Toward a New Macro Economic Theory

It is well know that Keynesianism deals with flow variables, looking to current income or GDP, current consumption, current savings and current investment. Income and interest rates are largely the adjusting variables. The presumption is that we want to maximize consumption subject to various restraints because that maximizes utility. Stock variables like wealth and total debt are out of the loop and are not really considered.

That is why Keynesian economists are so willing to run big current deficits to stimulate the economy and hopefully increase GDP and consumption, even though it means incurring more public debt, and why they do not worry about the consequences of that debt. Keynesians, of course, have their critics, me included, but our criticisms have obviously been less than effective.

Ironically, Keynes had the answer there too. He said it takes an idea to beat an idea. So in this post, I want to step beyond my criticism of Keynesianism that it is too much focused on flow variables and maximizing consumption and say in outline form what I really think is going on and how we can integrate the flow variables analysis approach of Keynesianism and the stock variables analysis that is largely missing.

Unfortunately, I am in no position just now to do that in more detail than what I have written here, but I do not, at the same time, want to sit on these ideas. Here what I have so far.

Let us alter our perspective and take a different view. Consider this as a step toward changing our thinking. We might look at the world most simply this way. Human behavior is not so much interested in maximizing or minimizing current flow variables such as income, savings and borrowings during the current period, for example, as it is in maximizing the stock variable of personal wealth, subject to a current consumption restraint, and minimizing the stock variable of total debt and other liabilities, subject to maximizing total wealth.

In short, the real focus is not so much on the income statement as it is on the balance sheet. The income statement is only relevant in so far as it affects the balance sheet. It is the tail, not the dog and as its tail, it should not be allowed to wag the dog, as Keynesians believe it should.

The problem then becomes that other economic factors then enter into the analysis, over and above the obvious flow variables, to impact those stock variables. These factors include all those which impact asset valuations, appreciation and depreciation and therefore wealth, as well, of course, as interest rates, transaction costs and all the other variables which in turn affect those variables and impact asset prices, wealth and total liabilities.

Consumption and GDP are no longer subject to being maximized, but instead are relegated to supporting roles, literally. This perspective integrates flow variable analysis and stock variable analysis and is a much more useful and powerful causal perspective on human economic behavior than that afforded by current economic flow models and the thinking that assume utility, current consumption and GDP maximazation are the proper goals. They are not; wealth is. This theory can be modeled just as Keynesian macro economics is modeled. We need to get to it.

The theory outlined has serious implications, too. Anything that increases total wealth, both personal and of the nation, is desired and anything that increases total debt or unfunded obligations raises problems. If that is the case, then consider these facts. The U.S. is seriously awash in debt. All debt in the U.S., both public and private and including unfunded liabilities of the government trust funds such as Social Security, now comes to a humongous $57 trillion dollars and we do not owe it all to ourselves. Much is owed to foreign nations and individuals.

This is all debt of every kind generated in the U.S., public and private. This $57 trillion dollar figure amounts to $185,041 per person in the U.S. or $740,164 for a family of four. Just the federal government debt alone is $12 trillion dollars or $38,956 per person or $154,624 for a family of four in the U.S.

These are staggering figures, especially when you think about paying them back and the fact that our GDP (Gross Domestic Product) was only $14.4 Trillion at the end of 2008.

Although households do not have to directly make payments of principal or interest on the governmental and corporate portions of this debt, they know that they or their children are ultimately responsible and it affects their taxes or further indirect debt obligations. The real culprit here, of course, is the federal government which cannot stop growing and spending money it does not have.

The problem, in significant part is made worse by Keynesians who focus on GDP and consumption and have an insatiable desire to prime the aggregate demand pump, but ignore the longer term stock variables.

Thomas Jefferson was likely closer to the mark than he realized when he said, “ . . .public debt [i]]s the greatest of the dangers to be feared." Too, Adam Smith’s great book was not entitled, The Income of Nations.

As we can see, efforts to maximize personal income or GDP and its partial mirror consumption are flow aggregations that can badly miss the mark as a model of human behavior when, for example, asset prices such as that for housing are dropping or stock and bond prices are changing for various reasons. All the factors, including the intangibles and expectations, that affect asset values then come to have a direct bearing on household wealth, impact the desire to maximize it and consequentially affect human economic behavior much more.

