tag:blogger.com,1999:blog-2761684730989137546.post8367827702004075143..comments2024-03-28T04:13:36.779-04:00Comments on Mike Norman Economics: Michael Sankowski — 3 Big Reasons Monetary Realism Mattersmike normanhttp://www.blogger.com/profile/03296006882513340747noreply@blogger.comBlogger146125tag:blogger.com,1999:blog-2761684730989137546.post-21962771455711880042012-12-21T14:19:33.875-05:002012-12-21T14:19:33.875-05:00While I commend Steve's efforts and dedication...While I commend Steve's efforts and dedication to developing an econometric model sufficient to the task of describing a modern complex economy, it's probably a lot more than we need to get the outline of the system and see what the basic parameters are where the limits lie. I think you are on the right track to this, Paul.Tom Hickeyhttps://www.blogger.com/profile/08454222098667643650noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-7411531202993725482012-12-21T14:13:33.767-05:002012-12-21T14:13:33.767-05:00Guys, Thanks
I suppose this is the same problem S...Guys, Thanks<br /><br />I suppose this is the same problem Steve keen is working on…he's just trying to do it with a robust software analysis tool and mathematical models.<br /><br />My approach (since this is just a hobby and I have no funding) is to keep things simple and use information that we already have (and it's free) that anyone can use to try to solve different parts of the puzzle. I see geerussell has already fiddled with it as have others.<br /><br />Another thing I would like to point out re the 2nd chart I posted…the areas above the line are periods of increasing leverage, the areas below periods of de-leveraging.<br /><br />It appears that we have considerable more de-leveraging to do before things get back to normal.paul melihttps://www.blogger.com/profile/04604543110795683837noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-81766512146106209142012-12-21T13:11:20.094-05:002012-12-21T13:11:20.094-05:00Right, the private debt/equity (NFA) ratio and the...Right, the private debt/equity (NFA) ratio and the credit money/NFA ratio are the things to be watching instead of the public debt/GDP ratio.Tom Hickeyhttps://www.blogger.com/profile/08454222098667643650noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-75118866183430647412012-12-21T12:59:11.981-05:002012-12-21T12:59:11.981-05:00paul,
Nice charts. I think I see where you're...paul,<br /><br />Nice charts. I think I see where you're coming from and agree. I had a more mechanical notion in mind for "limit" as in prior constraint, a dollar of new credit needing a dollar of new NFA that I was arguing against.<br /><br />In the sense I think you mean it, limit as "danger zone where you need to be really afraid the whole thing is about to blow up" we're on the same page.geerussellhttps://www.blogger.com/profile/10631984593634015839noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-23159595371935399392012-12-21T12:43:40.233-05:002012-12-21T12:43:40.233-05:00Actual money is (hopefully) involved in the exchan...<i>Actual money is (hopefully) involved in the exchange</i><br /><br />That the magic. It's a "game of musical chairs," to paraphrase former Citi chairman and CEO Chuck Prince.<br /><br />As you say, it's "anticipation of future income" and the future is uncertain. That's why it's said that money is trust, and all money is someone's IOU, even state money. <br /><br />That's the reason for the otherwise irrational gold fetish, and related "thing" fetishes that people convert money into when trust wanes.Tom Hickeyhttps://www.blogger.com/profile/08454222098667643650noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-56113376299787454502012-12-21T12:34:56.521-05:002012-12-21T12:34:56.521-05:00"This is the "magic of money." The ...<i>"This is the "magic of money." The bulk of transactions are credit-based so no actual "money thing" or equity is involved in the exchange. "</i> - Tom<br /><br />Actual money <b>is</b> involved in the exchange…transactions are based on the <b>anticipation of future income</b>, which is yet to be earned, rather than the vapor of credit "money", which doesn't exist unless you ignore the liabilities.<br /><br />The future money to be earned is a direct function of NFA.<br /><br />NFA is the only "real" money when the rubber meets the road.paul melihttps://www.blogger.com/profile/04604543110795683837noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-67161798500432054112012-12-21T12:32:58.328-05:002012-12-21T12:32:58.328-05:00Of course, if banks decide to throw away underwrit...<i>Of course, if banks decide to throw away underwriting standards even further, all bets are off, the ratio could rise above 1.8, and the shit would hit the fan again unless the government unleashed the deficit cowboy.</i><br /><br />Yes, meaning increase deficit to increase NFA to bring down the private debt/equity ratio.Tom Hickeyhttps://www.blogger.com/profile/08454222098667643650noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-41304358452338453292012-12-21T12:22:10.984-05:002012-12-21T12:22:10.984-05:00"When I look at the black line, I a relations...