Steve Keen talk at Google

[bart]

Re: Steve Keen talk at Google

Throughout my various research efforts, I've found so many ways to try and get a handle on the big inflation vs. deflation question that my mind has been known to boggle... and here's my best shot so far, and even it does not include anything about velocity or monetary lags.

[ThePythonicCow]

Re: Steve Keen talk at Google

As far as debt leads credit, not only did my prior chart show that base + deposits leads credit:

Where would be the easiest place (if any such exists) for me to get the data that's in this chart in numerical form, not graphical?

I presume that with a little messing around, I could compute the correlation of the two data series, for various time shifts of one versus the other. That strikes me as a more accurate way of determining delayed correlations than eyeballing charts.

(The larger question of my response your post and how I think that relates to Keen's work remains open, for want of any cluefulness on my part yet :rolleyes:.)

[ThePythonicCow]

Re: Steve Keen talk at Google

bart wrote:

To comment as he does on the money multiplier area is quite odd to me - all it really boils down to is that the velocity of money changes, and affects "total money". I wish he would have used a different term and headline.

I was unable to understand this part of your post, bart. Sorry.

My take is that Keen uses the term "money multiplier model" to refer to the mainstream economics notion that:

• The government or some bank or whatever creates fiat money, then
• banks engaging in fractional reserve lending stretch that money by relending it to make it look like more money (multiply it.)

Keen's description of this model seems reasonable to me; I'm willing to agree that this is the mainstream understanding of fiat money these days, and I remain enamored of Keen's alternative explanation, in which banks create debt out of thin air, as a pair of balancing entries on their ledger.

Where did I fall off the wagon as you see it?

[metalman]

Re: Steve Keen talk at Google

I remain enamored of Keen's alternative explanation, in which banks create debt out of thin air, as a pair of balancing entries on their ledger.

what? that's the argument itulip had with keen in 2007... that contradicted the keen deflation case. he said the banks could not do that... deflation for sure.

wrong.

sigh...

used to like keen. another mish.

[bart]

Re: Steve Keen talk at Google

Where would be the easiest place (if any such exists) for me to get the data that's in this chart in numerical form, not graphical?

I presume that with a little messing around, I could compute the correlation of the two data series, for various time shifts of one versus the other. That strikes me as a more accurate way of determining delayed correlations than eyeballing charts.

(The larger question of my response your post and how I think that relates to Keen's work remains open, for want of any cluefulness on my part yet :rolleyes:.)

Fair enough, and have fun.

Z1 will need to be interpolated since its only quarterly (I estimate it weekly with a massive "Excel lookup" using bank credit, comm'l/industrial credit, real estate credit, etc. - over 15 items - and it would take quite a while to detail it for you), but Z1 is here in a PDF: http://www.federalreserve.gov/releases/z1/current/

Checkable deposits:
http://research.stlouisfed.org/fred2/series/WTCDNS

Base:
http://research.stlouisfed.org/fred2...WSBASE/124/Max

Debt:
http://research.stlouisfed.org/fred2/series/GFDEBTN
and
http://www.treasurydirect.gov/NP/BPD...application=np

[bart]

Re: Steve Keen talk at Google

bart wrote:
I was unable to understand this part of your post, bart. Sorry.

My take is that Keen uses the term "money multiplier model" to refer to the mainstream economics notion that:

• The government or some bank or whatever creates fiat money, then
• banks engaging in fractional reserve lending stretch that money by relending it to make it look like more money (multiply it.)

Keen's description of this model seems reasonable to me; I'm willing to agree that this is the mainstream understanding of fiat money these days, and I remain enamored of Keen's alternative explanation, in which banks create debt out of thin air, as a pair of balancing entries on their ledger.

Where did I fall off the wagon as you see it?

If that's true, I wish he would have used the term "fractional reserve" instead of "money multiplier" - semantics are a b*tch sometimes. It wasn't at all clear to me that he wasn't talking about velocity.


To hopefully be clearer, banks can indeed and of course do create money out of thin air - especially central banks.

What I believe that the data and charts show though is that deposit and base growth are present prior to credit creation, and that its the historical pattern. Gov't debt shows no similar pattern after the mid '80s or so.

[ThePythonicCow]

Re: Steve Keen talk at Google

that contradicted the keen deflation case. he said the banks could not do that [create debt as a pair of balancing entries on their ledger.]

metalman - do you have a link to where Keen said banks don't create debt this way?