The focus on the obvious flow variables is wrong. That is why Keynesians got caught by surprise during the last financial crisis and, indeed, by this recession. Krugman is off base in his assessment of why economists were so blindsided. It is not that we need more behaviorialsim in Keynesian macro models, as it is that we need a new macro theory that focuses on the relevant stock variables which Keynesianism does not. The financial crisis and the recession were a lot to not see coming. Smarter heads on Wall Street were much more prescient.

In short, economic developments which affect or which threaten to affect the principle stock variables adversely or beneficially are what really govern human economic behavior, with current consumption as a constraint, much more so than the obvious current flow variables on which Keynesians doggedly focus.

Positions: no disclosures

Comments

[W.E. Heasley]

Interesting article/excellent points.

As you round out your argument in the future, you might want to illustrate your argument by the following:

(1) household’s now have to show their share of unfunded entitlements and national debt (the $185,000 to $740,000 figure depending on the size of the household) on their own personal balance sheet (Yikes!),

(2) the new entry on their balance sheet from (1) above would sink many and/or impair most balance sheets,

(3) with the new entry on the balance sheet from (1) above the consumer/household would quickly understand the size and scope of government is unsustainable. That is, the line item from (1) above needs shrunk as quickly as possible in order for the balance sheet to improve,

(3a) if the item from (1) above is added to the personal balance sheet, the consumer/household would also understand that increased income alone will not solve the balance sheet problem,

(4) that if the item from (1) above is added to the balance sheet, and assuming the household can somehow struggle along with such debt, when the household ceases to exist (decreased), the heirs to the household inherit a much reduced sum or they merely inherit debt.

2009 Oct 11 08:56 AM

[chap08]

"In short, the real focus is not so much on the income statement as it is on the balance sheet. The income statement is only relevant in so far as it affects the balance sheet."

There speaks a rational man. There speaks an educated, informed, solvent and patient man. Unfortunately, there are many people who aren't like that. Many people sacrifice long term wealth for short term consumption - big time. If it seems irrational behavior to take on increasing loans to support excessive short term consumption, that's because it is. That doesn't stop lots of people from doing it. It doesn't stop governments doing it either.

People make decisions which are detrimental to long term wealth, because they are often short term focused.
Governments make decisions which are detrimental to long term wealth, because they are often short term focused.
Businesses make decisions which are detrimental to long term wealth, because (too often) they are short term focused.

If you disagree with my point about businesses, then you have never worked for a quoted company with a quarterly earnings target to meet (or a US bank).

I fear that if you take your position as stated above and develop your argument from there; what you will develop will be entirely rational - and entirely wrong.

2009 Oct 11 09:32 AM

[derryl]

I don't think it's necessary that economic participants behave rationally in order for this balance sheet focus to do its work. What is being proposed is an alternate baseline to watch. Look at balance sheets, not incomes and spending.

Keyensianism is a government policy prop. It looks at changes in GDP growth and prescribes policies based on that metric. Shifting the focus to the national balance sheet would expose systemic risks like total debt rising faster than total assets, which GDP does not see at all. So I agree with Kimball. It's more accurate from a macro policy perspective to focus on wealth rather than income.

And on the micro view this very same focus is what prudent bankers do when choosing to allow or disallow debt expansion (i.e. new loans) for private sector firms and individuals. An overindebted balance sheet will sink the borrower, the lender and the nation. A narrow focus on rising income (GDP growth) is blind to the even faster rising debts (balance sheet erosion). Prudent macro policy needs to watch the same indicators that prudent micro policy sees.

2009 Oct 11 10:51 AM

[chap08]

Derryl

I agree with the balance sheet focus, but Kimball is trying to develop an economic theory based on a model of human behavior. The problem is that his model is wrong. His model is: "Human behavior is not so much interested in maximizing or minimizing current flow variables such as income, savings and borrowings during the current period, for example, as it is in maximizing the stock variable of personal wealth ..."

A more accurate model would include the following:

- Most people are greedy to some degree. This leads, for example, to over consumption and "too good to be true" investments.
- Most people over prioritize short term consumption, over long term wealth. This leads, for example, to inadequate retirement savings.
- Most people are over influenced by the decisions and views of people around them. This leads to the widespread adoption of irrational views, because it is psychologically difficult for human beings to stand away from the crowd.

These few points don't develop a "model" of human behavior, but they start to show that Kimball's model is wrong.

