[Premium] China’s growth is slowing much faster than expected

The latest data out of China will give those expecting a soft landing pause about China’s economic situation. While inflation has come down somewhat of late, so too have industrial output and capital investment. This is creating EM feedback loops which diminish the number of equity, corporate and sovereign plays in this space. Asia in particular should be impacted

What about all those excess reserves at the Fed?

The Fed is out of bullets on interest rate policy and has turned to other nonconventional measures like quantitative easing. Excess reserves have piled up as a result. What does this mean for inflation and the economy

What is this “Financial Instability Hypothesis” by Hyman Minsky really about?

In his publications in the 1950s through the mid 1960s, Minsky gradually developed his analysis of the cycles. First, he argued that institutions, and in particular financial institutions, matter. This was a reaction against the growing dominance of a particular version of Keynesian economics best represented in the ISLM model. At the same time, he examined financial innovation, arguing that normal profit seeking by financial institutions continually subverted attempts by the authorities to constrain money supply growth. This is one of the main reasons why he rejected the LM curve’s presumption of a fixed money supply. With his 1975 book, Minsky provided an alternative analysis of Keynes’s theory. This provides his most detailed presentation of the “financial theory of investment and investment theory of the cycle”. Minsky continually developed his financial instability hypothesis to incorporate the extensions made to his investment theory over the course of the 1960s, 1970s, and 1980s. The Kalecki equation was added; the two-price system was incorporated; and a more complex treatment of sectoral balances was included. Minsky also continued to improve his approach to banks, recognizing the futility of Fed attempts to control the money supply

Progress on the monetary policy and banking debate

We seem to be moving forward with this discussion on monetary policy, banking, and reserves. John Carney does a good job of summarising some of the initial forays in this back and forth. I am going to try my hand at framing the discussion here using my own analysis of the comments iteratively, with the assistance of more comments of course. Where there are mistakes, I will fix them accordingly

Endogenous or exogenous money?

I think the real difference between what Nick Rowe is saying and what people like Scott Fullwiler and Steve are saying is that Nick believes over the medium-term, central bank interest rate policy is endogenous. What I think Nick means is that Scott Fullwiler’s view is reasonably clear and straightforward but that it only matters over a short-term time horizon because central bank interest rate policy adjusts endogenously over the medium-term to commercial bank and other economic variables such that it is really endogenous rather than exogenous

More on why Minsky matters

In Paul Krugman’s view, banks are not very important since all they do is to intermediate between savers and investors, taking in deposits and packaging them into loans. Now, I know that Krugman’s own specialty is not money and banking, so one would not expect him to have a deep understanding of all the technical details. However, he is an important columnist and textbook writer, so if he is going to expound upon “what banks do”, he should at least have the basics more-or-less correct. But he doesn’t. we need Minsky—whose views even from the 1950s are far more relevant to today’s real world banks than are Krugman’s

Krugman’s Flashing Neon Sign

The debate between Paul Krugman and my friend Steve Keen regarding how banks work (see here, here, here, and here) has caused me to revisit an old quote. Back in the 1990s I would use Krugman’s book, Peddling Prosperity (1995), in my intermediate macroeconomics courses since it provides a good overview of what were then contemporary debates in macroeconomic theory as well as Krugman’s criticisms of various popular views on macroeconomic policy issues from that era. One passage near the very end of the book has always remained in the back of my mind; in it, Krugman critiques a popular view that was and still is highly influential regarding productivity and trade policy. He writes: “So, if you hear someone say something along the lines of ‘America needs higher productivity so that it can compete in today’s global economy,’ never mind who he is or how plausible he sounds. He might as well be wearing a flashing neon sign that reads: ‘I DON’T KNOW WHAT I’M TALKING ABOUT.’” (p. 280; emphasis in original)

In his latest post in this debate (which Keen replied to here), Krugman demonstrates that he has a very good grasp of banking as it is presented in a traditional money and banking textbook. Unfortunately for him, though, there’s virtually nothing in that description of banking that is actually correct. Instead of a persuasive defense of his own views on banking, his post is in essence his own flashing neon sign where he provides undisputable evidence that “I don’t know what I’m talking about.”

Ptolemaic Economics in the Age of Einstein

Paul Krugman’s claim that those who argue banks play an essential role in macroeconomics are “Banking Mystics” has a natural riposte: Neoclassical economists like Krugman who believe that capitalism can be modelled without either money or banks are Barter Mystics (David Graeber, 2011). How on earth can someone believe that the manifest reality that transactions involve money being exchanged for goods can be ignored, and pretend instead that goods are exchanged for goods? How on earth can the institutional reality of banks be ignored by those who claim to be macroeconomists

On bank lending’s creating deposits and Paul Krugman’s response

Alan Holmes wrote in 1969 that “in the real world, banks extend credit, creating deposits in the process, and look for the reserves later.” Holmes would turn in his grave at Krugman’s naïve assertion, half a century later, that banks need deposits before they can lend. Bank lending creates deposits. That’s why banks matter in macroeconomics, and it’s not “Banking Mysticism” to point this out

Why Minsky Matters

My friend Steve Keen recently presented a “primer” on Hyman Minsky. In his piece, Steve criticized the methodology used by Paul Krugman and argued that Krugman could learn a lot from Minsky. In particular Krugman’s equilibrium approach and primitive dynamics was contrasted to Minsky’s rich analysis. Finally, Krugman’s model of debt deflation dynamics left out banks–while banks always played an important role in Minsky’s approach. This post is to help explain why Hyman Minsky matters by quickly summarizing Minsky’s main areas of research. Next week I will post up more on Minsky’s view of “money and banking”

A Primer on Minsky

Minsky’s “Financial Instability Hypothesis” is one of the key foundations of Steve Keen’s approach to economics. Minsky has come into vogue these days of course, but to people who’ve known his work for several decades rather than ever since the “Minsky Moment” of late 2007, a better expression would be that he’s “come into vague”

[Premium] Daily Commentary: On collapsing money supply and Chinese and Japanese current account deficits

This daily commentary is a bronze level members-only post. I saw a number of commentaries this past weekend and late in the week that were gloomier than one would have expected. In the US, consumer credit is expanding as are jobs and most of the data has been robust of late. Yet, the worries about recession continue – with good reason, I might add