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

Jul 28
Mainstream macro relies on rational expectations: agents are assumed to know the model and forecast the future accordingly.

But real economies aren't solved backwards.
The Deep Minsky model throws this out, and models how expectations actually evolve.
🧵1/7 Image
Instead of perfect foresight, Deep Minsky agents adapt using feedback:
-Flows inform future behavior
-Perceived trends shift confidence
-Expectations are path-dependent

This lets the model evolve historically, not jump from equilibrium to equilibrium.
🧵2/7
In Deep Minsky, investment, consumption, and pricing decisions respond to changing financial conditions, not "optimal" plans.

Expectations are formed endogenously, through firm behavior, bank leverage, and wage–price dynamics.
🧵3/7 Image
Read 7 tweets
Jul 27
In the 1960s, MIT's Jay Forrester created a simulation that changed how we think about supply chains: the Beer Game.

It revealed that even stable demand can cause wild production swings—now known as the bullwhip effect.
🧵1/10 Image
The game has 4 roles: Retailer, Wholesaler, Distributor & Factory.

Each tries to meet demand & manage inventory—but only sees demand after it’s placed. That delay leads each player to guess, and missteps quickly multiply.
🧵2/10
If the retailer slightly overorders, the wholesaler overreacts, the distributor does the same, and the factory ramps up too much. That overcorrection leads to big swings—causing stockouts or bloated inventories.
🧵3/10 Image
Read 10 tweets
Jul 25
Mainstream macro uses the NAIRU, or the Non-Accelerating Inflation Rate of Unemployment, as a constraint.

If unemployment falls “too low,” inflation is expected to rise uncontrollably.

But this framework misrepresents both data and Phillips’ original insight.
🧵1/7 Image
In 1958, Phillips published a paper showing a statistical relationship between wage inflation and unemployment in the UK, not a structural law.

He didn’t claim there was a “natural” rate or a threshold.

It was a historical pattern, not a causal rule.
📎 Phillips (1958)
🧵2/7
Phillips warned this relationship could shift with institutions, union density, labor laws, bargaining regimes.

Modern NAIRU theory ignored that.

Instead, it imposed a fixed trade-off and turned an empirical curve into a universal policy constraint.
🧵3/7
Read 7 tweets
Sep 10, 2023
Macroeconomic Price Level Theories.

I've been trying to develop a coherent set of equations for the price level in my #systemdynamics model.

My conclusion on the matter: Its important to understand that these theories are not mutually exclusive. 🧵Thread 1/8 Current price level equations for the draft Economics Biophysical Dynamic Model.
Quantity Theory of Money (QTM):

QTM suggests that the price level is directly linked to the money supply. More money = higher prices (assuming other factors remain constant). It's a fundamental idea in monetary economics.🧵Thread 2/8 Nicolaus Copernicus
Monetarism:

Monetarists, like Milton Friedman, stress the importance of controlling the money supply growth rate to maintain stable prices. They argue that excessive money growth leads to inflation.🧵Thread 3/8 Milton Friedman
Read 8 tweets
Sep 7, 2023
I'm about 80% done my National Economic #systemdynamics model, Still have some subsystems that need to be added.

Should have a beta version for download (Using Minsky software) sometime in the next week on my Patreon page. 🧵Thread 1/16
It's stock flow consistent with a foreign sector. There is over 300 variables and parameters at this point. and about 90 feedback loops. I have 17 units of measure including time. 🧵2/16
I found it important to include both domestic and foreign bond holders, as this very much impacts currency values. 🧵3/16 Image
Read 16 tweets
May 8, 2023
Can we spend our way to a greener future? The World models demonstrate we can't. GDP and CO2 (and other pollutants) fit pretty tightly. We might just spend our way into a climate disaster. Let's be clear were sacrificing our existence for a material standard of living.🧵1/4 Image
In the world model, if I increase capital investment in the aggregate by 25% in 2025, I am able to maintain the material standard of living at the cost of the biosphere. Notice the food ratio does not increase with the additional capital investments. 🧵2/4 Image
Now if I reduce capital investment in aggregate in 2025 by 25%, sure we lose our all-important coping mechanism in the material standard of living, but notice our food ratio holds steady. 🧵3/4 Image
Read 4 tweets

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