As I noted in my first update, I had decided that for both medical and visa reasons, the best place to be during the Coronavirus crisis was Thailand. Outside of China (the epicentre of this crisis), the world’s governments have been dominated by the Neoliberal emphasis upon efficiency, with a total ignorance of the need for resilience as well in a complex system. I didn’t expect any of them to be able to respond effectively as this exponential crisis exploded, so the safest thing was to go for the highest level of social isolation possible—and southern Thailand, below the major tourist spots, made sense on that ground alone. There was also nascent research implying that heat and humidity slow the spread of the virus. This is from the abstract for the paper:

This paper investigates how air temperature and humidity influence the transmission of COVID-19. After estimating the serial interval of COVID-19 from 105 pairs of the virus carrier and the infected, we calculate the daily effective reproductive number, R, for each of all 100 Chinese cities with more than 40 cases. Using the daily R values from January 21 to 23, 2020 as proxies of non-intervened transmission intensity, we find, under a linear regression framework for 100 Chinese cities, high temperature and high relative humidity significantly reduce the transmission of COVID-19, respectively, even after controlling for population density and GDP per capita of cities. One degree Celsius increase in temperature and one percent increase in relative humidity lower R by 0.0383 and 0.0224, respectively. 

I had already started to make this inference from the statistics from the John Hopkins University site. Thailand began with the second highest number of cases to China, but the number of cases rose far more slowly than in the rest of the world. On January 31^st, Thailand had 19 cases, while Australia had 9, the Netherlands zero, and the UK 2. The Netherlands recorded its first cases on February 27^th, finishing the day with 2 cases; by this stage, Australia had 23 cases, the UK 15 and Thailand was still far higher at 40 cases. However, as of March 19^th, Australia had about 700 cases, The Netherlands and the UK about 2500 each, and Thailand had under 250. This time series plot from my soon-to-be-released program Ravel illustrates the divergence of Thai data from the rest of the world—or rather the three other countries where I could have considered living during this crisis.

My partner and I arrived in Bangkok on Thursday March 19^th, one day before Thailand started closing its border to non-nationals (my partner is a Thai citizen, though she hasn’t lived here for over 25 years). One day later, and I would have had to continue on my own to Australia, which is mishandling this crisis as impressively as any other Western government.

We then flew and drove to Trang, which is south of the usual tourist spot of Phuket, and has mainly Thai visitors as tourists.

Even Thai tourists are thin on the ground now, as Thailand has wisely cancelled its annual Thai New Year holiday and festival. We went to a popular beach yesterday looking for potential places to stay for a year, and it was almost empty.

We’re now looking for a house to rent here, for the year that I think it will take before there’s any prospect of a post-Covid-19 “normal” developing.

The during-Coronavirus “normal” is the exponential growth of the infections, and the lagged reaction of authorities and the public to a crisis that can only be addressed by being pro-active. It is absurd that it has taken until now for the social and political powers-that-be to appreciate the scale of this crisis. Social isolation protocols and financial supports should have been in place two months ago: all large gatherings, from weddings up, should have been banned; preparations should have been made for military-regulated distribution of food, rather than the free-for-all panic buying the public has been forced into; and direct money payments to all citizens should have been made to enable financial transactions from rents and mortgages to household services to be paid for even when the virus forces people to cease working. We are seeing the collapse of a social order that does not understand itself.

Neoclassical economics bears a major responsibility for this pathetic state of affairs. It encouraged the emphasis upon efficiency over all other aspects of a complex society—especially, as we can now see, of its resilience. It lulled policymakers into thinking in equilibrium terms when there is nothing like equilibrium in a runaway exponential process like a new virus’s transmission. We have a globalised supply chain that is incredibly fragile, thanks to the fantasy of comparative advantage running industrial policy across the West. Once I have settled, and before I catch the virus—because almost all of us will, given how fast it is spreading and how long it takes for a vaccine to be developed, tested, manufactured in global bulk (7.5 billion doses?!) and distributed.

In the end, I think this crisis will prove—at least to the citizens of China, and to a lesser extent other Asian nations which have a military and/or collectivist background—the superiority of their societies over those of the West. The West works brilliantly when things are good, and falls apart when they are bad. Its guiding philosophy of Neoclassical economics is a, if not the, major factor in this systemic fragility. This next graphic from Ravel indicates how well China has gotten on top of the outbreak, after the initial disaster of trying to suppress news about it.

Keep safe. Practice as close to total social isolation as you can. Prepare as best you can. Go on a rent strike and a mortgagor strike, especially if you can organize something through relevant political movements. Our governments have failed us in this crisis. They don’t respond when renters and mortgagors become distressed. They do when landlords and banks cry foul. So let’s trigger them into action by hitting them where it hurts.

Note: This post is also freely available on my Patreon page www.patreon.com/profstevekeen. Support from my patrons lets me operate as an independent scholar, and they decided that they wanted my posts to be freely available to help communicate my ideas. Only podcasts have restricted access.

The coronavirus could cause the financial system to collapse unless something is done to enable basic payments to continue during the fight against it. While some businesses are doing very well out of it—toilet paper and hand sanitizer produces come to mind—many, if not most, could collapse as their sales collapse and/or their workers become unable to turn up to work. Workers—especially those in the jovially-named “gig economy”—will be unable to pay their rents and mortgages. If we insist on these payments being honoured, mass bankruptcy could result that could take viable companies down with it—even toilet roll producers.

So what to do?

The answer is fundamentally simple: the Treasury issues “Coronabonds” that raise a substantial sum—enough to cover say 3 months of standard mortgage, rent and food payments for an average family. These Coronabonds could be priced at zero percent yield: interest rates are at that level anyway, and given the current stockmarket carnage, financial corporations would jump at the opportunity to park their money in an asset that won’t fall in value.

Using the US Economy as our template, let’s say that $1 trillion of these bonds were issued. They would then be bought by the financial sector—raising $1 trillion to be spend by the government on tenants, mortgagees and firms. The cost to the Treasury would be zero because that would be the yield of the bonds. The public debt would rise, but it would be debt carrying no servicing costs.

The inevitable question from our budget-assessed world is “how would we pay for it?”, and the basic mechanics are outlined in the Minsky model shown in the screenshot below. I haven’t filled in sample flows for the model, but the Godley Tables show that the entire scheme works in an accounting sense. The government could raise $1 trillion, spend it into the economy, and enable tenants to pay their rents, mortgagees to service their mortgages, and corporations to avoid bankruptcy.

We need something like this, now, before the Coronavirus overwhelms our monetary system in the same way that it has overwhelmed the emergency medical systems of many countries already.

 

Any of you who know me personally know, and many of the rest of you may suspect, that my personal life is as complicated as Neoclassical economics is simplistic.

I am an Australian citizen and UK resident with a flat and partner in Amsterdam. I am with her using the visa waiver scheme; she is a Netherlands resident but not yet a citizen. If I stay here then I will certainly breach the “no more than 90 out of the last 180 days” provisions of the Schengen visa. If things get really tough—and I expect that they will—neither of us speak the local language, me at all and my partner not fluently (everyone you meet here speaks English better than the English). But if there are police/army on the street, and you don’t have a residency card (I don’t) or get a non-English speaking “grunt”, we’re both in trouble.

The Netherlands has also recently joined the rest of Europe in an explosion of cases. I was watching this data (using the John Hopkins site: https://gisanddata.maps.arcgis.com/apps/opsdashboard/index.html#/bda7594740fd40299423467b48e9ecf6) while in Australia, and couldn’t fathom why the Netherlands, a major tourist destination, was showing no cases at all.

That changed abruptly last week, a few days before I left Sydney to come here for my partner: it was 1 one morning when I woke, 2 when I went to bed, 6 when I woke up… and now it is 1136.

On the opposite end of this scale lie Australia and (even more so) Thailand, my partner’s country of birth and citizenship:

Certainly in Australia’s case, that is not due to good management. Thailand may be taking it more seriously, or underreporting numbers, but the data seems to indicate that the pandemic is growing linearly there rather than exponentially. I have seen some academic research arguing that the virus lives for longer on surfaces in cold climates than warm ones, and that may explain both country’s relative out-performance.

Below is a screenshot of a new commercial program I’ve been working on with Russell Standish for some time, using Minsky as a base. Called Ravel, though it is in a pre-alpha stage right now (ie, before we’re ready to release it to beta-testers, let alone the general public). But even in its primitive state it lets you compare trends in selected countries easily, something no other existing Dashboard that I’ve seen does. These trends were a major factor in my decision: we can’t stay here, because we lack citizenship rights that I expect; I will breach the visa if I do, and if I’m stopped on the streets while shopping and asked to show ID, I could find myself forcibly deported (yes I expect it to get that bad—or at least to be interred in a foreigner’s quanrantine).

So we had to go to one of the countries we are citizens, either together or apart. For obvious reasons, we chose the together option, which means Thailand (my partner’s tourist visa there has lapsed, and it’s a lot more expensive to live in Australia anyway). We are flying there this Wednesday, arriving Thursday, and moving to a beachside non-tourist town where we can easily and cheaply rent a standalone bungalow for a year, which I intend to be our quarantine period.

I’ll use the quarantine productively of course. I’m 1 chapter in to the revised and final 3^rd edition of Debunking Economics, I have a book contract with Polity on “Economics Matters Because” which is due in August, Russell, Wynand and I are working on both Minsky and Ravel… Boredom will not be an issue (it may be tougher on my partner). And I will keep actively posting here, and commenting in whatever media outlets enable me—and that includes Russia Today, despite some people thinking

I won’t be posting or replying to comments for the next couple of days for obvious reasons: everything has to be thrown into preparing for the trip and locking up my flat here for a year or more.

Keep safe everyone. I’ll do my best to argue for the sane and extraordinary policies that are needed to cope with this threat: the Modern Jubilee and the Coronabonds that I’ve already posted about, and done an interview on with Ross Ashcroft of Renegade Inc. I’ll post that here shortly, after I put this one up.

Finally, a personal word of thanks to you all. The fact that I am able to be this flexible is due to you. The fact that I can devote myself to this issue 100%—after I do the best to secure my own safety—is thanks to you. Hopefully I can delay catching this thing—I don’t think there’s any chance to avoid getting it, in the end—and when I get it, I get either a low effect infection, or anti-virals are available.

If not? Well, I’ll let you know first. I hope it doesn’t come to that, for any of us. But these are such dangerous times for the over-65s amongst us, and for all of us, given how this systemic threat will overwhelm our episodic (and austere!) medical systems.

The one good thing that might come of this is that the deluded morons (looking at you William Nordhaus and Richard Tol and Bjorn Lomborg and the many politicians who’ve fallen for their bullshit) who’ve led us into this maelstrom might finally lose influence and power. But I won’t hold my breath.

I wish you all the very, very best of luck.

A first version of this post used raised to a power, rather than 2 raised to a power. My apologies there, and many thanks to my Patreon supporter Rudolph Kammerer for pointing this out. Figures in this post are now corrected for that error.

One reason why we react far too slowly to threats like the Coronavirus is that thinking about processes that involve exponential growth just doesn’t come naturally to us: we tend to extrapolate linearly instead. That is seriously hampering our reactions to this threat. If we did think exponentially, we’d be practicing serious containment, right now. I want to illustrate why with a simple graph.

There are roughly 100,000 serious Coronavirus cases around the world now, and without public health measures, the infections appear to double every six days. That rate will not be sustained as more people get infected, and many may have only mild symptoms. That said, if the base rate of doubling did continue, and if the serious cases were the only ones that existed (which they’re not of course: there are many carriers who are asymptomatic right now), then the entire human population of the planet would be infected in three months.

What if we slow the doubling rate down a bit, to ten days, by better hygiene, not congregating in large crowds, etc? Then it would take five months for everyone to be infected.

We could do better than that though: by really limiting social interaction, really ramping up personal hygiene in public. If we slowed the doubling rate to once every month, it would take one and a half years to infect the whole planet’s population.

And if we did even better, perhaps with something approaching China’s controls, and reduced the doubling rate to two months? Then it would be three years before the virus infected everybody.

This is why it’s necessary to impose strict limits on social interaction now, not later. The longer we leave it, the longer the doubling rate stays at 6 or so days. All it takes is a hundred such days, and it’s too late: everyone already has it.

So a sensible containment policy would ban large gatherings, where carriers (many of whom are non-symptomatic) can infect many others. Sporting events should stop—or rather events could still happen, but be watched by near-empty auditoriums, and broadcast. Schools and universities should shut down—or conduct classes online. Churches should hold services online as well. Since it seems to take about 15 minutes of sustained exposure within 1-2 metres to pass the disease on, actions that eliminate such gatherings now could slow down the disease’s momentum, and give us more time to develop vaccines, anti-virals, pre-symptomatic screening systems.

The trouble is, this reaction will be seen as too extreme, and resisted—until such time as the number of infections have hit such a level that everyone panics. So I worry that we won’t politically accept extreme confinement measures until we’ve hit a terrifying number of serious cases and deaths—perhaps once 100,000 people have died.

We’re currently at 3,000 deaths from 90,000 reported serious cases. How long will it take us to get to 100,000 deaths, if the doubling rate sticks at the current 6-day level? One month: by the beginning of April.

I don’t think it will be that fast by the way—changing personal behaviour might increase the doubling rate a lot, to say, every two weeks. How long does that give us till we hit 100,000 deaths? About 70 days—or early May.

