[Steve_American]

I'm told that the economics textbooks have not changed much for 40 years. That this is to some extent just laziness on the part of their authors. If true this is a HUGE problem. Why?

Economics claims to be a “science”. Sciences all rely on numbers and mathematics for their rigor.
The thing is there has been a revolution in mathematics in the last 40 years. Chaos Theory was discovered on one of the first personal computers. Chaos Theory is all about 2nd order equations and iterative systems [like the populations of bugs]. Chaos Theory has shown that you CAN NOT simplify the equations without destroying the insights you get from solving them. It is the study of dynamic systems.

Economics froze itself just before Chaos Theory became widely know. So, economics needed to use simplifying assumptions to be able to prove things. They didn't realize the simplifying assumptions will often destroy the insights that you get from solving the resulting simpler equations. Economics needed to assume that the economy of each nation is in equilibrium [or at least close to it]. At the time there was no way to study systems that were dynamic.
. . . Let me illustrate this with water flowing down a channel. If the channel has smooth concrete walls and the slope is not too great you get “laminar flow”. This is like equilibrium. At any given time the flowing water in front of a point is pretty much the same as at any other time. However, if the channel is full of big rocks and the slope is steep you get turbulent flow. Now, the flow is constantly changing. I can tell you from my personal experiences in engineering school in the late 60s, that then they had no theory for turbulent flow. They used empirical solutions like the Reynolds Number to approx. reality good enough to get on with designing things. Chaos Theory and computers lets us now solve the equations of turbulent flow.

When economics assumed that the US economy was in or near a state of equilibrium it necessarily made a huge mistake [to be able to get any result], because the economy is one of the most dynamic and turbulent things in reality. By refusing to change their theory economists are doing the nation a great disservice.

Obviously, Mainstream or Neo-liberal economics has made a lot of other assumptions that they also refuse to change. Like banks can only lend the money they get from their depositors (proven false by an experiment 4 years ago), like their model can ignore the effects of private borrowing as a result of that, like Gov. selling bonds to deficit spend crowds out private investment and raises interest rates [when the opposite is true*], like having a Gov. surplus is a good thing because it is the Gov. saving dollars for when it will need them in the future**, and many others.

In summary, the economics taught in 95% of economics classes is full of false assumptions. Even one would invalidate it but over a dozen or 2 makes it worthless.



.* . In the aftermath of the GFC/2008 it was widely reported that the big banks had $3 Trillion to loan but would not loan it. It was also widely reported the big corps. had trillions of dollars on hand. So, after 6-7 years of GW Bush deficit spending there was still plenty of money on hand. Private investment had not been “crowed out” by a long shot.
** . The US Gov. running a surplus (by accounting definition) always is accompanied by the private sector being in deficit (meaning it must be drawing down its savings or borrowing from banks). this is rarely a good thing to do. This is true as long as the foreign sector is in deficit.

[quetzalcoatl]

The Misbehavior of Markets: A Fractal View of Financial Turbulence annotated edition Edition by Benoit Mandelbrot

This is a worthwhile, if somewhat frustrating, read - but it sounds like the direction you're going in.

[Oxymandias]

@Steve_American

Economics is less of a science and more of an art. Abstraction is necessary but it cannot be done through the simple usage of equations and other mathematical models. Due to the sociological properties of economics, this makes that impossible.

If you are interested in chaos theory, you should check out complexity science. A large part of my political philosophy is based upon complex systems.

[Steve_American]

@Steve_American

Economics is less of a science and more of an art. Abstraction is necessary but it cannot be done through the simple usage of equations and other mathematical models. Due to the sociological properties of economics, this makes that impossible.

If you are interested in chaos theory, you should check out complexity science. A large part of my political philosophy is based upon complex systems.

My point was that in the 60s and 70s economists still had to assume an equilibrium condition before they could solve the equations in some sense.

