Every transaction has both a seller and a buyer, or more
generally, there are at least two sides to every market transaction. This indisputable
fact, although extremely general and abstract, is one of the only true economic
laws but one which is often forgotten. One reason why this fact is often overlooked
is that its ramifications are most easily seen in the world of accounting –
transactions are measured via income statements which lead to changes in
balance sheets. Every transaction creates at least 4 accounting entries (two
for each party). Accounting relations, in themselves, say little about what
caused things to happen or reveal much about key economic variables like
relative scarcity or utility, but they quantify a true constraint that exists
in our market economy and provide a pseudo scientific framework with which to
study economies. This methodology, stock-flow consistent macroeconomic
modeling, has been developed by multiple Post-Keynesian economists such as
Wynne Godley and Mark Lavoie1.
To help visualize the
accounting quantified economic system I will use the flow of a river to
represent the flow of purchasing power (money) between buyer and seller. These
flows of dollars occur at a certain rate (i.e. $/year) corresponding to the
market determined exchange for “real” goods, services and assets. As time
passes these transactional flows (recorded on income statements) lead to stocks
(recorded on balance sheets) just like how a river fills or drains a lake.
Below is a diagram that details all of the major flows in the US economy.
Stocks of money and stocks of real assets are not shown but should be thought
of as being “lakes” of potential flows attached to each actor in the cycle. The
blue lines represent money flows between transacting parties while the green
lines represent real good/service/asset flows. The diagram is circular because
the US$ system is “closed” (no external in/out flow of US$) and since every
buyer has a seller.
A few things to note about the Economic cycle diagram:
-
The income of households equals the total
amount of money that flowed to them during the period and this amount equals
the amount they spent plus/minus net money flow additions or subtractions completed
by others in the cycle.
-
The flow of income during the year is
decreased when an individual in the cycle decides not to transact but to
accumulate the money flow in their stocks (increase their balance sheet assets
(e.g. bank deposits) or “lake” of money). The flow of income increases when an
individual chooses to spend (transact) a portion of their stored money flows (e.g.
decrease their bank deposits). The only way the economy grows (nominally) is
via increases in debt (money creation) or the spending of savings.
-
Money is created by the government and banks.
After being created (via 2 accounting entries – loan & bank deposit) every
dollar flows from one money stock to another until it moves back to a bank or
the government which chooses to destroy the money by cancelling it against an
equally valued monetary liability (like outstanding debt or a bank deposit) on
its balance sheet. For every dollar that exists there is a liability (debt) of
the same amount.
-
The speed at which money flows around the
economic cycle is called the “velocity of money”. The number of times an
average dollar flows around the cycle in a given period equals the Keynesian
“money multiplier”.
-
Inflation (price increases) is when the flow
of real goods/services/assets transacted slows relative to the money flows
given in exchange. Deflation occurs from the opposite real flow/money flow rate
change.
-
Investment spending creates savings (not the
other way around) since the process of investment entails money flows from
businesses to households (to obtain/construct the “real” assets) but does not
involve any money flows from households to businesses (meaning households now
have savings). In an ideal world the real asset created will provide real flows
that will be valued in money flows that equal the stock of money saved (hence helping
to maintain money/real flow balance in aggregate over time)
-
Most real output flows, like haircuts and
healthcare, cannot be saved for future use because they are time specific
flows. This fact is the major impediment to maintaining real flow / money flow
balance. “Too many dollars chasing too few goods & services” is easier to
avoid when you can fully adjust both sides of the equation using “buffer” pools
of stored flows.
-
Stocks of real assets, with their ability to
produce goods and service flows, is what ultimately defines the country’s
potential standard of living now and in the future. The other key to living
standards is the distribution of these real flows.
-
Distribution of real stocks and money stocks
between households is of critical importance but which is not readily
observable using high-level stock-flow consistent economic flow charts or
sectoral balance equations. Distribution issues can be elucidated using more
micro focused stock-flow consistent analyses and assumptions.