Many other factors will come in to play, some good, some bad. Hygiene and isolation will both improve—but this will challenge our financial system, as people stop earning an income and businesses go bankrupt. So we have to plan for that: as I suggested in my previous post, we need to stop the ordinary rules of capitalism, which are suited for episodic events, making this systemic crisis even worse. Some ideas include

• a “modern Jubilee”, similar to what Hong Kong has already done, where they have given every citizen HK$10,000, or roughly US$1250. Give everyone a direct cash injection into their bank accounts on a per capita basis. This will allow people to pay their rents and service their mortgages, even if they’ve been sacked, lost their “gig economy” job, or had to shut their restaurant;
• Put a hold on bankruptcy proceedings, for businesses likely to be affected adversely by the crisis, and maybe give those firms a Central Bank money injection too, on a “share of market” basis. Obviously, airlines, sporting venues, restaurants, personal service industries, are all going to be affected adversely.
  • Toilet roll manufacturers, sanitation producers, etc., are going to do very well—so maybe what we need there are price controls, combined with the same Central Bank money injection.
• Direct support for share prices by direct Central Bank purchases of shares, as Japan’s Central Bank has been doing for some time. This is to stop a stock market collapse triggering financial collapses, especially by banks.
• Modify bankruptcy rules for the interim for banks banks. Banks should be able to operate even if they end up in negative equity, to keep the payments system going.

One reason why we react far too slowly to threats like the Coronavirus is that thinking about processes that involve exponential growth just don’t come naturally to us: we tend to extrapolate linearly instead. That is seriously hampering our reactions to this threat. If we did think exponentially, we’d be practicing serious containment, right now. I want to illustrate why with a simple graph.

There are roughly 100,000 serious Coronavirus cases around the world now, and without public health measures, the infections appear to double every six days. That rate will not be sustained as more people get infected, and many may have only mild symptoms. That said, if the base rate of doubling did continue, the entire human population of the planet would be infected in 50 days: less than two months.

What if we slow the doubling rate down a bit, to ten days, by better hygiene, not congregating in large crowds, etc? Then it would take almost four months for everyone to be infected.

We could do better than that though: by really limiting social interaction, really ramping up personal hygiene in public. If we slowed the doubling rate to once every month, it would take almost a year to infect the whole planet’s population.

And if we did even better, perhaps with something approaching China’s controls, and reduced the doubling rate to two months? Then after a year, less than 100 million people would have the virus.

This is why it’s necessary to impose strict limits on social interaction now, not later. The longer we leave it, the longer the doubling rate stays at 6 or so days. All it takes is sixty such days, and it’s too late: everyone already has it.

So a sensible containment policy would ban large gatherings, where carriers (many of whom are non-symptomatic) can infect many others. Sporting events should stop—or rather events could still happen, but be watched by near-empty auditoriums, and broadcast. Schools and universities should shut down—or conduct classes online. Churches should cancel services—or hold them online as well. Since it seems to take about 15 minutes of sustained exposure within 1-2 metres to pass the disease on, actions that eliminate such gatherings now could slow down the disease’s momentum, and give us more time to develop vaccines, anti-virals, pre-symptomatic screening systems.

The trouble is, this reaction will be seen as too extreme, and resisted—until such time as the number of infections have hit such a level that everyone panics. So I worry that we won’t politically accept extreme confinement measures until we’ve hit a terrifying number of serious cases and deaths—perhaps once 100,000 people have died. We’re currently at 3,000 deaths from 90,000 reported serious cases.

How long will it take us to get to 100,000 deaths, if the doubling rate sticks at the current 6-day level? Three weeks: before the end of March.

I don’t think it will be that fast by the way—changing personal behaviour might increase the doubling rate a lot, to say, every two weeks. How long does that give us till we hit 100,000 deaths? 50 days—before the end of April.

Scene 0, Earth One, Year Minus One: A Mad Scientist’s Lab

Dr Strangle:    Gentlemen. I vish to show you something magical: thanks to your generous funding of my quantum computing research, I haf created ze world’s—no, ze Universe’s—nein, ze Multiverse’s! first ever quantum communication system!

Dick:    That’s great Dr Strangle… So how does it differ from a, you know, a cellular phone?

Dr Strangle:    Ha! Those pathetic devices, supposed to be used to communicate ideas, and instead used to share pictures of Brittney Spears. All zey let you do is browse ze intellectual refuse of zis planet, or speak to other stupid persons on it. My Quantiverse©™ Phonebooth lets you speak to YOURSELF across multiple universes!

Tom:    What? You mean there’s more than one of me?

Dr Strangle:    Yes, unfor… Um, yes, zere are millions of you, on millions of world’s, all of which differ from zis world in tiny but consequential ways. On another world, you might be a woman, or Black, or poor…

Harry:    I could handle the first two, but not the third… And you’re saying we can speak to another instance of ourselves, on another planet?

Dr Strangle:    Vell, perhaps in version 2.0. But for now, when you speak, what you say occurs as a thought in the minds of every instance of you on every Earth in ze Multiverse—and zat’s a lot of Earths! And everyone who hears it will think what he hears is his own thought!

Dick:    My God. You mean, I could say something, and every other Dick in the—the what, the Multiverse?—would think it was their own thought? That… That’s brilliant! Guys! Think about it: remember those experiments we always wanted to do to show how the monetary system should be run? With this device, we can run them all simultaneously, and then pool the results!

Tom:    So we should all say the same thing at once? Like, for example, “I want to show how our monetary system is bad: governments that promise to run surpluses and then don’t do it; fractional reserve banks; banking itself, when people should rely just on their own money? I’m going to run an experiment that shows how money should really work. I’m going to use my wealth to create a country—let’s say TomDickHaria—where money is done right from day one.”

Dr Strangle:    Vell yes, but don’t be so specific. State something general. Zen each you on another Earth vill think of a different aspect of ze problem…

Harry:    In fact, if I understand quantum computing correctly Dr Strangle, we should just focus on one aspect of money ourselves, and let the other Toms, Dicks and Harrys choose other aspects?

Dr Strangle:    Zat is right, Herr Harry! Ze magic of the Quantiverse©™ Quantum Multiverse Communications System is zat each trio of Tom, Dick & Harry will carry out a different experiment. You can then pool your newfound knowledge at the end of all zese different simultaneous experiments!

Dick:    This is truly brilliant Dr Strangle! Gentlemen, you know we all complain about the monetary system? Well here’s our chance to do more than complain. We can fix just one thing, and also create a multitude of experiments simultaneously! Let’s use this Quantiverse thing to get our counterparts to expose all the weaknesses of the monetary system, all at once!

Harry:    Love the idea Dick, but we’d better get the script right. Give us a few minutes Dr Strangle.

Dr Strangle:    Certainly gentlemen. I have all the time on all ze worlds in ze Multiverse.

Tom:    Ah Dr Strangle, if there are multiple me’s, then there are multiple you’s too, correct? How do you know some of them haven’t already made a Quantiverse?

Dr Strangle:    Elementary my dear Tom. Because I have. I’m the Dr Strangle that succeeded, the others have all failed—so far.

[A few minutes later, Tom Dick and Harry hop into the Quantiverse booth, and say in unison]

“I am going to create a mini-country with my two best friends, where the money system is done right. We’ll fix one thing that’s wrong with the current system, and show how much better the economy works as a result.”

Dick, to Strangle:    So that’s it? What do we do now?

Strangle:    Easy. You just choose one thing to change, and do it. Trust that some Tom, Dick and Harry on some Earth elsewhere in ze Multiverse will change one different thing.

Tom:    But how will we know what they found in their experiments?

Strangle:    Ah, zank you for asking. Let me show you the budget for my Quantiverse©™ Séance machine…

Dick:    We’ll pay it, Dr Strangle. Now gentlemen, as the Earth on which this experiment originated, let’s go for the purest of all systems: a world that reproduces our hero Milton Friedman’s hypothetical world from the Optimum Quantity of Money (Friedman 1969). There’s a fixed amount of money, no banks, no lending, and no government. Let’s do this!

Scene 1, Earth One, Year 1: A recording studio

Hi! I’m Tom.

I’m Dick.

And I’m Harry.

Dick:     We are three, law abiding, liberty loving Americans who have had it up to here with the America of today.

Tom:     We are so sick of politicians who won’t keep their promises.

Dick:    And governments that won’t balance their books.

Harry:     Every election, some politician promises to get the government’s house in order. Every year, they fail. Look at this: the Whitehouse has kept a record of its surplus since 1901. And what does it show?

Tom:     Failure!

Dick:     They all say they’re going to run a surplus: almost all of them fail. The average “surplus” since 1901 is minus 2.5% of GDP!

Tom, off script:     Err, Dick, what about the Wars though? Shouldn’t we leave them out?

Harry:     Ha! Even if we do, the deficit is still 1.85% of GDP.

Dick:     Some “Surplus”! Ha! They should be honest and call it a deficit! Turn it upside down and you’ll see the truth.

Dick:     You see? Irresponsible! Promise a surplus, deliver a deficit! It’s criminal.

Tom:     Shame! Shame!

Dick:     And Trump! What a disappointment! He criticized Ryan for not balancing the budget…

Harry:     When he wasn’t even President!

Tom:     That’s right, when he wasn’t even President!

Dick:     And yet when he gets the #1 job, what does he do? Can’t even get to the average deficit, even excluding wars! He’s running a deficit of over 4% of GDP!

Tom, off-script:     Ah, Dick, Clinton did pretty well though, didn’t he? He managed a 2% of GDP surplus! Maybe we shoulda voted for [whack!]

Tom:     Sorry Dick, I don’t know what came over me!

Dick:     Maybe it’s your mutual love of cigars? Anyway, back to business: we’ve had enough!

Harry:     That’s right: we’ve had enough of governments promising to save money, to put some aside for a rainy day, and not doing it.

Tom:     So, we’ve decided to form our own country.

Dick:     And do it right, from day one! We’re sick of governments running up debt, so…

[spin out to three worlds here, where in each world, Tom, Dick and Harry try a different Neoliberal fantasy about money…]

Chapter 1, Earth One: we’re not gonna allow debt, and we’re not going to have a government!

All 3, to camera:     We hereby declare ourselves to be citizens of TomDickHaria™©. TomDickHaria is a self-sufficient country located about here (x covers half of the Midwest). We have no government but! And no welfare! And no taxes either! We are a pure, free enterprise nation. And we want our story to be an inspiration to more of you to break away, form your own free countries. So here it is. We’ll lay it down as it happens, so you can all learn from our quest for freedom…

Giles [Camera Man, interrupting the filming]: But how are you gonna do that? The United States government won’t let you!

Dick:     You just right on shooting sonny boy, and let us big boys worry about the details…

Harry [conspiratorially]: You see, we ain’t dumb. We’ve incorporated TomDickHaria™© in the Cayman Islands: it’s a company, not a country.

Giles: But what about all the other businesses here? What about my business? I’m not part of “TomDickHaria”!

Dick:     Oh yes you are sonny. You see, we’re not poor either. I’ve made a little money out of oil.

Harry:     And I’ve made some out of “accounting”. People pay me real good to cook their books.

Tom:     I just inherited lots of land from ma Daddy. But really, really lots of land.

Dick:     We bought your business, and every other business in TomDickHaria™©. You can keep on running it just fine, and pay yourself a nice management fee, but you’re a subsidiary of ours.

Giles:     I’m what?

Tom:     A subsidiary of mine. We bought the bank, I paid off all your debts, and I got your business in return.

Dick:     Just so that, you know, you’d have to come along with us for the ride. You’re debt free, but we own you. Sort of, anyway. And everybody else in TomDickHaria™©.

Giles: What? Oh My God this is insane! And you guys can evade your US taxes, but I’ll have to pay them!

Rita [Giles’ sound recordist]:     And so will your staff.

Dick:     No you won’t, because we’re not going to pay you in US dollars. You’re going to get Miltons instead. And your wages will be in Miltons too. The US doesn’t tax Miltons.

Giles & Rita in unison:    “Miltons”? What the hell are “Miltons”?

Harry:     They’re our own currency. See?

Giles:    Your own currency? What, you expect me to accept payment in your bloody IOUs, rather than Uncle Sam’s Greenbacks?

Dick:     Did I mention we were rich? We’ve put 300 billion greenbacks into a little account in the Cayman Islands to back the Miltons, just in case. But in TomDickHaria™©, all payments will be in Miltons. You can use your Miltons to buy anything else you want produced in TomDickHaria™©. We’ll maintain parity to the dollar: one Milton will always be worth one 2020 United States dollar. But hell, it’ll be worth a lot more than a US dollar in 2030! With the trillion-dollar deficit Trump is running, hyperinflation will start in Uncle Sam’s currency any day now!

Tom:     Errr, but Dick, inflation has been fall… [whack]

Tom (a bit shaken but still going):     It’s fallen even as the deficit has risen. Look—they don’t seem to move togeth… [whack!]

Dick:     Mere detail. “Long and variable lags” (Friedman 1961, p. 464). It’ll happen to Uncle Sam, but not to us: the supply of Miltons is fixed. There’s 300 billion of them, and that’s it. Just as we agreed, OK Tom?

Tom:     Yes Dick. 100 billion for each of us.

Giles:    Each of you? What about me?

Harry:     Your fee for shooting this video was $2,000, wasn’t it? Then we’ll pay your firm…

Dick:     Tom’s subsidiary.

Harry:     That’s right. Tom’s subsidiary; we’ll pay you M2,000 instead. Do you want them physical, or in the electronic account we’ve set up for you?

Giles: I WANT DOLLARS, not “Miltons”! What fucking use are those things to me?

Dick:     They’re accepted everywhere in TomDickHaria™©. You can buy just what you like with them here, and one day, they’ll be worth a lot more than a US dollar. You’ll see. So, what’ll it be sunshine: physical or electronic?

[Giles goes to object, but shadowy figures who are Dick’s henchmen start to move towards him. He realises he has no choice.]

Giles:    Physical funny money or electronic… I don’t know which is worse… I’ll take the physical. At least that way I’ll have proof when I go to my lawyer to sue you!

Dick:     Your lawyer? You mean, Harry’s law firm?

Harry, smirking: It makes sense for the accountant to own the lawyer, don’t you think?

Dick:     Now piss off and edit this thing for broadcast. Me and the boys have some planning to do…

Tom Dick and Harry exit the studio, along with Dick’s henchmen.

