Steve Keen talk at Google

[Rajiv]

From Steve Keen's blog

Google runs a regular seminar series on topical issues, which I spoke at last week. There was a substantial audience (see the quick scan of the audience below) and Google’s staff lived up to their hyper-intelligent and hyper-engaged reputation.

gave a presentation that combined my standard talk on debt and Minsky, with some exposition of the Circuit and Minsky models, befitting of an audience to whom simulation is no big deal–unlike economics conferences where such approaches are still fringe activities.

The discussion was also extensive, and intertwined with the talk, so it went for a long time–almost two hours. Most of the first hour was my lecture.

And most of the second hour was an extensive discussion with Google staff that I had to call an end to because my voice was about to fail.

[bart]

Re: Steve Keen talk at Google

Thanks Rajiv, one of the best 90 minutes I've spent for a while. I have a much better picture of Keen's various positions and thoughts now.

Let's hear it for non ivory tower economics!

[Rajiv]

Re: Steve Keen talk at Google

Steve Keen's modelling is very good -- however, there are other things that have to be incorporated inyo with his model to get a much more realistic view of the world.

Keen mentions one of those in his blog -

Next week I hope to post the recent presentation to UNEP of my work with the CSIRO, which will showcase both the dynamic multisectoral monetary model of production I have built, and the CSIRO’s multidimensional - database - driven biophysical model of the economy.

Another is incorporating energy and biological/ecological constraints in the models (perhaps CSIRO's model is one of them) like the one from Cornell -- talked about by George Mobus for example - The Dynamics of an Abstract Economic System and also his other postings on Biophysical economics.

Other approaches as espoused by Frank Rotering - looking at needs and limits

Real World Economic Review published by the Post Autistic Economics network is another place where new economic paradigms are talked about.

[ThePythonicCow]

Re: Steve Keen talk at Google

Another is incorporating energy and biological/ecological constraints in the models (perhaps CSIRO's model is one of them) like the one from Cornell -- talked about by George Mobus for example - The Dynamics of an Abstract Economic System and also his other postings on Biophysical economics.

Awesome stuff.

If I understand my initial partial reading correctly, Mobus is saying that rising debt makes sense so long as there is rising productivity, and that we will have (oops - have had, past tense) rising productivity in our human economy so long as we have a rising "net energy" from oil. Peak cheap total energy from oil is happening about now, give or take, but peak cheap net energy (net of the energy costs of production) happened earlier.

Debt makes sense when you will be producing or earning more in the future than now. If future dollars are easier to obtain than present dollars, paying with future dollars (aka debt) is easier.

For human civilization on planet Earth in modern times, the net energy we obtain from petro is an excellent proxy for our economic productivity.

That net energy is already declining, putting anyone still holding debt or (even worse) requiring more debt in a tight spot. Future productivity will be more dear, not less, than present productivity.

This ties oil and debt and economic trends together better than anything I recall seeing.

Thanks, Rajiv.

[metalman]

Re: Steve Keen talk at Google

Awesome stuff.

If I understand my initial partial reading correctly, Mobus is saying that rising debt makes sense so long as there is rising productivity, and that we will have (oops - have had, past tense) rising productivity in our human economy so long as we have a rising "net energy" from oil. Peak cheap total energy from oil is happening about now, give or take, but peak cheap net energy (net of the energy costs of production) happened earlier.

Debt makes sense when you will be producing or earning more in the future than now. If future dollars are easier to obtain than present dollars, paying with future dollars (aka debt) is easier.

For human civilization on planet Earth in modern times, the net energy we obtain from petro is an excellent proxy for our economic productivity.

That net energy is already declining, putting anyone still holding debt or (even worse) requiring more debt in a tight spot. Future productivity will be more dear, not less, than present productivity.

This ties oil and debt and economic trends together better than anything I recall seeing.

Thanks, Rajiv.

let's lobby for a a keen, hudson, ej faceoff.

[ThePythonicCow]

Re: Steve Keen talk at Google

let's lobby for a a keen, hudson, ej faceoff.

