I haven't read it yet. It's not available in the libraries here yet. So right now I haven't seen the details of what you're talking about well enough to answer your question. And I'm really not that mathematical to begin with. I'd have to see the terms described.
Money. Doing it Right this Time.
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Beta is defined as the value of a nation's capital stock divided by the national income, which he defines as GDP, minus capital depreciation, plus net income from abroad. Piketty claims that this quantity approaches the savings rate divided by the long-term growth rate of the economy, which was apparently first introduced by Roy Harrod and Evsey Domar in the late 1930s, and refined by Solow in the 1950s. He uses this to show that low growth rates (on the order of 1-1.5%) will lead to high levels of capital relative to national income. I haven't tracked down those papers or anything, but I imagine this relationship must break down at very low growth rates.
Hygro
soundcloud.com/hygro/
what does he define as capital?
Hygro
soundcloud.com/hygro/
So K/Y is different than s/g and that difference shows up when g turns negative.
I played around to show you two scenarios. In each scenario, the capital stock is appreciating by 7%, but in one, general income growth is a steady 3% and in the other it is a steady decline of 2%. Notice that while the beta value changes, as defined by K/Y, it's not some logical error of value.
This is because even if growth is flat or negative, income remains positive.
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That makes sense, although it does show that his assertion that K/Y approaches s/g in the long run isn't really right, unless I'm misunderstanding what he means by s or something of that nature.So K/Y is different than s/g and that difference shows up when g turns negative.
I played around to show you two scenarios. In each scenario, the capital stock is appreciating by 7%, but in one, general income growth is a steady 3% and in the other it is a steady decline of 2%. Notice that while the beta value changes, as defined by K/Y, it's not some logical error of value.
This is because even if growth is flat or negative, income remains positive.
Hygro
soundcloud.com/hygro/
well in the Solow growth model, g is never endogenously negative in the long run because that would mean that the system is managing to slowly destroy itself in the longrun without any kind of interruption or revolution.
So we can safely assume that a country's long-run historical growth average is going to be positive in any capitalist society.
If g is the Solow model g, then it really is taken over the course of decades/centuries, so it's probably a safe variable for not worrying about it going negative empirically. I really need to read Piketty's book though :lol
Monsterzuma
the sly one
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I'm reading:
What Every Economics Student Needs to Know and Doesn't Get in the Usual Prinicples Text by John Komlos
definitely has my recommendation.
What Every Economics Student Needs to Know and Doesn't Get in the Usual Prinicples Text by John Komlos
definitely has my recommendation.
Hygro
soundcloud.com/hygro/
Turns out, according to James Galbraith, Piketty has apparently rolled the whole discussion of "capital" into "money" which makes much more sense given how it adds up the way it has been described.
Monsterzuma
the sly one
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Link to video.
this is a great video about corporate tax havens and evasion explaining how companies like apple pay less than 2% in taxes on its corporate profits despite a 35% top marginal tax rate in the USA.
I'm trying to get myself to understand how Fractional Reserve Banking actually works. This isn't as easy as you'd think, because all the 'explanations for dummies' out there are wildly biased into thinking it's a bad idea.
But, a question occurred to me. If GDP is growing at 2% and loans are at 5%, then there's just no real way for all of those loans to succeed. What happens to that 3%? If 100% of loans were actually viable, then the economy would grow at 5%, yeah? Now, I kinda get that a portion of that 5% is being use to pay Prime (call it 2%). Where is that spare 3% going? Failures?
But, a question occurred to me. If GDP is growing at 2% and loans are at 5%, then there's just no real way for all of those loans to succeed. What happens to that 3%? If 100% of loans were actually viable, then the economy would grow at 5%, yeah? Now, I kinda get that a portion of that 5% is being use to pay Prime (call it 2%). Where is that spare 3% going? Failures?
Tahuti
Writing Deity
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I don't see how it could harm the explanation. Fractional Reserve Banking is that part of the money deposited is lend out. Being opposed or supportive of it doesn't change that.
Because they inevitably leave things out, or don't explain some obvious objection to their explanation.
Well, that kind of depend on who you're talking to. : But then the math doesn't resemble what you are saying, either. That is, while FRB is necessary to growth, it's not as straightforward how much growth there will be. The issue is that there can be loans made for different reasons. There is investment loans, which should yield a rate of return to the borrower higher than the interest rate paid, so that the loan generates the creation of the wealth that is used to pay back the loan. Then there are consumption loans, which don't create wealth, but the borrower pays them back out of their income from other sources. And there are speculative loans. Which if the gamble pays off, it pays off enough to pay back the loan, but if the gamble doesn't pay off, the borrower has to either pay back the loan from other sources, or default on it.