Giles and Rita stand in shock. Giles gives Rita M250 as TDH leave. “What good are these bloody things? I signed up for 250 bucks a day, not 250 Miltons”. “I don’t know, but it’s all I’ve got. We’ll just have to see if this mad scheme works.”

Dick, walking along the street:    Now boys, we got some work to do. What’s the state of the books, Harry?

Harry:     Come to my office boys. Got some things to show you.

Scene 2, Earth One: Start of Year One

Harry’s [large] accounting firm. TDH are sitting in a boardroom, looking at a large LCD screen.

Harry:     So, here are our consolidated accounts. We divided things up real good: we each own capital worth a hundred billion dollars…

Dick:     Miltons!

Harry:     Last year we were still using dollars, remember? So we were worth 100 billion dollars each last year, we each had a turnover of $100 billion, and we each made a profit of $10 billion.

But…

Dick:     But what?

Harry:     Well, now that we own all the businesses in TomDickHaria between us, I decided to consolidate our operations and look at what my businesses buy from yours, and what your businesses buy from mine. And it looks like we all just break even. Look:

Dick:     What?! But you just told again that me I made a $10 billion profit last year. And you did; and Tom did. What’s going on—[menacingly] you’re not cooking my personal books, are you? I don’t care if what you show the Feds is a fantasy, so long as they can’t prove it; but I want what I see to be squeaky clean—and profitable!

Harry:     It is Dick, and you are! But … I don’t know… I just don’t understand that table.

Dick:     Well I do: we’re not saving enough money! We founded TomDickHaria to show we can do better than the US government. We’re going to save money, and we’re not going to run up any debt…

Tom:     Yeah, we agreed, no debt—private or public!

Dick:     That’s right! Bring up that total debt graph Harry. Right, look at that! Does that say “Failed State to you, or what?”. That’s not gonna happen in TomDickHaria, understood?

Harry and Tom:     Understood.

Dick:     Right. So, starting today, I want us all to pledge that every year, we’ll save 10% of our income. Agreed?

Tom:     Um, Dick… Remember “long and variable lags”?

Dick:     What about it?

Tom:     Well, we’ve only just started. We haven’t even told everybody that the greenback is banned. Hell, we haven’t even told anyone else that TomDickHaria exists yet! Maybe we should give people time to get used to the new system.

Dick:     No! We’re going cold turkey on loose money from day one!

Harry:     Tom’s right Dick. Your doctor told you that you had to lose weight, right? And you said you’d train up to be able to do a Marathon, right? You said you’d take two years to get there, right? Well, what if your doctor forced you to run a Marathon today? We’d be at your funeral tomorrow.

[Deflated Dick]

Tom:     Let’s give people two years to get used to the Milton Dick.

Dick:     OK, OK, OK. Here’s a deal: I said I’d do the Silver City Marathon in two years’ time. And. I. Will. The day after, we all start saving 10% of our income, every year. Agreed?

Tom and Harry:     Yes Dick.

Scene 3, Earth One: Year Two

Giles puts Tom, Dick and Harry’s announcement out across all broadcast and social media. It includes an announcement from President Ivanka Trump, who is a personal friend of Dick’s, that the US Government is interested in seeing how the experiment turns out, and won’t intervene. The population starts in shock, and no-one really trusts the Milton except Tom, Dick and Harry. But everyone is suddenly also debt-free, so everyone starts to spend more freely in this funny money. To everyone’s amazement (except Tom, Dick and Harry), the economy picks up. As the Silver City Marathon approaches two years later, even though there are only 300 billion Miltons in existence, the GDP of TomDickHaria comes in at 600 billion Miltons.

Tom, Dick & Harry are heroes, and the population cheers Dick on as he crosses the Silver City Marathon finish line after five hours. Giles and his crew of three—sound recorder Rita, lighting engineer Sol, and makeup artist Joan—record an exhausted but triumphant Dick at the end.

Dick:     I want [wheeze] to thank all you TomDickHarians for your support! I’ve shown that a fat old geezer can turn his life around, and we’ve shown that a debt-free, government-free money can work. Tomorrow, we go one step further: Tom and Harry and I have pledged that, from now on, we’ll save 10% of our income. We’re gonna have so much savings, we’re gonna turn TomDickHaria into the richest country on Earth!

The crowd and Harry and Tom cheer Dick on, but Harry remains puzzled by the fact that, despite GDP doubling over the last two years, none of them have managed to save any money.

Scene Earth One: Year Three

The Category 6 cyclone Donald hits Florida, destroying Miami. and turning Mar a Lago into More a Lagoon. Donald is downgraded to a Category 4 by the time it hits inland TomDickHaria, but it does extensive damage to Tom’s farming operations and Dick’s factories. Harry’s insurance company has to pay out to them both, but that doesn’t compensate Tom for the fall in his sales. Dick manages to meet his sales targets by machinery sales to Tom from inventory. To add insult to injury, Harry is run ragged fighting insurance claims. At the end of the year, exhausted, he sits down to check the state of TomDickHaria’s finances—and gets the shock of his life.

Dick has outdone his ambition to save 10% of his income, and in fact has saved 15%, or M30 billion. But Harry, Harry has dis-saved: his account has fallen by precisely as much as Dick’s has risen. He’s stunned. He can’t believe the figures. He pores over their accounts, making sure—unfortunately—that there are no mistakes. He gives up, goes to the ‘loo, sits down and thinks to himself: “I’m lost in that bloody matrix”.

Matrix thought bubble. Neo. A spoon…

SPOON BOY (SKINNY BOY) Do not try to bend the spoon. That is impossible. Instead, only try to realize the truth.

NEO What truth?

SPOON BOY That there is no spoon.

Harry:     “There are no savings!” [He exclaims, as he jumps off the toilet with his trousers still around his ankles. Harry composes himself, pours a scotch, sits back in his armchair and says out loud] “And now I’ve got to explain that to Dick”.

Scene 4, Earth One: Year Three, Harry’s Office

Harry:     Boys, take a chair. Time to go over the year’s accounts. First of all, Dick, congratulations: your goal was to save 10% of your income, but you actually saved 15%: M30 billion!

Tom, to a smirking Dick:     Congratulations, big boy. How’d I do, Harry?

Harry:    You just broke even Tom.

Tom:    Ah. Dang. Well, I suppose it’s better than going backwards, isn’t it fellas?

Harry:    Better than you realize.

Tom:    So how did you do, Harry?

Harry:    I lost M30 billion.

Tom and Dick in unison:    What?!! How’d that happen Harry?

Harry:    Because you stole it from me, Dick.

Dick, puzzled and angry all at once:    I did no such thing!

Harry:    Not knowingly, no. But you did. Your savings caused by loss—my “dis-savings”.

Dick:    “Dis-savings”? What sort of a word is that?

Harry:    It’s one you’re going to have to learn the meaning of, Dick. You see, when you add us all together, “There are no savings”.

Dick:    What? What’s this “There are no savings” shit? You ain’t gone all Zen on me, have you Harry? You’re sounding like a monk.

Harry: Close, Dick, but an accounting monk. It’s a mathematical identity: your savings are our dis-savings. There’s only a fixed number of Miltons, remember? So if you have more, the rest of us have to have less. You saved 30 billion Miltons and they all came out of my pocket.

Dick, rising to his feet:    No-one calls me a thief! You’re just not man enough to cut back your spending like I did. Bugger you: I’m going to do it again. And I’ll start by cancelling my accounting contract with you, and doing it myself! Good day!

[Dick storms out of the room]

Harry sighs to himself:    Well that went well…

Tom (who’s been virtually ignored):    Ah, Harry, I didn’t understand it either. But I’m not angry like Dick. Can you try to explain it to me, one more time?

Harry:    Sure Tom. You remember that there’s only a fixed number of Miltons—300 billion of them?

Tom:    Sure. That’s the first thing we agreed. “Inflation is always and everywhere a monetary phenomenon”, as Milton Friedman taught us. So with no money growth, no inflation: TomDickHaria’s proudest achievement!

Harry: Yeah, but what that means is that, whatever each of us has in our accounts, the total has to be M300 billion. Agreed?

Tom (thinking for a second):    Yup, makes sense.

Harry:    So Dick’s account went up by M30 billion; yours didn’t change. Mine had to fall by M30 billion, so that the total remains at M300 billion. Dick’s savings caused me to dis-save by precisely as much.

Tom (sort of enlightened but also puzzled):    Hmmm. I can understand the arithmetic: if Dick’s account went up by M30 billion, and mine stayed the same, then yours has to go down by M30 billion, sure. But that’s just arithmetic: you said he “caused” your dis-savings. But how? That’s the bit I don’t get. And what do you mean, “There are no savings”? We’re all trying to save all the time, aren’t we? And don’t you need to have savings before you can have investment? We’re all investing—especially me after that storm—so there must be savings to finance them.

Harry sighs:    All good questions Tom. I don’t understand those things either. Not yet, anyway.

Scene 5, Earth One: Year 4

Harry tries to cut his spending further, but he’d done so much in TomDickHaria’s 3^rd year that all he can manage to do is save himself a billion by using his own accounting firm rather than Harry’s. Harry, determined to prove a point, cuts back on all maintenance and equipment purchases and causes his demand for Harry’s machinery to plunge by 10 billion. Tom, still reeling from the floods, is unable to reduce his spending on either Dick or Harry.

It’s also been a tough year for the economy of TomDickHaria. Things are still far better than under the dollar, but GDP inexplicably slumps from M600 billion to M569 billion. The recession cuts Giles’ income by about 10%, and he copes by cutting his management fee and reducing Joan’s hours by 50%.

Harry does his own accounts, and Tom’s. Dick’s accountant does his. As Harry is explaining the accounts to Tom, a gloating Dick rings up via Skype, and Harry puts his call on the big screen.

Dick:    Hello ex-accountant, how’s it going? Don’t bother telling me, because I’m doing fine. I only managed to cut my spending by M1 billion, but somehow, I ended up saving M11 billion! How do you like them apples? And where do you reckon I “stole” them from?

Tom:    You stole them from me, Dick.

Dick:    What? Not you too Tom! What the hell do you mean?

Tom:    Dick, there’s only 300 billion Miltons. If you get more of them, they have to come out of my account or Harry’s. He “dis-saved” [illustrated by air quotes] 1 billion last year too, so while you “saved” M11 billion, Harry and I “dis-saved” precisely the same amount.

Dick:    What’s with this “dis-savings” nonsense, Tom? Have you forgotten why we established TomDickHaria too? We’re all about saving money!

Tom:    There are no savings Dick! Harry explained it to me last year, after you stormed out. The logic is…

Dick:    Ooh, big word, farm boy: “logic”. Screw you too! Neither of you have the balls to save like I have. You’re both losers! [The screen goes blank].

Harry:    Tom, are you OK? You don’t look right.

Tom:    I’ve copped this all my life Harry. Farm boy, rich man’s son, Daddy-made-billionaire. Normally behind my back, of course. Didn’t think Dick was one of those that did, but now I know… Well, we’ll see whose made of tougher stuff. Harry, I’m going to cut my spending on his businesses to the bone: let’s see how Dick “likes them apples”! Will you join me? I promise to keep my spending on your stuff constant if you do. You’re still my best friend, even after all this. [Harry nods]

Tom, as he leaves the room:    By the way Harry, you know the economy went backwards quite a bit last year: GDP was down by M31 billion. Do you have any idea why?

Harry: No old son, that’s still got me beat. But I’m working on it.

Scene 6, Earth One: Year 5

Demand for manufacturing plummets as both Harry and Tom put off all new equipment purchases and do the bare minimum of maintenance. Tom cuts his spending on Dick’s manufacturing businesses from M90 to M60 billion, while continuing to spend M100 billion on Harry’s services. Harry does likewise, cutting his purchases from Dick by M30 billion, but keeping his spending on Tom’s agricultural and real estate empire constant. Inexplicably, the economy tanks badly as well, with GDP plunging to M499 billion. It’s still better than the last year with the dollar, but the plunge causes unemployment to rise, and it has everyone spooked.

When Dick does his accounts for the year, he’s both shocked and puzzled. Somehow, someone has stolen … Oh shit. When he calls Harry this year, he finds that Tom and Harry are more than prepared for the call.

Dick:    Hi fellas. Look, I have a problem here, and…

Harry:    We know, Dick. Your “savings” fell from M141 billion to M82 billion, a M59 billion plunge.

Dick: What? How did you know that? Have you got a spy at my accounting firm?

Tom:    No Dick, it’s simple accounting L.O.G.I.C. My account went up by M30 billion this year. Harry’s went up by M29 billion. Since the stock of Miltons is constant, that means your account had to fall by M59 billion.

[Silence; the penny finally drops on Dick]

Dick:    Holy shit. Then There are …

Tom:     no savings, at the aggregate level. That’s right Dick. Individuals can save, societies—including TomDickHaria—cannot.

Dick:    Damn. So if we want to save more money, we have to somehow create more money? That goes against everything I learnt from Friedman.

Tom:    Maybe he didn’t know what he was talking about.

Dick:    I’d call that heresy, if I wasn’t staring at an account that’s 18 billion short of when we started, after I’ve spent three years trying to save money. But what happened to the money? We didn’t save any, but something hap…

SMASH! His sentence is interrupted as a stone thrown by a now unemployed Joan smashes his office window:    Screw you and your funny money experiment, you Dick!

Dick:    What the hell? Why the fuck did she do that?

Harry:    She’s unemployed Dick, and there’s no welfare, remember? She probably wants to be arrested and sent to the private jail you own. At least she’ll get fed.

Dick:    That’s another thing. Why has the economy slowed down so much? I thought savings was supposed to cause investment, not unemployment. This experiment is turning out to be a lot less fun than I expected.