After Chaos Theory was born there was a new tool to think about complex systems.
CT said that a system could jump between different states at seemingly random times even though they were totally determined.
CT showed that simplifying the equations destroyed much of the interesting behavior. It just isn't true that a slight change makes little difference.
Mainstream or Neo-liberal or Neo-classical economics has not kept up with the times. And still uses assumptions to simplify complex systems, in ignorance of the fact that this usually gives spurious results. The nation's economy is constantly changing, it is not in equilibrium.
This is just another reason the MMT may be a better theory of economics.
.

[Truth To Power]

My point was that in the 60s and 70s economists still had to assume an equilibrium condition before they could solve the equations in some sense.

Equilibrium has the same role in neoclassical economics as circular orbits had in pre-Keplerian astronomy.

The nation's economy is constantly changing, it is not in equilibrium.

More to the point, few markets spend much time close to equilibrium.

This is just another reason the MMT may be a better theory of economics.

MMT is a better theory of economics than neoclassical economics. But then, so is astrology.

[Steve_American]

Equilibrium has the same role in neoclassical economics as circular orbits had in pre-Keplerian astronomy.

More to the point, few markets spend much time close to equilibrium.

MMT is a better theory of economics than neoclassical economics. But then, so is astrology.

I doubt the astrology can be shown to be a better economic theory than Neo-classical economics.
However, is astrology a better theory than MMT?
I think MMT is a better economic theory than astrology.
.

[Truth To Power]

I doubt the astrology can be shown to be a better economic theory than Neo-classical economics.

Astrology is merely delusional. Neoclassical economics is actively deceitful.

I think MMT is a better economic theory than astrology.

I agree, but MMT takes a key insight -- that almost all our money is created by private commercial banks as loan proceeds -- and spins it into some delusional ideas about taxation, debt, government spending and economic relationships.

[Steve_American]

Astrology is merely delusional. Neoclassical economics is actively deceitful.

I agree, but MMT takes a key insight -- that almost all our money is created by private commercial banks as loan proceeds -- and spins it into some delusional ideas about taxation, debt, government spending and economic relationships.

Yes, MMT does get around to pointing that* out, but it is not where MMTers start.
MMT starts with the fact that the US Gov. is off the gold standard.
That therefore, rules that protected the gold supply of the nation no longer apply.


.* . "that" being --- that almost all our money is created by private commercial banks as loan proceeds

[Truth To Power]

MMT starts with the fact that the US Gov. is off the gold standard.
That therefore, rules that protected the gold supply of the nation no longer apply.

But that's not news, everybody knows it. OTOH, very few people -- and apparently a minority of economists -- know that almost all our money is created by private commercial banks as loan proceeds.

[Steve_American]

MMT starts with the fact that the US Gov. is off the gold standard.
That therefore, rules that protected the gold supply of the nation no longer apply. Their only function was to protect the nation's gold supply, so now they have no function.

But that's not news, everybody knows it. OTOH, very few people -- and apparently a minority of economists -- know that almost all our money is created by private commercial banks as loan proceeds.*

Yes, everyone knows this. However, MMTers say that Neo-liberal aka Mainstream economics has not been changed to reflect this reality.
It insists that rules that protected the gold supply of the nation still do apply. MMTers say that since they don't apply any more, the US can deficit spend all it wants [as long as it avoids inflation] and that it doesn't even need to sell any US-Bonds to deficit spend. That since banks create real dollars when they make loans [and they can make loans without any limit] if the US just deficit spent without selling bonds it would not add that much more to the money supply.
MMTers say that it is far better for the US Gov. to do this than it is for the economy to rely on banks making loans because private debt must be paid back and Gov. deficit spending need not and in fact should never be "unspent".**

Notes:
.* . Crantag says that all (or almost all) economists do know this.
** . The Gov. would 'unspend' money by running a surplus, thereby taking the dollars back from the private sector.
.

[Truth To Power]

Yes, everyone knows this. However, MMTers say that Neo-liberal aka Mainstream economics has not been changed to reflect this reality.
It insists that rules that protected the gold supply of the nation still do apply.

Which rules, specifically?

