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
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.