This is Figure 5 from Lancastle, N. (2012) 'Circuit Theory Extended: The Role of Speculation in Crises' based on Keen, S. (2010). Solving the Paradox of Monetary Profits.
The upper
diagram shows the principal factors that have an influence on the budget
deficit and indicates what needs to be done to correct it. But this is not the
full story. The diagram below shows that
cutting public expenditure reduces aggregate demand and increases unemployment. The reduction of
aggregate demand reduces economic activity which has the effect of reducing
tax revenue. In addition, the state has to pay out funds
as there is a need for more unemployment benefit payments. The result of these austerity measures is often the opposite of their intended
purpose: they can increase rather than decrease the budget deficit.
There is
plenty of empiric evidence to show that this has happened time and time again.
For instance, a report from UNCTAD (United Nations Conference on Trade and
Development) found that between 1990 and 2000 in all the cases examined where cutbacks in public
spending and tax increases were used, the fiscal situation did not only not
improve but worsened. Despite such repeated evidence, unfortunately calls for austerity measures continue to be heard.
On the occasion of th G20-meeting in Toronto, the German Economics minister Herr Schaüble said that without restoring confidence it would not be possible to get consumer spending and business investment going. Similar remarks were made by David Cameron and Señor Zapatero of Spain. All maintain that confidence is a pre-requisite to get growth going and that, therefore, it was imperative to reduce fiscal deficits. Reducing the fiscal deficit will restore confidence at first. However, reducing the deficit very quickly will introduce a dynamic that may cause the economy to decline - and perhaps depress consumers demand even further. It will actually destroy confidence: few businesses are inclined to invest in a shrinking economy. Cutting the deficit too rapidly or too steeply can lead to a confidence trap.
NOTE: A big experiment is now taking place in the UK - the government has cut public spending severely! Will this lead to hardship and, perhaps, social unrest?
From Jennifer Prah Ruger (2010) Health Capability Conceptualization and Operationalization Am J Public Health 100 p41-49 available from SSRN. Extends Insight 779 with Dahlgren and Whitehead's Sunrise Diagram of Social Determinants of Health added. See also wikipedia Capability Approach
This is Figure 4 from Lancastle, N. (2012) 'Circuit Theory Extended: The Role of Speculation in Crises' based on Keen, S. (2010). Solving the Paradox of Monetary Profits.
If banks run down their reserves but there is a policy to maintain wages, the model shows a decline in household spending and an increase in bank spending: austerity and inequality followed by a partial recovery.
If private bond holdings are going down and the government is running a big deficit then the central bank has to monetize bonds equal to the deficit plus the decrease in private bond holdings. We don't show the details of the central bank buying bonds here, just the net results.
See blog at http://howfiatdies.blogspot.com for more on hyperinflation, including a hyperinflation FAQ.
WIP Social determinants of health from Michael Marmot's ABC 2016 Boyer Lectures on Social Justice and the Health Gap See US Data website for data and AIHW website for concepts. See also IM-83417 Marmot Essay 2017
This is a variation on Figure 4 from Lancastle, N. (2012) 'Circuit Theory Extended: The Role of Speculation in Crises' based on Keen, S. (2010). Solving the Paradox of Monetary Profits.
Modern industrial civilisation has created massive
interdependencies which define it and without which it could not function. We all
depend on industrial farming to produce the food we eat, we depend on gasoline
being available at the gas station, on the
availability of electricity and even on the bread supplied by the local baker. Naturally,
we tend to support the institutions that supply the amenities and goods to
which we have become accustomed: if we get our food from the local supermarket,
it is likely that we would be opposed to it’s closure. This means that the economic
system that relies on continuous growth enjoys implicit societal support and that
nothing short of environmental disaster or a shortage of essential raw
materials will impede it’s growing indefinitely. It is not hard to work out the
consequences of this situation!
Clone of The Inescapable Dynamic of Economic Growth (Version 2)
Goodwin cycle IM-2010 with debt and taxes added, modified from Steve Keen's illustration of Hyman Minsky's Financial Instability Hypothesis "stability begets instability". This can be extended by adding the Ponzi effect of borrowing for speculative investment.
The macroeconomic ruel: SPENDING = INCOME = OUTPUT, WHICH DRIVES EMPLOYMENT is presented here in a schematic form. Output can be taken to be equivalent to GDP. In order to maintain output it is necessary for all the income earned to be spent. If this is not the case, then companies find they have excess unsold stock on their hands and will cut back on production. This, in time, will lead to an increase in unemployment as companies need fewer employees. The shortfall in spending can be made up by any of the three sectors that contribute to total output. However, in cases where a country has a trade deficit and where the private sector is not spending or investing enough, the only option is for the government to Net Spend i.e. to spend more than it collected in taxes causing a fiscal deficit.
From Jay Forrester 1988 killian lectures youtube video describing system dynamics at MIT. For more detailed biography See Jay Forrester memorial webpage For MIT HIstory see IM-184930 For Applications se IM-185462