<i>"When I look at the black line, I a relationship I care about a lot as a barometer of risk and fragility but I don't see a "limit" imposed by the green line on the black one."</i> - geerussell<br /><br />geer, OK , now we're getting somewhere. The limit is within the black line itself…the green line doesn't add anything and it goes beyond my original assertion.<br /><br />Your graph indicates a limit of some ratio less than 10 based on total credit market debt owed. I have already looked at this very thing myself.<br /><br />We can say with fairly good confidence the ratio as you have expressed it will never exceed 10 without a credit event, and it would probably occur at a somewhat lower ratio. now that the thing has fallen apart. In previous years the events have occurred at ratios of around 7 to 1.<br /><br />The reason for the difference is likely because of underwriting issues. We could get above 10 if we just threw away underwriting and just made loans to everybody willy-nilly, but this applies mainly to households…businesses have no reason to borrow unless households are spending.<br /><br />I've gone further and looked at this in terms of household debt, because households fund the debt service, and thus the gains of businesses, both financial and non-financial.<br /><br />If it weren't for household spending businesses would have no need for investment borrowing. Household income is largely funded by government spending and profits of businesses (and household saving) by net government spending.<br /><br />In other words, the costs of business borrowing (debt service) is rolled into the price of products and recovered when their products are purchased. Business debt doesn't mean as much…it's not as volatile as household debt.<br /><br />The important metric is household debt and it's growth, the repayment of which is linked to NFA. This in turn limits business borrowing.<br /><br />I've been playing with FRED data myself:<br /><br />https://dl.dropbox.com/u/33741/graph2.png<br /><br />https://dl.dropbox.com/u/33741/graph3.png<br /><br />The first chart illustrates the point I've been trying to make…that household debt expands linearly with respect to NFA.<br /><br />If you were to take the data points on the first graph and plot the ratio on a normal (non-logarithmic) scale it looks like the second graph.<br /><br />There is an average level (near 1.5) and upper (and lower) extremes. The upper extremes correlate with financial shocks, the lower indicate the result of the shocks as far as the level of credit in relation to NFA.<br /><br />I can say with pretty good confidence that the level of credit extended to households will likely remain below a ratio of 1.8 to 1 debt-to-NFA. There is a reason this is the case, it's not a random result. Currently we're at about 1.1 to 1.<br /><br />Of course, if banks decide to throw away underwriting standards even further, all bets are off, the ratio could rise above 1.8, and the shit would hit the fan again unless the government unleashed the deficit cowboy.paul melihttps://www.blogger.com/profile/04604543110795683837noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-34231210614680967782012-12-21T11:29:54.623-05:002012-12-21T11:29:54.623-05:00My point is that "money is just keystrokes&qu...My point is that "money is just keystrokes" or "accounting entries" may be true but there are framing issues to overcome. People knowledgeable about finance and accounting don't have issues with this, and I suspect that digital people in general won't either, but most people don't think that way. Money is a fetish.Tom Hickeyhttps://www.blogger.com/profile/08454222098667643650noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-46523212340843876602012-12-21T11:25:30.494-05:002012-12-21T11:25:30.494-05:00I'm glad you brought this up because technical...<i>I'm glad you brought this up because technically, it is wrong.<br /><br />Credit "money" nets to zero, so mathematically there is no credit "money" in the economy. Zero.</i><br /><br />This is the "magic of money." The bulk of transactions are credit-based so no actual "money thing" or equity is involved in the exchange. <br /><br />But we do figure this in the M2 "money supply" which includes demand deposits (loans created deposits) and small time deposits, so in that sense it makes perfect sense to say that M2 (money supply) "dwarfs" both HPM and NFA. And while the "money multiplier" (ex ante) is wrong the "money multiple" (ex post) as the ration of M0 and M2 is correct. <br /><br />And the ratio of MZM and M3 wrt M0 is much greater than M2. Then there are all the derivate contracts that also result in obligations denominated in the currency. That's a pretty huge magic wand that is wielded by the financial sector.Tom Hickeyhttps://www.blogger.com/profile/08454222098667643650noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-41705093634286790692012-12-21T11:21:49.656-05:002012-12-21T11:21:49.656-05:00"I believe they are related inextricably in t..."I believe they are related inextricably in the sense that NFA limits the upper level of credit…"<br /><br />To try and get a visual for what we're talking about I <a href="http://newarthurianeconomics.blogspot.com/2012/12/the-green-one-is-federal-debt.html" rel="nofollow">totally stole this chart</a> (Hi, Art!) and added <a href="https://research.stlouisfed.org/fred2/graph/?graph_id=101182&category_id=0" rel="nofollow">a line of graffiti to it</a> because FRED is fun.