Steve Keen on how to model and forecast economic trends using Minsky

[@josehawking5293]

Nice to see you have the Wizard of Economics on!

[@AcademicInfluence]

He really is a whiz! I'm amazed by his intellect.

[@grayarcana]

Wizard of Oz, actually.

[@Achrononmaster]

@25:50 '"What backs the deficit money?" Prof Keen maybe has a bit more to learn from MMT (noting he admitted he only this year learned Stephanie Kelton has been correct all along, only took Keen 20 odds years to admit!). MMT reveals (by simply examining current law and institutional operations) that the gov spending is performed by computer mark-up of bank accounts. The "money creation" when government spends is a simple spreadsheet record entry. But still, what _backs_ the acceptance of the dollar spending? Why do people accept the State's money tokens (aka. tax credits) in return for rendering goods & services? The answer is the power and authority of the government to tax. State currency is fundamentally a tax credit. Tax liabilities (not tax receipts) drive demand for dollars. That is why a fiat currency does not need a commodity backing it, the threat of tax collection backs the demand, the issuance of tax liabilities makes the initial threat real. Then the government will find sellers willing to accept it's otherwise worthless currency. The Central Bank has nothing to do with it, they must comply by law and do what Treasury/Parliament orders, the only independence the CB has is interest rate policy (setting the overnight cash rate and interest on bonds) and even that is only because Parliament allow that small independence. In war times governments often revoke even this independence and will fix interest rates, the central bank then becomes just a payments system maintenance agent and commercial bank prudential governor. Then the question is, what about the _value_ of the currency? We've explained demand. What about price values? This too is well explained by MMT: the value is whatever the currency monopolist decides it is, by either setting the price (exchange value) and letting money supply float, or fixing supply and letting the price float. In the real world most government's fix price (by various means, fixing wage rates for public sector employees, so maybe $30 is worth about one hour of public sector worker labour, and by fixing transfer payments, and setting the collateral requirements for bank lending), but they routinely stuff up the price level because they also think they need to fix supply (the deficit/surplus) which is erroneous thinking, as the currency-issuing monopolist, now that fiat money is used so not convertible to finite supply of gold, the government can always let supply (the gov deficit) float, to guarantee full employment. _Note a gold standard cannot guarantee full employment for this reason, government cannot let supply float on a gold standard, so has to float the price level (permit deflation) or use draconian taxation._ Anyway, with fiat currency, fixing wage/prices and floating supply, sets a base price level the private market must accommodate, since private sector entities cannot create money, they are currency users, not currency issuers. Private markets thus can only determine _relative prices,_ not the base price level. Short Summary: Banks create credit money by marking-up the borrowers deposit account with a computer (in the old days it was by fountain pen and ledger books) and marking an equal amount on their asset side (the debt amount owed back). So fundamentally "money" is just a record of credit or debt, a unit of accounts. Money tokens like cash notes or coin or digits in bank accounts are just records of the credit or debt. Governments create money by instructing the central bank to mark-up the bank account of the agent they are purchasing from or paying wages too, it is literally just typing numbers into a spreadsheet, one number on the asset side (our bank deposits, or withdrawn cash), another on the liability side (all cash outstanding is a liability of government Treasury since it promises to redeem $1 for $1 payment of tax liability). Of course, no moral hazard is involved, since the authority to type in those numbers requires votes in Parliament, the central bank cannot just create money as it pleases,[*] votes in parliament ultimately are what create fiat money. Also, even Parliament cannot create money at will, they must purchase something for it, or have laws guaranteeing pension and welfare payments. So they have legal constraints on how much they can spend, but only legal, not operational constraints. If something is for sale, the government can always vote to purchase it, this includes all idle willing labour. Hence, MMT tells you, unemployment is a choice of government (the wrong wasteful choice), the private sector does not cause unemployment. No other school of economics understand this, only MMT informed people and a few post-Keynesians like Michael Hudson, John T. Harvey and Prof Keen. The remedy for the policy mistake of allowing unemployment is to either tax less or spend more, by hiring all who want to work, either directly into new public sector jobs or a freely offered unconditional Job Guarantee program. You see now the *_ultimate purpose of taxation._* It is to *_generate unemployment,_* but for the express purpose of then immediately eliminating _all_ the unemployment your tax liability created by hiring _all_ the unemployed to provision the State with workers. This is in MMT analysis, which most people fail to understand, even most politicians, which is why they get the tax story completely backwards. They (falsely) believe governemtn has to tax us to get money to then spend. But this is backwards. No one can pay taxes until the government (or banks) issue money. Spending (or bank investment) always precedes taxation. Why tax us then if they do not need our money? Well, as I just explained, the government desires public sector workers, so it *_needs us to need it's currency._* That's why it taxes, whether they know it or not!!! There is no other fundamental reason for tax (although there are valid secondary reasons, e.g., to offset some spending to limit inflation). Kings and rulers used to understand this, that's why they called tax receipts "revenue" from the French "return back"), making it clear in language the government first issue the tax liability, then can spend (since now it finds willing takers) and then later it taxes (to prove the tax liability was real). Whatever amount of currency government spends that it does not tax back is left in the private sector as savings. Dynamical savings are also generated by bank credit, but only at the expense of someone else's debt. *_Investment creates savings,_* one of the few iron laws of monetary economics, or you can put it another way: Savings are the accounting record of past investments. [*} So-called quantitative easing (QE) by the CB is not the central bank creating money, it is an asset swap, bonds are swapped for reserve deposits, it is functionally equivalent to shifting money from a savings term deposit account to a cheque account, so QE does not create any new money. By law, in almost all countries (outside the EU) only government via votes in Parliament can create money _ab initio_ out of thin air by typing numbers into bank accounts. Private banks do create money too, but they cannot create *_net money,_* since when they create credit money, it must by law incur a debt repayment liability, but they will create credit money out of thin air if they can find a credit-worthy borrower. This is the source of Minsky instability --- too much credit money fuelling an economy is unstable, since debt growth rate is exponential if it is not paid down in the aggregate, whereas the real goods production growth required to repay debts is sigmoidal, the aggregate private debt eventually overwhelms the private GDP capacity to repay, unless the government issues non-debt fiat currency by net spending more than it taxes (aka. running a fiscal deficit).