On Oct 11 10:51 AM derryl wrote:

> I don't think it's necessary that economic participants behave rationally
> in order for this balance sheet focus to do its work. What is being
> proposed is an alternate baseline to watch. Look at balance sheets,
> not incomes and spending.
>
> Keyensianism is a government policy prop. It looks at changes in
> GDP growth and prescribes policies based on that metric. Shifting
> the focus to the national balance sheet would expose systemic risks
> like total debt rising faster than total assets, which GDP does not
> see at all. So I agree with Kimball. It's more accurate from a
> macro policy perspective to focus on wealth rather than income.
>
>
> And on the micro view this very same focus is what prudent bankers
> do when choosing to allow or disallow debt expansion (i.e. new loans)
> for private sector firms and individuals. An overindebted balance
> sheet will sink the borrower, the lender and the nation. A narrow
> focus on rising income (GDP growth) is blind to the even faster rising
> debts (balance sheet erosion). Prudent macro policy needs to watch
> the same indicators that prudent micro policy sees.

2009 Oct 11 11:56 AM

[Kimball Corson]

Chap08´s comments are interesting and challenging. He suggests, in a nutshell, that people ignore their wealth, and opt for current consumption and good results. But are we to then to believe people and firms ignore wealth or total value, as Keynesians and Chap08 suggest, and focus only on the here and now? I don't really believe that either.

Within the context of my analysis, for an individual consumer, it may simply go to the weight accorded by that consumer to current consumption as a restraint on his or her wealth maximization. The theory can accommodate a broad range of propensities here, without throwing wealth maximazation, subject to a consumption restraint, out the window. In fact, just within the current period, it is buried in the decison of how much to consume and how much to save. Keynesians clearly recognize that but do not go beyond it, as I am attempting to do and look at wealth and debt or assets and liabilities as being relevant also. I think they make a mistake there because people are concerned about their wealth and their debt. The fact they save something suggests that as does the fact they "invest" in secondary financial markets. BUt conventional macro analysis simply and I think mistakenly just stops there. If people are not concerned about their wealth and only want consumption, why do they save and invest?

2009 Oct 11 09:11 PM

[bob adamson]

An interesting analysis Mr. Corson but one arguably focused on the interests and desires of too narrow a segment of the populations of both the mature and emerging economies.

Arguably Lord Keynes himself didn’t purport in the 1936 “General Theory” to be creating a macroeconomic theory that would be applicable for all time and circumstances; simply one to illustrate and sustain a route out of the impasse of the western democracies faced by the Great Depression, the substantial breakdown of international trade, the demise of the gold standard (a demise which he saw as overdue and intrinsically a good thing) and the rise of the totalitarian states with their autarkic command economies. In the “General Theory” he sought to (and largely succeeded in the context of the late 1930s) describe and justify a way to preserve free markets and liberal democracy by creating an enhanced role for a democratic government to prevent a national economy settling into equilibrium for an extended period at less than full employment and for the resurrection of a ‘sticky’ but workable system of international trade. Keynes’ ideas have proved to be a fertile starting point for many competing stands of thought purporting to be Keynesian and debate among these strands and between these strands and Monetarist and Austrian School strands have helped cast useful light on various economic problems that have arisen over the intervening 70 years as the global economy has changed out of all recognition to that of 1936. Have the writings of Lord Keynes lost their capacity to shed light on current economic problems (Keynes himself would be quite prepared, his public life suggests, to think afresh if circumstances warranted so why shouldn’t we?) and is Mr. Corson suggesting a firmer foundation for a modern macroeconomics?

Chap08, if I understand his position sufficiently, has the better argument in my view. I would put his case more positively and a bit differently but first should put Mr. Corson’s points in context.

Mr. Corson is right to observe (looking at North America, Western Europe, Japan and Australia etc.) that upper middle class persons (especially those beyond their 30s) of settled circumstances and having some accumulated wealth are now much more focused than before on wealth preservation than on cash flow and lifestyle issues. This change in predilection extends down the social ladder in those countries to include other groups of older citizens who are capable of increasing their savings. This is a natural reaction given the aging demographics and economic turmoil being experienced currently and it is also natural that many of these same people see their nations facing a similar challenge to that they individually face and want their national governments similarly to focus on wealth preservation.

For different reasons (because they are finally experiencing economic opportunities allowing them to save for old age and to no longer simply live from hand to mouth) large segments of the populations of South and East Asia and parts of South America are also accumulating wealth in the form of savings and taking pride in the fact that their nations are doing likewise on the international stage.

