Home > Uncategorized > Links. Economic models and economic statistics edition (featuring H-W Sinn!)

Links. Economic models and economic statistics edition (featuring H-W Sinn!)

1) Hans-Werner Sinn, on Project Syndicate, shows that he still does not understand the basic accounting behind Target2. He still seems to think that the Greek Target2 deficit is increasing because Greek citizens are borrowing and bringing this borrowed money abroad. Sigh. Even when a country has a current account surplus (which Greece has) and private credit is shrinking (which, according to the Greek national bank is happening) the Target2 deficit increases when foreign Eurozone banks do not want to roll over legacy private debts anymore and the European Central Bank automatically finances this by letting the Target2 deficit increase. Private debts are offloaded to the central banking system. It’s a shame that Project Syndicate publishes this nonsense.

2) On the website of Elstat, the Greek statistical organization, an alarming document has been published in which the members of the European statistical system committee:  “confirm our concern with regard to the situation in Greece, where the statistical institute, ELSTAT, as well as some of its staff members, including the current President of ELSTAT, continue to be questioned in their professional capacity. There are ongoing political debates and investigatory and judicial proceedings related to actions taken by ELSTAT and to statistics which have repeatedly passed the quality checks applied by Eurostat“. Mind the ‘continue’ and ‘ongoing’ – this is the way statisticians say that this predates the present government (which should take a clear stance, however). Dian Coyle eloquently states why this is indeed alarming and why (economic) statistics – with their flaws and mistakes – are important for an open society (and why economists do have to know the structure, limits but also the strengths of these statistics).

3) I totally agree with Coyle. Imnsho, however, mainstream economists commit a comparable crime by using models which use variables that are on the conceptual at odds with the statistical data or even leaving entire sectors of the economy, like the government, out of supposedly ‘macro’ models is at least as bad: unscientific, politically biased and outright wrong.

4). A practical example why (economic) statistics (should) matter: one of the things the Greek economic statistics show is Greece deflation. In real terms, the Greek economy was, in the first quarter of 2015, almost precisely as large as two years ago. In nominal terms it was was 4.4% smaller (table 2). Remarkably, this decrease of the price level (an intended consequence of the ‘structural reforms’!) does not seem to play a role in the present negotiations about the Greek debts.

5) The good news: Zoltan Jakab and Michael Kumhof have a new Bank of England working paper which states that Loanable funds theory is nonsense and economists should use models which are more consistent with the glorious system of economic statistics, in this case the Central Bank statistics on money creation:

In the intermediation of loanable funds model of banking, banks accept deposits of pre-existing real resources from savers and then lend them to borrowers. In the real world, banks provide financing through money creation. That is they create deposits of new money through lending, and in doing so are mainly constrained by profitability and solvency considerations. This paper contrasts simple intermediation and financing models of banking. Compared to otherwise identical intermediation models, and following identical shocks, financing models predict changes in bank lending that are far larger, happen much faster, and have much greater effects on the real economy“.

  1. May 30, 2015 at 9:00 pm

    ” Loanable funds theory is nonsense”

    There’s nothing fruitful to be gained from an argument about which of two ERRORS is the correct one. While it is true that banks create the money they lend from the borrower’s promise to pay it back and extinguish it, the above statement is just as dangerously wrong as the theory it claims is nonsense. Endogenous money becomes loanable funds after the first spending and it is mathematically provable from “economic statistics” that the vast majority of lending is of “loanable funds”. Furthermore, there is actually NO CONTRADICTION. Banks do BOTH.

    Please let me explain. It should be rather obvious to anyone that, if I have a bank account, I can privately lend my “loanable funds” to anyone I choose. I personally know people lending millions of dollars they OWN OUTRIGHT and living off the interest they earn by doing the work of vetting borrowers themselves. If someone creates $1000 as their debt to a bank, and I get $500 of it and lend it privately, there is now $1500 of principal debt and only $1000 available to pay it.

    I can also choose to lend my loanable funds to a bank as a term deposit and let the bank take the risk and earn most of the interest in re-lending it. Now comes the standard endogenous money neophyte objection … “banks don’t re-lend peoples’ savings, banks create the money they lend”. That’s true. Now think further.

    Because term deposits are DEFERRED liabilities of banks, from the same legal tender reserve, capital base and risk appetite position, the banks can now REPLACE the term deposit amounts with new endogenous money creation. If $1000 is created and $500 is put aside in a term deposit and replaced there is now $1500 of principal debt and only $1000 of money available to pay it. This is mathematically identical to my re-lending the term deposit as “loanable funds” above.

    So the argument of “endogenous money vs. loanable funds” is a black comedy of serious conceptual ERRORS. The banking system is BOTH by DESIGN. And, in addition to banks, are non-bank lenders of loanable funds.

    I explain this in my article “The Confusion about Savings”
    (http://paulgrignon.netfirms.com/MoneyasDebt/TheConfusionAboutSavings.html)

    Economic statistics need CORRECT interpretation
    In the USA, the very familiar chart of M1 and M2 shows that, typically 3/4 of all money created is in term deposits at any given moment. M2 is called the “total money supply”.

    To refer to M2 as the “total money supply” is the ROOT ERROR. Term deposits are DEFERRED liabilities of banks and are, therefore, NOT MONEY – because money is only the CURRENT liabilities of banks.

    M2 is the TOTAL PRINCIPAL DEBT of borrowers to BANKS, on which scheduled interest and principal payments are being made. M1 is the ONLY acceptable means of payment available to be earned. If M2 is $1 of principal debt and M1 is only 25¢ of available money, do we have a built-in grow-or-collapse imperative that must produce periodic financial, economic and social disasters? I think so. I predicted the Crash in 2006 with an animated movie that went viral. I have been proffering this explanation of the event since 2009.

    Viewed correctly, the chart of M1 and M2 shows that borrowers in the USA are making interest and principal payments on all of M2, $12 Trillion in Principal Debt. These payments can only be made from M1, $3 Trillion of accepted means of payment. Therefore, borrowers must be paying current principal debt with newly created debt leaving the borrower of the newly created loan without any means of paying it off – except to tap someone else’s principal. And so it goes until growth fails.

    Savings make the payability of current principal debt entirely dependent on the rate of credit creation never slowing down. Any time the creation of new debt money slows down for ANY reason, people lose their homes by mathematical certainty, not by any fault of their own. In real life, backed by the correct logic applied to the chart of M1 and M2, every $1 shortage of new bank credit will cause at least $3 of defaults, because every dollar of M1 is simultaneously owed to at least 4 lenders, the bank that created it, 3 savers and who knows how many non-bank lenders.

    Certainly, the weakest “sub-prime” borrowers will fall first and take the system down like dominoes, but the immensity of the taking down was foreordained by the immensity of the actual shortage of available principal. At the Crash of 2008, every dollar was owed to an unprecedented 5.26 lenders. During the prosperous 90s the ratio was 2.0. No connection?

    This simple overlooked dynamic inherent to the banking system itself is why we have mass default in the absence of perpetual growth of debt to banks. It is a MATHEMATICAL TRAP by DESIGN.

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