Diagram
1 – Circular Economic Flow
The relations illustrated in the economic flow chart
above can also be expressed using the following tautology (equation that is
true by definition):
Spending
($ Uses) = Income ($ Sources)
C +
S + T = C + I + G + (X – M)
The spending variables (C, S and T) are shown in three
arrows flowing out of the Households box – C – representing consumption
(expenditures to businesses), S – representing savings (money flows with banks)
and T – representing taxes (money flows to government).
The income variables (C, I, G and (X-M) are combined
together in the money flow from businesses and the government to households but
which flowed initially from the expenditures from households plus money created/destroyed
by banks plus the net inflow or outflow of money associated with foreign trade
(X – M, exports – imports) plus money flows created/destroyed by the
government.
The above relation can be rearranged into “sectoral
balances” as follows:
(S – I) = (G – T) + (X – M)
The three groupings are called the private sector
(businesses and households, in blue), the government sector (in red) and the
foreign sector (capital account, in green). Below are the sectoral balances
since 1952:
The sector balances and national accounting relations discussed
above come from the transactions that define our market economy. To get a
better understanding of these transactions we will now discuss each stock, flow
and sector in the economic cycle. Note that I will also include other insights
from Post Keynesian economic theory2.
Money
Money is usually defined as having three characteristics
– 1) a medium of exchange (the flow ability of money – the ability to exchange
for real flows), 2) a unit of account (a stock and flow characteristic of money
– the unit by which money stocks and flows are measured) and 3) a store of value
(a stock characteristic of money – the ability of money stocks to retain value
over time). This definition of money is appropriate for the accounting based
economic framework that we are using. However, it is important to understand
that all of these elements are required for something to be considered
money. For example, accounts receivable is a financial asset that was created
as a result of a real flow, yet this financial asset is not readily exchanged
for additional real flows and thus cannot be considered money. Throughout this
paper I use the term money to refer to items such as physical currency, bank
deposits (including savings/checking/CD’s etc.), reserves and Treasury
bills/bonds. The last item is included due to the ease by which Treasuries can
be exchanged for cash and the debtor’s ability to pay (i.e. risk free). I will
assume that all financial assets not backed by a bank or the government cannot
function as a money flow. I will ignore such items.
Debt
As mentioned previously fiat money (as opposed to gold
backed money) is always accounted for as an asset to the holder and a liability
to the issuer. This fact is true for both bank issued and government issued
money (in the case of physical cash the liability of the government is to
provide a new bill in exchange for the old bill). The mirror image of the money
stock is the debt stock – for every dollar in existence there is an equal
amount of nominal debt (private + public) – this is the essence of a credit
based economic system. The accounting reality of money adds another element to
the money “river” that flows around the economic cycle. Specifically, debt can
be thought of as a stock of soil which can consume “lakes” of money (think of
filling a lake with dirt – the water is absorbed by the dirt and in the end the
lake no longer exists). Similarly, the act of digging up a pile of dirt (debt)
provides an equal volume (amount) of water (money) [again, money = debt, so the
size of the money “lake” = size of the debt dirt pile].
Debt is critically important to businesses and households
because it provides them money to spend which otherwise they would not have.
Debt growth adds to money stocks and in doing so usually increases money flows
(economic activity increased) while debt contraction usually subtracts from
money flows (economic activity decreased). Of course the cost of debt is that
it needs to be paid back, with interest, to the issuer. It is therefore
critical that money flows facilitated by debt provide the user an opportunity
to pay it back, by say providing a real asset which can generate money flows in
excess of the debt or by providing the individual a means to survive while
money stocks are accumulated (saved) to repay the debt (destroying the money in
the process). This fundamental requirement of debt is a key weakness of our
market economy since the misguided use of debt can result in financial ruin of
both the non-government creditor and debtor (e.g. the housing bubble).