If you're up to your common task of reminding us that "if it's worth saying, it's been said before ... on iTulip", then I'm afraid your post is a tad too cryptic for me. Sorry.

[Rajiv]

Re: Steve Keen talk at Google

I think Metalman is correct -- I think we need to put together a unifying voice, that identifies the problems of the system, and the solutions that need to be adopted. Bringing together Keen, Hudson and EJ may be a good idea.

[bart]

Re: Steve Keen talk at Google

Bringing together Keen, Hudson and EJ may be a good idea.

Maybe Finster & I can do Vulcan mind-meld and join in? :eek: ;)

Steve Keen's modeling is very good -- however, there are other things that have to be incorporated into with his model to get a much more realistic view of the world.

Indeed, there's no single economist that has the full answer, and it's quite the minefield in winnowing the chaff and finding the pearls.

Although I do agree with most of Keen's work, I do have a significant problem with his view about deposits and/or base trailing credit creation. Per my work, the actual facts just plain don't bear it out:

[rabot10]

Re: Steve Keen talk at Google

If you're up to your common task of reminding us that "if it's worth saying, it's been said before ... on iTulip", then I'm afraid your post is a tad too cryptic for me. Sorry.

I'm with the Cow wtf is your point

[ThePythonicCow]

Re: Steve Keen talk at Google

Indeed, there's no single economist that has the full answer, and it's quite the minefield in winnowing the chaff and finding the pearls.

Although I do agree with most of Keen's work, I do have a significant problem with his view about deposits and/or base trailing credit creation. Per my work, the actual facts just plain don't bear it out:

It's a minefield alright, with enough data mines to threaten any theory.

Keen can reference equally compelling (at least to a naive cow) data to the contrary. See for example his post of a year ago Steve Keen’s DebtWatch No 31 February 2009: “The Roving Cavaliers of Credit in which he explains this theory of money creation. There he provides various supporting evidence for his theory that debt precedes money, including evidence that M2 leads M1 and that debt is always larger than the money supply, not smaller.

The Data versus the Money Multiplier Model

Two hypotheses about the nature of money can be derived from the money multiplier model:

1. The creation of credit money should happen after the creation of government money. In the model, the banking system can’t create credit until it receives new deposits from the public (that in turn originate from the government) and therefore finds itself with excess reserves that it can lend out. Since the lending, depositing and relending process takes time, there should be a substantial time lag between an injection of new government-created money and the growth of credit money.

2. The amount of money in the economy should exceed the amount of debt, with the difference representing the government’s initial creation of money. In the example above, the total of all bank deposits tapers towards $10,000, the total of loans converges to $9,000, and the difference is $1,000, which is the amount of initial government money injected into the system. Therefore the ratio of Debt to Money should be less than one, and close to (1-Reserve Ratio): in the example above, D/M=0.9, which is 1 minus the reserve ratio of 10% or 0.1.

Both these hypotheses are strongly contradicted by the data.

Testing the first hypothesis takes some sophisticated data analysis, which was done by two leading neoclassical economists in 1990.[3] If the hypothesis were true, changes in M0 should precede changes in M2. The time pattern of the data should look like the graph below: an initial injection of government “fiat” money, followed by a gradual creation of a much larger amount of credit money:


Their empirical conclusion was just the opposite: rather than fiat money being created first and credit money following with a lag, the sequence was reversed: credit money was created first, and fiat money was then created about a year later:

“There is no evidence that either the monetary base or M1 leads the cycle, although some economists still believe this monetary myth. Both the monetary base and M1 series are generally procyclical and, if anything, the monetary base lags the cycle slightly. (p. 11)

The difference in the behavior of M1 and M2 suggests that the difference of these aggregates (M2 minus M1) should be considered… The difference of M2 – M1 leads the cycle by even more than M2, with the lead being about three quarters.” (p. 12)

Thus rather than credit money being created with a lag after government money, the data shows that credit money is created first, up to a year before there are changes in base money. This contradicts the money multiplier model of how credit and debt are created: rather than fiat money being needed to “seed” the credit creation process, credit is created first and then after that, base money changes.

