Want to learn how economics really works (and doesn't)? Then read Professor Michael Pettis' latest blog post
John
This post is for those of you who are interested in understanding economics (particularly macroeconomics).
From observing and reading for more than a decade I have formed the view that almost all teaching of macroeconomics over the past 50 years (if not longer) is mostly wrong - and horribly wrong at that. It is mostly based on flawed models staggeringly disconnected from reality. Unfortunately, these flawed approaches and models have (mis)guided economic policy for decades. One of the most glaring and shocking example of how fundamentally wrong the teachings of mainstream economics are can be seen in the subject of the source and importance of debt and money, specifically:
- How is money created?
and - Is debt important?
In the case of the former question, mainstream economics generally teaches that governments or central banks control money creation and it's supply. In the case of the latter question, mainstream economics generally teaches that neither high or low levels of debt in an economic system should be sources of significant interest or concern.
On these most basic, most critical and most fundamental issues mainstream economics is completely WRONG. Moreover, without having a correct understanding of how money is created and whether or not debt is important how could anyone hope to make correct decisions about how to manage an economy????
No wonder countries stumble from financial crisis to crisis!
Let's not hold you in suspense any longer. In case you didn't know:
- Almost all the money in the world is created by banks out of thin air (most of the time through government regulation that the regulators themselves do not understand, which both empowers banks to create money out of thin air and restricts all other organisations from doing likewise)
and - Debt IS extremely important - particularly the rate of change (or acceleration) of debt.
It was shocking to me to discover during my research how many economists reject outright or are extremely resistant to the idea that banks are the (almost) sole creator of money in the world and that the restraints on their money creation powers are minimal at best. Most mainstream economists haven't realised it yet, but the closest thing we have to incontrovertible proof that banks create money is now on the table thanks to this recent paper, which I strongly recommend you read:
"How do banks create money, and why can other firms not do the same? An explanation for the coexistence of lending and deposit-taking", Richard A. Werner
Centre for Banking, Finance and Sustainable Development, Southampton Business School, University of Southampton, United Kingdom, 2014
http://www.sciencedirect.com/science/article/pii/S1057521914001434
One of the economists who is NOT stuck in mainstream delusions is Professor Michael Pettis. I've mentioned him many times in my writings, but his most recent blog post is probably his best yet. It is both incredibly detailed and, considering the material, is probably the easiest to comprehend compared to any of his earlier writings. Whilst the piece focusses on China, it has truly global implications.
I have no hesitation in asserting that if the economists and politicians of the world that have their hands on economic levers would dispense with their mainstream economic fallacies and make decisions based on Michael Pettis' understanding, not only would the numerous bubbles and crises of the past many decades never have occurred (or been so severe). If they only learned of Michael's approach now and applied it, the coming global turmoil could be greatly reduced in magnitude and the risk of bad side effects (such as war) would be greatly diminished.
You can read Michael's article here: http://blog.mpettis.com/2016/01/will-chinas-new-supply-side-reforms-help-china/
I highly recommend it.
Cheers
John