[NOTE: This is largely a RE-POST of the second part of a recent post connecting the SFB and IE models. The main difference is that an extra section has been added at the end, noting how analysis of the sectoral balances enabled some economists to identify problems that later culminated in the global financial crisis and Great Recession. In retrospect, I prefer the material in this post to stand alone, for inclusion in the 'Posts to Read First', rather than potentially getting lost at the end of a longer post. The previous post has been renamed as well as shortened through the deletion of the material in this post. This note will self-destruct in a few days.]Heteconomist
Introduction to the Sectoral Financial Balances Model
Peter Cooper
5 comments:
Excerpt from Peter's of a quote from Godley in 1998:
"The article concludes that the expansion of net lending cannot continue for much longer without making debt-income levels impossibly high; therefore, in contradiction to the political consensus of the moment, fiscal policy will have to be expanded substantially and progressively compared with what the CBO is now projecting if a prolonged recession is to be avoided."
OK, if the "impossible" level was not reached until the GFC in 2008, then I dont know what the value of this statement is... if it cannot predict an event with less than 10 years of accuracy...
You could almost lump this Godley statement in with the statements by the Rogers/Schiff/Farber debt doomsday crowd to the effect that "its coming, just you wait!" and then a broken clock can show correct time twice a day....
So what we need to identify is predicted threshold conditions for system failure; if we are to have a useful Theory.
rsp,
Fiscal policy was expanded substantially - the Bush tax cuts, wars and Medicare expansion - but not very progressively. This happened soon after 1998 and sufficed to postpone the crash. Without all that it would have happened much sooner.
Right, in the social sciences including economics general forecasts and specific predictions are contingent upon foreseeable alternative courses and ontological and epistemic uncertainty of events owing to complex adaptive systems being, non-ergodic, reflexive, and non-ratoinal in addition to being path dependent. Too many of the causal factors are not only variable but volatile for a variety of reasons, some rational and some less so. See Campbell's Law, Goodhart's Law and the Lucas Critique, not to mention the warnings of Keynes abut trying to wring too much precision out of a subject matter that is inherently uncertain and changeable.
As commented at Heteconomist:
Tom Hickey on 21 January 2014 at 7:04 PM
Given the record of the social sciences other than economics, only broad trends are foreseeable and events within those trends or turning points are not predictable with any precision. Precision in social science tends to be narrowly circumscribed.
Conventional economics pretends to be more analogous to natural science than social science, even though it is one of the social sciences. Therefore, most of the expectations concerning precision of prediction are simply wrong and are dependent on assuming a continuing trend when what is important to know is the future rate of change and the turning points, at least the major ones together with the causality.
The heterodox view recognizes uncertainty, reflexivity, and non-ergodicty, and denies long run equilibrium, perfect foresight, rationality, and market efficiency. It's point is that predictive precision is a chimera. Conventional economists resist heterodoxy for precisely that reason. They prefer to dwell in the chimera of knowledge instead of admitting the consequences of ontological and epistemic uncertainty when the relationship among causal factors is complex, adaptive, and emergent.
Heterodox systems can give early warning signals based on causal analysis that enables preventative steps before developing problems get out of hand and eventually go viral. Instead, what we get is false confidence and dashed expectations.
Well here is Treasury spending since that year:
http://chartsninja.com/charts/single/6956
Look at for instance 1998 to 2008:
it went from 1,855 to 3,435 so up 1,580 or up 85% in those 10 years... and accordingly bank credit went up... I will add bank credit to this chart... lets take that 85% and divide it by 2 to get a 5 year figure: say 43% increase in 5 years...
OK, five years have transpired since 2009/2010/11/12/13 so govt spending should be up 43% from 3,435 to over 4.9T and where is it? 4.2T ie in the toilet..
I can GUARANTY that if Treasury spent over 4.9T last year and was on track to spend another 8.5% or 5.3T this year there would be millions more at least employed and bank credit would be higher than 7T...
And where are we this year:
http://chartsninja.com/charts/single/6495
BEHIND last year! We should be OVER 5T this year...
Calg,
Debt to income levels CANNOT increase without this fiscal increase...this is my point. Godley' statement tells us NOTHING, its basically accounting, Monday morning quarterbacking.... circular logic... he is basically saying: "income cannot increase unless income increases..."
What has happened over the last 5 years after the reset caused by the derelict libertarian "free market" Bernanke Fed letting Lehman go BK? Loans and leases in Bank Credit is FLAT. It DIDNT go up.
Here is 2008 a bit over 7T:
http://www.federalreserve.gov/releases/h8/20081229/
Here is the latest a bit over 7T:
http://www.federalreserve.gov/releases/h8/current/
Why?
Look at the chart at the link... it didnt go up either (actually went down a bit)... which is "cause" and which is "effect"?
If govt does not increase Treasury withdrawals, where does the system's increase in income come from to be able to increase system leverage?
Where does it come from?
You cant "go to the bank" and say "I got a raise! I would like to borrow more money!" if govt doesnt increase Treasury withdrawals... the system has no additional income.
rsp
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