Tuesday, June 12, 2012

Rodger Mitchell — Which is more important to our lives: Meteorology or economics?

I recently commented at Bill Mitchell's in response to a comment asking for a more complete macro approach. Here is what I said:

An ideal macroeconomic explanation would involve a formalized model as a set of equations that accounts for multi-variable inputs (factors) in terms of functions yielding output information that allows prediction of real world events with precision, enabling testing of hypotheses. The economists with whom I am familiar that have a superior understanding of mathematics, having earned degrees in math or physics before entering economics, say to a person that such a model has never been undertaken seriously, and that the math of present econometric models is far too limited for the task.

So such models describe assumed worlds that are not representational enough of the real world to be sufficiently predictive to achieve any degree of precision. The result is that the models not only result in predictions that are disconfirmed by events, even a mammoth events like the GFC, which was thought not be possible or of extremely low probability, but also they are used in policy formulation that fails, resulting in real world damage. like the GFC. MMT economists and others (Wynne Godley) did foresee the potential for crisis building early one using SFC sectoral balance modeling and cautioned about it.. 

So the question for this idealized concept of macro is who is going to write those complex equations and what might they look like? At this stage this is asking for a level of precision that humans have not yet achieved in the social sciences, which have to deal with reflexivity and other factors resulting in uncertainty, quite unlike hard science that deal only with data that is subject to quantification and observation in terms of changes in space-time/mass-energy, where ergodicity prevails at least at the classical level. Not that we can’t do better, but economics is not likely to approach the precision of physics anytime soon.

The social sciences, including economics, are non-ergodic. Solutions in this case are limited to describing underlying structures of a system, or probabilistically based on processing a huge amount of data. MMT chooses to investigate the underlying structure of modern economic system from a particular angle that is selected for the reasons Bill summarizes above.

Roger proposes a path to a more ideal (actually more realistic) solution by tackling complexity in economics the way we approach atmospheric science. That would entail a commitment at least as big, which beyond the scope of any economists or small groups of economists. This would need to be a national project, or, better, a global one conducted on a grand scale and amply funded to do so. This kind of approach probably needs to go hand in hand with advances in artificial intelligence.

Read it at Monetary Sovereignty
Which is more important to our lives: Meteorology or economics?
by Rodger Malcolm Mitchell

OK, engineers, physicists, mathematicians, and computer scientists, have at.


GLH said...

What can we really expect when outlets like CNBC have people like Jim Rodgers telling us to buy gold and ignore people like Mike Norman who explain sector economics? I don't think the math is the problem.

Tom Hickey said...


Given uncertainty and complexity, Jim Rogers, Peter Schiff, et al could turn out to be right about a trade, but it will not be because of the reasoning, but rather the working out of complexity. There is no way to use macro or even a correct description of the monetary system to predict trades infallibly. They can only provide a leg up.

paul said...

The sectoral balances relationship is really simple math and anything else that happens is subordinate to it.

Modelling the government sector is easy and the external sector can (for now) be thought of as a constant leakage.

The domestic private sector is very complex with many variables so the trick would be to identify inputs that would be neglegible in the overall scheme of things and focus on the elephants in the room.

Model the individual sectors as blocks in an electrical (or hydraulic) circuit.

Sounds easy, probably isn't, but I think it is doable.

Lots of build, test, adjust, re-test, etc.

Gotta start somewhere (I think Steve Keen already has hasn't he?).

In the meantime I don't think it's necessary to move forward. We just have to forget everything mainstream economics has told us over the past 40 years or so.

Matt Franko said...


F=ma, let's talk about it! ;)


What do you think the total stock in Table L.4 represents wrt the total amount of "loans" made, for which there has not really been created the balances necessary to pay the interest on?

page 66 here:


over $54T reported as currently issued. If average rate is 2% that is a bit over $1T in interest required annually which is equal to the current fiscal deficit (NFAs)


Leverage said...

So all the net money being created is to pay bankers and rentiers. Working great I guess... for them!

This way they keep a deflationary bias on money purchasing power while they secure incomes virtually forever and amplify differential capital accumulation (which leads to inequality, income disparity, etc.).

So sad...

Matt Franko said...

