Reserves are simply the liquidity that backs loans made within the system. Hence they must be created and tightly regulated by a truly sovereign government and lent only by a Public Banking structure that is not allowed to be corrupted by the desire to be profitable. Private Banking must be even more tightly restricted and regulated by sanctioning it to only aggregate priorly accumulated profits and savings without the ability to leverage such funds. Thus Banks/brokerages would not be able to leverage individual or commercial accounts, merely create bonds from such funds. The public Banking system, using money created by the sovereign money creating agency, would be able to leverage funds to invest/speculate with, but only for reputable, productive and non-destabilizing purposes.

Without such a tri-level banking/financial system the system is destabilized by greed, wild speculation and lack of ethical and adult responsible control.

The danger of excess reserves is wealthy individual and corporate access to them for illicit or wildly speculative purposes because of their creditability. Another very dangerous possibility is their availability and use for war funding.  For instance, if the current monopoly on credit perceives their dominance being eroded or ended they may very likely have little compunction about starting a war that destroyed everyone’s productive capacity….and then of course they would be happy to lend us all the money to rebuild everything. This colossal waste and equally colossally unethical possibility must be avoided at all costs. 

Of course quite aside from this re-working of the system, monetary grace/monetary gifting must also be integrated into the system in order to correct the systemic imbalance between a simultaneous excess of total costs and hence prices in ratio to total individual incomes created and actually spent. In addition, this imbalance is increasingly being added to by innovation and artificial intelligence as they reduce aggregate individual incomes. 

This problem can only be resolved by an ongoing direct and supplementary gift of income granted by the sovereign monetary authority, a universal Dividend to the individual and by a gifting Discount by retail merchants to consumers which in turn is reciprocally gifted back to such merchants so that they can be whole on their overheads and margins.

Of course every lowered interest rate freed up more individual income….just not (and never) enough to actually effect an equilibrium of total costs/prices and total individual incomes actually available to spend and so liquidate those costs/prices. And there goes Austrian and Keynesian economics into the dust bin of history…and the rise of Wisdomics/Gracenomics.

wisdomicsblog.com

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Beer Drinker,

You are absolutely right. Artisan products will become the new “shadow economy”, but that will simply be enough to reproduce a feudal/barter/mostly austere economy for the overwhelming majority of the populace. We will still have to integrate monetary grace as in monetary Gifting into the regular economy in order to avoid the absurdity of feudal austerity amongst technologically abundant productive capacity to produce.

Every economist and pundit is a nascent advocate of Wisdomics/Gracenomics

wisdomicsblog.com

One thing that economists and accountants need to understand is that Depreciation allowances for businesses do not enable them to avoid the costs of depreciation. They are not grace as in gifts/gifting, but merely a “stay of execution” of costs that must still be paid….if the business is to be profitable and survive. All such allowances for businesses do is make the system temporarily onerous instead of macro-economically utterly onerous.

Luca Rivera:  Luca says: what irresponsible are you talking about? The Working class dope who borrowed money so he could own a home or the Finance, Insurance and Auto Billionairs who leveraged up to to make more billions? Oh, I forgot, only the working slob is irresponsible, the Wall Street group are shrewed. They know the treasury vault is always open to them. Luca says: If you can give AIG billions you can give a working slob a house.

Tony Bennett:   The guilty are everywhere from Wall Street to “home” buyer.

You are fantasizing if think all “working class dope” bought a home as shelter … and should be let off the hook (apologies to those who tried to do the right thing). In the heyday (circa 2005) Home Equity Withdrawl (refinancing with cash out) reached $500 billion / year. The “working class dope” was buying new vehicles / vacation / concert tickets / etc with proceeds that he had no chance of paying back unless housing continued to appreciate to the moon. The reason they got foreclosed is that they either bought a house they had no prayer of making payment when mortgage reset (if they could not understand the mortgage documents … no business buying) … or they HEWed out so much to make future payments unrealistic. Icing on the cake was being allowed to stay in their homes months / years after making last payment.

Me:  Of course there is plenty of blame to go around, but when you factor in the fact that the Banks are the one’s who are in “control” of the system and so are the enablers of its negative effects both individually and systemically…plus the fact that the Banks have already been bailed out….it’s obvious who needs to be bailed out now. That is if you want to return to a semblance of normalcy instead of wallowing in the debt over hang for another 30 years and/or having a war that destroys EVERYONE’S productive capacity. And then we can borrow from the Banks to rebuild it all. We so need to stop being the slaves of the Banking system.