That much supports Mr. Corson’s analysis but, arguably, it is not a sufficient basis for displacing some version of the Keynesian analysis. First, a large portion of the population of both the mature and emerging economies is and will continue to plan their economic life on a cash flow basis (this is not necessarily on a short sighted and ill-considered basis although it may be for some). Think of the young, low income, elderly, those with limited opportunities etc. Second, while an orderly resolution of the private and public sector debt bubbles over time is clearly a necessary long range goal if a sound economy is to be created, the more immediate need is to prevent a deflationary depression of unprecedented proportions. Both these requirements require that that the current focus be on using the credit of the state in the form of monetary and fiscal stimulus in whatever amount needed to bridge the gap created by the collapse of value of a significant portion of the real estate, government debt, secularized debt and derivative bubble (counterintuitive though that may appear to many).

2009 Oct 12 03:32 AM

[Mansoor H. Khan]

W.E Heasley,

"(1) household’s now have to show their share of unfunded entitlements and national debt (the $185,000 to $740,000 figure depending on the size of the household) on their own personal balance sheet (Yikes!),"

You should count most of these liabilities as assets somewhere on U.S. households' balance sheets since most of these liabilities are to U.S. Citizens? Unless the quality of these assets is very low (that is liabilities are not expected to met).


On Oct 11 08:56 AM W.E. Heasley wrote:

> Interesting article/excellent points.
>
> As you round out your argument in the future, you might want to illustrate
> your argument by the following:
>
> (1) household’s now have to show their share of unfunded entitlements
> and national debt (the $185,000 to $740,000 figure depending on the
> size of the household) on their own personal balance sheet (Yikes!),
>
>
> (2) the new entry on their balance sheet from (1) above would sink
> many and/or impair most balance sheets,
>
> (3) with the new entry on the balance sheet from (1) above the consumer/household
> would quickly understand the size and scope of government is unsustainable.
> That is, the line item from (1) above needs shrunk as quickly as
> possible in order for the balance sheet to improve,
>
> (3a) if the item from (1) above is added to the personal balance
> sheet, the consumer/household would also understand that increased
> income alone will not solve the balance sheet problem,
>
> (4) that if the item from (1) above is added to the balance sheet,
> and assuming the household can somehow struggle along with such debt,
> when the household ceases to exist (decreased), the heirs to the
> household inherit a much reduced sum or they merely inherit debt.

2009 Oct 12 03:37 AM

[Dave Wrixon]

What Keynsians don't understand it that large debts make you a bad risk and ultimately that means either much higher interest rates or much lower currency valuations. These are not variable that the Fed can ultimately arbitrarily determine, although Ben is having a bloody good go. One is recessionary and the other is is not only inflationary but it destroys the wealth of the nation. Basically, the main argument against the kind of Keynsian theories being implemented is they don't f*cking work! That will soon be apparent to everyone.

2009 Oct 12 03:43 AM

[bob adamson]

I should have added to my earlier comment the observation that Lord Keynes implies (rightly I suggest) that people will naturally save as their circumstances allow and they see warranted by their current situation. In other words, the role of public policy is not to induce people into unnatural savings patterns but rater to remove the basis for hording which will lead to the economy settling into equilibrium at less than full employment. Can’t the same be said over the longer term for individual and national wealth accumulation (i.e. good in moderation and in good time but not in a miserly mode)?

2009 Oct 12 03:44 AM

[Kimball Corson]

The model or theory I outline takes wealth maximization as being subject to the restraint of current consumption. Only if everyone (1)saves nothing and everyone (2) does nothing at all to enhance or increase their existing wealth does the model collapse (back into just being a flow variable model that seeks maximim consumption only) as Bob A and Chap08 suggest. That clearly is never going to be the case for everyone all the time. Even Keynesians recognize that.

2009 Oct 12 04:55 AM

[Kimball Corson]

Mansoor H raises an interesting point. Isn't a governmental unfunded liability, for example, a liability of governement, but also an asset on household balance sheets? Yes and no is the answer I think or better, it depends. If households have to pay that liability with increased taxes, then it is not an asset. If the liability is owed to households, say SS receipients, then it is probably an asset. If interest has to be paid on the unfunded liability, then households are probably net losers, except if they can escape the higher taxes and have future generations pay instead. The analysis gets very messy.

2009 Oct 12 05:10 AM

[chap08]

On Oct 11 09:11 PM Kimball Corson wrote:

> Chap08´s comments are interesting and challenging. He suggests, in
> a nutshell, that people ignore their wealth, and opt for current
> consumption and good results.

