We're told central banks fight inflation by raising rates.

But rate hikes don't "cool" the economy, they just change who gets paid.

So why is it that interest rates don't actually control inflation.
🧵1/12 The textbook story: higher rates → less borrowing → lower demand → lower inflation.

Simple, right?

Except it rarely works that way in reality.

BIS (2023), The Transmission of Monetary Policy Revisited
🧵2/12

Every time deficits rise, someone cries "money printing."

Sounds scary, but it's a misleading metaphor.

Here’s why deficits aren’t printing presses, and what they actually do.
🧵1/12 Story: gov't spends → prints money → inflation.

Reality: spending credits bank accounts, creating deposits, matched by Treasuries. Balance sheets, not printing presses.

Fujiki (2001), Budget Deficits and Inflation - BOJ
🧵2/12

Balanced budget rules sound responsible.

In reality, they make recessions worse.

A thread.
🧵1/12 The idea is simple: governments should not spend more than they tax.

No deficits, no "irresponsibility."

But economies don't work like households, and enforcing a balanced budget creates vicious cycles.
🧵2/12

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 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

What is wealth? Different schools of economics give very different answers.

A thread.
🧵1/13 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

The "crowding out" myth: government deficits don’t squeeze private investment.

They create net financial assets.

A thread.
🧵1/12 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

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

https://twitter.com/elonmusk/status/1962680097816879208

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

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 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

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 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

📌 Share buybacks: greedy short-termism, or part of a broader capital system?

The debate is noisier than it is clear.

Here’s a systems view.
🧵1/12 Buybacks spark endless debate: are they corporate greed, or rational capital use?

Critics say they starve investment.

Defenders say they return cash to shareholders.
But the real story is more complex.
🧵2/12

📌 The "natural rate of interest" (r) is one of the most misleading ideas in macro.

If the natural rate is zero, then it isn’t a rate at all, it’s a fiction.

A thread.*
🧵1/10 Wicksell’s idea: there exists some "natural" interest rate where saving = investment and inflation is stable.

Mainstream macro still clings to this.

But once you examine how credit economies work, the floor falls out.
🧵2/10

Since 2008, central banks created trillions in reserves through QE.

Textbook logic said this would unleash lending & cause hyperinflation.

It didn’t. Inflation stayed low for over a decade. Why?
🧵1/9 Because reserves don’t flow into the real economy.
They sit at the central bank as electronic balances between banks.

QE swaps bonds for reserves, it doesn’t give households more cash.
🧵2/9

Mainstream econ says:
Households save → banks lend savings → firms invest.

Robinson flipped it: investment comes first, savings follow.

Once you see how money & banking work, it’s hard to unsee.
🧵1/10 The Goodwin growth cycle shows it:
Investment drives output & jobs → higher employment boosts wages → rising wages can squeeze profits → investment slows → cycle repeats.

It starts with investment decisions, not household savings.
🧵2/10

Mainstream macro blames crises on public debt or bad policy.

History tells a different story, The biggest crashes follow private debt booms , when households & firms load up on credit faster than incomes grow.
🧵1/8 1929, Japan’s 1990s bust, the 2008 GFC, all preceded by surging private debt-to-GDP.

In each case, public debt rose after the crisis, as governments absorbed the fallout.

Cause and effect are backwards in the textbook story.
🧵2/8

Fractional reserve banking" still shows up in textbooks, news, and even heterodox debates.

But the concept is dead.

Modern banking doesn’t work that way, and clinging to the term misleads more than it explains.
🧵1/9 Traditionally, it meant banks held a fixed % of deposits in reserve (say 10%) and lent out the rest.

But today?

There are no reserve requirements in countries like the U.S.

Banks aren’t lending most of your money. They aren’t required to hold any.
🧵2/9

Neoclassical models treat fiscal policy as neutral in the long run, only useful in “crises.”

But this idea rests on flawed assumptions: full employment, crowding out, Ricardian equivalence, and perfect markets.

Let’s unpack why none of these hold.
🧵1/7 Assumption: the economy naturally returns to full employment.

Reality: underemployment, labor market hysteresis, and demand shortfalls are persistent.

When you assume away slack, you assume away the need for fiscal intervention.
🧵2/7

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 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 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 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

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 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

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 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

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