MMTers say that since they don't apply any more, the US can deficit spend all it wants [as long as it avoids inflation] and that it doesn't even need to sell any US-Bonds to deficit spend. That since banks create real dollars when they make loans [and they can make loans without any limit]

Not quite. They are limited by the capital adequacy ratio, reserve requirements, and the willingness of qualified borrowers to assume debt.

if the US just deficit spent without selling bonds it would not add that much more to the money supply.

Right.

MMTers say that it is far better for the US Gov. to do this than it is for the economy to rely on banks making loans

True. Private banksters have a perverse incentive to lend too much (almost always for asset purchases, like mortgage loans) in pursuit of interest income. This contributes to the positive feedback and consequent instability of the financial system, so private banks' issuance of debt money should be prohibited.

because private debt must be paid back and Gov. deficit spending need not and in fact should never be "unspent".

Not quite. Repayment of private debt in general does not remove money from the economy. Repayment of bank debt principal does.

Crantag says that all (or almost all) economists do know this.

Then why do so many of them -- including in introductory macroeconomics textbooks like Nobel laureate Greg Mankiw's -- repeat the popular myth that banks lend out customer savings? Why does neoclassical economics pretend that money, debt and banking are irrelevant to the "real economy"?

The Gov. would 'unspend' money by running a surplus, thereby taking the dollars back from the private sector.

Repayment of commercial bank loan principal inherently deletes money from the economy. Repayment of government-issued fiat money through taxation does not inherently remove any money from the economy, just puts it back into government's hands to be spent again.

[Steve_American]

1] Which rules, specifically?

2] Not quite. They are limited by the capital adequacy ratio, reserve requirements, and the willingness of qualified borrowers to assume debt.

3] Right.

4] True. Private banksters have a perverse incentive to lend too much (almost always for asset purchases, like mortgage loans) in pursuit of interest income. This contributes to the positive feedback and consequent instability of the financial system, so private banks' issuance of debt money should be prohibited.

5] Not quite. Repayment of private debt in general does not remove money from the economy. Repayment of bank debt principal does.

6] Then why do so many of them -- including in introductory macroeconomics textbooks like Nobel laureate Greg Mankiw's -- repeat the popular myth that banks lend out customer savings? Why does neoclassical economics pretend that money, debt and banking are irrelevant to the "real economy"?

7] Repayment of commercial bank loan principal inherently deletes money from the economy. Repayment of government-issued fiat money through taxation does not inherently remove any money from the economy, just puts it back into government's hands to be spent again.

#1 Under the gold standard, there were rules to keep the Gov. from creating more dollars than it could back with gold. If they were not followed the gold supply of the nation could/would be depleted by people and foreigners getting gold for the extra dollars.
. . . The rules were a] Borrow dollars to deficit spend. Just like everyone else the Gov. had to get dollars before it could spend them. b] Never, ever [except in wartime] print dollars and just spend them.

#2 If I understand professional MMTers right it goes like this.
The 1st National Bank of Colorado has $100M in deposits. The reserve requirement is 10%, so it can lend out $90M.
Mr. Smith wants to borrow $1M to buy a house. He is credit worthy and the house is worth it. Etc.
The loan officer decides to make the loan. The papers are signed and $1M is added to Mr. Smith's account. That $1M was not moved from an existing pool of dollars on the bank's books, it was created by the bank when it made the deposit.
At that moment the bank's deposits are now $101M and its loanable funds are now $90,900K.
That night the Reserve Requirement Officer has to make sure the bank meets its reserve requirement. She already has $900K because of the loan and only needs to borrow $100K from one of the other 400K banks in the nation using the interbank overnight loan system. In a pinch the Fed. Res. Bank will *certainly* lend the bank that money because of its policy of never making a bank bounce a good (i.e., non-rubber) check because of a lack of reserves or any other reason. This policy [according the MMTers] is in place to keep the banking system stable and maintain public confidence in the system. If the public losses its confidence the economy will suffer.

#4 But, how would that be done?