Furthermore, the fact that debt is fixed (nominal amount unchanged by
inflation/deflation) economic recommendations that require deflation in wages
is problematic as this would make debt repayment or servicing harder. Inflation
on the other hand lowers the burden of debt stocks and lowers the value of saved
money stocks – inflation is not bad for everyone. Money stocks are a form of
insurance since they can provide real flows when needed – the price of this
insurance is inflation.
US
Federal Government
The US federal government (Fed + Treasury) has unlimited
money creation abilities (via “keystrokes”) and unlimited money destruction abilities
using taxes. Government spending occurs to provide real flows to the household
sector (e.g. roads to drive on) or money flows to the household sector (e.g.
Social Security). Government taxes to remove money stocks from the players in
the economic cycle, primarily because if they did not inflation would occur as
government created money moves from stock to stock via spending transactions.
The specific spending /taxing balance chosen is politics but always quantified
in terms of a net spending flow with the private sector overall – either
creating or destroying money stocks. Government deficits (public net financial
liabilities) lead to an equal amount of private sector saving (private net
financial assets) because again there are two sides to every transaction. Government
surpluses reduce private sector savings (way to go Bill Clinton!).
I have discussed the operational role of the Federal
Reserve and Treasury in an earlier paper (titled “US Monetary System &
Deficits”), so I will not go through it again beyond a few simple statements of
fact. All transactions between banks occur on the books of the Federal Reserve
which maintains the inter-bank clearing/settlement system. This system
processes more than a trillion dollars’ worth of transactions EVERY DAY and as
such the overall objective of the system is to ensure all transactions settle
and that the system does not come to a crashing halt. The Federal Reserve’s
unlimited money creation ability ensures that this system will never fail and
that interest rates (both short and long) are always under its control
(although the Fed usually focuses on just short term rates). In fact, contrary
to common knowledge, deficit spending (money creation) by the government
actually decreases interest rates due to the nature of the corridor system usually
employed by the Fed (excess reserves results in overnight interest rates
falling to whatever interest rate the Fed provides on reserves, while
insufficient reserves results in overnight rates rising to whatever interest
rate the Fed charges on overnight loans). The current policy of paying interest
on reserves makes the “corridor” much smaller (approaching a single point),
assuming reserves continue to be well above the level required by law. Payment
of government debt simply involves the transfer of money from savings accounts
at the Fed (government bonds) to checking accounts at the Fed (reserves). Since
the Federal Reserve is prohibited from buying debt directly from Treasury a
system of primary dealers (usually large banks) have been established that buy
Treasury securities. Since the Federal Reserve targets interest rates and can
buy unlimited amounts of government bonds in the secondary market (unlike in
the Eurozone) the risk to Primary Dealers is basically zero. This arrangement
is great for the primary dealers since the process provides them with a spread
(difference between buy & sell prices) basically risk free, but this
obfuscation makes it appear that the government depends on private sector money
creation. While it might appear that primary dealers do in fact buy the debt it
is critical to note that the moment Treasury moves the resulting bank deposit
back to its main account at the Federal Reserve the Primary Dealer would be
short of reserves (assuming they had none previously) and so would have to sell
the previously purchased bond to the Federal Reserve – taking the Primary
Dealer out of the picture. Of course when Treasury spends the funds “procured”
from the bond sale the banking system would have the reserves to buy back the
bond from the Federal Reserve. Again, two points are key to understanding the
process – only the Federal Reserve creates the balances on its books, and
balances on the Fed’s books can only be destroyed by transforming them into
physical currency or into Treasury securities – they can’t be “lent” to
businesses or individuals (who do not have accounts with the Fed).