[ThePythonicCow]

Re: Steve Keen talk at Google

the keen deflation case. he said ... deflation for sure.

That's not what I'm seeing. Take for example the following quote of Keen, from Interview with Dr. Steven Keen: The Future of Debt Deflation - Part II:

Keen: There is such a momentum behind the declining American dollar and so much economic need for the dollar to fall that there’s not much the American economy can do to control that fall. And of course the other aspect of that I think is very important is that China in terms of production is ultimately going to have to revalue against the dollar. Global warming and peak oil are driving up input costs. There are forces of inflation that are beyond any control by the Federal Reserve so they can persist for quite some time.

What I'm seeing Keen say on these matters is that we'll most likely have debt and asset price deflation (at least in real terms), along with a declining dollar and commodity price inflation.

[ThePythonicCow]

Re: Steve Keen talk at Google

Many of you may recall the following famous cartoon:

Sometimes I worry that discussions of inflation or deflation are like this, with all subtleties of whether it's asset or debt or commodity or wage or this or that going up or down or being volatile in what time frame relative to what are lost. It immediately devolves to inflation yes, deflation no.

[ThePythonicCow]

Re: Steve Keen talk at Google

If that's true, I wish he would have used the term "fractional reserve" instead of "money multiplier" - semantics are a b*tch sometimes. It wasn't at all clear to me that he wasn't talking about velocity.

Allow me to reassure you that I am well aware that my interpretation of Keen may be well off the mark.

[ThePythonicCow]

Re: Steve Keen talk at Google

If that's true, I wish he would have used the term "fractional reserve" instead of "money multiplier" - semantics are a b*tch sometimes. It wasn't at all clear to me that he wasn't talking about velocity.

From the iTulip post Max Keiser and Steve Keen and the implications of what was said by Rajiv late last year comes a (perhaps) clearer statement of what Keen means by "money multiplier":

But as PhD economist Steve Keen pointed out last week, 2 Nobel-prize winning economists have shown that the assumption that reserves are created from excess deposits is not true:
The model of money creation that Obama’s economic advisers have sold him was shown to be empirically false over three decades ago.

The first economist to establish this was the American Post Keynesian economist Basil Moore, but similar results were found by two of the staunchest neoclassical economists, Nobel Prize winners Kydland and Prescott in a 1990 paper Real Facts and a Monetary Myth.

Looking at the timing of economic variables, they found that credit money was created about 4 periods before government money. However, the “money multiplier” model argues that government money is created first to bolster bank reserves, and then credit money is created afterwards by the process of banks lending out their increased reserves.

That "pointed out" link goes to the post by Keen on his blog It’s Hard Being a Bear (Part Five): Rescued? which states (more clearly):

In explaining his recovery program in April, President Obama noted that:

“there are a lot of Americans who understandably think that government money would be better spent going directly to families and businesses instead of banks – ‘where’s our bailout?,’ they ask”.

He justified giving the money to the lenders, rather than to the debtors, on the basis of “the multiplier effect” from bank lending:

the truth is that a dollar of capital in a bank can actually result in eight or ten dollars of loans to families and businesses, a multiplier effect that can ultimately lead to a faster pace of economic growth. (page 3 of the speech)

This argument comes straight out of the neoclassical economics textbook. Fortunately, due to the clear manner in which Obama enunciates it, the flaw in this textbook argument is vividly apparent in his speech.

This “multiplier effect” will only work if American families and businesses are willing to take on yet more debt: “a dollar of capital in a bank can actually result in eight or ten dollars of loans”.

So the only way the roughly US$1 trillion of money that the Federal Reserve has injected into the banks will result in additional spending is if American families and businesses take out another US$8-10 trillion in loans.

[Down Under]

Re: Steve Keen talk at Google

That's not what I'm seeing. Take for example the following quote of Keen, from Interview with Dr. Steven Keen: The Future of Debt Deflation - Part II:

What I'm seeing Keen say on these matters is that we'll most likely have debt and asset price deflation (at least in real terms), along with a declining dollar and commodity price inflation.

I haven't looked at detail into Keen's analysis. However, he sold his unit here in Sydney beginning of 2009 and his superannuation (retirement) fund is 100% cash. I can't provide a link to the 100% cash position but read it on his blog.