[@iambored8342]

Great job

[@Achrononmaster]

@6:56 also not quite true. Economic systems are non-smooth, so in fact the continuum assumption in Keen's work is an approximation. The "correct" method to analyse economic dynamics is in fact with difference equations, since all money flows are discrete steps. The problem with the orthodox books is not their use of difference equations, it's that they use bad models. Nothing wrong of course with Keen's models, as a continuum approximation they are fine since, (a) the macroeconomy is close enough to looking like quasi-continuous money flows since bank clearing payments are done in the background these days, the consumer does not notice any appreciable step changes and most of the time no one is instantly spending any huge fraction of GDP, and (b) in the end he uses numerical methods which are discrete, and so under the hood his Minsky software is using difference equations, it's just he sets up the ODE solver with differential equation expressions.

[@jamesmorton7881]

Classical Systems Engineer (plant function is S domain) works in the real world. step function system response will result in billions dying. declining global oil production will smash the constant growth fantasy, industrial production will dive for the bottom club of Rome results continue to predict global growth behavior, the BAU is looking best. 2022 peaking on the down side from now on.

[@mecom3450]

18:20 《and the area the mainstream is wrong on, is how they analyze what is the impact of that government debt. And while they ignore private debt, they obsess about government debt, and they’ve got it, here’s an Australian expression, arse about tit. Totally backwards.》 （主流が間違っているのは、政府債務の影響をどう分析するかです。民間の債務を無視する一方で、政府債務に執着しています。オーストラリアの表現では、「おっぱいのお尻」です。完全に逆です）[DeepL翻訳]

[@TheMacoskos]

I would say you have it exactly the way Prof. Keen also feels! I'm glad you found his interview!

[@Achrononmaster]

@7:00 Not really the full truth. Mas-Collel, Arrow, Debrue and others know more math, and in some senses more sophisticated math (algebraic topology and the like), than Prof Keen, so it is _not just_ the math illiteracy[*] blocking the orthodoxy (though Keen is dead right the math they use is all describing a dynamically sterile fantasy world). The Thai people know deeply about what the resistance to the paradigm shift to MMT is, it's called "saving face". The Neo-Keynesians and Monetarists simply cannot dare admit they've been wrong about austerity and government debt all these years. To acknowledge that is tantamount to admitting to mass manslaughter, practically genocidal economic malpractice, and that's not hyperbole, it'll be what the future history records recount. [*] Your average journeyman orthodox economist, however, is as Prof Keen says, pretty pedestrian in use of math, not that math qualifies one as a wise economist (it does not). The best economists start with anthropology and have the welfare of people in mind ahead of economic indicators for whihc no accurate forecasting models exist. If you take care of people, you will take care of the "economy". And know also there is no such thing as "the economy" it is an abstraction. Full employment, balance sheets, money, production and real goods people need are the proper objects of study, not inflation or interest rates (which a monopoly currency issuer sets, whether it knows it or not).

[@AcademicInfluence]

Thank you, Bijou! Your insightful comments really help.

[@thomasd2444]

comment 2. 20:00 -

[@thomasd2444]

comment 1. 10:00 -

[@Rob-fx2dw]

Keen conveniently for his own theory ignores financial reality when he claims private debt is the problem. It leads to the gross misleading narrative which when the real facts are presented even he can't explain why he is correct when questioned about it althouhg he has promised to and fails to come up with any explanation.. He ignores the fact that government money is created with an equivalent debt that is forced onto the private sector when their taxes are used to pay back the borrowed money that the government Treasury spends to enable federal deficit budgets. Those borrowings are either new fiat money from the Federal Reserve bank which are exchanged for Treasury bonds or money from Treasury bond sales to the public and foreign entities. All of has to be paid back with interest when it matures. The source of funds to pay it back is taxation paid by the private sector.

[@AcademicInfluence]

Rob, it seems to be in the American makeup today to be a little more like the grasshopper and less like the ant. Winter will never arrive, right? ;-)

[@Rob-fx2dw]

@@AcademicInfluence That's correct . Try looking at this explanation of the financial direction the US is going by George Gammon who has a good grasp of those issues.

[@Rob-fx2dw]

@@AcademicInfluence Of course winter won't arrive this year . It's "different" this year because we are 'modern ' !! Don't worry about the historical facts - We are 'modern' !

[@stevo-dx5rr]

“When their taxes are used to pay back the borrowed money…”. When taxes are paid to the Federal government, the deficit is literally cancelled out by those flows. The tax money doesn’t “go somewhere”. It’s just bookkeeping

[@Rob-fx2dw]

@@stevo-dx5rr No. You are wrong. If you think it is "just bookkeeping" you obviously don't know what bookkeeping is. Bookkeeping is not concocting money and payments without actual payments and actual debt being taken into account. You can't just take off debts without actual payments of money or pretend money is created without actual payments and contracts . If you think it is as insignificant as "just bookkeeping" then try it yourself and see how you feel when you face court for fraud . Is the money someone owes you "just bookkeeping" without the money being paid ?