<br /><br />In terms of the conversation so far, blue is total assets, red is total liabilities, green is total equity and the heavy black line is leverage (blue/green).<br /><br />When I look at the black line, I a relationship I care about a lot as a barometer of risk and fragility but I don't see a "limit" imposed by the green line on the black one.geerussellhttps://www.blogger.com/profile/10631984593634015839noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-19448002253537838062012-12-21T10:43:16.284-05:002012-12-21T10:43:16.284-05:00"Yes, independent variables. The way passenge...<i>"Yes, independent variables. The way passenger count and lifeboat seats are independent. The ratio tells you about your buffer vs insolvency but either variable can change independently of the other."</i> - geerussell<br /><br />I disagree…I believe they are related inextricably in the sense that NFA limits the upper level of credit…<br /><br />…it's a "pull" not a "push". The level of credit can vary upwards independently to some extent yes, <b>but only within a very narrow range</b>.<br /><br />Whenever the upper extremes of the observed range have been tested we have had a serious financial event. Do you think this is coincidental?<br /><br />If you look at the history of the two series in comparison it is apparent that credit is not going to rise independently of NFA. One can count on it.<br /><br />This does not imply causation, NFA does not "cause" credit to expand.<br /><br />Credit isn't necessary for economic activity to occur, credit (the way it is set up) has the government assuming most of the risk in investment decisions.paul melihttps://www.blogger.com/profile/04604543110795683837noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-4339296345630639042012-12-21T09:43:11.606-05:002012-12-21T09:43:11.606-05:00Yes, independent variables. The way passenger coun...Yes, independent variables. The way passenger count and lifeboat seats are independent. The ratio tells you about your buffer vs insolvency but either variable can change independently of the other.geerussellhttps://www.blogger.com/profile/10631984593634015839noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-20413439624813947462012-12-21T08:43:55.234-05:002012-12-21T08:43:55.234-05:00"Tell that to most people and add that as a r...<i>"Tell that to most people and add that as a result the teller window will be closed tomorrow for cash and you will have a bank run."</i> - Tom<br /><br />Tom, I'm not suggesting that we tell people that …i merely stated a fact.<br /><br />My point is that making a distinction between cash and demand deposits in a technical discussion is usually unnecessary, yet it happens often in discussions.paul melihttps://www.blogger.com/profile/04604543110795683837noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-4584582913737070232012-12-21T08:39:14.869-05:002012-12-21T08:39:14.869-05:00"since credit money dwarfs state money due to...<i>"since credit money dwarfs state money due to "leveraging.""</i> - Tom<br /><br />I'm glad you brought this up because technically, it is wrong.<br /><br />Credit "money" nets to zero, so mathematically there is no credit "money" in the economy. Zero.<br /><br />Calling credit "money" is only possible if one ignores the liabilities…which are negative money…and this is a persistent error. It has come about over time from a misunderstanding of the system.<br /><br />The confusion probably comes from the fact that credit generates spending, and then spending is conflated with money…but they are two completely different things.<br /><br />Non-mathemeticians seem to have a problem with this but it it what it is. Only NFA is "money" in the mathematical sense.<br /><br />I suppose semantically one could make the argument that credit is money but mathematically it doesn't hold up.paul melihttps://www.blogger.com/profile/04604543110795683837noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-33309636846359767272012-12-21T08:26:54.048-05:002012-12-21T08:26:54.048-05:00"As with the money multiplier, action words l...<i>"As with the money multiplier, action words like leverage and multiplier suggest a limit or constraint but it's just an ex-post accounting."</i> - geerussell<br /><br />If you make this statement, you are implying that there is no relationship between the two variables, growth of NFA and growth of credit- that they are independent variables.