinking about these processes.
That is extremely well said. One of my favorite econ bloggers made exactly that point just a few days ago. He proposes a solution worthy of some consideration.
Yep. It’s a balancing game, and I personally don’t know where the balance should really lie.
I give this loads and loads of thought, but I just don’t know.
Right.
The government accepting the cash for taxation gives it the oomph it needs to become somehow genuine in our minds. After that has happened, though, it tends to stay genuine. There’s psychological inertia. Czarist banknotes didn’t have a government supporting their value by fiat after the revolution, but they were still accepted as money afterward for a decent while. Government decrees help get the process started, but once it’s started it can kinda take a life of its own.
I agree that it’s absolutely important to know whether you’re talking about money or real things. Confusing them leads to problems.
For example, social security. People say we have to save more for the retirement of baby boomers. If they were talking about saving in your sense of the word, it’d make sense. But usually they’re talking about setting aside money, which (I think you’d agree) is senseless.
But I’d argue that you really have to care about money. For example, the most recent recession, some say, was caused by people trying to save money. If they were saving-investing, in your sense of the word, that’d be fine. But they weren’t. They were attempting to accumulate money balances/pay down debt. But saving money doesn’t create more of it, so no amount of money-saving increases money-savings in the aggregate. And paying down debt reduces the money supply.
But, I mean, yeah, ultimately it’s resources that are important. It’s just that money influences people’s behavior, so you have to care about that too.
When you talk about income in terms of gardening or housework, you’re using the term in a way that’s different from how people usually use the word “income”. Ordinarily income is used to mean a flow of money, not the benefits of a clean house or fresh vegetables.
And, to my understanding, GDP does not include those kinds of activities.
Well, we agree I guess then. Saving/building investment goods means using labor. Saving/accumulating money balances does not. Ordinarily, though, when people talk about saving they mean not spending/accumulating money.
Thanks for typing all that out. I am not sure I can actually use in of it, though, except to make sure they know there is more going on out there than dreamed of in my philosophy. It’s roughly analogous to the problem with explaining why AD slopes downward: because it looks like a market demand curve, they figure it’s the same thing, basically, and unless they also take micro, I really can’t disabuse them of the notion that they are the same, really. Macro simply doesn’t allow the time to explain the whole picture on the market model, and without that, they can’t believe that AD isn’t just “big D”.
I can at least allude to this stuff, though, and the future economics majors will remember enough that when they step into Intromediate Macro, they will hopefully at least have some idea of what questions to ask.
This I can, and will, explain. They may not all entirely get it, but I think it will really help in moving them past their current identity, which is S = wad of bills in coffee can. Thanks.
Very interesting. I guess I do the exact opposite: he says “teach them all in Greek, no Latin” and I think I do all Latin, no Greek. I start with AS/AD, even before financial markets, so that I can forever link everything back to (C+I+G+NE), and discuss everything in terms of long-run equilibrium. Most textbooks seem to have the idea that you explain all the parts, and then put them together in AS/AD: Bade/Parkin puts AS/AD after banking and the monetary system: Mankiw puts it after fiscal and monetary policy. Krugman puts it a little earlier, but still after the financial system. I like to start with AS/AD to provide context for everything else. I do velocity very, embarrassingly briefly, partly because the test doesn’t demand they understand more than what the identity is, and partly because I am shaky on it myself. The blog post you gave actually helped a lot.
I think it’s more accurate to say that the official accounting of GDP doesn’t include those activities. If we could find a good way to count them (like the way we count imputed rent), we would. Since we can’t, we assume they remain relatively static and so do not distort our relative comparisons too much.
If I am measuring the distance from Dallas to San Fransisco on a map, I am not going to “count” the changes in elevation because I really can’t: all I have is a map and a ruler. But those changes still exist.
Ok, so take this article, for example: http://www.kc.frb.org/publicat/econrev/PDF/2Q06garn.pdf
Should the Decline in the Personal Savings Rate Be a Cause For Concern?
It’s clear from the context he’s not talking about spending on real investments, but about balances in bank accounts.
So what we’re talking about here is people depositing paychecks in bank accounts, and banks using those funds to build factories.
Which is complete nonsense, right?
