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The Forum > Article Comments > The future of economics > Comments

The future of economics : Comments

By Steve Keen, published 1/2/2012

Neo-classical economics is wrong to think that economies exist in equilibrium.

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Curmudgeon, the reason we stopped targeting money supply back in the early 80s was not because it wasn't useful, just that it was impossible. Money, or credit, can be created by just about anyone, including retailers, service providers etc.

In fact, I created some credit the other day when I allowed a client some time to pay.

While governments could control M1 because they printed the bills, the rest tended to be more and more beyond their control.

So we tended towards using interest rates to control the economy and as money supply does tend to shrink when you are in a recession,this gave a de facto level of control over money not available by direct controls.
Posted by GrahamY, Wednesday, 1 February 2012 2:17:28 PM
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GrahamY - okay, good point.. not useless so much as difficult to control. Certainly changes in money supply would be linked to economic change but I'm still not sure that changes in money supply, given the lags in monitoring it, told us anything much we didn't know about the economy at the time..

However, as you note and certainly a point that I should have made earlier, the emphasis now is on shifting around interest rates, not because its a good lever to control the economy but becaue its one that they can use..
Posted by Curmudgeon, Wednesday, 1 February 2012 4:05:17 PM
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Graham Young,"Money or credit can be just about be created by anyone..." This is not true.New money to equal in creases in our productivity can only be created by the banking system.The loan sharks in the financial system have to get their money from banks.They cannot create it from nothing themselves

Now in this time of money shortage ( which by the way is an anomoly when considering the US Fed has created $15 trillion for bailouts + wars and also $ 16 trillion in off balance sheet transactions from nothing,for their scams since 2008)that is destroying our real economies.

Worthless money,the oil which is the medium of exchange has been made more important than real productivity.That is the crux of our dilemma.

People here are saying put your money with Credit Unions and boycott the banks.This will put us in more debt since there will be less deposits with the banks hence their fractional reserve ratio will be lower.Thus our system will have to borrow from OS banks who just create more micky mouse debt money for us.Forget Credit Unions unless they get the power of money creation.Put your money with the smaller Aust Banks and slowly initiate change.

In 1911 with the initiation of the Commonwealth Bank,for the first 11 yrs of its inception,it had the power to create a lot of our money for increases in GDP.By 1922 the private banks had stolen that role.

Ron Paul wants precious metals to once again back our currencies but Bill Still is correct when he says,it does not matter what backs your currency,but who controls the quantity.

It is the people through a proper constitution that should have ownership and control of their currency,since new money represents the wealth of all society,not a self appointed,chosen few.
Posted by Arjay, Wednesday, 1 February 2012 8:15:34 PM
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Arjay - sorry but Graham Young was right. Perhaps without realising it you've wandered into one of the old battlefields of monetary theory. The credit he extended to a client counts as the creation of money.. However, the problems we have at the moment have little to do with the supply of money as such. Its part of the old-fashioned boom-and-bust of markets. The problem with this one was that it was severe enough for everyone to go down at the same time, and it exposed a long standing problem in Europe and that dragged it out..

Monetariasts would have a lot of trouble reconciling their theories with events but, please note, there is now talk that the worst has past and we are coming out of this rather gloomy time..
Posted by Curmudgeon, Thursday, 2 February 2012 11:57:10 AM
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Curmudgeon,while finance companies and credit unions are agents of money distribution,they themselves are not allowed to use the fractional reserve system to create new money themselves.They have to get it all from the banks or if they have depositors loan out their money.

Do you understand that point I'm making?
Posted by Arjay, Thursday, 2 February 2012 3:37:49 PM
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I'm sorry Graham, but I don't see that the total amount of money is affected in any way by a bill being paid next week instead of this week.
The only way the total money supply can be increased is if you charged interest on that bill, or if you used your customer's IOU as collateral for another loan, which money in turn you loaned to another customer -keeping of course a small fraction back...
Posted by Grim, Saturday, 4 February 2012 7:13:34 AM
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