Home > Uncategorized > The macro-economic formula of everything

The macro-economic formula of everything

Today, The European Central Bank published, according to schedule, new data on the amount of Eurozone money, august 2013 . Money growth was and stays low, in a historical perspective as well as compared with the ECB target (and according to the ECB Monthly Bulletin even when we correct for high money growth before 2008).

Annual percentage change of the stock of M-3 money, Eurozone.
Money2

Source: ECB

But, more importantly, the data also show the changes in borrowing and lending:

‘The annual growth rate of loans to non-financial corporations stood … adjusted for loan sales and securitisation … at -2.9% in August, compared with -2.8% in the previous month)

Despite the low but positive increase in M-3, which was caused by among other things an outflow of money from longer term savings accounts into checking accounts, lending to companies decreases… and this is no small difference. Just looking at ‘money’ and not at its double entry accounting counterparts might give you a distorted view of the economy! The rather tight relation between lending and ‘real’ economic development can also be shown by invoking:

the macro-economic formula of everything. 

This formula is somewhat unknown but it totally consistent with the ideas in this very clear article by Adair Turner, who reviews the monetary disequilibrium ideas about money and our fiat money system of people like Minsky, Schumpeter, Wicksell, Hayek and Minsky and compares these ideas with mainstream ideas which, surely when it came to economic policy, largely ignored the monetary system.

Back to the formula: buried deep in an obscure economic statistical manual (p. 147) one can find this definition of the amount of money (M-3):

Δ M3 ≡ (Current and capital account balance) – (External financial transactions of resident non-MFIs)
+ (Δ credit to euro area residents) – (Δ longer-term financial liabilities) + (Δ other
counterparts (net))

This more or less boils down to the idea that:

* the change in the amount of M-3 money is equal to the
* net inflow of euro’s from abroad plus net borrowing by households and non-financial companies from money creating banks plus net inflow of euro’s from longer term savings accounts into checking accounts and the like.

The point: the formula includes the current account.

And the current account is the (Ex-Im) part of the basic Y = C+I+O+(Ex-Im) formula which describes spending in the real economy. Which means that we have a formula which enables us to connect the monetary side of the economy (including for instance borrowing for the purchase of existing houses) with the ‘real’ side of the economy. Note that the definitions of households, companies and banks used to calculate the amount of money are consistent with the definitions used to calculate and estimate the national accounts. The formula does of course not indicate any kind of causality but shows the accounting restraints inherent in any kind of monetary economy. Which shows that, as some changes of the variables used to calculate M-3 might offset each other, just looking at M-3 might hide important developments ‘below the surface’ of the total stock of money – which is why we have to look at these underlying variables and their components, like lending and borrowing per sector of the economy and purpose of the loan (lending for house purchase!). Which is exactly what Adair Turner, following in the footsteps of Wicksell, Schumpeter, Hayek, Fisher and MInsky, advises us to do. See also this somewhat Kaleckian interpretation of such ideas by Paul Krugman.

  1. BC
    September 26, 2013 at 4:47 pm

    Are the growing cash assets on banks’ balance sheets included in the M-3 figure? If so, the rate of circulating M-3 is even slower, as the cash assets are not circulating in the larger economy. Rather, flows of cash assets in the banking system are between primary dealer banks, central banks, and gov’t treasuries primarily to liquefy bank balance sheets and in part to fund incremental gov’t deficits (in the US, for example), or at a minimum fund net interest payments.

    Historically, during debt-deflationary regimes of the Long Wave Trough (1830s-40s, 1890s, 1930s-40s, and Japan since the ’90s), in which we find ourselves today, bank loans contracted 30-50% (large bank loans in Japan contracted 30%+ during ’98-’03) to clear the decks, as it were. The secular debt-deflationary bust occurs following a secular reflationary debt regime during which the cumulative differential rate of growth of debt achieves an order of exponential magnitude to wages, production, and GDP. For the GDP per capita to continue growing, debt-money growth must thereafter assume a super-exponential trajectory, which eventually leads to hyper-inflationary collapse.

    Now (1) the US total local, state, and federal gov’t debt has reached the critical differential order of exponential magnitude of debt to GDP since the 1950s; and (2) non-financial US corporate debt has similarly reached the limit bound (primarily in recent years due to Fortune 25-100 firms borrowing to buy back shares even as revenues and earnings stagnate since ’11), implying that private corporate debt growth will no longer result in continuing growth of private investment, production, profits, employment, wages, and purchasing power for workers.

    The secular debt cycle and resulting debt-deflationary regime occurs not coincidentally with increasing wealth and income concentration to the top 1% within the hierachical system of low- to high-entropy exergetic and financial flows and the resulting economic and political power to make the rules and direct flows upward. By the time the debt-deflationary regime becomes entrenched, firms, households, and gov’ts are irretrievably indebted to the top 0.1-1%.

    Thus, growth of public and private debt to GDP can no longer continue. In a debt-money-based financial and economic system, without growth of debt-money, real GDP per capita cannot grow. Without growth of GDP per capita, revenues and earnings will not grow, and a larger share of remaining output, profits, and after-tax incomes will go to low- and no-multiplier spending for debt service (“rentier taxes”), food, energy, utilities, etc.

    Most reading this (if anyone is still reading at this point) will reflexively advocate politices that are intended to grow the economy faster by Keynesian spending on infrastructure, “education”, etc.; however, when the public debt limit bound to profits, wages, and GDP has been achieved, further growth of public debt and attendant debt service is no longer possible. Taxing profits or private incomes of the top 1-10% will only reduce private consumption further, as in the US the top 1-10% receive 20-45% of income and own 40-85% of all US financial wealth.

    Then there is the exergetic constraints from Peak Oil, falling global oil extraction and oil exports per capita, population overshoot with 7 billion people, and ongoing depletion of forests, fisheries, aquifers, arable land, and phosphorus.

    The only ways out historically have been debt default, pay down, or some combination and associated currency crisis, social unrest, and once-in-a-lifetime regime change and r-evolution; or world war, mass destruction of life and property, and the same aforementioned outcome.

  2. Steve/BFWR
    September 26, 2013 at 6:32 pm

    There’s accounting and then there’s accounting so to speak. The thing that economists have missed is the datums of cost accounting and the economic effects of their relationships. They also have mistakenly abstracted out the fact that any money re-circulating or remaining in the economy is still subject to the current rules of cost accounting.

    So you have the individual data which shows that labor costs (wages, salaries and dividends) always being only a fraction of total costs (and hence by cost accounting convention, total prices, which must be recouped if the business is to remain a going affair.
    This is a basic disequilibrium which is never not in effect. In other words any money which indeed does recirculate/re-enter the economy is always subject to this same economic and monetary effect which is a scarcity of total individual, emphasis individual, income in ratio to total prices. Velocity theory is exposed as actually fallacious and irrelevant when this effect is understood to be constant…because the costing effects do not enable any additional individual purchasing power to be increased. The scarcity always remains. And the only way to overcome it is to GIVE individuals a monetary supplement before it goes back into the economy because that way it does not incur any additional cost and re-initiate the individual monetary scarcity inherent throughout the productive process.

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