I mean, we’ve established that a paycheck (or any check of any kind) merely changes the owner of the money, not the amount of money in banks. And whether the owner chooses to save (not spend) his paycheck or buy Beanie Babies with it, again, makes no difference to banks. If I buy Beanie Babies, guess what? The money’s not gone, it’s merely changed owners.
And - if I can take it a step further- deposits are liabilities on banks, not assets. And they’re liabilities that are created when banks make loans. Meaning IOW, that the amount on deposit is determined by the amount banks lend, not the other way around. You increase the total amount of bank liabilities (ie, money) by lending, not by choosing not to spend. Choosing not to spend affects the velocity of money, not how much there is.
So, ok, fine, he doesn’t understand the nature of money, so what? Well, except that the article is a publication by the Federal Reserve, and the author is a freaking vice-president at the Fed. And it’s not like this is the only article like this. Almost every article about the savings rate is an article about how we need to save more by spending less. As if not spending increases the supply of money, and money (rather than work) creates goods and services and investments - both of which are false.
OK, fine, so let me try to reconcile this. Maybe personal savings is a different type of animal from Hellestal-savings. Hellestal says savings is not “not spending”, but a special kind of spending - spending on goods that last a long time and/or save labor in the future. That’s fine, and makes sense. We know that spending=income, ine the economy as a whole, so all income has to be spent on something or other. There can be no remainder. But it makes a difference what we spend it on. If we spend it all on popcorn and candy bars we won’t be so well off as if we spend it on machines that make candy bars for us.
But personal savings is clearly meant to mean people spending less than their income. So maybe personal savings is a subset. And here we go: national savings is made up of personal savings, business savings, and government savings.
So people can save (spend less than their income) to the extent that either the goverment borrows, or businesses borrow, or both.
So what is meant by “personal savings” is people acquiring assets from either businesses or government, or both.
Which is also fine. If people want to acquire financial assets (which they do) those assets have to come from somewhere.
But the talk of reckless spending misses the point. In the first place, the rate of spending - the velocity of money - has nothing to do with how much or whether banks can lend to build factories. In the second place, the direction of causation is wrong. It’s not consumers’ decision to spend or not spend that determines personal,savings, but whether government and businesses choose to borrow. If they do, those liabilities become assets for the non-government, not-business sector.
Anyway, sorry for the stream of consciousness. Hopefully, if there’s a mistake, someone can point it out.
Is the money multiplier a myth because required reserves were slashed during the early 1990s? (And was this shift in regulation world wide, or only in the US? I assume it at least spans the developed world, since French banks have the same access to regulation-circumventing cash management software as the US does.)
Or am I barking up the wrong tree? Are you saying the money multipliers didn’t matter during the 1970s either?
What’s a good paper or chapter laying out endogenous money theory?
ETA: The OP might want to take a look at the Keynesian cross.
Well, I didn’t say the “money multiplier” is a myth.
Again, I’m not trying to be an pedantic asshole here. Most of what I’ve done in this thread so far has been mere definitions. There hasn’t been much theory, mostly just definitions. And I’ve done this because it is literally impossible to understand the significance of the theory if we don’t have a strong handle on the definitions.
For example, the M1 money multiplier is the ratio of the M1 money supply to the monetary base. The amount of the M1 money supply has a clear definition and can be measured. The amount of the monetary base also has a clear definition and can be measured. Therefore, the multiplier ratio can be easily calculated. I was very very careful about my phrasing when I said: “The conventional story of the money multiplier is a myth.” It is the story of money creation that is the myth.
The problem with the conventional story is not that reserve requirements can be changed, but that reserve requirements are not strictly enforced. The conventional story starts with an infusion of cash from on high. Reality is the other way around.
Imagine a bank hard up against its required reserves. It has 100 dollars of deposit liabilities, and a reserve requirement of 10%. True to the requirement, for the moment, it has 10 dollars of cash. “O noez”, we might think, “This bank can’t lend any more money!” Except that it can and it will. If this bank sees an investment opportunity, you damn well better believe that it will extend a loan, to hell with the reserve requirement. Why? The Fed only checks reserves every two weeks (pretty sure it’s every two weeks). The bank can extend the loan today, and then find the reserves tomorrow.