Right Lev,

Hard to say what the average interest rate is on all of this...

My general inquiry is basically to identify where do the balances come from to be able to pay the interest?

Liquidation of assets for a price below what the original principle value was for the loan I guess could also account for some balances being available to pay interest on a different loan..,


paul said...


I started to make a comment related to this in another post and realized i hadn't crunched any numbers so I deleted it and got distracted.

Glad you have followed through.

What I was thinking about was how fast the existing $5Trillion in cash (if our estimates are right) would last before the banking system had all of it.

They must be near their end game.

I have a couple of observations:

First - 2% is probably low, $13 Trillion is in residential mortgages, plus banks charge origination fees which are often in excess of the loan.

I always wondered why banks like to roll-in your closing costs when financing. Just went through this on a refi and we insisted on paying fees out of pocket.


This leads me to wonder if there is any cash backing our pension funds, etc.? It seems like it is all paper value. No wonder the financial interests are trying to renege.

$5 Trillion doesn't cover much.

Maybe I'm not seeing this clearly but it looks like a disaster in the making.

Surely with all of the smart people in the world this can't be a big surprise.

Tom Hickey said...

Matt: "My general inquiry is basically to identify where do the balances come from to be able to pay the interest?"

To the degree that the interest (compounded) received by creditors is not spent into the circular flow but saved as financial assets without government offsetting the leakage fiscally, a financial drag is imposed on the system that results in periodic financial crises. It's historical. Pretty much Michael Hudson's analysis as I understand it.

Matt Franko said...

Look at the growth in this stock (Z.1 table L.4) from 2005 to 2008.

Grew from about 40T to 50T in those years (25%).

At 5% average yield, this would require an additional $500B of NFA to pay the interest on the newly issued $10T.

Deficit during this time was collapsing.

You could probably look at the increase in this stock vs the increase in NFAs and determine a degree of stress.

iow credit issuance requires 500B of new NFAs to make the interest payments but the deficit is only 100B.

Then looks like we are "on borrowed time" pardon the pun.

Right now there is NO CREDIT GROWTH (except for USTs which are at 0%) if you look at L.4 So there is no additional interest burden being added.

So our fiscal deficit of $110B/mo NFA flow seems high enough to pay the interest on this $54T and the economy can "muddle thru" as WM often says.

This represents about a 2% effective yield on all of the L.4 paper or perhaps a bit more if there are some asset liquidations/cramdowns happening that frees up some NFAs to pay interest...


paul said...

That all makes sense.

How about the additional $40+ Billion/mo leaving via trade deficit?

Does that translate to a deflationary trend?

Tom Hickey said...

Matt, one can look at the fiscal deficit as a transfer payment to savers (fiscal deficit equals non-government surplus) after the injection has flowed through the economy. In other words, it flows to the top and abroad.

Tom Hickey said...

paul: "How about the additional $40+ Billion/mo leaving via trade deficit? Does that translate to a deflationary trend?"

Those funds are saved in USD, which means they are not being used for consumption in dollars. Hoarding is deflationary. It results in demand leakage and costs jobs unless offset. But even if offset, those funds get saved, too, in a continuing cycle.

paul said...


Yes, but I was alluding to Matt's observation that the entire deficit amount appeared to be going towards interest payments. Towards the banking sector.

That leaves the trade deficit as a leakage.

Maybe can't say much concrete other than the air is being let out of the spending balloon.

Matt Franko said...

Paul, perhaps not just the banking sector, but think of non-financial corporate retained earnings which probably immediately end up in short term USTs (perhaps indirectly thru MM funds), the Chinese do the same thing ie put it right into USTs (directly).

Then both of those entities are "savers" of USD NFAs via ownership of short term USTs ... they hold most of the new NFAs and then the household sector is 10 dogs after 9 bones trying to get the NFAs to pay their interest liabilities... brutal.


Matt Franko said...

household sector slugging it out for NFAs to pay Tax liabilities also

Matt Franko said...

Two forms of liabilities that have to be accounted for when USD balances are issued: Interest and Taxes.

Loans issue only balances for the principle, do not account for future required interest balances. Fiscal policy results in issuance of USD balances that does not account for USD savings desires (both foreign and domestic).