[Tom, has been doodling noughts and crosses on his pad as he waits for Dick to come to grips with reality. To fight the boredom he lets X win one round, and draws a cross through the table…]

[Thought Bubble: the movie War Games. A child hacker accidentally sets The Pentagon’s WOPR supercomputer on a course to Global Thermonuclear War, until he teaches WOPR Noughts and Crosses. After playing a few hundred drawn games, it does the same with mock all-out nuclear war, and then makes the analogy:

WOPR: “Nuclear War is a strange game … the only winning move is not to play”]

Tom, excitedly:    The Savings War: the only winning move is not to play! Harry, that mystery matrix of yours: what’s the sum of the numbers on the diagonal? Hurry!

Harry, after fiddling with some Excel formulas:    Minus 489 billion Miltons. Why do you ask?

Tom:    What was TomDickHaria’s GDP this year?

Harry:    Four hundred and … eighty … nine billion Miltons. Oh God.

Tom:    And what was the sum back in before we started to try to save money?

Harry:    Minus M600 billion—exactly the same as GDP that year, only the opposite sign.

Dick, who’s now cottoned on:    And the sum of the other cells?

Harry:    M489 billion this year, M600 billion in Year Two. The same value as GDP, and the same sign.

Dick:    And the sum of the whole table is zero. Gentlemen, firstly, I apologize for being a dick for the last three years…

Harry:    Well if the name fits… But yeah, apology accepted. So, secondly?

Dick:    Secondly, I’ve worked out where we went wrong—or where we were misled by Milton. What you spend on me is your expenditure and my income at the same time. Ditto for what I spend on you guys. So while my expenditure and my income can differ, as they have for the last three years, our total expenditure IS our total income. That’s why There are no savings. I finally get it. Sorry that it’s taken me so long!

Harry:    No shit Sherlock. But I mean that as a compliment—you’ve explained something I hadn’t figured out yet. Wow. So, trying to save money doesn’t lead to investment; it doesn’t even save money! Instead it slows down the circulation of money, and directly reduces GDP, Milton for Milton. If you compare Year One to this year, we went from spending a total of M600 billion on each other, to spending M489 billion in total while trying to save M111 billion. And we saved ZERO, and GDP fell by precisely
M111 billion. Everyone loses in a “Global Savings War”.

Tom:    You’ve answered your “What happened to the money?” question too Dick. It didn’t go anywhere. It just slowed down. Our attempt to save money saved zero money in the aggregate, and reduced GDP instead. Isn’t that what Keynes called “the paradox of thrift”?

Dick:    So now we’re quoting Keynes?

Tom:    He’s starting to make a lot more sense than Friedman! Question is, what do we do, now that we’ve learnt that unexpected lesson?

Harry:    Simple: we spend more, on each other, deliberately!

Dick:    No! That’s irresponsible, it’s, it’s … Keynesian!

Tom:    Keynesian my arse: it’s sensible. I let my farms run down this year, trying to avoid spending money on you. Sorry, but as you said, you were a dick, so I treated you like one. But my farms have suffered. And hell, so has your business: you’ve got oodles of inventory rusting.

Harry:    You’ve even got a broken window to fix. Tom’s right Dick. It looks like it isn’t savings that leads to investment, but spending—somehow. If we all spend more, our expenditures go up, but so does our income. Our Miltons work harder by turning over more rapidly: we get more GDP from every Milton. So, let’s get back to spending M100 billion on each other each year.

Dick, in a funk:    OK, OK, OK. I get it. But what about my savings—I mean, I’m down M18 billion on where I was when we began this experiment. And you guys are up M18 billion? Is that fair?

Tom:    Well, we started this as an experiment to teach people about money Dick. We just didn’t realise that the people we’d be teaching would be ourselves. You’ve caught up now. But you started the savings war, and you were the last one to realise that we all lose. And, as you’ve always said, education should cost.

Dick:    I didn’t mean that it should cost me! But… OK, OK, I’m stuck. But… there’s still something I don’t understand. Harry, you told me at the beginning that I was—we all were—making profits. But your “Noughts and Crosses” table shows us in the aggregate spending exactly what we receive. That has to mean that we weren’t making profits, doesn’t it?

Harry:    That’s got me stumped too Dick. Maybe we need to speak to someone brighter than ourselves to understand it.

Tom:    You mean Dr Strangle? Hadn’t we better go see him anyway about his QuantumSeance machine? We’ve kept paying his bills every year, but we haven’t seen anything yet…

Scene 7, Earth One: End of Year 5

Tom:    Dr Strangle, we’re ready to communicate the results of our experiment, but there’s still one thing we don’t understand. Harry’s accounting showed us as each making $10 billion a year profits before the experiment, and as much as M20 billion a year before Harry started the Savings War.

But at the same time, when we look at what we spend on each other, it looks like there’s no profit in the aggregate. Our aggregate expenditure exactly equals our aggregate income—and we know now that this has to be true.

But that looks like we made zero profits—in fact, it looks like profits have to be zero! What’s going on???

Strangle, after checking the two tables for a few minutes:    Ah, gentlemen! You are doing something typical of Earthlings—and especially of economists. You are confusing stocks and flows. You know that the stock of Miltons in this TomDickHaria necessarily sums to 300 billion, so that’s all there can be. That’s the stock of Miltons, eternally fixed in your TomDickHaria. And you know that you’re each making M20 billion a year in profit—which is a flow of Miltons per year. And you think that you should each be able to add this annual flow to that stock… But you can’t. Adding “Miltons per year” to “Miltons” doesn’t make any sense.

Dick:    But then what happens to our profits?

Strangle:    Simple: you spend them, just like your managers like Giles spend zere management fees, unt zere workers like Rita spend zere wages. And you generous philanthropists spent most of your profits on me, so that I could develop the QuantumSeance machine. That spending of profits turns up in your “Noughts And Crosses” table, so ze table balances.

Tom:    Ah. I get it… I think. Profits in Miltons per year is not the same as accumulation of additional Miltons each year. If we want to accumulate more Miltons each year, then we have to create them each year. But we decided that our TomDickHaria would not create any more Miltons. So our Profits have been spent mainly on you, and by you, as you created the QuantumSeance machine! And you’re saying that the QuantumSeance machine exists now?

Strangle:    Yes! It is even more amazing zan ze Quantum Phonebooth! You sit around ze QuantumSeance Table, ask a question, and it is answered by all ze Tom unt Dicks Unt Harries who have carried out their experiments, on ze other worlds where they were rich enough to do it!

Dick:    Let’s do it then. Let’s hold that Quantum Séance. Maybe learning what happened on other worlds will make up for me losing M18 billion in profits—sorry, in accumulated wealth—here on Earth One…

Chapter 2, Earth Two: We’re going to have a government that is debt-free!

Scene 1, Year Zero: Giles’s studio

All 3, to camera:     We hereby declare ourselves to be citizens of TomDickHariett™©. TomDickHariett is a self-sufficient country located about here (x covers half of the Midwest). Our government, unlike other governments, will practice what it preaches. We’re going to cut government debt to zero!

Dick:    Right! Just look at what a dreadful job the US government has done. They promise to get debt under control, and they never do. Why, we’re not even in a War (well, not a World War anyway), and government debt is stuck at 100% of GDP! That’s criminal!

Tom (off script):    Look how much debt was reduced from 1946 until Reagan though! The government must have done the right thing then Harriet: run huge surpluses?

Harriet:    Um, er, actually, no Tom. It ran an average deficit of 1.6% of GDP. I don’t quite follow how debt fell while the government ran a deficit…

Dick (interrupting):    I’ll tell you how: inflation, that’s how! They government pumped up the money supply and made their own bonds worthless. They effectively robbed those people who were stupid enough to buy them!

Tom:    Err, Dick, that’s sort of true in the 40s and early 1950s, but inflation was below 4% from 1952 till 1968, and government debt still fell from 66% to 44% of GDP. So [whack!]

Dick, menacingly:    So are you with us or against us in this experiment Tom?

Tom, intimidated:    I’m with you guys, Dick; I’m just saying that, when you look at the data, it doesn’t look so obvious any more.

Harriet:    That’s why we’re running this experiment Tom: to cut through the confusion. And whatever happened between 1952 & 1968, deficits have been twice as big since then: 2.9% of GDP! Now debt is right back up to 100% of GDP again.

Tom:    Does that mean that there’s a right level of deficit then? [whack!]

Dick:    Any deficit is a bad deficit! Spending more than you earn? What would happen to us if we did that, as private individuals?

Tom (dizzy after the whack):    We’d go bankrupt, Dick.

Dick:    Right! And so would the government. So every year, we’re going to run a surplus of at least 1% of GDP.

Giles:    What are you guys talking about? You aren’t the government! Who voted for you?

Dick:    President Trump did sonny! We bought TomDickHariett™© off her for $300 billion, and we’re running it as a country, with us as the Government.

Rita:    But you can’t just buy somewhere and call it a country: that’s undemocratic!

Harriet:    Too right it is! Democracy’s the problem! Or part of it, anyway. Letting you lot have a say means politicians try to buy your votes with funny money. Well that won’t happen in TomDickHariett™©, because you don’t get to vote.

Giles:    But you’re going to tax us, correct? Then we demand a vote: No Taxation without Representation!

Dick:    Just think of us as your Mum and Dad (and Uncle, including Tom ). You didn’t vote in your family, and you’re not going to vote in TomDickHariett™© either. You’ll just benefit from a country run as well as my Mummy and Daddy ran the ChezKnee household. And hold off on the riots until you’ve experienced our revolution, sonny. For a start, you’re not going to pay any taxes: we are!

Giles:    What?

Dick:    We’ve set things up so that us capitalists pay taxes and you lot—workers—get government services. Your wages are tax-free, and you get government services for free as well.

Rita:    Gee… Thanks… I think.

Dick:    Don’t mention it, And Giles, you slogan works backwards: No Representation without Taxation! So, it’s fair that you don’t get a vote. You savvy?

Giles:    Well, that’s hard to argue against… But what if your experiment doesn’t work? What if the economy goes backwards rather than forwards?

Dick:    Ha! It’ll work, you’ll see. We’re going to have the world’s only debt-free economy. The place will boom!

Scene 2, Year Zero, Earth Two: Harriet’s offices

Dick:    So what’s the state of our new nation, Ms Accountant?

Harriet:    Well, as we agreed, we’ve set things up so that the government of TomDickHarrieta starts with the same debt ratio as the USA: 100% of GDP. GDP is $600 billion, and the Treasury has net debt of $600 billion: $630 billion in outstanding government bonds—$430 billion owed to private sector banks and $200 billion owed to the central bank—minus $30 billion that the Treasury has in its account at the Central Bank.

Tom:    So our government starts with negative equity of $600 billion!

Dick:    That’s the same as the US government Tom, in percent of GDP terms: they owe 100% of GDP. It’s criminal: no-one should be allowed to operate with negative equity!

Harriet:    That’s not strictly true Dick. A private individual or company can operate with negative equity, so long as they can meet their expenses and service their debts. The only organizations that must have positive equity are banks: a bank whose Liabilities exceed its Assets is by definition bankrupt.

Dick:    Harrumph! Well it’s obviously better to be in positive equity than negative. A country with positive equity will obviously be better than one that’s in the red—to the tune of 100% of GDP!

Tom:    Err, Harriet, what’s the “Bonds_Treasury” account, and why is it zero?

Harriet:    Well, obviously, the government can always issue new bonds—but they are only paper money until when they’re sold. So I’m valuing that capacity at zero.

Tom:    But what if they issued, say $1,000 billion worth? What would the Treasury’s books look like then?

Dick:    They’d look like a lie too, that’s what! They’d pretend to be $400 billion in the black, but it would just be an accounting trick. Those bonds are worth zip dollars until they’re sold. That’s what we’re valuing them at.

Tom:    What do the Central Bank’s books look like Harriet?

Harriet:    The Central Bank is pretty much just the conduit for the Treasury’s relationship with the public. Everything passes between the Reserve accounts of the private banks and the Treasury’s Deposit account: taxes reduce Reserves; government spending, interest payments and debt repayment increase them.

Tom:    You’ve said that tax revenue pays for interest payments to the private banks Harriet; does tax revenue pay for interest payments to the Central Bank as well?

Harriet, sheepishly:    Well actually Tom, no. It turns out that interest payments to the Central Bank are self-financing, sort-of. You see, though it’s supposed to be independent, the Central Bank is effectively owned by the government—specifically, by the Treasury. The Federal Reserve puts it this way:

Who owns the Federal Reserve?… The Federal Reserve System is not “owned” by anyone… the Reserve Banks are required by law to transfer net earnings to the U.S. Treasury,…

Dick:    That’s outrageous! So Treasury “pays” interest to the Central Bank, and then the Central Bank pays those interest payments back to the Treasury as profits? That means the Treasury could borrow as much as it likes from the Central Bank, without cost! That’s a total sham! It shouldn’t be allowed.

Harriet:    Maybe not Dick, but it’s the law, and it’s the case in every country on the planet. Besides, if the Central Bank didn’t pay its profits to the Treasury, where would they go? If they didn’t distribute them at all, then there’d only be an inflow into the bank from interest payments, and no outflow. The Central Bank would end up accumulating all the money in the economy. You don’t want that do you? And think about it Dick, we own all the banks in TomDickHarrieta. So if we took out a loan, most of the interest they charged us would come back to us as dividends. Isn’t that almost the same?

Dick, annoyed but conceding the point:    OK, OK, OK. So effectively, the Treasury doesn’t pay interest on its debt to the Central Bank. Now what about our books?

Harriet:    Well, you can see ours by looking at the private banks’ account. As we agreed, we’re keeping the banking sector out of the picture: it can’t make loans, but it does own $430 billion in government bonds. With $20 billion in Reserves, its assets are $450 billion. Its liabilities are our $100 billion, $280 billion in the accounts of the firms we own, and $20 billion total in the workers’ accounts, leaving it with $50 billion in equity. The banks earn interest on their government bonds, which is another source of profit for us, since we own them. We of course also make profits from the firms we own, we invest in our firms, and we pay taxes, which finance both interest payments and services for workers.