The loan is 5 bucks, and that check is deposited at another bank. The bank now has 100 dollars of deposit liabilities, and 5 dollars of cash. “Breakin the law, breakin the law!” Except the bank just asks another bank before judgment day for a interbank loan, “federal funds” in the US. They ask for, and receive, a 5 dollar loan from another bank.
The bank has 100 dollars of deposit liabilities, and 10 dollars of cash on hand. Legal requirement satisfied. The bank also has 5 dollars of interbank liabilities, but federal funds have no reserve requirement. If we want to oversimplify the story, we can tell ourselves, “Well, of course there were five dollars of available funds on the interbank market! The check was cashed at another bank, and that bank should have the funds!” And I guess that’s true in a way. There’s always money somewhere out there.
Always money to be lent somewhere, at some price. The problem for a bank is NOT finding reserves to meet the requirement before the regulators check again. Cash can always be found somewhere. The problem is the price. A bank wants to find wholesale reserves at a cheap enough price that they were justified in issuing the retail loan. Which is to say, if there’s a lot of pressure on the interbank market as banks scramble to find required reserves, the banks will be bidding up the interest rate on that market. There is a limited amount of monetary base out there, and if all the banks are scrambling for reserves at once, they should be increasing the price.
Except… who controls the interest rate of the interbank market? The central bank does. And if the banks are scrambling for reserves and bidding up the interest rate, and the central bank has a specific interest rate target in mind, then the central bank itself can provide the liquidity to keep their interest rate lever at the proper place.
The banks loan first, and then the liquidity can come later.
Just as the conventional story indicates, all of this lending behavior is extremely dependent on central bank behavior. But it works the other way around. The new monetary base generally comes after the new loans. A bank can look at how much it’s paying for deposits and also how much it’s paying on the interbank market, and say to itself, “That’s a good rate to borrow money.” That can be a good rate not just for the bank’s own bottom line when borrowing but also good for the general health of the business community, which increases the chances of getting paid back. So the bank thinks “I’m happy to make loans if I can borrow money at that rate.” But if the central bank committee meets and raises rates by half a percent next week, that might have been a really crappy loan they just made, for more than one reason. Finding the funds for the loan could be more expensive than they initially anticipated, and a general decrease in business activity will increase the risk of the loan going bad.
Also interesting: In the US, at least, the Fed often didn’t keep quite as short a leash on the interbank market rates in the past. Which is to say, the interbank market was much more volatile. Banks that had good loan opportunities would make those loans. Banks that lacked good loan opportunities and had cash available would attempt to gouge other banks on the interbank market before Fed judgment day. Interbank rates could spike during the scramble for funds, then come back down very quickly.
If you look at the data for the interbank rate, and you click on “daily, not seasonally adjusted”, you can see that volatility even on the multi-decade graph. You can even see when the Fed made the deliberate choice to reduce that volatility. Very interesting graph there.
Money can be considered “endogenous” because in a practical sense banks clearly start the process themselves by looking for good opportunities today and hoping to find cheap cash later. However, banks make loans based on their expectations about future funding, and future business conditions, and the central bank clearly has its thumb on those things. The point that I would personally make is that even if the creation of private-bank-money can be accurately described with an endogenous model, the central bank nevertheless has exogenous targets it can strongly influence, like the inflation rate or nominal spending.
Above is a description of what actually tends to happen.
Most of the genuine theory comes from heterodox criticisms of conventional econ. If you dig that sort of stuff, let me look for one of my books… okay, chapters 13 and 14 of Steve Keen’s Debunking Economics, the newer edition, has a more comprehensive theory, more fleshed out. It’s extremely interesting if you can ignore what a complete jackass the guy can be sometimes. (When he’s offering his own ideas, he is worth listening to. When he’s criticizing anybody else in the universe, safer to ignore him. He often doesn’t give a fair shake, for example his enormous mistakes on US unemployment measures.)
If I say “the sun rises in the east”, that doesn’t necessarily mean I am unaware of the spinning of the earth. It’s just that we don’t have a short way to say “sunrise” which can also convey our deeper astronomical knowledge.
