An economics, investment, trading and policy blog with a focus on Modern Monetary Theory (MMT). We seek the truth, avoid the mainstream and are virulently anti-neoliberalism.
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Thursday, October 22, 2015
Andrew Lainton — ‘Thin Air’ and Economic Causality
Michael Pettis has a a long and interesting post which is effectively a critique of Steve Keen.
The bank design discussed here is simply not the one used in the real world.
As usual they forget that loans take weeks to conclude and that sales pipeline data plus a bit of statistical inference about how many usually convert informs the funding operation.
Loans create deposits which then increases the demand for bank equity and paper. The 'cash flow' constraint is a fiction. You simply can't transfer to another bank unless the other bank takes the place of the depositor.
I would add that in accounting, unlike in physics, there are no "natural" laws, only man-made rules and practices.
There are mathematical models in economics, and you can argue that the math is or is not mathematically correct, but it's still just an artificial model based on artificial rules.
What economists can do is test their models by comparing them to real world data. Keen frequently does this, and he should be commended for it.
The bank design discussed here is simply not the one used in the real world.
ReplyDeleteAs usual they forget that loans take weeks to conclude and that sales pipeline data plus a bit of statistical inference about how many usually convert informs the funding operation.
Loans create deposits which then increases the demand for bank equity and paper. The 'cash flow' constraint is a fiction. You simply can't transfer to another bank unless the other bank takes the place of the depositor.
Good response by Neil.
ReplyDeleteI would add that in accounting, unlike in physics, there are no "natural" laws, only man-made rules and practices.
There are mathematical models in economics, and you can argue that the math is or is not mathematically correct, but it's still just an artificial model based on artificial rules.
What economists can do is test their models by comparing them to real world data. Keen frequently does this, and he should be commended for it.