Stock and flow

Money & Credit - A Simplified Stock and Flow Model of the Economy - Aaron Wissner

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• published: 24 Jul 2012
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What is money? What is economics? Aaron Wissner summarizes economics, starting by looking at all of the money and credit in the world; and uses a very simplifed models to explain spending, saving, banks, debt, credit, governments, taxation, and unemployement. This discussion immediately followed talks by Steve Keen, Tom Greco, and Nicole Foss at the 2011 International Conference on Sustainability, Transition, and Culture Change: Vision - Action - Leadership. The conference was organized by Local Future, a 501(c)3 non-profit educational organization. http://localfuture.org Wissner holds a mathematics degree from the University of Michigan - Ann Arbor; is a public school teacher of 19 years; and is founder and executive director of Local Future. Questions during this presentation come from conference participant, Steve Rogge. INTRODUCTION: Designed to help give a general audience an effective understanding of how to think about economics. Themes include: the differences between govenment (fiat) money and private credit money; the stock and flow nature of money and spending; the likely impacts of changes in savings and spending on the economy; and other introductory points in understanding economics. SUMMARY AND CLARIFICATIONS: Goverment money is called fiat money. When fiat money is created, a public debt is also created simultaneously. Bank money is called credit money. When spending occurs from a line of credit, both credit (money) is created along with a matching private debt. Money and credit are based on trust; the trust between the one extending the credit, and the one requesting the credit. This always involves at least three individuals or entities: 1. the one buying, 2. the one selling, and 3. the trust agent, who guarenteed the value of the credit from the buyer to the seller. Bank money involves credit and debt. A person with a mortgage sees the mortgage as a debt; whereas the bank sees the mortgage document as an asset. In the same way, the individual sees the bank credit (money) as an asset; whereas the bank sees the bank credit (a deposit) as a liability. Note that the term "credit" is not being used here as the same as "credit line". Credit is bank money, such as credit in circulation from credit card spending. The credit is now held by the seller; and the debt (bank debt) is now evident on the credit card balance. In step two, Wissner divides all the money into either money owned by individuals (human people) and all the rest (them). He then shows how the stock (amount) of money flows back and forth between the People and Them. In the third chart, Wissner examines peak oil (and a doubling of the price of oil) and shows the flow of money between the oil owners and everyone else leads to a drain on the economic system. The fourth chart looks at the US trade deficit, and the need for the USA to increase the money supply continuously. The fifth chart divides out the world economy into three groups: 1. the people and private businesses in the USA, 2. the US government (and contractors and banks); and 3. everyone else in the world. Wissner discusses the flows of funds between these entities. This discussion looks at taxes, the paying off of mortgages, and deleveraging. Chart six divides all the money/credit into the world into four pools: 1. banks, 2. all governments (plus contractors, schools, etc.), 3. the US people and firms, and 4. everybody else. This creates six flows between the four stocks of money/credit. This allows an examination of US public debt, the trade deficit, bank deleveraging, and the impact on the US economy including the unemployment and jobs numbers. When people "pay" banks on the principal of a mortgage (or to pay down the balance on a credit card), money (credit) is extinguished at the same time as the debt, and by the same amount. We look at how a large universal tax refund in the USA would change the flow of money from the people to the banks, and would allow increased domestic spending, and increase sales. The final diagram divides the universe of money/credit into seven sectors: * Oil owners * Banks * US Federal Goverment * State/Local Governments * The People (in the USA) * The Firms (in the USA) * Everyone Else At 45 minutes, a review of looking at all of the money/credit in the world; and dividing that into different sectors, as many as needed; and then examining the flows between these stocks.