Widdekind
Member
- Mar 26, 2012
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economies consist of three kinds of economic entities
- individuals (I)
- corporations (C)
- Governments (G)
Chart 1 - Primary Money Flows in the American Economy
the solid-line outer circuit represents the nonfinancial expenditure-income payments, in exchange for "real" goods and services. The dash-line inner circuit represents money advanced in exchange for credit claims (or securities). The counterclockwise money flows shown in the diagram are thus conceptually matched by (unseen) equal and opposite flows of real goods, services, and securities.
The "credit market" is an analytical abstraction for conceptually "pooling" all credit flows between economic units...
The money balance of each sector is represented in the diagram by a small circle...
The "monetary agency" is an analytical abstraction representing the source of all new money. New money created in connection with bank loans is shown as entering the circuit via the credit market. Conceptually, the banks borrow the new money...from the monetary agency...
I + U + M = E + A + C
I = nonfinancial net income
U = primary uses of credit
M = new money (increase in currency and demand deposits)
E = nonfinancial expenditure (consumption + capital investment)
A = primary credit advances
C = change in cash balance
...The basic money-flow equation is equally appropriate to the economy as a whole, or to individual economic units. Its three subsidiary equations are true only for the economy as a whole: I = E, U = A, M = CI = nonfinancial net income
U = primary uses of credit
M = new money (increase in currency and demand deposits)
E = nonfinancial expenditure (consumption + capital investment)
A = primary credit advances
C = change in cash balance
employing my own notation, for a given currency's economy:
Commodities (including Labor) Market
Incomes = Outflows
Revenues + Borrowings = Expenses + Loans + change-in-Reserves
Credit Market
Borrowings = Loans + new-Money
subtracting the second equation, from the first equation, we have that (w.h.t.):Incomes = Outflows
Revenues + Borrowings = Expenses + Loans + change-in-Reserves
Credit Market
Borrowings = Loans + new-Money
Revenues = Expenses + [change-in-Reserves - change-in-Money-supply]
I = E + (d/dt)[R - M]
that is the "Income/Expenditure" equation, albeit without distinguishing domestic from foreign economic entities:I = E + (d/dt)[R - M]
Revenues = domestic + foreign = Y + M
Expenses = domestic + foreign = I+C+G + X
For simplicity, Reserves & Money-supply need not be accounted separately, for domestics & foreigners.Expenses = domestic + foreign = I+C+G + X
Y + M = I+C+G + X + (d/dt)[R - M]
GDP = Y = I+C+G + NX + (d/dt)[R - M]
where the last term does not differentiate domestic from foreign:GDP = Y = I+C+G + NX + (d/dt)[R - M]
estimating the correction term
First, the total supply, of all conceivable forms of pseudo-Money in USD (M4):
M4 = M3 + Money-Market-Funds
~= (M2-M1) + (MZM-Currency)
Second, Domestic Reserves (MB-M0) of USD (DR); and Foreign Reserves of USD (FR)*. The latter increased steadily, from $0.6T in 1995, to $3.5T in 2011.~= (M2-M1) + (MZM-Currency)
* ignoring I/C/G Reserves (individual, corporate, & Government cash-on-hand)
From 1995 through 2011, M-R increased by +$6T over 17 years. Ergo, since 1995, US GDP estimates may have been overstated, by $350B / year, mis-accounting net Money creation ([d/dt][M-R]) as earned income (GDP).M4
M4 - DR
M4 - DR - FR (estimated)
M4 - DR
M4 - DR - FR (estimated)
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