<br /><br />Is that what you mean?<br /><br />The term leverage has always been used this way in finance…this isn't anything new. What's new to me is that anyone is confused by it.<br />paul melihttps://www.blogger.com/profile/04604543110795683837noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-55838856019654908322012-12-21T08:02:38.512-05:002012-12-21T08:02:38.512-05:00"Or is it better to say credit is a function ..."Or is it better to say credit is a function of the level of NFA, or credit is limited by the level of NFA?"<br /><br />We take two numbers, total assets and total equity, juxtapose them in a ratio, label it "leverage" and then infer some things about solvency and risk.<br /><br />As with the money multiplier, action words like leverage and multiplier suggest a limit or constraint but it's just an ex-post accounting.<br /><br />geerussellhttps://www.blogger.com/profile/10631984593634015839noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-78051353367634726952012-12-20T22:58:02.128-05:002012-12-20T22:58:02.128-05:00BTW, IIRC, polling reveals that most people think ...BTW, IIRC, polling reveals that most people think that money "comes from the government," and when questioned prefer that to money coming from the banks. So most people have this backward, since credit money dwarfs state money due to "leveraging." Oops, bad framing.Tom Hickeyhttps://www.blogger.com/profile/08454222098667643650noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-21206683154369196992012-12-20T22:55:24.919-05:002012-12-20T22:55:24.919-05:00I don't necessarily agree with that view, but ...<i>I don't necessarily agree with that view, but I think it's worth considering</i><br /><br />There is a lot of truth to that. In a modern monetary system, money is a public utility. Bankers have a vested interest in keeping that quite.Tom Hickeyhttps://www.blogger.com/profile/08454222098667643650noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-73071795426777557792012-12-20T22:53:35.342-05:002012-12-20T22:53:35.342-05:00I suspect that most people that haven't grown ...I suspect that most people that haven't grown up in the digital age think of their bank deposits as "cash in the bank" instead of "cash under the mattress."Tom Hickeyhttps://www.blogger.com/profile/08454222098667643650noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-85139010076455260442012-12-20T22:52:37.806-05:002012-12-20T22:52:37.806-05:00The AMI crowd seem to argue that the main aim of b...The AMI crowd seem to argue that the main aim of bankers is to make us forget what money is. <br /><br />I don't necessarily agree with that view, but I think it's worth considering.yhttps://www.blogger.com/profile/03233997168975370006noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-68008747083069688582012-12-20T22:48:25.050-05:002012-12-20T22:48:25.050-05:00"the teller window will be closed tomorrow fo..."the teller window will be closed tomorrow for cash and you will have a bank run"<br /><br />Our direct access to 'state money', or 'base money' or 'central bank money' is through paper notes, or coins (state money - but not CB money).<br /><br />(You can own money-like assets, such as bonds, but that's different)<br />yhttps://www.blogger.com/profile/03233997168975370006noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-54908735985769189052012-12-20T22:44:27.272-05:002012-12-20T22:44:27.272-05:00Supposedly, banks serve as intermediaries that fac...Supposedly, banks serve as intermediaries that facilitate circular flow and make a reasonable return for doing so. This service is productive. That is not banking today, which is mostly rent-seeking based on risk taking, financial engineering, and fees. Warren's reform proposal would return banking to plain vanilla.Tom Hickeyhttps://www.blogger.com/profile/08454222098667643650noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-79391456292268451882012-12-20T22:40:51.845-05:002012-12-20T22:40:51.845-05:00The only thing that matters in an analysis is that...<i>The only thing that matters in an analysis is that it represents net dollar assets on a balance sheet somewhere in the non-government. A paper dollar and an electronic one look exactly the same on a balance sheet or in a mathematical expression in terms of money.</i><br /><br />Tell that to most people and add that as a result the teller window will be closed tomorrow for cash and you will have a bank run.Tom Hickeyhttps://www.blogger.com/profile/08454222098667643650noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-61325690869533844152012-12-20T22:38:57.951-05:002012-12-20T22:38:57.951-05:00Paul, I am saying that the use of the term "l...Paul, I am saying that the use of the term "leverage" is OK theoretically, but the framing is bad because of other associations, e.g., money multiplier, leverage as a factor in the financial crisis. So I would stay away from it for framing my issues in a positive light.Tom Hickeyhttps://www.blogger.com/profile/08454222098667643650noreply@blogger.com