Dick:    OK, I can understand the initial sums in the bank accounts, and the flows, but I’m not happy about us paying the taxes while the workers get the benefits. Won’t that mean that our accounts will get emptied, and the workers will end up with everything?

Harriet:    That’s where the cash flows come in Dick. Look, as we agreed, when we start running a surplus, we’ll use it all to pay the debt the government owes to the private banks.

Taxes will pay the interest on government bonds held by the private banks, and fund government services—which go entirely on the workers. They consume what they get paid, so wages plus government services enable their consumption.

That all gets spent on the firms that we own, and we get their profits—which we re-invest, after paying taxes. We get the income from the private banks’ holdings of government bonds too, which finances our consumption—which I’ve called “Indulge”, given what we buy compared to what workers buy.

When I add it all up, the flows balance out. What TomDickHarrietans earn (wages plus profits) equals what is purchased (consumption goods and investment goods). This is a “double entry” check that the accountant in me insisted upon, and it holds.

Lastly, the total money supply—which is the sum of all the private bank accounts, plus the equity of the private banks—is $450 billion. With GDP of $600 billion, the velocity of money is 1.33—about the same level as applies for the USA as well.

And when I run the model, it works as I expected: our accounts remain constant, which they should if we’re not changing anything yet.

Dick:    Ok, OK. But explain to me again why we’re not letting the banks lend, and why we’re paying taxes, but workers and the banks aren’t?

Harriet:    Because those details would make our experiment too complicated Dick. Remember when we had that collective brainwave to run this experiment?

Tom, interjecting:    I certainly do! It was magical. I said that I wanted to run an experiment with you two, my two best friends, where the money system is done right. We’d take one thing that’s wrong with the current system, change it, and show how much better the economy works as a result. And then you two told me that you were thinking precisely the same thing at the same time! It had to be God talking to us.

Harriet:    That’s right Tom. We want to understand what actually happens when we run the experiment. So, in keeping with God’s Word, we’ve made the experiment as simple as possible.

Dick:    That’s all very well in theory Harriet; but if the theory is wrong and our accounts go backwards, I’m pulling the plug—Word of God or no Word of God.

Tom:    That’s why we agreed to leave things as they are for 2 years Dick, before we try to reduce government debt.

Dick:    Yep. I hate waiting, but I hate losing money more. Incidentally Harriet, where’d you get this software from?

Harriet:    Minsky? Dr Strangle developed it for me.

Dick:    Strangle? Well I’m glad he’s given us something, after all that money we’ve poured into developing his Quantiverse technology—with nothing to show for it to date. So this software had better describe reality, or he’s toast!

Scene 2, End of Year Two, Earth Two: A Bar

The first two years went as Dr Strangle’s software predicted. GDP remained at $600 billion per year, and the amounts in bank accounts remained constant. Dick accepts that he, Tom and Harriet can pay all the taxes without having their accounts fall, while workers spend all the money they get as wages and government services. He’s now raring to cut government debt, but Harriet has done some calculations that make her slightly concerned. She knows Dick will be hard to convince—he’s gone from being sceptical to gung-ho—so she arranges for a quiet drink with Tom.

Tom:    What’s the matter Harriet? Everything seemed to work OK: the economy performed like Dr Strangle’s software said it would.

Harriet:    Yes Tom, but that was when nothing changed. And we’d deliberately neutralized the impact of government by making its spending identical to its taxation. Next year, we intend bringing government into the picture by running a surplus: making government spending smaller than taxation. I’ve fiddled with this a bit in the model, and two things happened that have me worried.

Tom:    What are they?

Harriet:    Well, I’m no economist, but I am an accountant, and I know that the books have to balance somehow: accountants invented double-entry bookkeeping because it gave us a double check on our calculations, to make sure they’re correct. I copied that idea in the model by having two ways to define GDP: by adding up wages and profits (which I called GDP_Y for “Income”—economists use “Y” rather than “I” for some reason) and adding up the things that were purchased—consumer goods bought by workers, and investment goods bought by us (which I called GDP_E for “Expenditure”). Those two things were equal when taxes and services were identical. But then I tinkered with the model to generate a surplus. Obviously. interest had to be paid on government debt, so the $10 billion surplus reduced services by $10 billion, as you can see.

Tom:    Well that has to happen—unless we increase taxes on ourselves! What’s the problem?

Harriet:    The problem is that then my two measures of income differed—so there had to be a mistake. Look: there’s a $10 billion discrepancy between them:

Tom:    Could you fix it?

Harriet:    Yes, but the only way I could was by treating the surplus as something that reduced the income measure of GDP!

Tom:    What? Running a surplus reduces GDP? I thought running a surplus would improve GDP. We all did, didn’t we?

Harriet:    Well maybe it still does, but indirectly. But it’s more complicated than we thought. We intend running a surplus to reduce the ratio of government debt to GDP. But if a surplus cuts GDP at the same time as it cuts the debt, it isn’t obvious that the ratio will fall.

Harriet:    And there’s another issue. You remember that the velocity of money was 1 1/3^rd: money turns over 1.33 times a year, the same as in the USA these days?

Harriet:    Well, out of curiosity, I worked out how fast the money in each account turns over in TomDickHarrieta. Think of the $100 billion in our account as our money stock, and our expenditure of $48.6 billion as our annual discretionary expenditure. Then our velocity of money is just under 1/3^rd. The banking sector’s velocity is lower still—just 0.287 times a year. The firm sector’s velocity is much higher: 2.61 times a year. And the workers, who have a money stock of only $20 billion, spend $350 billion a year. That’s a huge velocity: almost 14 times a year!

Tom:    So?

Harriet:    So I don’t really know. But for the last year, all the accounts have been constant, and spending has been constant. What if all that changes: will GDP change more than we expect? And in a good or bad way?

Tom:    When are you going to tell Dick this?

Harriet:    Ha! You know what he’s like when he’s made his mind up: you can’t argue with him. But I’ll have this ready in case things don’t turn out to be as simple as we had hoped.

Scene 3, Start of Year Three, Earth Two: Dick’s House

Dick:    Lady and gentleman, a toast! Here’s to the success of our experiment! The workers in TomDickHarrieta have got used to having no vote, but also paying no taxes; we know we can handle paying them ourselves. So now, let the experiment begin! Let’s run a surplus and drive government debt down to zero!

Tom:    How do we do it? By cutting spending, increase taxes, or do both?

Dick:    We cut spending, obviously! I’m not about to put taxes up on myself.

Tom:    The workers might have something to say about that. Less government services means they’ll have to provide things for themselves that they’ve relied upon the government for in the past: medical services, transport, education…

Dick:    It’ll do them good! They should provide for themselves and stop scrounging. Besides, with less government debt, the economy will boom: the increase in their wages will more than make up for the cut in welfare. And can I have some enthusiasm please? You both agreed to this experiment with relish initially. Why the glum faces, when we’re about to set it in motion?

Harriet:    Well Dick, I did some experiments with Strangle’s software, and it pointed out a problem: running a surplus reduces GDP, so…

Dick:    Running a surplus reduces GDP? Poppycock! Are you freaking out like Tom is over cutting welfare? Don’t go all soft on me now Harriet! We know, in our heart of hearts, that we have to get government debt down.

Harriet, insistently: Dick, even if we use the surplus to pay off government debt, it’s not obvious that the ratio of debt to GDP will fall!

Dick:    Nonsense! You’re trusting Strangle’s software over our intuition? Who are the billionaires here: us, or the boffin? We’ll show we’re right by running the experiment. As of today, we run a surplus of $6 billion a year by cutting government services. Agreed?

Tom and Harriet, resignedly and in unison:    Agreed Dick, agreed.

Scene 3, End of Year Three, Earth Two: Dick’s Office

To achieve the $6 billion a year surplus target, Tom Dick & Harriet cut government services by $6 billion, from $51.4 billion to $45.4 billion. By the end of the year, government debt had been cut from $600 billion to $594 billion, as they intended. But inexplicably—at least to Dick— GDP fell. And it fell even more than Harriet expected, from $600 billion a year at the start of year 3 to $579 billion at its end. Consequently, the government debt ratio has actually risen, from 100% to 103% of GDP! Harriet’s fear that GDP might fall faster than government debt had been realized.

Dick:    Harriet What the hell is going on? We’re running a surplus, and the debt ratio is rising!

Harriet:    I’m no wiser than you on this Dick—or not much anyway. But remember what I said at the start of the year: paying down government debt by running a surplus cuts GDP as well. Now that you’ve seen it, will you believe it?

Dick:    Not yet: on this I’m a Doubting Dick. And I don’t want rhyming couplets from you Harriet, I want answers. We’re cutting debt—it’s down by $6 billion as we planned. But why is GDP down by even more? Find out!

Harriet:    I’ll try Dick. But what do we do now? Do we end the experiment?

Dick:    Give up after just a year? No! … Maybe we didn’t try hard enough. We took the easy option: cutting services and leaving taxes where they are. But what if we increased taxes? As well as cutting services? Maybe we need to feel some pain as well to get the debt ratio down.

Harriet:    Do you think that’s wise Dick? There are lots of people complaining of the cuts to services, and unemployment is up as well, not down as we expected.

Dick:    Bugger them! They know we pay the taxes: let’s see them complain if we increase taxes on ourselves! We’ll achieve a $12 billion surplus this year: $6 billion from the services cut, and $6 billion from additional taxes.

Scene 4, End of Year 4, Earth Two: Strangle’s Laboratory

Tom:    Dr Strangle, our experiment isn’t going as we expected. First we cut services by $6 billion, to cut government debt by $6 billion. The cut worked: government debt is down by $6 billion. But GDP fell by almost three times as much, so the debt ratio actually rose, even though government debt fell.

Harriet:    Then we decided to double up and increase the surplus to $12 billion by increasing taxes on us. That’s been a disaster: we cut government debt by another $12 billion, but GDP tanked to $540 billion—a 10% fall from before our experiment. There are protests and riots everywhere! Your Minsky model didn’t predict anything like what has happened.

Strangle:    Would you have believed it if it had, without actually experiencing it, Frau Harriet? And Minsky is not strictly a model: it is a modelling tool. Perhaps ze model you built in it was incomplete?

Harriet:    Maybe, but how would I know?

Strangle:    Vell, I suggest you run your model forward in time, and see vhat changes and vhat doesn’t. Zen if zese things behave differently zan in ze real vorld, maybe you need to change your model to suit. Let’s run your model for 30 years and see where it goes wrong.

[Harriet runs the model for 30 years]

Harriet:    Well government debt and the government debt ratio fall, as we intended. But look at what’s happening to the money supply: it’s fallen precisely as much as debt has! Debt is down by $168 billion, and so is the money supply. And all of the fall occurred in the firm sector: our accounts and workers and the banks have remained the same. But velocity has risen a lot, from 1.32 to 2.11 times a year over the 30 years.

Strangle:    Vich of zose phenomena also happened in ze real world, and vich didn’t?

Harriet:    Hmmm. Well the money supply has dropped, by $6 billion—precisely as much as we cut government debt. And all of the fall has occurred in the firm sector’s accounts. But velocity hasn’t risen—in fact it fell from 1.33 to 1.3 times a year, in just one year.

Strangle:    Vell you need a model zat does all zose things. Zen you might be able to understand vat is going on.

Scene 4, End of Year Four, Earth Two: Harriet’s office, late at night

Harriet, to herself:    So… I need a model where money supply drops as debt is repaid… And the velocity of money falls… Let’s just see why velocity rises so much in my model.

[She runs the model for 30 years, but this time with a graph of all the velocities.

Harriet:    Ouch! Well the money supply graph mimics what happened in the real world, but the velocity figures for firms are nonsense… The way I defined them was correct though: wages and profits divided by the money in the firm sector’s accounts…

Harriet:    Hang on. My income definition of GDP was Wages plus Profits was, before I took account of the impact of the surplus. And I have them constant, when they fell in the real world… Maybe I’ve got this back the front: maybe the firm’s velocity remains constant, determining GDP by income before government gets in on the act…

Harriet:    So far so good, but how to split GDP between wages & profits?…

[Much working away, daylight turning into night]

Harriet:    Oh stuff it, let’s just pretend the ratio of wages and profits remains constant… Profits were 100 & Wages 500 when we started: so profit share is 16.7% and wages the rest…

Harriet:    Now the moment of truth—maybe. Let’s see how close this gets to what actually happened. Run it with no surplus for 2 years, then $6 billion a year for one year

…

Harriet:    Bingo! So now I can reproduce the what. All I still don’t know is … the why?

Harriet, on the phone:    Tom. Got something to show you. Do you have time for a drink?

Scene 6, Year Five, a bar

Tom:    That’s impressive Harriet: now we know why GDP went backwards last year.

Harriet:    Not really Tom: I can reproduce it, but I don’t understand it. Why does GDP fall by more—much more—than debt falls? And why does total velocity fall? I’m keeping velocity in the firm sector constant now, so why does it fall overall?

Tom:    Well, let’s treat it like a crime scene.

Harriet:    What, “Cherchez la femme”? The only woman in this story is me, Tom.

Tom:    No, no, no: treat it like a robbery, not a murder: “Follow the money”. We know that money fell in both the model and the real world. So who got robbed, and what happened because of the robbery?

Harriet:    Good thinking Tom! OK… well our accounts remained constant, and so did the workers accounts, and the bankers. So we weren’t robbed: only the amount in the firm sector fell, by $6 billion over the year.

Tom:    And you assumed that this turns over 2.6078 times a year—why the crazy number, by the way?

Harriet:    It was necessary to generate a GDP of $600 billion before the surplus cut in. But I think you’re onto something here. If the amount in the firm sector’s accounts fell by $6 billion, and it turns over 2.6078 times a year… My calculator tells me that Wages and Profits fall by $15.6522 billion…

Tom:    Harriet, that’s it! We’ve already worked that out each dollar fall in debt cuts the money supply by precisely the same amount—though we don’t quite know why. Each dollar in the firm sector’s accounts generates $2.6078 of GDP per year. So, for each dollar we cut debt by, GDP falls by 2.6 dollars. No wonder the ratio rises!