#5 I'm not sure what your distinction is there between private debt in general and bank debt principal. MMTers say that because making the loan creates the dollars that therefore, repaying it destroys the dollars.

#6 Maybe Crantag is wrong. MMTers say he is wrong. But, he said just the other day, "They are flat wrong when they say that." He is very sure he is right. But, thanks for helping me convince him he is wrong.

#7 MMTers say that taxes do *always* destroy all the dollars paid under them. It is just that the Gov. normally creates new dollars when it spends that puts them back into the economy. However, I said "when it runs a surplus," this means the surplus dollars are not 'recreated' and so *were removed* from the economy. MMTers say this is why the Gov. can't run a surplus for long before a recession starts.

In summary --- I hope my explanations are clear to you and convince you.
.

[Truth To Power]

#1 Under the gold standard, there were rules to keep the Gov. from creating more dollars than it could back with gold. If they were not followed the gold supply of the nation could/would be depleted by people and foreigners getting gold for the extra dollars.
. . . The rules were a] Borrow dollars to deficit spend. Just like everyone else the Gov. had to get dollars before it could spend them. b] Never, ever [except in wartime] print dollars and just spend them.

I don't think that describes the situation in the Federal Reserve era.

#2 If I understand professional MMTers right it goes like this.
The 1st National Bank of Colorado has $100M in deposits. The reserve requirement is 10%, so it can lend out $90M.

No, that's not the way it works. The money customers deposit is not lent out, it is used as reserves. So if the bank has no other reserves, it could lend $1G before needing to borrow reserves.

Mr. Smith wants to borrow $1M to buy a house. He is credit worthy and the house is worth it. Etc. The loan officer decides to make the loan. The papers are signed and $1M is added to Mr. Smith's account. That $1M was not moved from an existing pool of dollars on the bank's books, it was created by the bank when it made the deposit.

Correct.

At that moment the bank's deposits are now $101M and its loanable funds are now $90,900K.

The "loanable funds" concept is irrelevant because banks do not lend existing money. They CREATE the loan proceeds, as you described above.

That night the Reserve Requirement Officer has to make sure the bank meets its reserve requirement. She already has $900K because of the loan and only needs to borrow $100K from one of the other 400K banks in the nation using the interbank overnight loan system.

If it has to borrow reserves, it can borrow them from the Fed.

#4 But, how would that be done?

Rescind the accounting rule that allows private commercial banks -- and ONLY banks -- to create a deposit asset de novo. I.e., any money lent by a bank would have to be taken out of some other account to be put into the borrower's account, just as must by done by any non-bank lender; and when it is repaid, the principal would go into the bank's own cash account to be spent or re-lent.

#5 I'm not sure what your distinction is there between private debt in general and bank debt principal.

Private non-bank debt does not create money. Only banks are allowed to create funds (the loan principal) by lending. If I lend you $1K, I no longer have the $1K. The loan does not create any money. But a commercial bank does not have any less money when it lends, because it CREATES the money it lends.

MMTers say that because making the loan creates the dollars that therefore, repaying it destroys the dollars.

That is correct, but it is only true of commercial bank lending, not other private sector lending. When a loan payment is made to a bank, it is separated into the interest portion, which is then income for the bank, and the principal repayment portion, which is simply deleted from the borrower's account and vanishes, taking along with it the same amount from the bank's loan asset.

#6 Maybe Crantag is wrong. MMTers say he is wrong. But, he said just the other day, "They are flat wrong when they say that." He is very sure he is right. But, thanks for helping me convince him he is wrong.

Some economists understand it. But most neoclassical economists at least ACT as if they do not, or as if it were not true.

#7 MMTers say that taxes do *always* destroy all the dollars paid under them.

That's just clearly false of all taxes that are paid to any government that does not act as currency issuer. This is a simple matter of bookkeeping entries. The property tax paid to a city government, for example, increases the city's bank balance. It is still there as spendable money.

It is just that the Gov. normally creates new dollars when it spends that puts them back into the economy.