Kimball, I probably didn't express myself very well, but I didn't mean quite what you suggest. It is a question of emphasis. I agree with you when you say: "Within the context of my analysis, for an individual consumer, it may simply go to the weight accorded by that consumer to current consumption as a restraint on his or her wealth maximization. "

As you imply, this varies by individual. There are probably no individuals who give zero priority to consumption (we all have to eat), but there are individuals who give it 100% priority. This occurs more frequently in poorer societies and in poorer areas of rich societies - which is consistent with your model.

However, individuals, businesses and governments do not go about this prioritization in a rational way. While wealth maximization may be the objective, the actual decisions taken may be inconsistent with this. To a disinterested observer, the decisions taken will often appear illogical, or even self destructive.

Another dimension that may add to this debate, is to think of wealth as delayed consumption. Then, the prioritization between the two becomes a matter of time preference - it's all consumption, but is it consumption now or consumption later? To me, this is a valuable way of looking at it because I think that human beings, in general, are bad at predicting the future. We "discount" the future excessively, and this is a major reason for over prioritizing current consumption.

Good luck with your thinking.

2009 Oct 12 06:19 AM

[Gedankonomist]

"Ironically, Keynes had the answer there too. He said it takes an idea to beat an idea."

Here's my idea, skipper: Toss the rascal and his bogus theories overboard.

2009 Oct 12 09:23 AM

[Gedankonomist]

"Ironically, Keynes had the answer there too. He said it takes an idea to beat an idea."

Here's my idea, skipper: Toss the rascal and his bogus theories overboard.

2009 Oct 12 09:24 AM

[W.E. Heasley]

Kimball:

Understand Mansoor's point and your analysis. Agree the analysis would be very, very messy.

If existing national debt was used, for example, to make food stamps available to a third party to buy a gallon of milk, when the milk is consumed, you have no counter asset to place on your balance sheet. If services are puchased for a third party with national debt, say daycare, then you have no counter asset to place on your balance sheet. That is to say, since the items were paid via finance/debt for a third party, and the item was not purchased for your use, then debt was transfered to your balance sheet without a corresponding asset. In otherwords, a wealth transfer occured via assignment of debt yet no counter asset appears. The Producer Class ends up with a moral obligation placed upon them by the Political Class to transfer items to the Recipient Class however the transfer was done via finance/debt.

Surely you could argue the Recipient Class then has the counter asset. However, since the Recipient Class (generally buys staples) quickly consumes the asset, the residual value is nil or close to zero.

Other items purchased with national debt, such as Infrastructure, clearly have a value albeit a high maintence item (additional costs to maintane the asset) with a clear depreciation schedule.

Hence you could assign as asset value to you balance sheet of owning part of Interstate 40, but the value is small due to depreciation and high maintenance (continued costs).

The unfunded future liabilities and interest on debt surely follow the same path.

Further, you could argue that some small income effect comes to you and your income statement as the items purchased with national debt do create income (debt financed income).

Hence for every $1 of liability placed on the balance sheet, the corresponding asset value, especially since the asset is either paid for by debt or unfunded, has to be a very small portion of each $1 of liability. For arguement purposed, possibly 10 cents on the dollar becomes asset.

Possibly an income effect of minimal value could be assigned.

However, the point really was: if consumers had to carry the value of their share of national debt and unfunded future liabilities on their balance sheet, they would quickly see how much over spending has occurred. That their balance sheet becomes impaired. That an increase in income would not come close to solving the problem. That spending would need reduced, with the savings being redirected to reduce debt.

As "national debt" stands now, its just a foggy thought to many and likely looked upon by many as "what someone else owes".


On Oct 12 05:10 AM Kimball Corson wrote:

> Mansoor H raises an interesting point. Isn't a governmental unfunded
> liability, for example, a liability of governement, but also an asset
> on household balance sheets? Yes and no is the answer I think or
> better, it depends. If households have to pay that liability with
> increased taxes, then it is not an asset. If the liability is owed
> to households, say SS receipients, then it is probably an asset.
> If interest has to be paid on the unfunded liability, then households
> are probably net losers, except if they can escape the higher taxes
> and have future generations pay instead. The analysis gets very messy.