Our intuitive human vocabulary is naturally based on our own personal experiences. Savings? Oh, that’s just the money that’s still in my account after I’ve paid the bills. Of course it is. What else could it be? That’s the easiest way to describe things. Of course, the macro world is a little different. We have orbits and rotations and things. The intuitive meanings don’t quite work, but those are the words we have available. Just because a person is using intuitive vocabulary does not necessarily mean they are unaware of the actual spinning of the earth’s money.
Maybe he is ignorant about this. I guess it’s possible. But a paper like this is not at all the way to find out.
Not always. There’s an easy counter-example to this.
Each time period, five people each have incomes of 100 and consumption of 80. The consumption is all purchases from each other. The rest is their ownership of a company. They each chip in 20 dollars of savings to maintain the company and employ its one worker, a sixth person, whose wages are 100. Number six blows this wage entirely on consumption purchased from the other five, completing the circle and balancing the equations.
Total consumption: 500
Total investment/saving: 100
Total income: C + I = 600
No debt anywhere in that picture. Resources plowed directly by owners into new equipment is also investment/saving.
Thank you thank you.
In the second time period you’ve got six people, with income of 600 and spending of 600.
In first period, though, you’ve got 5 people with income of 500 and spending of 400. Where did the missing 100 come from? Someone somewhere had to spend that 100 in order for it to be income.
You can always change the amount of spending and income within a period. Abe can spend 100 buying trinkets from Ben. Or Abe can spend 100 buying trinkets from Ben and Ben can spend 100 buying gadgets from Abe. In the first example there’s 100 of spending and 100 in income. In the second there’s 200.
What you can’t do is have Abe spend 80, while Ben’s income is 100.
You’ve said the 100 paid to the worker is investment/savings. But it’s not investment or savings. If I hire somebody the wages I pay him are not savings or investment. The wages are an expense.
Now you can turn those wages into an investment, by creating a corporation, lending the money to the corporation, which then uses it to hire a worker. In that case the corporation has -100 liability which is equal to the +100 asset which is the value of the debt.
Or you could do the same thing by lending to the government.
And you can always increase net worth by, for example, building a house and counting it as an asset. Or buying a house and counting it as as an asset. But you can’t spend less than your income unless someone somewhere spends more than his income. And you can’t purchase a financial asset, as opposed to a real asset, without someone somewhere taking on an equal liability.
No, no.
“Income” is what you produce. Money is just a yardstick for it.
If I weave three feet of cloth with my bare hands, no one is going to claim I didn’t make that cloth simply because there is no spare yardstick to measure it with.
In the same way, if those five people produced $500 worth of lumber, or food, or dressed stone, no one has to pay them for it for it to be worth $500 in income.
Double-entry accounting is a polite fiction in a lot of ways (IMHO, anyway, I don’t claim to expertise)–and one of those ways is that it doesn’t account for primary production very well. In a lot of meaningful ways, you can say that, say, the first person in the trivial example has -100 liability which he owes to the grove of trees he cut the lumber from.
No.
In every time period, there is income of 600 and spending of 600. I didn’t start a new time period in the middle of a paragraph for no bloody reason. All of that activity happens in the same time period, in every time period. If it helps, imagine they’ve all got a sock drawer where they keep a few hundred GP tucked away to begin the process.
You’re still having trouble with the identities. It’s not legit to label it as an expense and then dump its significance from your mind.
Expenses = income = production.
You can’t just say, “It’s an expense! It’s not investment!” That expense was specifically made for some kind of production. Okay, which kind of production? We have an identity for that. It’s either consumption or it’s investment. So which was it for? That question answers itself.
I’ll come back to this tomorrow in more detail.
Income has more than one meaning. People ordinarily use it to mean money earned or otherwise acquired. You could use it to mean things instead of money. But you’d want to make it clear that that’s what you were doing. Because if you make a shirt, you actually increase the number of shirts in the world. If you make money, unless you’re a bank or a counterfeiter, there’s no more money in the world. (And even if you’re a bank, you’re not created “net” money, because banks create assets and liabilities equally and simultaneously.) anyway, I don’t think you can ignore or gloss over the difference between money and real things, without doing damage to your understanding of the economy.
You can’t say that trees have assets and liabilities, given the rules of the financial system we have. Those rules are created by people, so in that sense theyre a kind of fiction, I guess.