Revenge of the Savings Glut Theory? | 53 comments (53 topical, editorial, 0 hidden)

Re: Revenge of the Savings Glut Theory? (none / 1)

Being a little bit more constructive, one can picture the economy as a network with a balance sheet at each node and cash flows on the links. The net of the cash flows at each node gives you the income statement for that node, and the sum total of all the unsigned cash flows on the links give you "national" income.

What's wrong with that picture or how do actual accounting and actual national accounting differ from it?

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Carrie (migeru at eurotrib dot com) on Thu Jun 10th, 2010 at 04:55:23 AM EST
[ Parent ]

Re: Revenge of the Savings Glut Theory? (none / 0)

Is money conserved over the network?

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Jun 10th, 2010 at 06:51:46 AM EST
[ Parent ]

Re: Revenge of the Savings Glut Theory? (none / 0)

Each node can be a source or sink.

by generic on Thu Jun 10th, 2010 at 07:28:01 AM EST
[ Parent ]

Re: Revenge of the Savings Glut Theory? (none / 1)

But the cash flow on a link contributes a positive amount to the money balance of the destination node and a negative amount to the origin node, so the total doesn't change.

Money nonconservation comes from credit in the form of intertemporal links.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Carrie (migeru at eurotrib dot com) on Thu Jun 10th, 2010 at 09:00:48 AM EST
[ Parent ]

Re: Revenge of the Savings Glut Theory? (none / 0)

I was thinking in terms of credit, but even without taking credit into account, what prevents a node from saving? Or more accurately: hoarding?

by generic on Thu Jun 10th, 2010 at 09:20:42 AM EST
[ Parent ]

Re: Revenge of the Savings Glut Theory? (4.00 / 2)

Given that the total balance is zero, either the time-average of the money flow into each node is zero, or some nodes will have a net average loss of money. This is unsustainable and eventually these nodes will go bankrupt. Since nodes abhor negative money balances, these balances will be compensated by issuing IOUs instead of paying outright. This means that the total money mass grows in proportion to the unsigned sum of the nodes' net money flows. This is inflation.

The more volatile transaction prices and volumes are, the larger will this unsigned sum of net money flows be, and the more credit will be created to prevent parts of the network from dying (going bankrupt). This means that inflation is correlated with market volatility.

So, the freer the market the larger the inflation of the money mass. Price and volume control, be it through market power or regulation, reduces volatility and the pressure to create credit and inflation.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Carrie (migeru at eurotrib dot com) on Thu Jun 10th, 2010 at 09:35:37 AM EST
[ Parent ]

Re: Revenge of the Savings Glut Theory? (none / 0)

In the absence of credit, yes.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Carrie (migeru at eurotrib dot com) on Thu Jun 10th, 2010 at 08:56:42 AM EST
[ Parent ]

Re: Revenge of the Savings Glut Theory? (none / 0)

That could be a problem. :)

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Jun 10th, 2010 at 08:57:32 AM EST
[ Parent ]

Re: Revenge of the Savings Glut Theory? (none / 1)

Why? Money is not conserved in the real economy either.

Let's see, if there is a cash flow on an edge, the amount is subtracted from the balance of the starting node, and added to the balance of the end node. The total of the balances doesn't change.

Instead of exchanging cash along an edge, an IOU at a discount may be exchanged. Say A has to pay B 100 but instead pays B with an IOU for 105 payable a year later, with "the market" agreeing that that IOU has a present value of 100. The balance sheets of A and B still change in ±100 now, so the total balance is still conserved.

But the total side of the whole network's asset (or liability) side has increased because this IOU didn't use to exist.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Carrie (migeru at eurotrib dot com) on Thu Jun 10th, 2010 at 09:12:50 AM EST
[ Parent ]

Re: Revenge of the Savings Glut Theory? (none / 0)

The balance sheets of A and B still change in ±100 now

Gah, ±100.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Carrie (migeru at eurotrib dot com) on Thu Jun 10th, 2010 at 09:37:23 AM EST
[ Parent ]

Revenge of the Savings Glut Theory? | 53 comments (53 topical, 0 editorial, 0 hidden)

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