And the surplus cut another $6 billion directly from GDP, as your double-entry accounting pointed out. So there’s our missing $21 billion.

Harriet:    Hot dang! And we’ve agreed to run an even bigger surplus this year, by taxing ourselves an additional $6 billion a year no less.

Tom:    Which means that GDP will fall even more this year, and the government debt ratio will rise even more! We’ve got to tell Dick and stop the experiment then! I’ll call him…

Tom:    Dick! Can you talk?

Dick:    I’m in my car. What’s the problem?

Harriet:    Well can you come over and join us at the bar? We’ve got something to tell you.

Dick:    I’ll come by, but you’ll have to tell me in the car: I’m in a hurry to get home. Meet me outside in five.

Scene 7, Year Five, Earth Two: Dick’s car

Tom:    Look Dick, Harriet and I have just worked it out: running a surplus actually increases the debt ratio! We’re trying to make things better, but we’re actually making them worse.

Dick:    What? Are you two high? That’s nonsense: if we’re cutting debt, then the debt ratio should fall!

Tom:    But it doesn’t Dick. We’ve already seen it last year. When we cut debt, we cut the money supply, and GDP falls much more than debt, so the debt level rises.

Dick:    All that’s rising right now is my blood pressure!

Tom:    And your speed! Maybe you should slow down Dick? Take your foot off the pedal a bit.

Dick:    I’ll put it down as hard as I please Tom. You might not be able to handle the pace, but I can!

Tom:    Maybe Dick, but there’s that new roundabout ahead! You’re going too fast!

[Dick hits the brakes, but too late. The car goes into a skid. He tries to control it, but the car rolls].

Scene 8, Middle of Year Four, Earth Two: A Hospital Ward

Dick:    Where am I?

Doctor:    You’re in the recovery ward Mr ChezKnee. You’ve just come out of an induced coma after your accident. On which note, Officer Petty here would like to have a word.

Petty:    Hello Mr ChezKnee. I’m afraid you’re under arrest for culpable driving.

Dick:    Arrest? For culpable driving? What did I do wrong?

Petty:    Well for a start sir, you entered the roundabout at 80 miles an hour or more—we could tell that from the skid marks. Then you rolled the car, which is why you’re here—as were your friends, though far more briefly.

Dick:    OK, I entered too fast, but I hit the brakes! And I did the right thing after that, didn’t I?

Petty:    No you didn’t sir: you made things worse. You turned the wheel in the direction of the roundabout.

Dick, scoffing:    Well what’s wrong with that? I wanted to turn left, so I turned left!

Petty:    That’s what you did wrong sir. That’s OK at low speeds, but you were in a skid. In a skid, you turn into the skid to control it: you should have turned the wheel right, not left.

Dick:    Turn right to go left? That’s absurd!

Petty:    That’s what most amateurs think. But turning in the direction you want to go in backfires in a skid. Smart drivers point the wheels in the opposite direction. Now please get changed and accompany me to the Station.

Scene 10, Year Five: A courtroom

Judge:    In the light of your previously unblemished record, Mr ChezKnee, I’m going to let you off with a good behaviour bond, but only on condition that you undertake an advanced driver training course. If you don’t agree, it’s a dangerous driving conviction, and a three month non-custodial sentence.

Scene 9, Year Five, Earth Two: Harriet’s offices

Dick:    So who are our guests Harriet?

Harriet:    I’ll get to that Dick. First, it’s good to see you out of the bandages. That’s the good news. The bad is that the economy’s in worse shape than you were. We have cut government debt to $582 billion—that’s the economy’s good news. But the bad news is that the debt ratio has risen even more: it’s now 107% of GDP! And GDP has gone even further backwards: it’s down to $542 billion. There are riots now, and people are demanding the vote. Which is what Giles and Rita are doing here: we’ve agreed that they can join us to set economic policy for the next year.

Dick:    What, have you two gone even softer on me? “No representation without taxation”, remember?

Rita:    That was on the faith that you knew what you were doing with the economy ChezKnee. But clearly you didn’t. Your precious surplus has slashed government services by ten percent, and the economy hasn’t boomed, it’s tanked. You’ve been like an amateur trying to compete in a rally race, and we’ve been your unwilling passengers!

Dick, Tom and Harriet, looking like stunned mallets:    What did you say?

Giles, to Rita:    Cool it Rita, we don’t want to …

Dick:    No Giles, it’s not a problem. Rita, can you say that again?

Rita:    I said, you’ve been like an amateur trying to compete in a rally race, and…

Dick:    My god, you’re right!

Rita:    I’m right? I wasn’t expecting you to say that…

Dick:    I wasn’t expecting to say it either. But it’s true. We have been like amateurs in a rally race. Me especially. So, what do you want us to do?

Giles:    We want you to restore government services, back to what they were before you began your damn experiment!

Dick:    We’ll do better than that: we’re make them $6 billion higher than before the experiment.

Tom and Harriet:    Ah Dick, are you sure you’re over your concussion? Shouldn’t we be cautious here?

Dick:    Cautious? When our experiment has caused GDP to tank by over 10%? No. We tried to reduce the government debt ratio by running a surplus, and the ratio rose instead. So now let’s turn the wheel the other way. Let’s see what happens if we run a negative surplus—a deficit!

[Policy changes to a $12 billion a year deficit, and not only does the economy boom, but the government debt ratio falls back to 100% of GDP.]

Scene 10: Dick’s Offices

Dick:    Gentlefolk, a toast: to the success of our experiment!

Tom:    Err, Dick, our experiment failed! We thought we could cut the government debt ratio by running a surplus, and we were wrong: it rose instead.

Rita:    Which is why your experiment was a success—even though it caused us common folk misery! It disproved your hypothesis, and now you won’t be stupid enough to do it again. Who wrote that line “The great tragedy of science—the slaying of a beautiful hypothesis by an ugly fact”? Well that’s what happened: your “beautiful hypothesis” was that cutting debt would cut the government debt ratio. The ugly fact was that it did the opposite. So that’s progress.

Harriet:    That was our secondary hypothesis: our primary one was that it was a good idea to reduce the government debt ratio in the first place, and that the economy would boom if we did. Instead, it tanked. So have we killed that hypothesis as well?

Tom:    I think so. If the government runs a surplus, then the money supply falls, and since the velocity of money in the firm sector is much greater than one, GDP falls even more. So maybe the government should aim to run a deficit rather than a surplus.

Dick:    Before this experiment, I would have bitten your head off for that comment—literally! Now… well, I’m not sure if I’m inclined to agree, but I can’t dismiss that outright. Harriet, can you show us the government surplus, for as long as you’ve got data?

Dick:    Hmmm. Well it’s pretty choppy, and the Wars are obvious. But look at the 1920s: the US government as big a surplus as we targeted—1% of GDP—for all of the 1920s. And that was a pretty good decade! Then it ran big deficits—up to 5% of GDP—during the Great Depression no less. Superficially, it looks like surpluses cause good times and deficits cause bad ones!

Harriet:    Superficially yes, but we’ve learnt enough to reject that direction of causation. We know that surpluses on their own don’t cause good times: they cause recessions. So there must have been something else going on in the 1920s that countered the direct effect of the government surpluses.

Tom:    Well, we excluded a lot in our experiment. We didn’t let the banks lend, for example. We know now that a government surplus causes an identical private sector deficit. In our experiment, there was no way for the private sector to compensate for that—so GDP collapsed. Maybe in the real world, the private sector compensated by borrowing from the banks. Let’s check…

Dick:    Oh My God: while the US Government was patting itself on the back for cutting government debt in half, private sector debt doubled! Government debt fell by about 15% of GDP, but private sector debt rose by 45%: the increase in private sector debt was three times as big as the fall in government debt. No wonder the immediate impact of the government surplus was swamped. What did all that borrowed money get spent on, I wonder?

Giles:    Well, partly on the new inventions of that age: radio, fridges and other domestic appliances, mass produced cars…

Rita:    And buying shares! Using 10% margin loans. How big were margin loans back then, Harriet, Compared to today?

Dick:    Holy Great Gatsby! Margin loans hit 12% of GDP at the peak??? No wonder they called it The Roaring Twenties! No wonder the 1929 Crash wiped out so many people! OK folks, we’ve found our “countervailing factor”: massive private borrowing offset the negative effects of the government surplus during the 1920s, making it look like a surplus delivers good times.

Harriet:    Let’s see how strong that countervailing force was. Debt is the aftermath of the borrowing: the real impact comes from the new debt, which creates new demand and new money.

Dick:    How do you know that?

Harriet:    Well, that’s what the surplus tells us about government spending: our 1% of GDP surplus reduced GDP by several percent per year: directly by the initial surplus, then indirectly by reducing the money supply. So, the same thing should apply for private debt: the change in debt should tell us how much bank money was rising, which would have turbo-charged demand: directly by the initial spending, then indirectly by it increasing the money supply. Let’s call the change in debt “credit” to distinguish it from debt itself, and compare it to the surplus…

Tom:    Holy Hell: credit was more than five times as big as the surplus during the 1920s. “The Roaring Twenties” was roaring on credit. But there’s something funny going on at the end there Harriet: private debt actually started to rise even faster in 1929, but credit was actually falling from 1928. How are those two things possible at the same time?

Rita:    Maybe the ratio is confusing you. Remember when you geniuses thought that reducing government debt would cause the government debt to GDP ratio to fall? Harriet, can you check the actual numbers for debt and GDP—and include the 30s as well as the 20s?

Rita:    There’s your explanation Tom: debt was actually falling from 1930, but GDP fell even faster. So the private debt ratio rose. Irving Fisher realized this back in the 1930’s, if I recall correctly.

Tom:    So the depressing effect of the government surplus during the 1920s was more than offset by the credit-fuelled binge at the same time. Then when credit collapsed, the economy tanked, and government was forced into a deficit. We had the cause right but the culprit wrong: Too much credit and too much private debt are the real worries, not the government deficit and government debt.

Rita:    I bet that the US government at the time was congratulating itself on the surplus, not realizing that the real cause of the apparent prosperity was a private debt bubble that their surplus probably encouraged!

Harriet:    Coolidge was fooled by the private credit bubble that more than compensated for the depressing effect of his surplus. And then the credit collapsed—no wonder when margin loans alone were 12% of GDP! I still can’t get over that. 12%! That’s even bigger than total credit—maybe demand in the real economy was collapsing, even as more money was thrown at stock market speculation rather than true enterprise.

Dick:    Then the decade after the government’s fetish with “saving for a rainy day” was the worst in the century: The Great Depression; the rise of the Nazis; the start of WWII. All the unintended consequences of trying to do good, by fiddling with a system that they didn’t understand.

Gentlemen—and women—I’ve seen enough for one day: I’m feeling positively sick. I need to get outside for a while: anyone want to join me for a spin in my new car?

Tom:    No way Dick! The last time we went for a drive with you, we all ended up in hospital!

Dick:    Tom, in driving as well as economics, I’m a changed man. Trust me: come for a spin. All of you: you’ll enjoy it. Let’s get away from the economy for a while.

Scene 11: Dick’s new car

Harriet:    Dick, Tom and I worked out that government surpluses cause recessions just before your car accident: that’s what we were trying to tell you when you had your crash. What puzzles us is how you worked it out: you didn’t listen to our explanation before you crashed the car. How did you go so quickly from being gung-ho for a surplus to realizing that the government should run deficits instead?

Dick:    I realized that it’s the same as cornering in a rally: to turn left in a skid, you throw the wheels to the right. I know why this works in a car now…

Tom:    Dick, you’re speeding towards the same roundabout! Slow down or you’ll crash again!

[The car enters the roundabout, but this time Dick takes it like a rally driver: he turns the wheel into the skid, and executes a perfectly controlled skid turn]

Dick:    Whee!!! This is how I worked it out Harriet: by experiencing obliquity: I turn left, and go right! Isn’t it a buzz?

Scene 12: a roadside bar

Giles:    Well that was exciting! I’m feeling positively high.

Tom:    It was a blast, that’s for sure. The world is more exciting when you know what you’re doing—both in managing the economy and behind the wheel. Hey—look over there! There’s a gypsy telling fortunes. Let’s get ours told for a laugh.

Rita:    Why just individual fortunes? There are five of us here: for real fun, let’s hold a Séance…

Chapter 3: The QuantiSéance Machine

Scene 1, Earth One: Dr Strangle’s Laboratory, with Tom Dick and Harry sitting around the QuantiSéance Table

Tom:    What does the QuantiSéance Table do, Dr Strangle?

Strange:    Vell Tom, via the experiment, you and your Multiverse selves who did similar experiments are quantum entangled. Zey vill not know why, but zey will be drawn to a similar experience to ze Séance you are about to do. Ven you type a question into ze Séance Keyboard, zey will answer it via ze QuantiSéance Screen. When zey ask a question, you will reply to zem via ze medium zey are using. Ze sum of your knowledge vill be greater zan ze parts too: things you have a partial appreciation of vill be filled in by zere knowledge. You will benefit from quantum superposition.

Dick:    My head is spinning already, and we haven’t even begun yet. How do we operate this thing, Dr Strangle?

Strangle:    Much like a Séance. You sit in zese chairs around ze table, put your head in zeze helmets and your hands in zeze gloves, and hold hands to close ze circuit. Zen you ask one question, and see ze answer form in ze séance screen. [I’m thinking of a circular screen—or maybe a crystal ball!—in the middle of a circular table].

Likewise, zere questions will appear in ze séance screen; when you answer, you will be heard by ze medium zey are using. It will seem positively magical to zem—vich is a pity, zere is too much superstition on Earth to begin with… But anyway, let’s commence.

