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ing i think the how much question is raised as a smoke screen something to distract and confuse the reader so that when keen and mitchell tell you it doesn t work you re glad to hear it and glad to toss the concept aside keen presents two hypotheses about money that arise from the money multiplier model one is that government money is created first and credit money is created from it but after the government money is created keen references a study showing that the opposite is true the other is that each new loan in the fractional reserve process creates new money and new debt in equal amounts so that at the end there should be exactly the same amount of money and debt except when we add in the money we started with we end up with more money than debt the amount of money in the economy should exceed the amount of debt with the difference representing the government s initial creation of money therefore keen says the ratio of debt to money should be less than one this is the first time i have seen anybody other than me talk about the ratio of debt to money which i call debt per dollar so i m kinda thrilled by this more than kinda because it s keen but i ve been looking at it for 30 years and it never occurred to me that if the money multiplier idea is correct there should be more money than debt maybe keen s right i don t know but let me show you why i ve been looking at the thing for 30 years back when i first looked at it using numbers from the historical statistics the history of the ratio of debt to money looked like this graph 3 starting with five and one half dollars of debt for every circulating dollar of money debt rose to over 7 a depression ensued but debt kept rising reaching eight and one half dollars for every circulating dollar of money then from 1933 to 1947 debt fell reaching a low of less than 4 then it started rising again by 1970 it was higher than it had been at any time during the great depression i didn t have to know why this happened to know that it was significant i ve been watching debt per dollar ever since i figured policymakers would stop the increase of debt before it gave us another great depression i was wrong graph 4 but my graph only goes up to 2007 which is before the crisis so it doesn t show what happened since but fred shows it graph 5 the peak is far higher this time than it was in the 1930s the bigger they are the harder they fall oh but to tie up a loose end both steve keen and bill mitchell deny that the money multiplier is an accurate picture of what happens in the economy could be they re right when i look into it a little it seems like they re right loans create deposits if the bank doesn t have enough reserves to lend what it wants to lend it lends anyway and gets the reserves later but what happens if the bank does have enough reserves to lend what it wants to lend then the money multiplier works normally right the bank s not going to borrow reserves if it has the reserves it needs do keen and mitchell deny that so i think their rejection of the money multiplier is a bit stronger than it should be or again if the banks always borrow the reserves they need in order to lend then the ratio of debt to reserves should be more or less constant it seems to me taking a guess what measure of reserves is relevant i ll look at total credit market debt relative to required reserves not adjusted for changes in reserve requirements how required reserves can possibly be not adjusted for changes in requirements i cannot fathom but hey i didn t make it up graph 6 not constant at all not even close so maybe i picked the wrong data but while we re looking at this graph look at the 1980s when the ratio is about 200 dollars of debt for every dollar of required reserves that figures to be an effective reserve requirement of one half of one percent and at the peak there when there was 1200 of debt per dollar of required reserves that s less than one tenth of one percent in reserve hopefully i m looking at the wrong data posted by the arthurian at 4 00 am 0 comments sunday june 19 2011 the world in red and blue 3 my graph 3 from yesterday graph 1 domestic financial gross federal debt billions red is federal blue is financial looks like the red and blue lines run really close together for a really long time well they could be pretty far apart and still look close because the recent numbers are so very very big so i want to compare the red and blue lines with a ratio graph 2 federal debt per dollar of financial debt graph 3 financial debt per dollar of federal debt oh just so you don t get the wrong impression the red line on graph 4 below is the same as the blue line on graph 3 above after world war ii there was a lot more government debt but not any more posted by the arthurian at 4 00 am 0 comments saturday june 18 2011 the world in red and blue 2 my graph from yesterday graph 1 domestic financial gross federal debt relative to gdp red is federal blue is financial i am fascinated by the parallel of the red and blue lines between 1980 and 1995 or so i want to look at the difference between the red and blue lines if i take the graph above take the red line and subtract the blue line from it it looks like the graph below graph 2 gross federal less domestic financial debt relative to gdp well look at that the golden age curve is now a golden age straight line decline from 1950 all the way to the 1974 recession then there is a possible sniff of decline from 1974 to 1980 but the line is really very flat from the mid 1970s to the mid 1990s that is the time of parallel and near parallel red and blue lines on graph 1 then beginning in the mid 1990s with the balancing of the federal budget our trend line drops to zero and drops rapidly to near 50 percentage points below zero meaning that the gross federal debt fell to about half the level of domestic financial debt or to put it more in the context of what actually happened domestic financial debt grew far far faster than the gross federal debt graph 3 domestic financial gross federal debt billions red is federal blue is financial until the crisis of course the crisis changed everything but now i m fascinated by the apparent long running closeness of the red and blue lines posted by the arthurian at 4 00 am 0 comments friday june 17 2011 the world in red and blue this is the last graph from my homework post of the 11th domestic financial debt compared to the gross federal debt graph 3 the blue line on graph 3 is financial debt as a percent of gdp the red line is the gross federal debt as a percent of gdp the vertical gray stripes are recessions the graph shows a recession at 1970 and then one at 1974 among others economists say there was a golden age for our economy that lasted from 1947 to 1973 that golden age appears on this graph in the red line starting at the left sweeping downward rapidly then less rapidly then less again until the 1974 recession when the line goes flat and that is when the golden age ended there were some troubles in the economy around 1970 there was stagflation and we went off gold in 1971 and since the mid 1960s inflation was becoming a problem these troubles occur during the slow decline of the red line then with the 1974 recession the red line goes flat it is the end of the golden age the end of keynesian economics and the beginning of a time of disarray with ronald reagan in 1980 everything changes the red line rises and runs parallel to the blue line for 15 years and