Since I'm convinced of the inflation argument, Jim Sinclair, EJ, Jesse, I've stopped reading Keen.

[ThePythonicCow]

Re: Steve Keen talk at Google

Since I'm convinced of the inflation argument, Jim Sinclair, EJ, Jesse, I've stopped reading Keen.

I suspect there's still confusion here.

This is not best understood as some disagreement over whether there will be inflation or deflation or neither.

Keen is debunking the "money making and distribution" mechanisms (aka the printing press and helicopter ;)) that the almost everyone these days, "inflationists" included, usually presume.

Most of our money was not "printed" by fiat into existence, but rather lent or contracted into existence as the liquid monetary half of the creation of a debt, mortgage, derivative, swap or other contract.

Now to say that the "inflationists" are wrong on how our money is usually created is not to say they are entirely wrong about inflation.

My view is that Keen is closer to right than most of us in explaining how our money is created. At the same time, EJ may be underestimating how rapidly the dollar will lose value over the next couple of years. However the key mechanism for the loss of value of the dollar will not be the Fed's Quantitative Easing or other such new money printing (or new mechanisms to fatten up select bank balance sheets.)

Rather the two key processes of the last year and continuing for the next year or two will be:

• the sale of dollar denominated assets (real estate, stocks, bonds, ...) for dollars, and
• the purchase, using those dollars, of more essential physical assets (food, energy, labor, ...)

Someone, perhaps EJ himself, showed us an image of two pyramids, one inverted over the other. The bottom pyramid represented physical assets (food, clothing, shelter, tools, ...) The upside-down upper pyramid represented paper assets (investment real estate, mortgages, stocks, bonds, derivatives, swaps, ...) At the center, where the apexes of the two pyramids met were the commodity metals gold and silver.

The primary shift now is down that pair of pyramids. Three years ago the most abstract paper derivatives at the very top were the "hot spot" of most rapidly increasing value. That hot spot is moving downward hard and fast, though with considerable volatility. So far the dollar is not far from where it was three years ago, albeit after much volatility. When something in the top pyramid collapses (say some Wall Street investment banks or a Mortgage Backed Security bubble in several countries) this drives wealth downward toward the dollar, strengthening it. On the other hand, if more dollars and treasuries are created (increasing Treasury debt or the Fed balance sheet) in an effort to avoid such failures, this drives bad debt toward the dollar-Treasury nexus, weakening it.

As always the "smart" investor wants to "beat the crowd." You don't just want to purchase something that is priced cheaply; you want to do so just before the crowd discovers it and bids up the price. Similarly on the top side, you want to sell just before the crowd rushes for the exits. Hence EJ's recommendations to (1) "buy stuff" from the lower pyramid and to (2) buy gold at the bottom apex of the top pyramid were both excellent recommendations.

We're moving down those pyramids, no doubt. But as always, we're doing it like the waves of the ocean tides, with shorter term oscillations overlaying longer term oscillations.

The bulk of the value destruction of the higher level paper assets (securitized debt, derivatives, swaps, ...) will come from forced liquidation of those assets, not from simply "money printing" diluting the monetary units.

The bulk of the nominal price increases in more essential physical goods (food, gas, ...) will come from (1) supply side destruction in the weaker investment environment, (2) downsizing individuals and companies, having to deal with deleveraging, job or market loss and failed investments by focusing their remaining liquid resources on the essentials, and (3) "smart" investors beating the crowd.

This is not essentially a fiat currency hyper inflation in which the nominal price of everything goes to the moon. This is essentially the destruction of the dollar and the collapse of an immense world-wide debt pyramid. Some prices will go to zero (stocks in most financially entangled companies, MBSs, CDOs, swaps, overpriced real estate, ...) while other prices go to the moon (food.)

This is not pure inflation. It is not pure deflation. It's a big shift towards the essentials such as food, combined with a general lowering of prosperity and increasing of social unrest and tyranny.

As usually happens in times of extended prosperity and concentration of power, corruption becomes extensive and embedded. This "bezel" of corruption will need to be shrunk dramatically before we can return to healthy growth. It is entirely unclear to me whether this shrinking of the bezel will happen in yours or my lifetime.

[bart]

Re: Steve Keen talk at Google

Chart updated with government debt change rates, and I still maintain that Keen is not fairly reflecting the full picture.

[Rajiv]

Re: Steve Keen talk at Google

You should be able to clarify Keen's thoughts by writing to him