Banks
Banks, in our fiat currency system, are licensed by the
government to create money by making loans. However, money creation by banks is
limited in numerous ways, most importantly via the fact that banks must remain
solvent (positive shareholder equity on their balance sheets). Solvency
requirements do not limit bank’s money creation per se, but the more money that
banks issue via loans the greater the chances that some of these loans will go
bad which could consume existing
shareholder equity and force the bank into bankruptcy. A bank levered up
30 to 1 (loans to shareholder equity) only needs a 3.4% loss on their loans to
become insolvent. This reality has led to regulation of banks (Basel rules,
leverage limits, etc.), which unfortunately have been slowly relaxed over the
last few decades. Government provided deposit insurance (on most deposits)
ensures that the risk of default does not discourage depositors from trusting
the bank with their money. Banks make money via the spread between the cost of
funding their liabilities (e.g. interest on deposits, interest on loans from
investors and the Federal Reserve, etc.) versus the yield from their assets
(e.g. interest from loans, interest from deposits at the Fed, capital gains
from trading, etc.).
Foreign
Sector
The foreign sector’s spending flows are similar to the
domestic private sector’s flows - money flows can grow or shrink based on
saving/borrowing desires and real goods flow in the opposite direction. One potential
difference is that foreigners often need to exchange foreign currency for US$
(because of course they cannot create US$). This process of exchanging foreign
money flows into US$ flows used to involve governments when the conversion rate
was fixed (e.g. gold standard) but nowadays, in our fiat, non-convertible currency
system, the process of exchange represents a key step in equalizing the real
flow/foreign money ratio with the real flow/US$ ratio. [Note: A floating
currency value has other benefits including interest rate flexibility (don’t
need to be as concerned about how interest rate changes will affect currency exchange
values)]. Another obvious difference with the foreign sector is that real flows
to it are a loss to the country as any derived benefit/utility goes to the
foreign country buyers. Imports divided by exports (both in real terms) equals
the countries terms of trade and the short term welfare of the country is best
when this ratio is the highest. Over the long term this ratio is also a key
indicator of US welfare, but an indicator which is not clearly apparent at any
point in time as stocks of money and exchange rate movements can change the
ratio over time (e.g. the US has given Japan “less” real flows than they have
given us, although Japan’s stocks of $USD relative to US holdings of Japanese currency
(Yen), suggest that this ratio will change in the future). I believe
Japan/China etc. will spend their $USD money stocks one day and thus I consider
foreign holdings of $USD as a debt of the US which will be paid using real
flows at some point (net of US holdings of foreign currencies, which equals
approximately $5 trillion at the moment).
Business
Sector
The business sector represents firms of all types (e.g.
Incorporated firms, LLC, employee owned, etc) and their function is
straightforward – they purchase labor and materials from households using money
(from saved money stocks or borrowed from banks) which they use to produce real
flows which they sell back to the household sector, the government sector or
the foreign sector. For simplicity purchases to/from other firms are netted out
(ignored). Owners of the business have a claim on all net assets of the firm – household’s
balance sheets are therefore linked with business balance sheets (shareholder
equity is a “liability” of the firm and an asset of households). Further, asset
value above the amount reflected in shareholder equity can be reflected in
multiple ways (e.g. implied or actual market value of equity), but in all cases
the accounting representation shows that the net worth of all businesses are
owed to their owners (so for listed firms pstock*shares of stock =
the liability of the firm and assets of the households). Dividends for example
produce two sets of accounting entries with households – one representing the
money flow and another reflecting the decrease in the firm’s net asset value
(which together net to zero on both balance sheets). Just like the household
sector, the balance sheets of businesses reflect both real assets and
financial/money assets.
Households
(and non-currency issuing governments)
The money flows to business in exchange for real flows
(goods and services) is, as stated before, the key to our current material standard
of living. The specific goods and services flowing, and the corresponding money
flows depend on numerous factors including individual preferences, consumer
budgets (money flow and money stock based constraints) and real resource
constraints (due to current and past real flows to businesses, the current
level of technology, etc.). Trade between households is assumed to equal zero
since all good and service production is assigned to firms (so one can think of
a sole proprietor as being both a business and a household).