Tom:    Ah, Dr Strangle? It looks like your machine has started without us: look! Spooky!

Strangle:    Then your alter-egos on another Earth must have begun their Séance before you.

[The QuantiSéance Screen displays the message:    The money triangle is cursed! Only if it grows can we save.]

Scene 2, Earth Two: With the gypsy at the roadside bar

Gypsy:    So what it is you wish to ask the spirits, ladies and gentlemen?

Dick:    Right now, I’d rather drink spirits than ask them questions! I think we got most of the answers we need without intervention from the “spirit world”.

Harriet:    But Dick, remember the original inspiration for our experiment? Something magical happened then. Maybe it’ll happen now too.

Dick:    Hmmm. OK, with a couple of bourbons in me, I’m game. Well, one thing we didn’t do in our experiment was try to save more money ourselves: maybe we should have done that? So my question is “Should the private sector save money?”

The Gypsy bends her head back an utters in an other-worldly voice that surprises even her, because normally she’s a fraud:    The money triangle is cursed! Only if it grows can we save.

Scene 3, Earth One: Strangle’s Laboratory

Tom:    What the hell is the “money triangle”?

Dick:    Beats me! All we do know that trying to save money causes income to fall, with no aggregate savings. So, trying to save is counterproductive. Trying to hoard money backfires.

Harry:    Hoarding—that’s treating money as a store of value, isn’t it? That’s one of the three functions of money: the other two are a unit of account, and a means of payment. Maybe the three together are the “Money Triangle”? But why is it cursed?

Tom:    Well, your attempts to save money didn’t go well, did they Dick? You tried to save money—and you did, until we joined you in the “Savings War”. Your savings came at our expense, but then we got even.

Dick:    More than even! And all our attempts to save did was cause GDP to shrink.

Tom:    Right. So, if you try to hoard—to emphasise the “Store of Value”—then the triangle shrinks. GDP falls, as we’ve experienced. So, it’s cursed. The “store of value” conflicts with the “Medium of Exchange”. But if you spend more, the triangle grows: velocity rises and the same amount of money generates more GDP. Is that what “Only if it grows can we save” means?

Harry:    That’s GDP growing Tom, not savings. “We”—the private sector I guess—can only save the money that already exists. “Only if it grows can we save”. So, the money supply has to grow if we are to save. The premise of our experiment was bad: a growing economy needs a growing amount of money.

Dick:    So, should I ask “how should we increase the money supply?”

Strangle:    Zat is too open-ended a question Herr Dick. Ze QuantiSéance Table’s answers are quantum-cryptic: you need to ask a more specific question to avoid too oracular an answer.

Harry:    OK. We didn’t have a government in our experiment, and when we tried to all save money, we crashed the economy instead. But does saving work when the government does it? So, my question is “Should the government save money?”

QuantiSéance:    Spending is saving and dis-saving is saving.

Dick:    Well that’s helpful! “Avoid too oracular an answer?”. Is this a real machine Dr Strangle, or have you paid a stoned hippy to sit under the table?

Tom:    Dick, some manners please! And think laterally here, not merely literally. You asked whether the government should save money: it answered that “Spending is saving”. So maybe government spending is saving, somehow? But how can “dis-saving” be its opposite, saving? That one’s got me. Any clues on that one, Harry? After all, you coined the term “dis-saving”.

Harry:    Well, I invented it to explain that when someone—like Dick—saved, that caused the rest of us to dis-save by precisely as much. That has to hold in the aggregate, whether that includes a government or not. So the government’s dis-savings cause identical savings by the private sector: hence “dis-saving is saving”. And government spending adds to our bank accounts, hence “Spending is saving”: net government spending increases our bank accounts, so that we can all save at once, with our savings precisely equal to the government’s net spending—or dis-saving.

Dick:    But how can the government afford to dis-save? Who finances the government?

QuantiSéance:    Debt is free and I owe to me.

Dick:    Damn, that was a rhetorical question! But OK, I think I’m getting the hang of this. The government borrows to finance its dis-savings—hence it goes into debt. But its debt is free, somehow? Free for whom?

Harry:    Good question! When the government gives you money, it doesn’t hit you with a debt as well. To the recipient of government spending, it’s debt free. So, government spending creates money for the private sector, without creating debt for the private sector at the same time.

Dick:    OK, that makes sense. But what about the “I owe to me” bit? When the Treasury sells government bonds, it sells them to the financial sector, doesn’t it? Not directly to the Central Bank.

Harry:    That’s required by law Dick, but the Central Bank also trades bonds with the financial sector. It can effectively buy any bonds it wishes, just by entering numbers into accounts on its ledger: its Liabilities rise by the amount of money it creates to buy the bonds, and its Assets rise by the identical valuation of the bonds.

Tom:    And then the “I owe to me” bit: the Treasury is effectively in debt to the Central Bank, which is also part of the government. So, there’s no financial constraint on the government’s spending—unlike yours or mine.

Dick:    I would have rioted against that before our experiment, but having cost myself $18 billion to learn that, in the aggregate, “There are no savings”… There has to be a limit to this though, doesn’t there?

Harry:    In the same way there’s a limit to your “turn left to go right” trick at the roundabout: if you turn the wheel too far, you’d just crash the car in a different way, wouldn’t you?

Dick:    Yup, it’d flip, There’s an art to a skid turn. So, how could I crash the economy by overdoing your “run a deficit to reduce the debt ratio” trick?

Harry:    Well, I suppose you could create so much money that you caused inflation, rather than enabling the economy to run at capacity.

Tom:    That just leaves one other thing we excluded from our experiment: bank lending. But what can we ask? We can hardly ask “Should banks save money?”. How about “Should we borrow from banks?”

QuantiSéance:    Margins, beware the illusion of positive equity! [and it also projects a ghostly outline of the margin debt to GDP graph]

Dick:    OK Harry, this one for you. What the hell is the “illusion of positive equity”? And who is “Margins”?

Harry:    Well, the fundamental law of accounting is that your Assets minus your Liabilities equals your Equity. So it’s got something to do with that. But it’s no illusion: if your Assets exceed your Liabilities, then you have positive Equity, guaranteed!

Tom:    Isn’t one person’s Asset another person’s Liability as well, Harry?

Harry:    Yes it is Tom.

Tom:    So then, isn’t the sum of all Equity zero—just like the sum of all savings is zero?

Harry:    Damn: you’re right! Yes, it has to be. We’re talking about financial assets of course: we can all have plenty of physical assets, but financially, the sum of all monetary assets and liabilities must be zero.

Tom:    Banks have to have positive equity though, don’t they Harry? It’s not an illusion for them—it’s a necessity.

Harry:    True: a bank with negative equity is bankrupt. Every solvent bank has Assets that exceed its Liabilities.

Tom:    Which means that the rest of the economy, in the aggregate, must have negative equity—correct?

Harry:    Oh God, yes, so it must! So, in the aggregate, the non-bank sector—the private non-banks and the government together—must be in negative equity.

Dick:    Oh, come on Harry: get out of your ivory tower for a second. Look at the value of the stock market! Surely that’s not a zero-sum game? Anybody with shares is massively in positive equity, especially with the market so high right now.

Harry:    Have you bought any of your shares on margin, Dick?

Dick:    Sure, but so what? Everybody does it.

Harry:    That’s what concerns me. Maybe “Margins” in that warning by the QuantiSéance machine referred to margin debt. Dr Strangle, can you show us margin debt, compared to the value of stock market?

Strangle:    Ah, I forgot to tell you: ze QuantiSéance machine is a Multiverse search engine as well. You can ask it data questions, and if ze data exists, it will display it.

Harry:    Great! OK, show us margin debt versus the stock market.

Dick:    For the love of Ponzi! Margin debt reached 12% of GDP in October 1929? No wonder the market crashed! So that’s why the word “Margin” in the message. But what’s this got to do with the “illusion of positive equity”?

Harry:    Well Dick, in my ivory tower, with Tom’s help, I worked out that the non-bank sector must be in negative equity in the aggregate—if we’re working in terms of money alone. But shares are a different story. How do you value your stock portfolio, Dick?

Dick:    Simple: I multiply the number of shares I have by their market prices. What’s wrong with that? Everybody does it…

Strangle:    Yes, Herr Dick. And what would happen if everybody tried to sell zere shares at zat price, at once? Ze price would crash—just like 1929, and 2000, and 2008… Zat, I think, is the meaning of ze plural in “margins”: you calculate the value of your portfolio by multiplying all your shares by ze price ze last share sold for: ze marginal price. But you can’t sell all your shares at zat price: hence you have ze “illusion of positive equity”: individual traders can sell zere stocks for zat price, but if everybody tries to sell, ze price collapses. Your positive equity is an illusion.

Harry:    Doubly so if credit is actually driving the share prices: the more people borrow, the higher they seem to be. Let’s think it through: it’s new margin debt that buys shares, so there might be a causal relationship between new margin debt—margin credit let’s say—and the level of share prices. So, is there a relationship between change in margin credit and change in stock prices?

Dick:    Hmmm. Can you zoom in on the last 30 years—the years when I’ve been in the market?

Strangle:    Certainly, Herr Dick. Ze correlation between change in margin credit and change in stock prices should be zero, if ze “Efficient Markets Hypothesis” is correct—zey call zis the “Modigliani Miller Hypothesis” I zink (Modigliani and Miller 1958). Unt ze correlation over ze last 30 years is… 0.63. Zat is signficantly different from zero, I zink!

Harry:    So much for that hypothesis too then. Dick, not only are your asset valuations dodgy because you’re using the marginal price, margin debt is driving the prices. Does the same thing apply to house prices?

Strangle:    Apparently so, Herr Harry: ze correlation of household credit change with house price change since 1990 is … 0.66:

Dick:    What about the real economy: how does credit affect unemployment, for example?

Strangle: Very strongly, it seems: ze correlation between credit and unemployment since 1990 is huge: -0.85. Clearly, when credit goes up, unemployment goes down; when credit collapses, unemployment explodes.

Tom:    Damn: we’ve been such fools. We were paranoid about government debt and deficits, but it seems the real culprits are private debt and credit. What do they look like over the really long term?

Strangle:    The US Census kept two data series way back to 1834. Zey have much different magnitudes, but ze trends are ze same as ze Federal Reserve data. Once ze QuantiSéance machine adjust them to fit, zis is what private debt and credit look like:

Harry:    Good grief! While we’ve been obsessing about government debt hitting 100% of GDP, private debt hit 170%! Even after the 2008 crisis, it’s still over 150% of GDP. That’s higher than the worst of the Great Depression, and one and a half times what government debt is today.

Tom:    And look: credit was negative during the Great Recession, and also during the Great Depression—and … what’s that thing back in the 1840s? Even though private debt was much lower, negative credit then was huge: minus 10% of GDP for half a decade. What happened then?

Strangle:    It is known as the “Panic of 1837. It is described in ze book America’s first Great Depression: economic crisis and political disorder after the Panic of 1837 as “an economic crisis so extreme as to erase all memories of previous financial disorders” (Roberts 2012, p. 24).

[The crystal ball goes blank]

Strangle:    Gentlemen, it zeems your alter-egos have ended their Séance. We can learn no more here.

Tom:    I’ve learnt enough for a lifetime already, I think. Everything we thought we knew was back the front. Saving money is a bad idea for the macroeconomy—all it does is reduce GDP; the government should run a deficit; running a deficit can cause the government’s debt ratio to fall (which explains the fall in the government’s debt ratio in the 50s and 60s that Dick believed was due to inflation); like it or not, the non-bank sector must be in negative equity in the aggregate; asset prices are driven by credit, and private debt, not government debt, has caused the worst economic crises…

Dick:    Oh damn it guys and gals, let’s leave the economics for a while, and have some fun. For some reason, I feel like taking a spin on a racetrack. Anyone care to join me?

Tom,Harry and Strangle:    You’re on!

References

Fisher, I. (1933). “The Debt-Deflation Theory of Great Depressions.” Econometrica
1(4): 337-357.

Friedman, M. (1961). “The Lag in Effect of Monetary Policy.” Journal of Political Economy
69(5): 447-466.

Friedman, M. (1969). The Optimum Quantity of Money. The Optimum Quantity of Money and Other Essays. Chicago, MacMillan: 1-50.

Keynes, J. M. (1936). The general theory of employment, interest and money. London, Macmillan.

Modigliani, F. and M. Miller (1958). “The Cost of Capital, Corporation Finance and the Theory of Investment.” American Economic Review 48(3): 261–297.

Roberts, A. (2012). America’s first Great Depression: economic crisis and political disorder after the Panic of 1837. Ithaca, Cornell University Press.

Real Vision have just publicly released this interview they did with me on February 4th last year (2018). It’s timely, given Larry Summers’ recent conversion to Post Keynesian economics as he attempts to explain why economic growth has been anaemic ever since the 2008 financial crisis.

I’d use a different title–“How Debt Zombies Will Cause Credit Stagnation”, but that’s about my only complaint. It’s good—in one sense—to see that most of my calls in that video have come to pass. It’s bad, because they were about continued stagnation caused by low levels of credit, and because the Federal Reserve uses economic models in which credit plays no role, and therefore triggers downturns that it can’t explain when it puts rates up.

There are a number of statements that I make about data in this interview that I’ll back up here with that data. At the end, I explain how credit adds to aggregate demand and aggregate income—and why mainstream economists are therefore wrong to totally neglect the role of credit in macroeconomics.

Long term US debt data

• All three of America’s great economic crises—the Great Recession, the Great Depression, and the long forgotten Panic of 1837—involved sustained periods of negative credit.

The Roaring Twenties till the Golden Age of Capitalism

The rise in America’s private debt to GDP ratio during the 1930s occurred while private debt was actually falling—debt was falling as debtors went bankrupt and those that remained solvent paid their debts down rather than spending, but GDP was falling faster still, so the debt ratio rose.

