the ripple effect 1694–2009: finishing the past by lowell manning
TRANSCRIPT
The Ripple Effect1694–2009: Finishing The Past
By Lowell Manning
The Ripple Starts Here
Hi, I’m Lowell Manning
Please join me in this short trip inside our debt-based financial system
1694–2009: Finishing The Past
• Keynesianism and Monetarism have both failed because neither of them takes account of the mechanics of the debt system itself
• This work proposes to replace them with an economic debt model that takes into account the mechanics of interest-bearing debt
Fisher’s Equation of Exchange
Irving Fisher proposed his equation of exchange in 1911:
M = money supplyV = speed of circulation of the money MP = price level Q = quantity of goods and services produced
MV = PQ
In Fisher’s day the terms were hard to quantify – that didn’t get any easier until now
V is essentially a hoarding function
The Visual ChallengeConsumer Price Index: England 1300–2000
Are we to blame M or V?
Base year 1300 = 100
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
1300 1350 1400 1450 1500 1550 1600 1650 1700 1750 1800 1850 1900 1950 2000
Year
CPI
Fisher Equation 1911 MV=PQ
Unearnedinterest income
Bank of England 1694Perpetual Interest-Bearing Debt
Perpetual debt is unproductive and
permanent
M = Mp + Ms
MpVp = PQ = (M-Ms)* Vp
Ms = unearned interest income
Mp = productive money supply
Vp = circulation speed ofproductive debt
Unearned Interest
The unearned interest must itself be borrowed, otherwise prices P must keep falling:
Ms applies to all unproductive unearned income interest on deposits
M(d) = (Ddc+Dca-R)= PQ(d)/Vp + (Ms+Mv)
Vp = 1 because debt can only be used once
Debt-Based Economies
For practical purposes, in modern developed economies all money now arises from bank debt, so:
In a modern debt-based economy $1 debt = $1 deposit
Mv = debt borrowed for purely speculative purposesDdc = domestic creditDca = the accumulated current account deficitR = Reserve Bank capital reserveM(d) = total debt = (Ddc + Dca - R)Q(d) = production created by the total debt M(d)Mp = PQ(d) = productive debt
Let:
then
The Debt ModelDebt Model: New Zealand 1978–2009*
* Growth and inflation exclude changes arising from cash transactions
DebtNZ$ billion
MsMs+Mv
Ms+Mv+Inflation on PQ(d)
Md
Year
0
50
100
150
200
250
300
350
400
450
500
1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008
Nominal GDP (PQ(d))
Growth
Inflation
Mv
Ms
Debt Management
Further reducing the new debt model using differential calculus we can say:
Over any short time span dt when deposit rates are not zero…
dGDP/dt = dM(d)/dt – (dMs/dt + dMv/dt)
The increase in GDP equals the increase in total debt M(d),less any changes in direct speculative investment Mv
Therefore in a cash-free, debt-based economy with zero deposit rates:
… and when deposit rates are zero
dGDP/dt = dM(d)/dt – dMv/dt
Debt Management
The economy is indeed about debt management as Irving Fisher surmised
a hundred years ago!
Speculative BubblesBusiness Cycle Bubbles as % GDP: New Zealand 1978-2009
Perhaps for the first time ever, the new debt model quantifies the speculative bubbles inherent in traditional business cycles
MV as% GDP (March year)
-5
0
5
10
15
20
25
30
1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008
Year
Wage & price freeze
‘Roger’s hole’
NZ$ floated 3/85
Deposit interest rate peak >14%
Deposit interest low
Asia ‘crisis’
Dotcom Property
Deposit interest low <5%
Fisher Differential EquationDebt Model Differential Form: New Zealand 1979–2009
Using differential calculus the debt model can be expressed as:
dM(d)/dt = d/dt(Ddc+Dca–R) = d/dt[PQ(d) + (Ms+Mv)] Vp = 1
Annual change in variableNZ$ billion
dMs/dt
d/dt(Ms+Mv)
d/dt (Ms+Mv+inflation)
dMd/dt
-5
0
5
10
15
20
25
30
35
40
45
1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009
Year
Business Cycle 1 Business Cycle 3Business Cycle 2
Inflation
Wage/price freeze June 82-Sep ‘84
Recession period
Richardson budgets
Growth
Bubble dissipating
Sharemarket crash from Oct ‘87 Bubble forming
Asia/dotcom crashes 98-02
The New Debt Model
The new debt model reveals a raft of new economic concepts:
a) System liquidity (circulating debt)
b) Systemic inflation (inflation caused by interest rates)
c) Growth and trade (impact of current account)
d) The nature of (earned) savings
e) Sample application: why Japan stagnated for so long
System Liquidity (Circulating Debt)Circulating Debt Mcd: New Zealand 1978–2009
Mcd = (Mp–Dca) = Ddc – (Ms+Mv) – R
0
5
10
15
20
25
30
35
40
45
50
1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008
Year
