Steve Roth — Why Tyler Cowen Doesn’t Understand the Economy: It’s the Debt, Stupid

It’s the debt, stupid = doing economics without balance sheets and awareness of finance.

It’s as if Irving Fisher and Hyman Minsky had never written.

Conventional economists seem to do their thinking without tethering it to the real world though finance as a source of funds and accounting as the record of what actually happens in market exchange. If economists are looking for microfoundations, this is where it is, rather than in "preferences," "expectations" and "confidence."

Asymptosis
Why Tyler Cowen Doesn’t Understand the Economy: It’s the Debt, Stupid

Steve Roth

Michael Hudson — The Economics of the Future

Mainstream [economic] models are unable to forecast or explain a depression. That is because depressions are essentially financial in character. The business cycle itself is a financial cycle – that is, a cycle of the buildup and collapse of debt.

Keen’s “Minsky” model traces this to what he has called “endogenous money creation,” that is, bank credit mainly to buyers of real estate, companies and other assets. He recently suggested a more catchy moniker: “Bank Originated Money and Debt” (BOMD)....

Counterpunch
The Economics of the Future
Michael Hudson

Oscar Valdes-Viera — The Borrowed Science of Neoclassical Economics

"Science" with an agenda = pseudoscience.

The Minskys
The Borrowed Science of Neoclassical Economics
Oscar Valdes-Viera

John Muellbauer — Macroeconomics and consumption: Why central bank models failed and how to repair them

Good analysis of why central bank models fall short based on overly restrictive assumptions and failure to include key factors in the parameters. So the parameters that are identified are miscast and important parameters are ignored, notably the role of credit as a financial accelerator. 

vox.eu

Macroeconomics and consumption: Why central bank models failed and how to repair them
John Muellbauer | Senior Research Fellow, Nuffield College; Professor of Economics, Oxford University; and Senior Fellow, Institute for New Economic Thinking, Oxford Martin School

The Slow Crash: When Global Economies are Run by Banks — Bonnie Faulkner interviews Michael Hudson

MH: The price decline is a result of having to pay debts. That drains income from the circular flow between production and consumption – that is, between what people are paid when they go to work, and the things that they buy. Deflation is a leakage from this circular flow, to pay banks and the real estate, called the FIRE sector – finance, insurance and real estate. These transfer payments leave less and less of the paycheck to be spent on goods and services, so markets shrink. Some prices for some products go down when people can’t afford to buy them anymore.…

He goes out of paradigm though:

When you pay a debt to the bank, the banks use this money to lend out to somebody else or to yourself.  

Funny mistranslation.

Look at Ukraine. Its currency, the hernia, is plunging.  

(Should be hryvnia.)

Counterpunch
The Slow Crash: When Global Economies are Run by Banks
Bonnie Faulkner interviews Michael Hudson

Ambrose Evans-Pritchard — World faces wave of epic debt defaults, fears central bank veteran William White

There is no easy way out of this tangle. But Mr White said it would be a good start for governments to stop depending on central banks to do their dirty work. They should return to fiscal primacy - call it Keynesian, if you wish - and launch an investment blitz on infrastructure that pays for itself through higher growth.

"It was always dangerous to rely on central banks to sort out a solvency problem when all they can do is tackle liquidity problems. It is a recipe for disorder, and now we are hitting the limit," he said.…

Second leg down?

What happens when China is forced to drop its peg, like Russia?

The Telegraph
World faces wave of epic debt defaults, fears central bank veteran
Ambrose Evans-Pritchard

David Glasner — Keynes on the Theory of the Rate of Interest

I have been writing recently about Keynes and his theory of the rate of interest (here, here, here, and here). Perhaps unjustly – but perhaps not — I attribute to him a theory in which the rate of interest is determined exclusively by monetary forces: the interaction of the liquidity preference of the public with the policy of the monetary authorities. In other words, the rate of interest, at least as an approximation, can be modeled in terms of a single market for holding money, the demand to hold money reflecting the liquidity preference of the public and the stock of money being directly controlled by the monetary authority. Because liquidity preference is a function of the rate of interest, the rate of interest adjusts until the stock of money made available by the monetary authority is held willingly by the public.