Jim:  +ProfSteveKeen Thank you for sharing this lecture. I really appreciate your goal of ensuring proper accounting in economic models, and my favorite feature in Minsky is the Godley tables. Unfortunately, I believe you have introduced an accounting inconsistency in this lecture’s model in your calculations of GDP which also causes inconsistencies in the gross profits (\pi_G) and net profits (\pi_N). I see several accounting contradictions in the model that result from these calculations. First, since we are not dealing with foreign exchange nor government consumption, GDP should equal the total consumption within the model. There are just two sources of consumption in the model, Cons_W (239.209) and Cons_B (5), which add up to just 244.209 annually, yet the calculated GDP value in the model is 341.727. The model doesn’t provide a source for this additional consumption. (In modeling quarterly turnovers, the quarterly revenue isn’t actually the full balance of Firms, as your GDP calculation assumes.) Second, gross profit should equal the total revenue minus the cost of goods sold. In the model, as defined in the Godley table, there are only two sources of revenue for the Firms, Cons_W and Cons_B, so the total annual revenue is just 244.209 (as calculated above), and if you use the Wages as your cost of goods sold, 239.209 annually, that means gross profit is merely 5, not 102.518 (as calculated from the overstated GDP amount in the current model). Third, Net Profit = total annual revenue – total annual expenses. In the model, therefore, Net Profit should equal (Cons_W+Cons_B) – (Wages+Interest), which is 244.209 – 244.209 or 0 — not 97.518. Likewise, since Net Profit = Gross Profit – Interest, if we start with the correctly calculated annual Gross Profit of 5 and subtract the annual interest payment of 5, this also shows Net Profit is 0. Even the Bank profits are 0 in this model, since their total annual revenue is just 5 and their total annual expenses (Cons_B) is also 5. (Interestingly, it is only because the Banks consume their total annual income that the Firms have the additional 5 units of revenue to be able to pay the interest without an annual loss.) The root cause of these inconsistencies in your model, I believe, is that it assumes the quarterly revenue equals the Firms total bank account (85.4317) and that wages are just 70% of these revenues. In fact, the quarterly revenue is just 61.05225 (i.e. 244.204/4) and ~98% is spent on wages. The current annual net profit amount of 97.518 is a calculation fiction that is not supported by the accounting in the Godley table. There is no source of spending to provide this additional 97.518 income, nor has your model defined how this profit is transferred out of the Firms accounts (e.g. dividends, owner draws, etc.) to explain why their net worth (Assets-Liabilities) doesn’t increase despite these profits. I believe I know how this problem can be fixed to properly account for and explain positive net profits in such a model (even without adding government spending or foreign exchange), but I wanted to bring these accounting inconsistencies to your attention to learn your thoughts about them. Perhaps you address these flaws in later lectures, or perhaps they are resolved in your more advanced models.

Me:  +Jim Nelson Thank you for this post. It makes more concrete the costing/pricing system that is an integral part of commerce/the economy and that economists are generally unaware of. Of course some would say these are merely static numbers, but considering that these realities are ongoing flows of money, costs and prices they are dynamic factors. If you also factor in the costs of depreciation which is an additional cost for virtually all businesses you begin to realize that the deepest systemic problem of the economy is that the rate of flow of total costs and hence total prices is greater than the rate of flow of individual incomes simultaneously produced and actually available to spend….which of course is the Social Credit insight.

There are actually two types of laughter. The natural laughter that is actually a release and effects a momentary state of grace/flow, and the overweening laughter of the prideful and temporally damned. The latter is what you accurately refer to of course.

Ken:  What will happen to all the workers who are “made redundant” by the relentless advance of technology? Will society provide for them? If not, will they passively accept their fate, or will social unrest follow? A serious question for “developed” economies.

Me:   Of course we’ll have to provide for them (the vast majority of the population that is, which will either not have a job or a job that is not adequate to avoid austerity)…because it will be both the self interested and the ethical thing to do

Rhonda:  History shows us, unfortunately, that sooner or later people come into power who do not do the ethical thing. Will this time be different? One can only pray it will.

Me:  A system does not have a mind to change….only an inherent condition. If you mandate policies that are gracious and that consequently resolve the inherent condition of the economic system (more costs and so prices as a flow than individual incomes simultaneously produced) people will be free and realize it….and then it will be damned hard for an idiot to change it.

Because ideas are still dualistic even in their combination, and hence things can be and/or made to appear as if one thing is as worthy as the other. The third consideration of what is most ethical for the individual  is what enables a true integration and a unitary resolution/oneness of the subject in question.

The first and most important question economists and politicians need to ask themselves is:

Are systems made more for Man, or Man made more for systems?

Their answer must then guide their policies.