Home > Uncategorized > Towards stock-flow consistent debt centered monetary statistics (3 graphs)

Towards stock-flow consistent debt centered monetary statistics (3 graphs)

In the last issue of the Real World Economics Review Edward Fullbrook makes a good fundamental point:

“Every scientific pursuit launches itself from a conceptual framework, a set of presuppositions about the nature of reality that, by providing a radical simplification of reality, makes investigation possible. These include such things as
• a classification of entities,
• which properties of those entities are taken into account,
• the types of connections recognized,
• whether all events are determinate or not,
• the nature and direction of causal relations,
• and whether or not there exist structural relations as well as aggregate ones.
In this way a conceptual framework defines a particular point of view toward its object of enquiry, and consequently, different conceptual frameworks offer different points of view. Or in Einstein’s words, they determine “whether you can observe a thing or not.”

What does he mean? The monetary statistics of the ECB may be a good example to explain this. These statistics are, like all macro-economic statistics, based upon the flow-of-funds ideas (“loans create deposits”) and the classifications of the national accounts (households and non-financial companies which borrow, Monetary Financial Institutions (MFI’s) which are the lenders etc.), as described in the SNA. This can be discussed – but that has to await another time. In this blog, the mindset used by the ECB to understand and show these data will be scrutinized. 

The ECB analysis of these statistics is of a mixed chartalist, monetarist and specific ECB nature. In the monthly press conferences of the president of the ECB attention is paid to the flow of credit between sectors (chartalist) – but the stock of debt is neglected, while the stock of  ‘M-3′ money gets center stage (both a monetarist influence). This neglect of debt is, for obvious reasons, regrettable. Also, the ECB always only looked at the Eurozone level, not at individual countries (deregulated capital markets would lead to Eternal Equilibrium, according to the ECB and people like alan Greenspan). This attitude is changing at the moment, but notice that the ECB is highly responsible for the lack of attention paid to imbalances between Eurozone countries (this is in fact a refutation of ‘rational expectations’ ideas, see Lars Syll, the believe of the ‘markets’ that the ECB was right made it wrong).

The changes mentioned above are necessary but at the moment only ephemeral. ECB monetary statistics still only take Eurozone developments into account and are not yet debt centered. But it does not have to be that way. We can define monetary statistics which, conceptually, do not emphasize the stock of money and the flow of credit on the Eurozone level but which emphasize the flow and the stock of credit on the national as well as a sectoral level. In the words of Fullbrook: we’ll recognize other types of connection:

Graph 1 shows the flow of mortgage credit in selected countries
Graph 2 shows the (net change in the stock of debt per sector (households and non-financial companies) for Eurozone countries (which is of course connected to the net flow of credit)
Graph 3 shows the stock of private credit in the Eurozone countries: debts are of course a sterling example of ‘path dependency’ in economics

Increase of mortgage debt, households

Change in debts

Totaldebts

Sources: Eurostat, ECB, De Nederlandsche Bank, Centraal Bureau voor de statistiek

Not all this credit was financed by MFI’s, part of it was ‘twice lent’ by for instance pension funds. And it’s only since June 2010 that the ECB systematically corrects the balance sheet data of the MFI’s for securitization (the Dutch data are based upon balance sheet data for the sector households). But the idea will be clear. It can be done, differences between countries were very large – and Finland and the Netherlands do not really deserve a triple A rating. All these data were already available – we just have to look at them in another way.

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  1. Steve
    December 15, 2012 at 6:35 pm

    Labor costs are only a fraction of total costs and so the rate of flow of total prices will at all times exceed the rate of flow of total individual incomes.

    This relationship between total money in the economic system and total individual incomes is an inextricable relationship between accounting and its subsystem cost accounting, and so the system and the individual. If we want to understand human much less humane systems we must give the individual at least as much consideration as the system itself. If the above relationship is permanent through time, and if someone can tell me when at any time cost accounting is not in effect in commerce I will back off from the following statement, its effects are permanent and operative for the economy and for every dollar that actually enters, re-enters and/or remains in that economy. Now some economists may cry “Velocity of money” and “Quantity theory of money” but these are merely means of systemic liquidity (total monies)….not an effective means of reducing either the austerity imposed upon individuals through time by the ever widening gap between prices and incomes or the consequent build up of debt, not only for businesses but also and most especially for individuals ….because the conventions of cost accounting always apply to them as well.
    The remedy for this conundrum is the implementation of a direct payment to individuals via a citizen’s dividend which corrects the scarcity of individual incomes in a way that does not incur an additional systemic cost, and a compensated retail discount, based on the formula of total cost of consumption over total cost of production for any given period of time, which also reduces any potential inflationary costs accumulated at the end of the commercial cycle at retail sale, and yet enables merchants to remain whole with their costs and necessary margins of profit.

    And of course any savings, being a cost of consumption, reduces the discount to consumers, as they are actually spent.

  2. Steve
    December 15, 2012 at 9:00 pm

    Actually, this is a more accurate rendition of my above post:

    Labor costs are only a fraction of total costs and so under normal economic circumstances the rate of flow of total prices will at all times exceed the rate of flow of total individual incomes.

    This relationship between total money in the economic system and total individual incomes is an inextricable relationship between accounting and its subsystem cost accounting, and so the system and the individual. If we want a functional economy much less a humane one we must give the individual at least as much consideration as the system itself.

    If the above relationship is permanent through time, and if someone can tell me when at any time cost accounting is not in effect in commerce I will back off from the following statement: cost accounting’s effects are permanent and operative for the economy and for every dollar that actually enters, re-enters and/or remains in that economy.

    Now some economists may cry “Quantity theory of money” and “Velocity of money’s circulation” but the first is merely a means of systemic liquidity (total monies)….not an effective means of reducing either the austerity imposed upon individuals through time by the ever widening gap between prices and incomes or the consequent build up of debt, not only for businesses but also and most especially for individuals ….because the conventions of cost accounting always apply to them as well. And the second is actually only a description of what occurs in the individual cycle of each individual product or service from its initial production through to its retail sale, and yet domestically because of the systemic scarcity of incomes compared to prices, can only represents sales from additional financing….and so the increasing accumulation of domestic debt.

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