Real
Asset Stocks
Real assets are anything you can touch (the physical
world) and some things that you can’t touch (e.g. technology patents, human ability,
etc.). The defining feature of real assets is that they can produce real flows
which someone values (and hence can be exchanged for money flows). The creation
and use of real assets is what a market economy is all about – and a function
which it does better than any other economic structure. This is not to say that
markets are perfect (they’re not) or that governments can’t improve market
outcomes (they can) but that the default structure of an economic system should
involve markets for their ability to communicate value judgments. With that
said I believe that humans are not always rational and are susceptible to
logical issues such as herd mentality (doing something because everyone else is
doing it) and loss aversion (people's tendency to strongly prefer avoiding
losses to acquiring gains). These quirks in the human psyche, in addition to
genuine uncertainty, can lead to the production of real assets that cost more
than the real flows that they can produce (e.g. the housing bubble). However,
for the purposes of stock-flow consistent modeling we assume that market prices
do reflect intrinsic value and therefore use these prices to value real assets
on balance sheets. If real asset market prices change during the accounting period
then there will be an adjusting accounting entry that changes the asset value
on one side of the balance sheet and equity (net worth) on the other. Since
this valuation change did not involve a monetary transaction such entries do
not appear in the economic circular flow described herein.
Asset
Swaps versus Asset Production
When someone buys an existing asset such as a house, or
buys claims on existing assets such as stock in a company this purchase is just
an asset (stock) swap – money in exchange for a real/financial asset. Such
transactions do not represent income (top arrow “salaries & profit” on flow
chart) since there was no real flow produced which necessitates salary/profit
payments to households. The money flow occurs on the left hand side of the
cycle (or between individuals in the household sector) exclusively, (net worth
implications depend on the paid price relative to the valuation currently used
on the balance sheet). Lastly, since the transaction changes who owns which
asset there are potential secondary flow impacts (e.g. the person now with the
money stock is more/less likely to spend it).
Interest
Money Flows
A fundamental stress within a credit based economic
system is that of interest expense – interest is due to banks based on loans
provided, yet no money is created to pay this interest (unlike the loan
principal itself which creates an equal amount of money stocks in the “loan
creates deposits” process). This is a stress for the system as a whole since
interest payments are a money flow (time specific) that need to come from
existing money stocks (unless banks loan (create) money to pay the interest).
This is not necessarily a constraint since money stocks are much larger than
flows, making such repayments feasible – although actual payment of the
interest requires the right people obtaining the money stocks (else we have
loan defaults). The ramifications of interest expense on aggregate demand
(money flows) is uncertain as it depends on the marginal propensity to spend
out of current income of creditors relative to debtors (i.e. will the bank or
individual receiving the interest payment spend it or save it).
Stock
Flow Consistent Economic Cycle Conclusions
The accounting derived relations detailed above always
hold in properly functioning market based economic systems (e.g. we’re assuming
barter transactions and unpaid production is insignificant and that a legal
system is in place to ensure no money counterfeiting, etc.). It is a shame that
the economic profession does not often recognize this reality and as a result
posits macroeconomic theories that are mathematically impossible. Further, by
not recognizing the stock-flow dynamics of our economy they miss many important
insights (like how stocks influence flows) and again posit forecasts that have
unrealistic or impossible results. We would be much better off if every
macroeconomic policy forecast was verified to satisfy the accounting
constraints detailed thus far – if we’re going to use math to represent
economies we better make sure that everything adds up!!
Below is a simple example of a transactions flow matrix,
which is the format by which stock flow models are represented. Note that all
rows sum to zero (buyer/seller - closed system requirement) and
that +ve values are the use of funds and –ve values are the source of funds.