then in the 1990s we balance the federal budget the red line turns downward crossing the blue after 2000 or 2001 the budget goes into deficit again and the red line rises not much for a few years but then more quickly at the end and at the end we see the red line shooting up and the blue line shooting down that shooting is the crisis at right after the red and blue lines stop the white is the undiscovered country posted by the arthurian at 4 00 am 0 comments thursday june 16 2011 i can t comment there so i ll post here at philipji com the top post today is james k galbraith has not read keynes philip is new to me thanks jazz and i m just reading quick to get some impressions but i had to stop when i read this keynes did not ascribe any importance to banks in his model money consists entirely of currency exactly as in the ricardo that galbraith excoriates soon as i read that something maynard said popped into my head as a rule i shall as in my treatise on money assume that money is co extensive with bank deposits so keynes does ascribe importance to banks i think money does not consist entirely of currency for keynes but of bank deposits for the context of the keynes quote i provide see my may day post posted by the arthurian at 8 05 pm 4 comments singin a different tune bruce bartlett former economic adviser in the white house the treasury department and congress apparently the same guy who wrote starve the beast writes in the new york times may 31 2011 6 00 am are taxes in the u s high or low by bruce bartlett historically the term tax rate has meant the average or effective tax rate that is taxes as a share of income the broadest measure of the tax rate is total federal revenues divided by the gross domestic product by this measure federal taxes are at their lowest level in more than 60 years the congressional budget office estimated that federal taxes would consume just 14 8 percent of g d p this year the last year in which revenues were lower was 1950 yet if one listens to republicans one would think that taxes have never been higher that an excessive tax burden is the most important constraint holding back economic growth and that a big tax cut is exactly what the economy needs to get growing again just last week house republicans released a new plan to reduce unemployment its principal provision would reduce the top statutory income tax rate on businesses and individuals to 25 percent from 35 percent no evidence was offered for the republican argument that cutting taxes for the well to do and big corporations would reduce unemployment it was simply asserted as self evident if taxes are low historically and in comparison with our global competitors how are republicans able to maintain that taxes are excessively high they do so by ignoring the effective tax rate and concentrating solely on the statutory tax rate which is often manipulated to make it appear that rates are much higher than they really are the economic importance of statutory tax rates is blown far out of proportion by republicans looking for ways to make taxes look high when they are quite low and they almost never note that the statutory tax rate applies only to the last dollar earned or that the effective tax rate is substantially lower even for the richest taxpayers and largest corporations because of tax exclusions deductions credits and the 15 percent top rate on dividends and capital gains the many adjustments to income permitted by the tax code plus alternative tax rates on the largest sources of income of the wealthy explain why the average federal income tax rate on the 400 richest people in america was 18 11 percent in 2008 according to the internal revenue service down from 26 38 percent when these data were first calculated in 1992 among the top 400 7 5 percent had an average tax rate of less than 10 percent 25 percent paid between 10 and 15 percent and 28 percent paid between 15 and 20 percent the truth of the matter is that federal taxes in the united states are very low there is no reason to believe that reducing them further will do anything to raise growth or reduce unemployment highlighting added well ya never know maybe he s running for president posted by the arthurian at 4 00 am 4 comments wednesday june 15 2011 no fate but what we make let me preface this by saying that the way i do economics is to just keep thinking about things until they make sense to me it helps that i am perfectly happy to postpone reaching conclusions i figure the conclusions are there waiting for me my objective is to understand little things along the way the reason i bring this up is that this post discusses equilibrium in economics i always just figured equilibrium meant something like everything balances out and i paid it no mind then one day i came across zen babu s macro cube the post presents a cube upon which are arranged a broad collection of economic theories in a remarkable effort to organize them the three axes of zen babu s cube are monetary policy fiscal policy and equilibrium analysis now for years i have considered that monetary and fiscal are the two tools of economic policy suddenly the notion of equilibrium became elevated in importance in my mind yet it remained essentially undefined so i have had equilibrium in the back of my mind for the past year and a half or so and now with this post and the previous two the term is starting to make sense to me and that s why i have to write this preface what i think equilibrium is may not be what anybody else thinks it is including or especially economists but i have to say it so that i know what i m starting to think i m thinking equilibrium is smooth sailing steady as she goes in equilibrium if the economy s not growing it s static if growing there are no imbalances no inflation no declining capacity utilization and no perpetually accumulating debt for example equilibrium is the trend economists use to predict the future they use it ignoring inflation declining capacity utilization and perpetually accumulating debt after i finished writing yesterday s post i came upon this from the conclusion of a steve keen post i doubt that kuznets would have been surprised by the failure of equilibrium oriented attempts to build dynamic multisectoral models of economic growth since he argued long ago that dynamics had to be different to statics and in particular that the fetish with equilibrium had to be abandoned according to the economists of the past and to most of their modern followers static economics is a direct stepping stone to the dynamic system and may be converted into the latter by the introduction of the general element of change according to other economists the body of economic theory must be cardinally rebuilt if dynamic problems are to be discussed efficiently the static scheme in its entirety in the essence of its approach is neither a basis nor a stepping stone towards a proper discussion of dynamic problems kuznets s 1930 pp 422 428 435 436 emphasis added yet the static approach masquerading as dynamics via word games such as using the moniker dynamic stochastic general equilibrium to describe bastardized ramsay solow equilibrium growth models still dominate economics even after the continuing disaster of the crisis of 2007 a static economy may be seen in any simple picture of the economy that imagines producers and consumers and sets the thing in motion but eliminates growth for the sake of simplicity as in this flow diagram...
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