Relearning Economics Profile picture
Jan 4, 2023 16 tweets 4 min read Read on X
Loanable Fund vs Endogenous Money.

A short film stylized in an old fashion silent movie-type format and utilizing the #Minsky #systemdynamics software.

Download Minsky for free: sourceforge.net/projects/minsk… (1/16)
Let's start with what you learn in the textbooks and hear on the news. It's the loanable fund's fallacy. (2/16)
The aggregate banking sector is broken into 4 accounts.

1. Reserves (Assets)
2. Customer1 Deposits (Liability)
3. Customer2 Deposits (Liability)
4 Bank Equity (Equity)

Note the initial conditions under each account. (3/16)
Image
Notice all rows must balance to zero, as per the rule of double-entry bookkeeping. The loanable fund's fantasy says customer 1 loans to customer 2. (4/16) Image
Since the bank facilitates this loan, they charge customer 2 interest. (5/16) Image
The bank kindly pays a portion of the interest to customer 1. (6/16) Image
The loan is repaid and the cycle begins all over again. (7/16) Image
Other than being fundamentally flawed as pointed out in the 2014 Bank of England paper titled: "Money Creation in a Modern Economy". (8/16)

The loanable funds model fails to address aggregate demand in the economy via the money creation process. (9/16)
Now let's take a look at how bank loans really work using endogenous money theory. First, we have to add a new account called "Issued Loans". (10/16) Image
The bank issues a loan, but this time it creates an asset under "Issued Loans". At the same time, the bank simultaneously creates a liability by marking up "Customer 1 Deposits". (11/16) Image
As before customer 2 pays interest to the bank for the loan. (12/16) Image
Finally, the loan is paid back to the bank canceling out both the asset and the liability. (13/16) Image
Imagine opening your monthly bank statement and seeing all your money is gone because it was loaned out! That's what neoclassical economists would have you believe with their loanable funds model. (14/16)
This school of thought forces us to reduce (or slow the growth) of the money supply during economic slumps. Thus reducing aggregate demand right when that demand is needed. (15/16)
This also creates an environment where too much lending happens in boom times, causing financial bubbles and system instability. (16/16)

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More from @RelearningEcon

Sep 10
Treasury auctions sound like "the market funding the government."

But peel back the layers, and you'll see: all primary auctions are settled with reserves created by the Fed.

A thread.
🧵1/13 Image
Every week, the Treasury issues new securities at auction.

Primary Dealers are OBLIGATED to bid. Indirect bidders (pension funds, foreign central banks, asset managers) now take 90% of the allocations.
🧵2/13
But here's the key: all bids clear through Primary Dealers with accounts with the Fed.

Indirect bidders and some Primary Dealers don’t have accounts at the Fed. They place orders through dealers.

Settlement happens inside the Federal Reserve’s payment system.
🧵3/13
Read 13 tweets
Sep 7
What is wealth? Different schools of economics give very different answers.

A thread.
🧵1/13 Image
Classical economics (Smith, Ricardo):

Wealth = produced surplus.

It comes from labor applied to nature, creating output beyond subsistence.

The central issue is distribution: who gets profits, wages, and rents?
🧵2/13
Neoclassical economics:

Wealth = utility embodied in goods & services.

Focus shifts from production to exchange.

Here, wealth is whatever satisfies preferences, measured in prices.
🧵3/13
Read 13 tweets
Sep 3
The "crowding out" myth: government deficits don’t squeeze private investment.

They create net financial assets.

A thread.
🧵1/12 Image
The textbook story:
Gov borrows more → supply of loanable funds falls → interest rates rise → private investment gets "crowded out."

It’s tidy. It’s also not how modern monetary systems work.
🧵2/12
Reality: when the federal gov runs a deficit, it injects more net financial assets into the private sector.

Treasuries are just safe interest-bearing assets created by public spending.
🧵3/12
Read 12 tweets
Sep 2
Elon Musk warns of "low birth rates."⚠️

But the real threat isn’t too few people, it’s the system’s limits.📈

The Limits to Growth study had the answer 50 years ago.

A thread.
🧵1/12 Image
Musk’s story: if population falls, economies collapse.

His "fix"? Have more children.

But this assumes growth = bodies. It misses the real constraint: the material system that supports those bodies.
🧵2/12
Back in 1972, Limits to Growth modeled the global economy as a system of stocks and flows:
–Population
–Resources
–Industrial output
–Food
–Pollution

The feedbacks between them told a stark story.
🧵3/12 Image
Read 12 tweets
Aug 28
MPT claims wages equal your individual contribution.

But the evidence doesn’t fit. CEO pay has soared while worker wages barely budged.

Either CEOs became omnipotent, or MPT fails.
🧵1/10 Image
Since 1978:
– CEO compensation rose ~1,200%
– Worker pay ~15%
– Productivity ~70%

MPT can’t explain this gap.

citations:
-barrons.com/articles/worke…
-mdpi.com/1911-8074/14/5…
-businessinsider.com/ceo-compensati…

🧵2/10
Across borders, identical jobs pay wildly different wages.

A McDonald’s worker in the U.S. earns 4–5× what a counterpart in Brazil does, even adjusted for Big Macs.

Institutions, not productivity, are the story.

citations:

🧵3/10crei.cat/wp-content/upl…
Read 10 tweets
Aug 27
Perfect competition is the textbook ideal:
– Many small firms
– Identical products
– Perfect information
– Free entry & exit

In this world, no firm has power. Prices are set by supply & demand.

But here’s the problem…
🧵1/9 Image
No real-world industry looks like this.

Firms spend billions on branding precisely because products aren’t identical.

Information is imperfect. Entry is costly. Exit destroys capital.

The assumptions erase how markets actually work.
🧵2/9
Textbooks still cling to it because it creates neat diagrams:
– Downward sloping demand
– Upward sloping supply
– Equilibrium at the intersection

But the model’s clarity comes from stripping away reality.
🧵3/9
Read 9 tweets

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