Tuesday, February 03, 2009

How they actually MAKE the money

A few years ago I corresponded with anti-neoclassical economist Steve Keen about his book Debunking Economics. It's not easy to classify Keen's viewpoint -- he is neither a neoclassical nor a Marxist nor even a standard "heterodox" thinker.

In this article Keen discusses how, in the modern financial system, credit markets determine the supply of money. I mentioned the same issue in my talk on the financial crisis (slide labeled Leverage). Allowing people to borrow from the future means that the money supply at any moment is a complicated function of beliefs about risk, uncertainty, the future, etc.

By clicking through to the article, you can also find out who wrote the following:

“Talk about centralisation! The credit system, which has its focus in the so-called national banks and the big money-lenders and usurers surrounding them, constitutes enormous centralisation, and gives this class of parasites the fabulous power, not only to periodically despoil industrial capitalists, but also to interfere in actual production in a most dangerous manner— and this gang knows nothing about production and has nothing to do with it.”

Based on his nonstandard view of money and the money supply, Keen identifies four big problems for Bernanke:

1. Banks won’t create more credit money as a result of the injections of Base Money. Instead, inactive reserves will rise

2. Creating more credit money requires a matching increase in debt—even if the money multiplier model were correct, what would the odds be of the private sector taking on an additional US$7 trillion in debt in addition to the current US$42 trillion it already owes?

3. Deflation will continue because the motive force behind it will still be there—distress selling by retailers and wholesalers who are desperately trying to avoid going bankrupt

4. The macroeconomic process of deleveraging will reduce real demand no matter what is done, as Microsoft CEO Steve Ballmer recently noted: “We’re certainly in the midst of a once-in-a-lifetime set of economic conditions. The perspective I would bring is not one of recession. Rather, the economy is resetting to lower level of business and consumer spending based largely on the reduced leverage in economy”


Anonymous said...

Marx was right as usual. Why make it so mysterious?

Anonymous said...

Marx was an extremely angry guy who wrote thinly veiled pseudo-political tracts, largely reflecting his own personal inadequacies and failures in life. Das Kapital was basically Marx's own version of "Mein Kampf".

Anonymous said...

to 6:19 PM Anonymous

Marx also isn't the only theory which was customized to always explain failure ex post facto.

The Austrian School of Economics (ie. Ludwig von Mises, etc ...) was also obsessed with explaining failure ex post facto. Same with Joseph Schumpeter.

I suppose explaining failures is a lot easier than coming up with viable solutions.

Anonymous said...

My sense of the history is that the epistemological carelessness of Marxism could be said to mirror the rationalizations and self-justification of 19th century capitalism. Many years ago Karl Popper's The Open Society and Its Enemies struck me as getting at the heart of the matter. (Popper's orientation was that of a democratic socialist as well as philosopher of science.)

Capitalism, Marxism, and their derivatives all have a lot to answer for. Neither of them seem capable of coming to grips with the profound problems now facing the human species on this planet. The constraints imposed by nature are indifferent to political ideology or the comfortable conventions of economic policy-making and business planning and strategy.

Anonymous said...

keen appears to have it exactly right

whether the governments remedy is the purchase of the banksters toxic waste securities, or tax rebates and deductions, or outright recapitalization of institutions, none of these purported remedies will turn the corner on this ugly ugly financial crisis

because the trillions of dollars of debt destruction, dwarf by nearly an order of magnitude all of the above stimuli and bailouts

debt is money, and debt is being destroyed at an alarming rate whether it is by bankruptcy, foreclosure or consumers just paying off and refusing to take on more...not to mention banks refusing to grant...more credit

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