2009 Oct 12 09:30 AM

[bob adamson]

Further to my earlier comments, arguably the great destruction of wealth occurred during the period 2002-2007 during which
1. the illusion of wealth was created by the inflation of real property values in the US, UK etc.,
2. this illusion supported national governments of those countries in their assumption of greater unproductive national debt prior to 2008
3. the illusion was compounded by the pyramiding of secularized and derivative debt instruments on a massive scale in the private sector,
4. commodity inflation ensued and became a factor in the later stages of the growth of the debt bubble, and
5. this illusion cracked during 2008 with a multi trillion reduction in ascribed value of the debt bubble.
It follows that much of the increase in US and UK national debt over the past 18 months has simply been the assumption by government of an increased share of the load for that debt bubble in order to prevent a deflationary collapse.

In short, there is little evidence of the creation of significant real wealth in the prime mature economies during the past decade and the accumulation of further government debt (counterintuitive though it appears as an isolated fact) over the past year has simply been designed to stabilize the global and national economies. Income support (both for individuals and corporations) still precedes wealth creation as Keynesian economics postulates.

It is true as Mr. Corson implies that as wealth rebuilds at later stages of the recovery a reasonable portion of it must be diverted to pay down part of the accumulated debt bubble and this wealth must be soundly based in the real economy and not an illusion.
My point, however, is that wealth creation continues to flow from income (not the other way around). While it is extremely important that wealth be created and that this be done on an intelligent and solid basis, there is no escaping the fact that the deeper need is for maintenance of income and adequate consumption.

2009 Oct 12 12:46 PM

[W.E. Heasley]

Bob:

Your points 1-5, according to John B. Taylor's book Getting Off Track could not have occurred without the Fed first causing the bubble via the violation of the Taylor Rule, which then lead to your points 1-5.


On Oct 12 12:46 PM bob adamson wrote:

> Further to my earlier comments, arguably the great destruction of
> wealth occurred during the period 2002-2007 during which
> 1. the illusion of wealth was created by the inflation of real property
> values in the US, UK etc.,
> 2. this illusion supported national governments of those countries
> in their assumption of greater unproductive national debt prior to
> 2008
> 3. the illusion was compounded by the pyramiding of secularized and
> derivative debt instruments on a massive scale in the private sector,
>
> 4. commodity inflation ensued and became a factor in the later stages
> of the growth of the debt bubble, and
> 5. this illusion cracked during 2008 with a multi trillion reduction
> in ascribed value of the debt bubble.
> It follows that much of the increase in US and UK national debt over
> the past 18 months has simply been the assumption by government of
> an increased share of the load for that debt bubble in order to prevent
> a deflationary collapse.
>
> In short, there is little evidence of the creation of significant
> real wealth in the prime mature economies during the past decade
> and the accumulation of further government debt (counterintuitive
> though it appears as an isolated fact) over the past year has simply
> been designed to stabilize the global and national economies. Income
> support (both for individuals and corporations) still precedes wealth
> creation as Keynesian economics postulates.
>
> It is true as Mr. Corson implies that as wealth rebuilds at later
> stages of the recovery a reasonable portion of it must be diverted
> to pay down part of the accumulated debt bubble and this wealth must
> be soundly based in the real economy and not an illusion.
> My point, however, is that wealth creation continues to flow from
> income (not the other way around). While it is extremely important
> that wealth be created and that this be done on an intelligent and
> solid basis, there is no escaping the fact that the deeper need is
> for maintenance of income and adequate consumption.

2009 Oct 12 07:21 PM

[bob adamson]

Mr. Heasley:

Agreed. There is a lot of blame to go around. My point is that in working the way out from where we found ourselves in October of last year a necessary first stage was to artificially stabalize the debt bubble and economy and that the stimulus approach was the least bad of the poor options available to do this. Further, we have not yet completed that first stage and it is therefore premature to move on to further stages which, I agree, will involve significant government and private sector debt pay down (and, unavoidably and regretably, debt monetization and repudiation) at various points in the future when the economy can withstand these measures.

bob adamson


On Oct 12 07:21 PM W.E. Heasley wrote:

> Bob:
>
> Your points 1-5, according to John B. Taylor's book Getting Off Track
> could not have occurred without the Fed first causing the bubble
> via the violation of the Taylor Rule, which then lead to your points
> 1-5.

2009 Oct 12 08:29 PM

[tjfxh]

Kimball, check out Bill Mitchell's Stock-Flow Consistent Macro Models.

2009 Oct 12 11:22 PM

[tjfxh]

Ooops. Forgot link:

bilbo.economicoutlook....

2009 Oct 12 11:24 PM