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The Ripple Effect 1694–2009: Finishing The Past By Lowell Manning The Ripple Starts Here 1694–2009: Finishing The Past Hi, I’m Lowell Manning Please join me in this short trip inside our debt-based financial system

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the ripple effect

The Ripple Effect

1694–2009: Finishing The Past

By Lowell Manning

the ripple starts here
The Ripple Starts Here

1694–2009: Finishing The Past

Hi, I’m Lowell Manning

Please join me in this short trip inside our debt-based financial system

  • 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
Fisher’s Equation of Exchange

Irving Fisher proposed his equation of exchange in 1911:

  • MV = PQ

M = money supply

V = speed of circulation of the money M

P = price level

Q = quantity of goods and services produced

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 challenge

CPI

50,000

45,000

40,000

35,000

30,000

Fisher Equation 1911 MV=PQ

25,000

20,000

15,000

10,000

5,000

Base year 1300 = 100

0

1300

1350

1400

1450

1500

1550

1600

1650

1700

1750

1800

1850

1900

1950

2000

Year

The Visual Challenge

Consumer Price Index: England 1300–2000

Are we to blame Mor V?

bank of england 1694
Bank of England 1694

Perpetual Interest-Bearing Debt

Perpetual debt is unproductive and permanent

Unearnedinterest income

unearned interest
Unearned Interest

The unearned interest must itself be borrowed, otherwise prices P must keep falling:

Ms = unearned interest income

Mp = productive money supply

Vp = circulation speed ofproductive debt

M = Mp + Ms

MpVp = PQ = (M-Ms)* Vp

Msapplies to all unproductive unearned income interest on deposits

debt based economies

Let:

Mv = debt borrowed for purely speculative purposes

Ddc = domestic credit

Dca = the accumulated current account deficit

R = Reserve Bank capital reserve

M(d) = total debt = (Ddc + Dca - R)

Q(d) = production created by the total debt M(d)

Mp = PQ(d) = productive debt

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

then

M(d) = (Ddc+Dca-R)= PQ(d)/Vp + (Ms+Mv)

Vp = 1 because debt can only be used once

the debt model

Nominal GDP (PQ(d))

500

450

Growth

400

350

300

Inflation

250

200

Ms

150

Mv

100

50

0

Year

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

The Debt Model

Debt Model: New Zealand 1978–2009*

DebtNZ$ billion

Md

Ms+Mv+Inflation on PQ(d)

Ms+Mv

Ms

* Growth and inflation exclude changes arising from cash transactions

debt management
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)

… and when deposit rates are zero

dGDP/dt = dM(d)/dt – dMv/dt

Therefore in a cash-free, debt-based economy with zero deposit rates:

The increase in GDP equals the increase in total debt M(d),less any changes in direct speculative investment Mv

debt management10
Debt Management

The economy is indeed about debt management as Irving Fisher surmiseda hundred years ago!

speculative bubbles

Deposit interest rate peak >14%

Wage & price freeze

30

NZ$ floated 3/85

25

Deposit interest low <5%

Asia ‘crisis’

20

15

Deposit interest low

10

‘Roger’s hole’

Dotcom

Property

5

0

-5

Year

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

Speculative Bubbles

Business Cycle Bubbles as % GDP: New Zealand 1978-2009

MV as% GDP (March year)

Perhaps for the first time ever, the new debt model quantifies the speculative bubbles inherent in traditional business cycles

fisher differential equation

Business Cycle 1

Business Cycle 2

Business Cycle 3

45

40

Sharemarket crash from Oct ‘87

Bubble forming

35

30

Wage/price freeze June 82-Sep ‘84

Recession period

Asia/dotcom crashes 98-02

25

20

15

Growth

10

5

Bubble dissipating

Inflation

Richardson budgets

0

-5

Year

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

Fisher Differential Equation

Debt Model Differential Form: New Zealand 1979–2009

Annual change in variableNZ$ billion

dMd/dt

d/dt (Ms+Mv+inflation)

dMs/dt

d/dt(Ms+Mv)

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

the new debt model
The New Debt Model

The new debt model reveals a raft of new economic concepts:

  • System liquidity (circulating debt)
  • Systemic inflation (inflation caused by interest rates)
  • Growth and trade (impact of current account)
  • The nature of (earned) savings
  • Sample application: why Japan stagnated for so long
system liquidity circulating debt

50

McdNZ$ billion

y = 1.24x + 2.4

45

Linear(Circulating debt

Mcd NZ$ billion)

Earned savings decreasing

40

35

30

Circulating debt

Mcd NZ$ billion

25

20

Earned savings increasing

15

10

5

0

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

Year

System Liquidity (Circulating Debt)

Circulating Debt Mcd: New Zealand 1978–2009

Mcd = (Mp–Dca) = Ddc – (Ms+Mv) – R

systemic inflation

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

8

7

6

5

4

3

2

1

0

-1

-2

Year

Systemic Inflation

Model Systemic Inflation vs. CPI Inflation: New Zealand 1989–2009

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

SNA (CPI) inflation% GDP

Systemic inflation% GDP

Total inflation = systemic inflation + ‘PQ’ inflation + non-systemic price changes

Systemic inflation rises when interest rates rise

growth trade impact of current account

250

200

R2 = 0.977

150

100

50

0

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

Year

All nominal GDP has been borrowed

Accumulated Current Account deficit Dca $100 billion higher

Domestic Credit Ddc $100 billion lower

System liquidity Mcd and domestic wealth $100 billion lower

Growth & Trade (Impact of Current Account)

Increase in GDP vs. Increase in Accumulated Current Account:New Zealand 1988–2009

Mcd = (Mp–Dca) = Ddc – (Ms+Mv) – R

Accumulated current account deficit+ NZ$45 billion

GDP/DcaNZ$ billion

GDP NZ$ billion

the nature of earned savings
The Nature of Earned Savings

Original Fisher equation

MV=PQ

Mcd is the modern debt equivalent of money M in the Fisher equation…

…and its speed of circulation Vcdis broadly comparable to Vin the original Fisher equation.

the nature of earned savings18

7

6

5

4

3

2

1

0

Year

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

The Nature of Earned Savings

Speed of Circulation Vcd of Circulating Debt Mcd:New Zealand 1979–2009

Speed of circulating debt (Vcd)

Speed of circulation of circulating debt (Vcd)

Linear

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

why japan stagnated for so long
Why Japan Stagnated for So Long

Current Account Deficit: Japan 2004–2008

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 long20
Why Japan Stagnated for So Long

Current Account Deficit: Japan 2004–2008

Dca(the deficit) is negative to the tune of US$-914b

Therefore to maintain dPQ/dt, dDdc/dt must increase by US$914b

The Japanese government has had to pumpUS$1 trillioninto the Japanese economy to keep it afloat

back to fisher
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
Fisher Revised – The New Debt Model

This presentation has revised the Fisherequation MV=PQ to develop a new debt model…

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

In the current financial system based wholly on debt…

fisher revised the new debt model23
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 model24
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 effect25

The Ripple Effect

1694–2009: Finishing The Past

By Lowell Manning

19B Epiha Street,

Paraparaumu, New Zealand.

manning@kapiti.co.nz