Everything comes from somewhere and every transaction has two sides – there is
no black holes. The top half of the transaction flow matrix is basically a summation of all
income statements, while the bottom half shows the balance sheet implications. There is another matrix that shows how income statement changes flow into ending period balance sheets (this matrix shows that every
row totals zero except for real assets).
Utilizing
the Stock-Flow Consistent Framework
The stock-flow consistent, accounting based framework
discussed thus far provides many insights into our economic system. However, in
order to develop more detailed economic forecasts and policy we need to
leverage this framework by the use of additional economic data, theories and
assumptions. For the sake of brevity I will not go through all of these details
except for a few key points regarding micro-macro relations, market structure
and behavioral assumptions. If you want to obtain further details about
stock-flow models I urge you to read the book by Godley and Lavoie1
or search for similar writings by other Post Keynesian economists (as
referenced2).
Macroeconomics was separated into a distinct discipline
from microeconomics in part because of the articulation of two fallacies – the
fallacy of Composition and the fallacy of Division. The fallacies of
Composition & Division simply point out that: 1) inferences regarding
macroeconomic topics using microeconomic data can be problematic (fallacy of
composition) and 2) inferences regarding microeconomic topics using
macroeconomic data can be problematic (fallacy of division). It is important to
remember these warnings when thinking about the issues discussed above – for
example - even though the Household sector might be saving overall there is in
fact a very diverse distribution of savings levels amongst households (some are
spending way more than they are earning, etc.). This does not diminish the
validity of the stock-flow consistent framework discussed, but it does limit
the insights that can be obtained from the framework itself without additional
data or assumptions. To minimize the degree to which assumptions are necessary
stock flow consistent modelers often go into more detail than I have discussed
in this paper (e.g. by splitting households into groups based on income, etc.).
Lastly, it is important to note that neoclassical (mainstream) economists have
somewhat blurred the distinction between macro and micro by use of their
“micro-founded” dynamic stochastic general equilibrium (DSGE) models which
contain elegant math but at the cost of a huge number of highly questionable
assumptions and utter disregard of money and debt (yes, the most “advanced”
DSGE macroeconomic models do not contain money or debt!!).
The main assumptions underlying the almost religious
belief of some that “free markets” yield pareto optimal outcomes (no one can do
better without harming someone else) are as follows: rationality, no market
power (firms are price takers), symmetric/”near perfect” information and no
positive/negative externalities (all costs/benefits internalized - all
costs/benefits accounted for in the market price). I contend that very few
markets actually satisfy these assumptions and that some, such as health
care, deviate greatly from each of these assumptions – producing the potential
for asset misallocation and suboptimal outcomes in the short and long term. For
example, my education and experience in business has shown me that businesses
try to avoid markets that function like a “free market” and instead
differentiate their offerings (or utilize existing laws and regulations) to
obtain some degree of market power which allows them to be a price setter and
not a price taker. However, even if the optimal free market assumptions do hold
the outcome obtained is dependent upon the initial allocation of resources – if
the allocation of resources is skewed, due to fraud or inheritance for example,
then the free market will not correct this but simply optimize outcomes from
this starting point. So in conclusion, understanding the true nature of markets
leads me to conclude that models which depend on Pareto optimal “free markets”
are wrong and that government involvement in private markets can improve the
utility (general well-being / happiness) of the population.