It doesn’t take sophisticated statistics to show that the second prediction is wrong—all you have to do is look at the ratio of private debt to money. The theoretical prediction has never been right—rather than the money stock exceeding debt, debt has always exceeded the money supply—and the degree of divergence has grown over time.(there are attenuating factors that might affect the prediction—the public hoarding cash should make the ratio less than shown here, while non-banks would make it larger—but the gap between prediction and reality is just too large for the theory to be taken seriously).

If I were smarter, perhaps I would have a unifying explanation for this apparent contradiction.

[ThePythonicCow]

Re: Steve Keen talk at Google

If I recall correctly (I'm no metalman, sorry) EJ has been saying that (1) the money supply will go up (which it has been doing), hence (2) inflation will happen.

We see reports of inflation (in food prices, say) but also of deflation (in real estate for example.) My take is that what we're seeing so far are mostly readjustments away from marble counter tops to pork and beans. The financial misadventures of the last few decades have led to a seriously out of whack allocation of resources and now as hard times roll over the land like a dense fog, it's back to basics and essentials. This means a collapse in demand for inessentials, which typically causes increased volatility in their prices as the producers and sellers of inessentials struggle to survive, or abandon the struggle with a going out of business sale. The rising cost of credit (banks get it cheap, yes, but the rest of us find credit more dear these days) leads to sporadic supply side crunches especially in investment heavy industry, and the continuing strong demand for basics leads to unstable and rising prices for pork and beans, and other such essentials.

Anyhow, back to my initial point. We for sure see a rising monetary base, but the evidence of inflation is more conflicting and subject to other explanations.

Perhaps the conventional "money multiplier" model of money creation is wrong, as Keen says. If so, and if EJ's reasoning that seems based on the notion that more money causes more inflation (do I understand EJ right in this?) is flawed, then would not this raise a substantial question for the iTulip forecast?

[ThePythonicCow]

Re: Steve Keen talk at Google

As I read more of Steve Keen’s DebtWatch No 31 February 2009: “The Roving Cavaliers of Credit it is rather obvious that I must have read it before, and that much of what I've been spouting off this last day regarding our debt based monetary system is but the dubious handiwork of a junior junior scribe, quill in hand, copying the works of the masters with an abundant addition of errors and confusions.

Re-read Keen for yourself I urge the gentle reader.

[Ann]

Re: Steve Keen talk at Google

As I read more of Steve Keen’s DebtWatch No 31 February 2009: “The Roving Cavaliers of Credit it is rather obvious that I must have read it before, and that much of what I've been spouting off this last day regarding our debt based monetary system is but the dubious handiwork of a junior junior scribe, quill in hand, copying the works of the masters with an abundant addition of errors and confusions.

Re-read Keen for yourself I urge the gentle reader.

Keen forecast a deflationary crash in 2009. Did this occur but I slept through it?

[ThePythonicCow]

Re: Steve Keen talk at Google

Keen forecast a deflationary crash in 2009. Did this occur but I slept through it?

Perhaps it will occur in the same year as the stock market crash EJ predicted :rolleyes:.

More usefully, I look for those who help my understanding, then I make my own investment calls. I don't look for those who promise to give me error-free market calls, as they are either liars or newbies.

Anyone worth reading (and many more not worth reading, unfortunately) has made wrong calls. That is not the measure of insight.

(By the way, are you married to Metalman ;)?)

[Ann]

Re: Steve Keen talk at Google

Perhaps it will occur in the same year as the stock market crash EJ predicted :rolleyes:.

More usefully, I look for those who help my understanding, then I make my own investment calls. I don't look for those who promise to give me error-free market calls, as they are either liars or newbies.

Anyone worth reading (and many more not worth reading, unfortunately) has made wrong calls. That is not the measure of insight.

(By the way, are you married to Metalman ;)?)

Not so. EJ predicted a 40% decline in stocks AND a rise in gold prices in 2008 when Keen predicted a huge deflationary collapse but made no predictions on stocks or gold. He did not stick his neck out at all.

Had EJ gotten this wrong, if stocks and gold both fell 40%, or not stocks but only gold, then I and thousands of subscribers would have abandoned iTulip.

You have no idea where you are, do you?