Freitag, 21. Dezember 2012

Another strange look at money and the economy

An real economy embedded into a financial sphere consisting of Banks with the capacity to generate a money flow (Mc) into the economy by money creation and the capacity to enforce to destroy a flow of money (Md) by debt repayment and non banks capable to store money on bank accounts as a means of value accumulation / storage is subject to the four money flows Mc (money created), Md (money destroyed), Me (money extracted) , Mr (money released). This establishes at the same time two money basins, each filled with an certain amount of money MR in the real economy and MA in the accumulating account. If we assume that the real economy needs a certain amount of money to run well, it is easy to see, that it can be starved by adjusting the flows in a way that makes (Mc-Md)+(Mr-Me) negative. It can also bee seen, that the economy will be flooded by money / inflated over time, when the sum of the two terms becomes positve. The equilibrium, where the sum of the two terms is exactly zero, is the rare pipe dream exception in the phantasies of neoclassical armchair economists ignoring all that. I think the above picture explains almost every monetary problem we see and have with this stupid arrangement these days. Just think about it. And don't expect that central banks will be able to fix it some how under the current conditions/setup.

Sapere Aude!

Georg Trappe

P.S.: Where can I apply for the next nobel price in economics?


  1. I am sure you cannot apply, but if you are really interested in beeing awarded the prize I can hint to the Nobel Committee that you would be a very good and worthy candidate, and they will give it some thought.
    Thx for the model.
    But how can the believers in the pipe dream be convinced that the system, if it doesn't reach equilibrium for more than a very short period, at least it will not deviate from it very far, very much and very long? Remember, beliefs of any kind seem to have a long standing with mankind.

  2. Just kidding. I would reject it anyway.
    The strange thing here is, that the above setup works for while. When you start an economy from ground zero, like the german economy after WW2, it works like a charm. But over time it turns into something really bad for the majorty of people if not for everyone. The reason is, that the escalating amount of money concentrates in the hand of a few and starts to run amok. It runs into "opportunities" like a Abrissbirne just to withdraw from them in the same fashion. Look at the Asia crisis from 97. Hot (accumulated) money leveraged by new created money (credit) flowing into Tiger economies, inflating them just to be pulled out with the same insane rate. During the dotcom thing the same happened to an entire industry. The housing bubble in the US, same story. The PIIGS bubble is the same story as well. Accumulated money from Germany flow into the so called PIGS and was leveraged by credit from local banks. When german banks and owners of accumulated money discovered that they were betrayed by Wall Street, they pulled their money back and the PIGS turned belly up.
    And the central bank has almost no control over it because their is this damned indirection of central bank money and ordinary bank money. When Bernanke raised interest on central bank money he starved the banks and Lehman was the weakest of the big ones and first to collaps.
    Now the banks are starving the real economies and of course the weakest (house owners with a 20 year fixed mortgage contract and a work contract that can be cancelled in a second) go belly up first. Look at this:
    And that:

  3. And the chosen solution at the moment?

    We increase Mc to the moon, Mc must be much larger than the other flows. By this way, at least a little money will temporarily(!) be there to run the economy.
    Collateral damage: the accumulator is blown like a balloon until ... KABOOM!

  4. Hello RealTerm,

    they have no solution. The thing is out of control! The mainstream theory says that low interest on central bank money leads to an expansion of credit given by banks to the real economy. This seems to work to some extend in the US because of QE and so forth but in Europe banks hoard central bank money on their accounts at the central bank. The real economies of the PIGS are in enourmes stress because of that and only Germany and alike where accumulated money is transfered back to stay afloat. The question is how long Germany will "enjoy" that reflow enlarged by capital flight of rich spainyards etc.. The illusion that central banks can control the growth of economies by controlling money flows into and out of them is just that, an illusion! The owners of the Abrissbirne are in control.