Economics biggest weakness, in my opinion, is its
simplified behavioral assumptions. This fault is being addressed by the growing
field of behavioral economics, but in the meantime this Achilles heel is
something every economist must be concerned about. I mention this here because in
order to predict future economic outcomes or fully explain current transactions
we need behavioral assumptions. Thankfully, this behavioral assumption need is
somewhat diminished in stock-flow consistent models relative to “micro-founded”
neoclassical models since the former utilizes more facts (e.g. balance sheet
composition of the players and closed system dynamics) that help explain and constrain
behaviors. One of the most important behavioral assumptions needed in all
macroeconomic models involves the formation and utilization of expectations due
to their undeniable impact on investment and other decisions that influence
real or nominal stocks (which span periods by definition). However, most post
Keynesians, including myself, believe that assumptions regarding expectations
are often misguided. Specifically, I believe that:
1)
Folks do not analyze decisions like
economists do (i.e. over analyze) and thus that much economic decision making
is done without much analysis or quantification of outcome probabilities. This
was clearly articulately by Keynes in 1936 – “Most, probably, of our decisions
to do something positive, the full consequences of which will be drawn out over
many days to come, can only be taken as the result of animal spirits – a
spontaneous urge to action rather than inaction, and not as the outcome of a
weighted average of quantitative benefits multiplied by quantitative
probabilities”.
2)
Even if individuals attempted to develop
“rational” expectations based on all available information (a huge “if”) their
ability to complete this endeavor is highly unlikely given the number of
factors that would need to be accounted for. Further, post-Keynesians contend
that the future cannot even be characterized using probability distributions
since future outcomes are truly uncertain which by definition cannot be
represented by probability distributions. Given these difficulties many
individuals simply look to the immediate past or to other’s behavior to inform
them regarding the uncertain future – and this can lead to problems (e.g. dot
com boom and housing bubble).
3)
Individuals often do not have the ability to
act upon their expectations due to financial constraints and/or market power
constraints (e.g. inability to secure salary increases).
It is for all of these reasons that I discount any
argument that relies heavily on expectations. Again, I am not saying that
individuals are not usually rational (or “bounded rational”) but that the
assumption that they are always rational is clearly wrong and to such a degree
that macroeconomic models assuming such behavior at its core (neoclassical
economics) produce unrealistic economic forecasts and policy guidance (post
Keynesians were the only economic school of thought that predicted the
financial crisis (Austrian economists were a close second, but their forecasted
mechanism was wrong). The following are two specific examples where I believe
rational expectations is incorrect.
Ricardian equivalence is an expectations based behavioral
assumption. This theory boils down to the following: deficit spending cannot
increase aggregate demand since individuals will expect the deficits to create
higher taxes in the future and thus will immediately increase savings (AD down)
to pay for these future taxes. I have never met anyone who behaves in this
manner and there is amply empirical evidence dispelling it, yet it remains a
stick that some fiscal conservatives use to attack Keynesian policy
recommendations (that involve deficit spending).
Assumptions regarding inflation expectations are
particularly problematic since they are thought to be often self-fulfilling.
However, the current situation in the US and the last 20 years in Japan have
clearly shown that inflation cannot simply be wished (or “printed”) into existence
but instead require action (i.e. money flow / spending increases) or market
changes which create real flow changes (e.g. oil supply changes, market power
changes, labor market changes, etc.) to come about. Heck, people don’t know who
Ben Bernanke is let alone what his committee is forecasting regarding
inflation. Most businesses cannot raise prices because they expect future
inflation increases (many cannot raise prices even if costs actually
increase!). Inflation in financial markets or asset markets are much more
likely, yet such effects are also less enduring since ultimately they need to
be validated by the real flows such assets produce (e.g. housing and dot com
bubbles produced temporary inflation in these areas).
US Current
Economic Conditions
My next paper will discuss current economic realities and
potential economic policies to improve them.
1 Godley, W. and Lavoie, M.
2007. Monetary Economics: An Integrated Approach to Credit, Money, Income,
Production, and Wealth. Basingstoke: Palgrave Macmillan.
2 Insights have been provided
by numerous Post Keynesian economists or Post Keynesian friends including: Warren Mosler,
Cullen Roche (Monetary Realism), Scott Fullwiler (New Economic Perspectives), Bill
Mitchell, Dean Baker, Steve Keen, Steve Randy Waldman, Ramanan, Mike Norman
(MNE), Marriner Eccles (best Fed chairman ever), Real World Economics blog and many
others both past and present – I’m standing on many shoulders.
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