Montag, 10. Dezember 2012

A strange view on money, banking and the economy

Readers of my blog know, that I am using LTSpice as a simulation tool for my economic modeling. This is because I am trained in electronics engineering and this tool provides very powerful means to simulate complex electronic circuits. It does this in a way that is identical to the flows and funds concept in economics. The only thing I have to do, is the translation of economic terms into electronic equivalents. For some time I was wondering, how to create a correct model of the banking system in conjunction with an economy that matches with observations and is able to explain the calamaties of our days.
On a very high level of abstraction the banking system consists of a source of money, a sink of money and two balance sheet accounts,  where the amounts of the net (sourced minus sinked) money are kept track of. The two accounts can als be seen as storages, where the net money created and injected into the economy during the process of credit/money creation accumulates. In electronic terms this is a current source, a current sink and two capacitors which are wired in way so that the two capacitors are charged up when the difference of source current minus sink curent is positiv and are discharged when the difference is negative. At the same time the capacitors are representing the liability side of the balance sheet as a positiv potential reference to ground and the active side of the balance sheet with a negative potential referenced to ground of the same size. The following circuit diagram does represent an electronics circuit that does exactly that.

Now, when we think of the economy as a black box that dissipates heat only when a net current is flowing through it, it has to be connected in a way, that this heat dissipation/economic activity occurs only when money is flowing into the liabilities account of the banking system or out of that account. This means you have to forget all this bull shit about economies that run out of them selfs with a certain amount of money injected into it. They do not! And the reason why they don't run that way is, that money, that is injected once, does not circulate for ever, but accumulates in the hands of a few over time, which leads directly into a deflationary collaps of that economy, because it looses its ability to communicate demand for an increasing number of agents/participants over time. The following diagram shows a resistor placed into the above shown banking model, so that current flows only through it, when net current flows into or out of the account on the liabilities side of the bank balance sheet.

I think this simple circuit diagram is well suited to let us understand a lot about the calamities we are observing in our current economic situation. First of all there is no economic activity / heat dissipation when there is no money /current flowing through it. To let current flow through it, the account on the liabilities side has to be charged up or discharged. This is  only possible if source current / money supply by money creation  and sink current / money destruction by debt repayments are unequal. The "normal" case is, that money supply exceeds money destruction, which leads to an accumulation of money/debt on both sides of the balance sheet. In the model this is shown by an increase of the potential/voltage across the capacitors. When the "normal" state is left, because the banking system reduces its supply current  to the same level or even worse below the level of money destruction by debt repayments the economic activity ceases. In the case of exactly equal currents on the supply and the sink side the net flow through the resistor/economy is zero. In case of a higher sink current compared to the source current, the difference is discharging the capacitor / accounts on the liabilities side of the balance sheet. However, since the money is highly concentrated in the hands of a powerful few after running the economy in "normal" mode for a while, which resist to let that money go at a rate equal to the rate agreed between banks and debtors during "normal" times, more and more debtors default and the system dives into a deflationary collapse as well.
And this is what is neglected by the dominating neoclassical economists, believing in absurd and fatal theories of equilibrium, (selfsustained) money circulation and ignoring an asymetry preventing all this by continous concentration processes. If this missbelieve is continued to be guidance for policy decisions by politicans, the economy will be certainly destroyed.
The puzzling thing here is, that only a infinite charge up by a positive difference of money supply/credit creation minus money destruction/debt repayment keeps the thing going. Which does not  mean that this would be a good thing to do, because the concentration processes leading to the fatal asymetric behaviour, that prevent the economy to run also in a discharge mode, continue, while the thing is charged up. So the problem what needs to be resolved is, to get rid of that ever increasing asymetry caused by the ever progressing concentration processes. Only when that is done, the economy will be able to run in a stable, sustainable  way with money flowing in and! out of accounts as needed.

Sapere Aude!

Georg Trappe

Appendix (added 8:00 UTC)

The picture above shows a sequence of things occuring over time to illustrate how the model works. Driven/controled independent variables are source und sink. Everything else follows as a function of them.
The blue line is the source current / money supply $/time. From time 0 to 1ms it is increased linear from zero to 1 (right scale). 
The green line is the liabilities account in $ (left scale). Since the supply rate increases linear, the accumulated money increases exponential. 
The gray line is the assets account it follows exactly the liabilities.
The red line is the sink current / money destruction $/time. In this example the sink current stays at zero from time 0 to 2ms and starts there to increase linear for another 1ms. 
The pink line is economicic activity (power dissipated / real GDP) it follows the blue line until time 2ms, when sink current / money destruction kicks in. From there it falls until money supply and money destruction are equal. It starts to increase again at time 4ms , because the money supply starts to drop and the unrealistic case that current is drawn out of the account starts. This is accompanied with a reduction of the money and the debt (green and gray). In reality debtors would default because they are starved of money.
At time 5ms the economic activity starts to drop again, because the sink curent starts to return to 0. This reduces the difference between source current (alraedy at zero) and sink current. At time 6ms both the source and the sink current are equal at zero and stay there. No more money flows into or out of the accounts. They stay stable at their current level. Economic activity is zero.
So we see already at time 3ms the economy would be dead. Everything that follows are theoretical things, because of that. Just to understand the model and its implications better.

Appendix_2 (added 11 Dez 2012, 3:40 UTC)

Here an updated Simulation plot with the effect of the concentration process included.

First the econonimic activity (pink) increases as the rate of money supply increases (blue, source current). When the rate of money supply stabelizes at a constant level, economic activity starts to decay slowly because of the increasing concentration of money in the hands of a few. When the debt repayment rate starts to increase (red sink current), the decay of the economic activity accelerates and when the rate of money supply is reduced the economic activity starts a nose dive.
I appologize for the poor readability of the plots. Unfortunatly the plot program of LTSpice does not allow to increase the line width.

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