I have been struggling with Keynes’s liquidity preference theory of interest, which evidently led him to deny the Fisher effect, thus denying that there is a margin of substitution between holding money and holding real assets, because he explicitly recognizes in Chapter 17 of the General Theory that there is a margin of substitution between money and real assets, the expected net returns from holding all assets (including expected appreciation and the net service flows generated by the assets) being equal in equilibrium. And it was that logic which led Keynes to one of his most important pre-General Theory contributions — the covered-interest-arbitrage theorem in chapter 3 of his Tract on Monetary Reform. The equality of expected returns on all assets was the key to Irving Fisher’s 1896 derivation of the Fisher Effect in Appreciation and Interest, restated in 1907 in The Rate of Interest, and in 1930 in The Theory of Interest...

Uneasy Money
Keynes on the Theory of the Rate of Interest
David Glasner | Economist at the Federal Trade Commission

David Glasner — Thinking about Interest and Irving Fisher

Economic history and the theory of interest. There's a lot packed into this post.

Uneasy Money
Thinking about Interest and Irving Fisher
David Glasner | Economist at the Federal Trade Commission

Steve Keen — The Unnatural Rate Of Interest - Ultra Wonkish

Steve takes on Marx's labor theory of value, too. (It's not all that wonkish either.)

Forbes
The Unnatural Rate Of Interest -Ultra Wonkish

Steve Keen

David Glasner — Keynes on the Theory of Interest

Criticism of Keynes on the Theory of Interest

Uneasy Money

Keynes on the Theory of Interest
David Glasner

Timothy Taylor — MONIAC in Action!

What I had not known until running across this article by Klint Finley in the most recent issue of Wired magazine is that a Cambridge engineering professor Allan McRobie has restored a MONIAC. Moreover, McRobie offers a lively 45-minute demonstration of the MONIAC at work on video here. As he says at the start: "It is a fabulous pleasure to demonstrate this. It is a thing of wonder and joy, and I would give this talk to an empty room. It is a brilliant machine, and a privilege for me to work with it."Conversable Economist

MONIAC in Action!

Timothy Taylor | Managing editor of the Journal of Economic Perspectives, based at Macalester College in St. Paul, Minnesota

Peter Radford — Irving Fisher and Inequality

“Our society will always remain an unstable and explosive compound as long as political power is vested in the masses and economic power in the classes. In the end one of these powers will rule. Either the plutocracy will buy up the democracy, or the democracy will vote away the plutocracy.” ~ Irving Fisher, 1919

That markets exist, indeed can only ever exist, inside a broader sociopolitical context disappeared altogether from mainstream economic thought. The consequence being, as I have said far too many times before, is that economists ended up studying only economics and not actual economies. Their models, large or small, formal or ad hoc, mathematical or narrative, all overlooked the sociopolitical impact subsequent policy advice derived from them might have. In this way economics became “performative” in that policy advice and the lessons learned in the classroom all had the effect of trying to bend society to conform to the ideal, rather than bending the ideal to conform with reality.

Economics became a massive social experiment. Economists began tinkering with society even while being oblivious to the fact that they were tinkering. Innocent or not – and I still believe that some economists knew full well they what they were doing – the mainstream drew to itself a massive ethical responsibility that it has never to this day recognized. Namely that if your advice is based upon some theory that assumes away most if not all social reality, and that it then has the effect of altering the reality it presumes to model, you had better be damned sure both theory and advice do no harm. Hiding behind idealized theoretical constructs is not acceptable. When you seek to bend real social relations to mimic those of your theory you had better be prepared to be called to task for any consequences society might not like. The loss of democracy being high on that list.