McdNZ$ billion
y = 1.24x + 2.4
Earned savings decreasing
Earned savings increasing
Circulating debtMcd NZ$ billion
Linear(Circulating debtMcd NZ$ billion)
Systemic InflationModel Systemic Inflation vs. CPI Inflation: New Zealand 1989–2009
Total inflation = systemic inflation + ‘PQ’ inflation + non-systemic price changes
Systemic inflation rises when interest rates rise
Systemic inflation = inflation caused by interest rates
Systemic inflation is the rate of change of dMs/dt, the speed at which the increase in the pool of unearned income Ms changes
Inflation% GDP
-2
-1
0
1
2
3
4
5
6
7
8
1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009
Year
SNA (CPI) inflation% GDP
Systemic inflation% GDP
Growth & Trade (Impact of Current Account)Increase in GDP vs. Increase in Accumulated Current Account:New Zealand 1988–2009
System liquidity Mcd and domestic wealth
$100 billion lower
Domestic Credit Ddc $100 billion lower
Accumulated Current Account deficit Dca $100 billion higher
All nominal GDP has been borrowed
Mcd = (Mp–Dca) = Ddc – (Ms+Mv) – R
GDP/DcaNZ$ billion
GDP NZ$ billion
Accumulated current account deficit+ NZ$45 billion
0
50
100
150
200
250
1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Year
R2 = 0.977
The Nature of Earned Savings
Mcd is the modern debt equivalent of money M in the Fisher equation…
Original Fisher equation
MV=PQ
…and its speed of circulation Vcd is broadly comparable to V in the original Fisher equation.
The Nature of Earned SavingsSpeed of Circulation Vcd of Circulating Debt Mcd:New Zealand 1979–2009
The accumulated current account deficit Dca is the underlying source of New Zealand’s lack of savings and new investment
The sharp upturn in Vcd shows system liquidity has fallen dangerously low by comparison with the long-term trend
Speed of circulating debt (Vcd)
0
1
2
3
4
5
6
7
1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009
Year
Speed of circulation of circulating debt (Vcd)
Linear
Why Japan Stagnated for So LongCurrent Account Deficit: Japan 2004–2008
2004 2005 2006 2007 2008 Total
Current account deficit (US$b) -172 -166 -170 -213 -193 -914
Nominal GDP change (%) 2.7 1.9 2.4 2.1 1.4
CPI (%) 0 -0.3 0.3 0 0.6
Growth (%) 2.7 2.2 2.1 2.1 0.8
Nominal GDP change (US$b) 114 100 96 92 35 437
In the revised Fisher equation: dMd/dt = d/dt (Ddc+Dca-R) = d/dt[PQ(d)/Vp + (Ms+Mv)]
Take: dMv/dt = 0 (no bubbles since 1990)
dMs/dt = 0 (deposit rates practically zero)
dR/dt = 0 (R small compared to Ddc and Dca)
Vp = 1
The equation reduces to: dPQ(d)/dt [Japan] = d/dt(Ddc+Dca) [Japan]
Why Japan Stagnated for So LongCurrent Account Deficit: Japan 2004–2008
The Japanese government has had to pump
US$1 trillioninto the Japanese economy to keep it afloat
Dca (the deficit) is negative to the tune of US$-914b
Therefore to maintain dPQ/dt, dDdc/dt must increase by US$914b
Back to Fisher
A general economic model aligned to the original Fisher equation of exchange is:
PQ = (Md – (Ms+Mv))Vp + MoVo +EoVeo
Where: PQ, Md, Ms, Vp, Mv, and Vp are as already described
And: Mo = circulating currency contributing to output
Vo = speed of circulation of Mo
Eo = circulating electronic debt-free currency
Veo= speed of circulation of Eo (and must be equal to Vcd)
Fisher Revised – The New Debt Model
This presentation has revised the Fisherequation MV=PQ to develop a new debt model…
In the current financial system based wholly on debt…
M(d) = (Ddc+Dca-R) = PQ(d)/Vp + (Ms+Mv)
In which Vp = 1
GDP = PQ(d) = M(d) – (Ms+Mv)
Ms results solely from interest rates (on deposits)
Mv results solely from loose bank lending for speculation
Fisher Revised – The New Debt Model
Bank profit is predominantly a function of M(d)
Recent world events show how derivatives have been developed and used to irresponsibly increase M(d)
to create extra bank profit
Fisher Revised – The New Debt Model
The debt model shows that management of both the quantity of debt and interest rates are crucial for financial stability, and that:
• The quantity M(d) must be increased in line with the productive capacity and resources of the economy for maximum production and very low or zero inflation
• Interest rates on deposits need to be zero or close to zero to avoid creating investment inflation that is out of line with the productive economy
• The present system based on interest-bearing bank debt produces a fundamental conflict between the interests of the financial sector and those of the productive economy
The Ripple Effect1694–2009: Finishing The Past
By Lowell Manning
19B Epiha Street,
Paraparaumu, New Zealand.