A big part of the problem today is that so many loans are for the speculative purpose. If I was writing the laws, those would be banned outright, or at least heavily restricted. Consumption loans are generally not a bad thing, but there should be some limits to them as well. Credit cards in particular are way out of whack in terms of volume and interest rates. But, that said, loans for consumption or gambling are not inherently going to default. They are just going to be paid out of things other than new wealth creation. So if loans are made at a greater rate than growth in the economy, that doesn't imply that we're about to hit some wall. Not by itself.
And some portion of loans do fail. Though most of the time the value of that is manageable, and is priced into the interest rate as a risk premium. This is an excuse credit card companies use when they charge outrageous rates.
So the loan rate does not match the growth rate. There's no real reason why it should. Not all loans are for growth purposes.
I'm not sure if that answers your question. Does it leave any point uncovered?
The problem is that there are a lot of people out there now who are pushing this conspiracy theory crap where all FRB is some sort of a ponzi scheme that can only end in disaster. It's not at all true, but it's a very large part of what's being seen online these days.
Tahuti
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Well, I am not completely supportive either. It is not that FRB is necessary for growth even though it is true that the vast majority of growth comes from FRB, though rather, that FRB requires growth to persist.
Let's just divide them into consumption loans and growth loans. Any speculative loan that doesn't succeed ends up being a consumption loan.
If there was no growth, people couldn't borrow to consume, at least not in any sustainable sense. Why would you lend people money at 5% to consume if there was only going to be 2% more stuff in the future? And how can you lend people money at 5% to grow if there's only going to be 2% growth?
Ah, I've answered it. The 3% is coming from a reduction in future consumption (by the person taking the loan). Consumption loans literally never pay themselves back. They're just a pure wealth transfer.
If there was no growth, people couldn't borrow to consume, at least not in any sustainable sense. Why would you lend people money at 5% to consume if there was only going to be 2% more stuff in the future? And how can you lend people money at 5% to grow if there's only going to be 2% growth?
Ah, I've answered it. The 3% is coming from a reduction in future consumption (by the person taking the loan). Consumption loans literally never pay themselves back. They're just a pure wealth transfer.
Not 'pure' wealth transfer. Though there is a lot of that. Much of it is like what governments and businesses both do, which is bridging the bad times. So Bob might have to borrow extra this year, maybe for some medical emergency, maybe because he has to put a roof on his house. If he cannot do that, then he has a long term chronic problem. But if he can, then he's better off the following year, and so can pay it back and not have to do it again.
Oh, I'll never doubt the validity of bridging borrowing. To me, they're nearly the same as a growth loan.
("Without the medical loan, my earnings next year will be $0. With the medical loan, they'll be 50% of what they are today")
I'm not sure if they're infinitely sustainable, but my intuition says they are.
("Without the medical loan, my earnings next year will be $0. With the medical loan, they'll be 50% of what they are today")
I'm not sure if they're infinitely sustainable, but my intuition says they are.
Hygro
soundcloud.com/hygro/
Yesss yesss come to the dark side
Yo Cutlass, I've been trying to alert you to a key point for the past, I dunno, half year or so. You made a bit of a leap, and the pit you leap is where El Machinae's question lies. Now I've read most of this thread so I know you yourself have said most of the pieces I'm about to send back your way.
The investment loan1 finances the creation of new wealth (but not money) which in turn is traded for money to pay back the loan. The problem is that the loan asset ≠ loan liability, because the loan liability is the principal plus the interest. So you have this conundrum: the macroeconomy is now bigger because there's new wealth, financed by a loan. But there's no new money because the loan cancels itself out, plus there's the transfer of money via interest. Theoretically, private interest owed in the economy can exceed the money in the economy infinitely, but, we have financial crises when the numbers are in the 3 digits.
The options are: financialize more things and create bank loans faster and faster to cover the old interest, which plays out in our lives by more and more credit and advertising and less... just... money. Or create more money in tandem to wealth growth, which we can call deficit spending.
So what am I saying this for? What's my point here? Why am I saying that I'm calling you out when you probably read this and went "well, yeah, duh"?
Because it's not a side quibble to what's really important, which is that it's not enough that the loan was productive economically, it has to be covered financially somewhere in the macroeconomy. It is not covered by the wealth it created, that's only true from the firm's perspective/on the microeconomic level.
1. You say the investment loan, which you could add to financial valuations and categorize them together as new bank money (i.e. leverage) to cover new real wealth.
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