Or is it that many mainstream economists simply have a contempt for democracy because it muddies their pristine theoretical waters?

The  post contains some excellent quotes about the intersection of culture, law and the economy.

The Radford Free Press
Irving Fisher and Inequality
Peter Radford

Lars Syll — Why austerity is no solution to economic crises

Why austerity is no solution to economic crises

Lars P. Syll | Professor of Civics, Faculty of Education and Society, Malmö University

Dirk Ehnts — Irving Fisher on the Great Depression

“Finally the Government stepped in and itself went deeply into debt with the banks. [Fisher]” Instead, the news today are rather showing us the opposite, as the NY Times reports in this headline:

U.S. Government Shuts Down in Budget Impasse

One wonders why politicians would actively sabotage the national economy and make the cake smaller. Either they are ignorant – but I hardly believe that – or there are some people who will gain and some that will lose from this. This is probably about distribution.

Ya think?

econoblog101
Irving Fisher on the Great Depression
Dirk Ehnts | Berlin School for Economics and Law

Dirk Ehnts — 100% money (1935): Fisher’s big insight on endogenous money

I am re-reading Irving Fisher’s 1935 “100% money” book for a workshop in Hamburg next month. The last time I read the book I thought that fractional reserve banking is a good description of reality. I don’t believe that anymore, but that is not the point I want to make. Re-reading Fisher (1935) I stumbled upon the following sentences, which are written under the title “‘Cash’ which is no cash”

Econoblog101
100% money (1935): Fisher’s big insight on endogenous money
Dirk Ehnts | Berlin School for Economics and Law

circuit — James Tobin on why deflation isn't a cure for unemployment

There's been a lot written lately on why the Pigou effect (i.e., increase in output and employment caused by an increase in consumption due to a rise in the real balances of wealth) isn't a foolproof way around the problem of the zero lower bound. It reminded me of these lines by James Tobin....

Fictional Reserve Barking
James Tobin on why deflation isn't a cure for unemployment
circuit

Why lower prices do not necessarily stimulate demand, and why it is likely they won't in Fisher debt-deflation.

Lars Syll — Sweden hit by deflation

Sweden is according to new statistics from the Statistics Sweden now in a state of deflation. The inflation rate was -0.2 percent in February, down from 0.0 percent in January. The inflation rate according to CPIF was 0.9 percent in February 2013, and HICP has increased by 0.5 percent since February of 2012.
So yours truly thought he should give the Swedish finance minister - Anders Borg – a suggestion for reading …

Zoltan Pozsnar and Paul McCulley have written an absolutely splendid essay on what a liquidity trap means and why mainstream neoclassical economics has nothing to offer in way of solving the problems that it brings along – and why it is so important to get hold of the insights that Fisher, Keynes, Minsky and Krugman have given us on debt-deflation processes and liquidity traps:

Lars P. Syll's Blog
Sweden hit by deflation
Lars P. Syll | Professor of Economics, Malmo University

Lars Syll — Paul Krugman on gold buggism – so right, so right

The “gold bugs” seem to forget that we actually have tried the gold standard before – in the era more or less between 1870 and 1930 – and with disastrous results!

Lars P. Syll's blog
Paul Krugman on gold buggism – so right, so right
Lars P. Syll | Professor, Malmo University
(h/t Ralph Musgrave via email)

Clint Balinger — Some pre- Great Depression roots of The Chicago Plan (& Minsky’s Financial Instability Hypothesis)

Valuable history lesson for appreciating the current debate. Many ideas being resurfaced today have a long pedigree.

Clint Balinger
Some pre- Great Depression roots of The Chicago Plan (& Minsky’s Financial Instability Hypothesis)

Lord Keynes — Fisher on Debt Deflation by Lord Keynes

Short summary of Irving Fisher on debt-deflation.

Social Democracy for the 21st Century
Fisher on Debt Deflation
Lord Keynes