That is just an accounting sleight-of-hand. It doesn't have to be done that way. Certainly if a taxpayer pays his taxes in coins, the government does not then promptly melt them down or thrown them in the sea.

However, I said "when it runs a surplus," this means the surplus dollars are not 'recreated' and so *were removed* from the economy. MMTers say this is why the Gov. can't run a surplus for long before a recession starts.

Again, that is just an accounting convention. Issuance of new fiat money (an asset of the government) has to be balanced by a liability, so although it is a wash on the government's books, it looks like a deficit. That doesn't mean the liability constitutes a debt that actually has to be paid to anyone. Likewise, an accounting "surplus" for the government indicates removal of money from the economy as taxes are paid, but no balancing money is created as loan proceeds.

[Steve_American]

@Truth To Power, I'm just reply to your 2 of your points.

From Investopedia article By Stephen D. Simpson, CFA

[Very first 2 paragraphs.] "As mentioned before, banks basically make money by lending money at rates higher than the cost of the money they lend. More specifically, banks collect interest on loans and interest payments from the debt securities they own, and pay interest on deposits, CDs, and short-term borrowings. The difference is known as the "spread," or the net interest income, and when that net interest income is divided by the bank's earning assets, it is known as the net interest margin.

Deposits
The largest source by far of funds for banks is deposits; money that account holders entrust to the bank for safekeeping and use in future transactions, as well as modest amounts of interest. Generally referred to as "core deposits," these are typically the checking and savings accounts that so many people currently have."

Read more: The Banking System: Commercial Banking - How Banks Make Money https://www.investopedia.com/university ... z5RbetBpwz
Follow us: Investopedia on Facebook
https://www.investopedia.com/university ... ystem3.asp

It seems that Investopedia disagrees with you there. They say that banks do make loans from customer deposits.
I didn't read more. I assume that they go on to talk about the reserve requirements and how banks can lend out 10 times more than their deposits.

MMTers say that because the loans become additional deposits at least in another bank. The banking system as a whole can lend out an *unlimited* amount of dollars.

#2 You misunderstood me there. Where I said tax revenue dollars are destroyed, I was unclear because I thought you understood that I was only talking about the US and other nations with a fiat currency. Yes, local and state govs. are like any company and must collect taxes to spend them. Sorry for the confusion.
. . I hope you can think again about the MMT claim that tax dollars paid the the US Gov. are destroyed as soon as they reach its account at the Fed. Res. Bank. They are IOUs and *all* IOUs are destroyed when the reach their issuer. Since 99.999%+ of US taxes are paid by checks, there is no cash or coins to destroy.
. . Then the US Gov. spends newly created IOUs they call dollars.
. . And yes, MMT claims that the Fed.Res. Bank is *not* really independent.It was created by a law written by Congress, most of its board are appointed by the Pres., and Congress has given it specific orders in the past. So, MMTers treat it as a part of the US Gov.
.

[Truth To Power]

It seems that Investopedia disagrees with you there. They say that banks do make loans from customer deposits.

There are lots of wrong sources that agree with Investopedia. As I said before, even Nobel laureate Greg Mankiw's introductory macro textbook tells the same wrong story. I figured that because you know some MMT, you would know that Investopedia is flat wrong.

I didn't read more. I assume that they go on to talk about the reserve requirements and how banks can lend out 10 times more than their deposits.

That's the popular fairy tale.

MMTers say that because the loans become additional deposits at least in another bank. The banking system as a whole can lend out an *unlimited* amount of dollars.

No, MMTers are aware that the bank CREATES the money it lends, and DOES NOT lend out customer deposits.

. . I hope you can think again about the MMT claim that tax dollars paid the the US Gov. are destroyed as soon as they reach its account at the Fed.

I understand that, but it's just how the bookkeeping is arranged under the Federal Reserve system. It doesn't have to be that way.

They are IOUs and *all* IOUs are destroyed when the reach their issuer.

They do not have to be issued as IOUs. They could be debt-free fiat money.

