The Center for Economic Stability Incorporated
With the support of blog members, I have formed the Center for Economic Stability Incorporated. Our objective is to develop CfESI into an empirically-oriented think-tank on economics that will develop realistic analysis of capitalism, and promote policies based upon that analysis. The success of CfESI is dependent upon raising sufficient funding to enable staff to be hired who can take over the administrative and web duties from me, and supplement my research efforts.
Named in honor of Hyman Minsky, this is a computer program that enables a complex monetary system to be modelled with relative ease. The program implements the tabular approach to modelling financial flows developed in (Keen 2008; Keen 2010; Keen 2011), and combines this with the “flowchart” paradigm developed by engineers to model physical processes, and implemented in numerous software programs (Simulink, Vissim, Vensim, Ithink, Stella, etc.). It will be both a pedagogic tool to make dynamic monetary modelling easy and attractive to new students, and a powerful research tool that will enable the construction of realistic, monetary models of capitalism.
- A first version of Minsky is already under development, with funding provided by a grant from the Institute for New Economic Thinking. This version, to be completed in mid-2012, will enable the modelling of the economy as a monetary dynamic single commodity system. A prototype will be released in early 2012. A Sourceforge page is now operating, and we will shortly be opening it up for collaboration by Open Source developers.
- Version 2.0 will enable multi-commodity input-output dynamics to be modelled, as well as a disaggregated banking sector. A seeding grant to help develop version 2.0 has been recently been received from the Institute for New Economic Thinking. This will be combined with grants from other private entities to make an application for support under the Australian Research Council’s Linkage program for up to A$500,000 p.a. of further funding. One Australian firm has already committed to be an Industry Partner in this application, and I welcome additional support from other firms, whether Australian or otherwise (a minimum contribution of A$50,000 over 3 years is required to qualify as an Industry Partner under ARC rules).
- Version 3.0 will add the capability to model international trade and financial flows.
The program will be platform independent, and freely available under the GPL licence.
Integrating Minsky with biophysical data
Minsky as it stands is purely a simulation tool. However, as part of a United Nations Environment Program project “Resource Efficiency: Economics and Outlook for Asia-Pacific”, a precursor to Minsky has been linked to a biophysical database known as ASFF (for “Australian Stocks and Flows Foundation”) developed by the CSIRO (Turner, Hoffman et al. 2011),. Our long term ambition is to combine the two systems seamlessly, so that the physical parameters of Minsky will be derived directly from empirical data (which can be derived for any national economy) and so that Minsky’s fit to empirical data can be tested.
The second stage of this process is part of the proposal for which I have just received further funding from INET.
Finance and Economic Breakdown
This will be a book-length treatment of the Financial Instability Hypothesis that I hope will form one of the foundations of a post-Neoclassical macroeconomics. Writing a book like this takes time and isolation, two things I have had very little of in the past six years since I first started warning of an impending economic crisis (Keen 2005). I have delayed the writing of this “magnum opus” for over a decade; in 2012–13 I intend devoting as much time as I can to writing it, which necessitates minimising time spent on other activities such as the maintenance of this blog.
Currently I pull in data from over 1500 different sources into a Mathcad worksheet on my PC. Mathcad, with a little help from my programming, does a wonderful job of analysing and displaying the data. But the naming conventions in my pseudo-database are … a joke, there are none. Consequently, only someone intimately acquainted with the data can use my system, and at the moment that’s just me. I also have to manually download files when they are updated. Thanks to Mathcad’s visible equations, auditing the data is certainly easier than with a spreadsheet, but it is still difficult compared to a well-structured relational database.
A supporter has developed an online system, currently called Econodata, to overcome these limitations:
- The data is stored in a “Ruby on Rails” relational database;
- The system automatically updates data when it is altered by providers;
- The relational database system and a 4GL for derived data series makes auditing straightforward, and the system generates a tinyURL so that a complex data series or chart can be easily replicated by anyone; and
- It will be easily accessible and usable by subscribers to Debtwatch and CfESI.
Econodata is currently unavailable since it is being ported to a new server, and the database is relatively unpopulated. The database will also support my book Finance and Economic Breakdown, by making it possible for readers to verify any empirical charts for themselves simply by typing its TinyURL into a browser.
Credit-aware Economic Indicators
My debt-aware perspective on economics makes it easy to explain what Bernanke has admitted is still inexplicable to him: where the crisis came from, and why it is persisting:
“Part of the slowdown is temporary, and part of it may be longer-lasting. We do believe that growth is going to pick up going into 2012 but at a somewhat slower pace than we had anticipated in April. We don’t have a precise read on why this slower pace of growth is persisting… ” His admission of ignorance reflects genuine puzzlement with the economy’s failure to reach what he likes to call escape velocity. (G.I. 2011)
In a nutshell, the change in total private debt is a key determinant of aggregate demand, and the turnaround from increasing debt boosting demand from incomes alone by 28% in 2008 to reducing demand below this level by 20 percent in early 2010 was the cause of the crisis.
Similarly, the slowdown in the rate of decline of debt from its maximum rate of decline of almost US$3 trillion p.a. to a mere $340 billion p.a. is—along with the growth in government debt—the main reason why the crisis has attenuated slightly, rather than plunging into Great Depression depths of unemployment.
One indicator that has arisen out of my work—building on original work by Biggs, Mayer and Pick (Biggs and Mayer 2010; Biggs, Mayer et al. 2010)—is the “Credit Accelerator” (Keen 2011, pp. 160–165), which was first called the “Credit Impulse”. Both the change in income and the acceleration of credit determine the rate of change of economic activity, and these are correlated with each other (the R2 since 1980 is 0.56), but the economics collapse in late 2007 was clearly driven primarily by the rapid and unprecedented deceleration of debt.
Debt acceleration is the main factor in determining asset prices. Asset bubbles therefore have to burst, because debt acceleration cannot remain positive forever.
This causal relationship is much more obvious with mortgage debt and change in house prices (see Figure 11).
Further development of this indicator is therefore highly warranted—both as an indicator of what trends can be expected in asset prices now, and as a means to identify whether a bubble is developing in future. At present, the Credit Accelerator’s definition is quite simple—the change in change in debt over a time period, divided by GDP at the midpoint of that period—and the noisiness of financial data makes it difficult to use short time periods, which would obviously be superior for forecasting. A sophisticated filtering process and forward indicators for credit would make the Credit Accelerator a much more powerful tool.