Private debt fell rapidly relative to GDP under the New Deal (and before Roosevelt’s ill-fated decision to attempt to return the government budget to surplus caused a recession and a revival in deflation). WWII completed the debt reduction job, with enormous levels of government spending and private sector investment for the war effort (both before the USA formally entered the war when it was supplying the UK with weaponry under Cash and Carry, and of course after), private debt halved from about 80% to 40% of GDP. Then the 20-year-long long “Golden Age of Capitalism” began, with credit boosting aggregate demand—and also driving private debt levels up.

Credit and US Unemployment during the Great Depression

The timing is complicated, because debt data then was annual and recorded at the end of the year, while the unemployment data is monthly, but the negative correlation of credit and unemployment is visually obvious. At the end of this post, I explain the causal relationship between credit and economic activity, and hence the unemployment rate.

Credit and unemployment, house prices across 1990-2019

Having not learnt from the Great Depression thanks to mainstream economists (especially J.R. Hicks and Paul Samuelson) mangling Keynes into the “Keynesian Neoclassical Synthesis” and totally ignoring Irving Fisher’s Debt Deflation Theory of Great Depressions, the USA repeated the same folly of ignoring a private debt bubble. To this day, mainstream economists continue being perplexed about what caused the Great Recession, while the data makes it screamingly obvious that it was caused by the collapse of that bubble, which turned credit from plus 15% of GDP in 2007 to minus 5% in 2009.

With quarterly debt data today, the correlation of credit and unemployment is much more obvious. This is the “smoking gun of credit” that the mainstream continues to ignore.

T

Federal Reserve rate

As I note in the interview, you can summarise mainstream macroeconomics with 3 numbers: 2, 3 and 4. The models they use—so-called Dynamic Stochastic General Equilibrium (DSGE) models, which are neither truly Dynamic nor truly General)—are almost all hard-wired with the beliefs that the “natural rates” of inflation, growth and reserve interest rates are 2%, 3% and 4% respectively.

When it began its rate rise campaign in 2016, The Fed was planning to get its reserve rate back to 4%. But it has been forced by reality (and a reality TV star!) to reverse direction well before 4% was reached.

Private sector debt service ratio

The reason is that something that mainstream economists think won’t affect aggregate demand—the level of outstanding private debt, and therefore the debt service burden, which depends on both the level of private debt and interest rates—does affect aggregate demand. Their “loanable funds” model of banks is structurally false, as the Bank of England and the Bundesbank have forced the mainstream to accept; but they still haven’t (and never will) accept the macroeconomic corollary that credit is a major component of aggregate demand and income.

CAPE Index

Japanese data

Link to modern debt jubilee post

This needs updating, but here is my proposal for a Modern Debt Jubilee.

Velocity of money FRED

One thing that I expect a Modern Debt Jubilee would do is revive the rate of turnover of existing money, which is at historic lows now—I believe mainly in response to the debt levels the private sector is carrying, which leads people to try to hoard existing money to be able to service their debt levels. In fact, that behaviour simply reduces the contribution of existing money to GDP, leading to a yet greater dependence on credit.

Why credit is part of Aggregate Demand and Income

The mainstream has the model of “Loanable Funds” etched into its collective brain. In this model, banks are “intermediaries” between savers and borrowers—they don’t actually lend money themselves. Consequently, a loan simply redistributes existing money between non-bank entities: it doesn’t alter the money supply, nor does it alter aggregate demand unless savers and borrowers have markedly different propensities to consume. This was the basis of Bernanke not seriously considering Fisher’s Debt-Deflation Theory of Great Depressions in his “Essays on the Great Depression”:

The idea of debt-deflation goes back to Irving Fisher (1933). Fisher envisioned a dynamic process in which falling asset and commodity prices created pressure on nominal debtors, forcing them into distress sales of assets, which in turn led to further price declines and financial difficulties. His diagnosis led him to urge President Roosevelt to subordinate exchange-rate considerations to the need for reflation, advice that (ultimately) FDR followed. Fisher’s idea was less influential in academic circles, though, because of the counterargument that debt-deflation represented no more than a redistribution from one group (debtors) to another (creditors). Absent implausibly large differences in marginal spending propensities among the groups, it was suggested, pure redistributions should have no significant macro¬economic effects.
(Essays on the Great Depression, p. 24)

As the Bank of England and Bundesbank have thankfully both emphasized, Loanable Funds (and the “Money Multiplier” and “Fractional Reserve Banking”) are all textbook model that are simply false descriptions of the real world.

The macroeconomic corollary is that credit is part of aggregate demand and income. I prove this using what I call a “Moore Table” in honour of Basil Moore, the pioneer of the Post Keynesian theory of Endogenous Money (which I prefer to call Bank Originated Money and Debt, or BOMD). The table shows expenditure by one sector on each row, and income for each sector on each column. The diagonal entries are negative, representing expenditure by a given sector; the off-diagonal entries are positive, representing the income that expenditure generates. Each row therefore necessarily sums to zero, while the columns can differ from zero (a sector’s income from other sectors can be greater than its expenditure on those sectors).

The “Say’s Law” case is a world in which money exists, but no borrowing or lending takes place. The symbols A to F represent spending per year by one sector on another—so Sector 3, for example, is spending E dollars per year on Sector 1, and F dollars per year on Sector 2.

When you add up either the diagonal entries (the negative sum of which is aggregate expenditure) or the off-diagonal entries (the sum of which is aggregate income), you necessarily get the same result: aggregate demand and income is the sum A to F, which can be regarded as Milton Friedman’s “quantity theory of money”: aggregate demand and income is the product of the amount of money in existence (M) times how often it turns over (V).

The Neoclassical model of “Loanable Funds” has one non-bank sector lending to another non-bank sector, in return for interest payments on outstanding debt. This is shown in the next table, with financial transfers (loans) being shown along the diagonal.

When you sum the diagonal (or the off-diagonal) here, you find that Interest payments are part of aggregate demand and income—but not credit, which cancels out.

In the real world, a bank loan increases the banking sector’s assets (the level of outstanding debt) and its liabilities (deposit accounts) by the same amount; the borrower then uses that credit to buy goods or services or assets off someone else (no-one borrows for the sheer pleasure of being in debt).

When you sum either the diagonal or the off diagonals, you find that in this real-world situation, credit is part of aggregate demand and income. This is the factor that the mainstream continues to ignore—and always will ignore—which is why they can’t understand where the 2008 crisis came from, nor why its aftermath is a relatively stagnant economy, despite zero interest rates for a decade and relatively expansionary fiscal policy (in the USA).

Patreon

As the final slide in the Real Vision video notes, I’ve left academia and am now supported on this crowdfunding site Patreon. If you’d like to keep in touch with my analysis, and support me in developing it, please consider signing up.

Real Vision

Real Vision (along with MacroVoices) is a bastion of realism in the fantasy-dominated world of economics and finance. Here’s their intro to this video, and

Steve Keen is a ‘renegade economist’ who has been debunking classical economic theory for decades. Steve argues that ever-rising levels of private debt are unsustainable in the face of rising interest rates, but that the US Federal Reserve will continue to raise them anyway until the credit cycle implodes – at which point the Fed will turn about and inevitably return to stimulative policies. The economist maintains that until the level of private debt is addressed, the Fed will remain intellectually locked in a never-ending cycle of massive asset bubbles and extraordinary busts. Filmed January 23rd, 2018 in London.

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Credit Zombies and the Walking Dead of Debt (w/ Steve Keen) | Real Vision Classics

 

Minsky is, and will remain, Open Source software. I will also always post the latest version of Minsky here too, for Windows and Apple PC (see the uploads at the end of this post). But though the Open Source repositories SourceForge and Github will continue to host the source-code for Minsky, no binaries will be posted there past the current version (version 2.10).

For new binaries, the SourceForge and Github Minsky pages will direct users to a new Patreon page: https://www.patreon.com/hpcoder.

The reasons for this move is simple: to raise development funding, and to build a user community.

Funding

Minsky has never received funding from the conventional research funding bodies like the UK’s Economic and Social Research Council (ESRC), or Australia’s Australian Research Council (ARC). This is simply because, with about 80% of academic economists being Neoclassical, virtually 100% of the referees are Neoclassical. Non-orthodox projects like Minsky haven’t got a chance.

All Minsky‘s funding to date has come from just four sources:

• The Institute for New Economic Thinking ($128,000) in 2012;
• A Kickstarter campaign​ ($78,000) in 2013;
• A grant from Kingston University (£20,000) in 2017; and
• Personal funding from me (about $20,000) and several of my supporters (about $50,000) over the last seven years.

That’s about $300,000, which is peanuts in software development terms. Despite this, Minsky is already a very innovative tool for system dynamics in general, and economic and monetary dynamics in particular. Each month, between 200 and 400 people download it from SourceForge.

Figure 1: Monthly downloads of Minsky since January 2018

What we are hoping is that at least 50-100 of those each month will be willing to pay $1 a month via Patreon to do so. The money raised will then employ Russell to maintain and extend the program.

I don’t expect anyone who’s supporting me on Patreon right now to sign up (though I wouldn’t object either!). You’re already supporting me here, and that’s more than enough. We just hope that users who are curious enough to download Minsky will also be curious enough to pay $1 a month (plus the VAT overhead!) to help us continue to develop it.

I give my time to develop Minsky for free of course—thanks to support I get from my Patrons already. But as a self-employed programmer, Russell has to earn a living, and he charges about US$100 an hour for his time.

Given Russell’s skills in programming, mathematics, big data, physics, and complex systems, this is a bargain.

I’ll never forget one telling incident on this front.

In my second-last year at the University of Western Sydney, a top notch young computer science student signed up for my course on Behavioural Economics and Finance: Nathan Moses. His essay was a C++ written, DOS-based, multi-agent simulation of monetary dynamics. It was so good that (a) I got him to give a lecture to the class on it, and (b) I gave him 22 out of 20 for his essay.

The next year, Nathan started a computer-science-degree project with two other friends to port Minsky to the Web, and wrote a user interface in which multiple people could work simultaneously on the same model. It worked, although there wasn’t time to add the underlying ODE engine beneath the GUI. But it was so good that I hoped to hire Nathan (& Kevin Pereira) if I got enough funding on Kickstarter.

That didn’t come to pass, but for a while during the Kickstarter campaign, we were collaborating on Minsky, and Nathan and Kevin checked out Russell’s existing code, just in case I could raise the funds to employ them.

Nathan walked into our next meeting and said, and I quote: “I used to think I was a hotshot C++ programmer until I saw Russell’s code”.

A User Community

Patreon also offers two advantages that aren’t available on the Open Source repositories: the capacity for users to interact with other users, and to get some feedback from myself and Russell; and the capacity for us to know who has downloaded Minsky, and over time, to find out whether, why and how they’re using it. Downloads from SourceForge are completely anonymous, and all we know is metadata—how many people have downloaded it, from which countries, using which operating systems.

With a Patreon page, there is a capacity for discussion between users, as there is on this site, plus feedback to myself and Russell (we’ll be co-administrators of that site, though all of the funding will go to him to work on Minsky.

I’ll let you all know when the new Patreon page for Minsky goes live. The rest of this post is here just to provide graphics to use the page: images on Patreon must come from a website, so I’m placing them here so that we can link to them from the new page.

Figure 2: Basic Keen model of Minsky’s Financial Instability Hypothesis

Figure 3: Extended Keen model including prices but no government

Figure 4: Model of the Portuguese economy (by Pedro Pratas)

Figure 5: Bank Originated Money and Debt

Figure 6: The double pendulum

Figure 7: Keen model derived from macroeconomic definitions, with nonlinear behavioural functions

Figure 8: Lorenz’s model of fluid dynamics

Noah Smith (who tweets as @Noahopinion) made this tweet this morning, in response to the latest “Sokal hoax”, in which academics submit a nonsense paper to a journal which then publishes it:

5/The reason I know this is because of econ.

If you wanted to “prove” that econ was bullshit, you wouldn’t even have to Sokal hoax any journal. You could just pull real examples from the literature.

There are some BAAAD papers out there.

But are most econ papers bad? No.

— Noah Smith (@Noahpinion) 4 October 2018

Cameron Murray observed in response that he often felt he was reading a Sokal hoax when he read economics textbooks:

Unfortunately, sometimes I read an economics textbook and wonder if it’s a Sokal hoax!@rethinkecon @UnlearningEcon https://t.co/QsPgcTCLA8

— Cameron Murray (@DrCameronMurray) 4 October 2018

That set off a brainwave for me. Textbooks are in fact the places that “Sokal Hoax” calibre nonsense in mainstream papers get sanitized sufficiently to hide the nonsense. These nonsense papers make assumptions or “logical” steps that any sane non-economist would think must be part of a hoax. And yet they go on to dramatically influence the profession. So I suggested that we institute a “Nobble Prize in Economics” to recognise–or rather expose–these papers:

Now that’s a good question: what’s your favorite actual, influential economics paper, that any non-economist would think was a Sokal hoax? @rethinkecon @UnlearningEcon @PostCrashEcon @Renegade_Inc
We can award it The Nobble Prize In Economics! https://t.co/IeG5uR6TAI pic.twitter.com/kwSCtp9IXe

— Steve Keen (@ProfSteveKeen) 4 October 2018

This is actually a serious issue, and maybe a way to break the veneer of science that still protects mainstream economics to this day. So when I have time (now there’s a nonsense assumption at present!) I’ll see if I can institute and get funded a Nobble Prize in Economics, to assemble a list of all the absurd papers that have made economics into what it is today.

There’s tons. Cause is economists wanted particular results, but mathematical logic or empirical data denied it to them. So they make bonking mad assumptions to sidestep the problem, and the discipline swallows them whole because it wants those results. #NobblePrizeInEconomics

— Steve Keen (@ProfSteveKeen) 4 October 2018

The funding, of course, wouldn’t go to the original authors. I’m open to ideas as to how they might be employed.