[Steve_American]

There are lots of wrong sources that agree with Investopedia. As I said before, even Nobel laureate Greg Mankiw's introductory macro textbook tells the same wrong story. I figured that because you know some MMT, you would know that Investopedia is flat wrong.

That's the popular fairy tale.

No, MMTers are aware that the bank CREATES the money it lends, and DOES NOT lend out customer deposits.

I understand that, but it's just how the bookkeeping is arranged under the Federal Reserve system. It doesn't have to be that way.

They do not have to be issued as IOUs. They could be debt-free fiat money.

Maybe I am wrong.
I do know that MMT does not accept the "fairy tale" aabout bans loan out money.
However, I do also know the some MMTers say things like what I was saying above.
You did say that banks loan out "reserves", IIRC.
what did you mean by that? I am rather fuzzy about just what these reserves are in the US system.

As for the dollar being IOUs --- clearly there I am repeating what MMTers say correctly.
Dollars are IOUs that promise to give you a dollar off what your tax liability is and nothing else. That is what all fiat money is according to MMT.

[Steve_American]

The link below is to the official looking Fed. Res. Bank page.
It says that "Reserves" are calculated as 10% of deposits {and a few other things} at that bank that is over $122M.Deposits below $122M are at 3%.
So, reserves are based on the amount deposited at the bank.

OTOH, dollars for loans are just created out of thin air. But, these dollars then become "deposits" that 99.99% of the time stay in the US banking system and so increase the reserve requirement of the US banking system as a whole.
OK, this is clear.
It appears that "Reserves" are money taken from 'cash on hand in the form of deposits' are transferred to the bank's reserve account at the Fed. Res. Bank.
It also seems like there is a delay of 2 weeks between the time when the loan is made and when additional reserves must be deposited to give banks time to get the dollars.

From the link: "The dollar amount of a depository institution's reserve requirement is determined by applying the reserve ratios specified in the Federal Reserve Board's Regulation D to an institution's reservable liabilities. Reservable liabilities consist of net transaction accounts, nonpersonal time deposits, and eurocurrency liabilities. Since December 27, 1990, reserve requirements have only been assessed on net transaction accounts, since nonpersonal time deposits and eurocurrency liabilities have had a reserve ratio of zero." Net transaction accounts are all deposits, etc., right?

https://www.federalreserve.gov/monetary ... ements.htm

[Truth To Power]

OTOH, dollars for loans are just created out of thin air.

They are created out of the balancing asset: the borrower's legal obligation to repay the loan.

But, these dollars then become "deposits" that 99.99% of the time stay in the US banking system and so increase the reserve requirement of the US banking system as a whole.

Right.

From the link: "The dollar amount of a depository institution's reserve requirement is determined by applying the reserve ratios specified in the Federal Reserve Board's Regulation D to an institution's reservable liabilities. Reservable liabilities consist of net transaction accounts, nonpersonal time deposits, and eurocurrency liabilities. Since December 27, 1990, reserve requirements have only been assessed on net transaction accounts, since nonpersonal time deposits and eurocurrency liabilities have had a reserve ratio of zero." Net transaction accounts are all deposits, etc., right?

Right.

[Truth To Power]

I do know that MMT does not accept the "fairy tale" aabout bans loan out money.
However, I do also know the some MMTers say things like what I was saying above.

Things "like" that may be far from exactly that in economics.

You did say that banks loan out "reserves", IIRC.

No, I said they use customer savings as reserves -- i.e., the money a customer deposits into his account becomes a cash asset that the bank can use as reserves. The customer's account balance is of course a liability of the bank, not an asset. Banks do not "loan out" anything but the money they create by lending it.

As for the dollar being IOUs --- clearly there I am repeating what MMTers say correctly.

Right.

Dollars are IOUs that promise to give you a dollar off what your tax liability is and nothing else. That is what all fiat money is according to MMT.

But it's not exactly true, is it? Dollars also enable you to pay off any other legal debt, including between private parties. That makes them useful independently of their use in payment of taxes.