Notes from Minsky 1

Wage market equilibrium w/p=MPL
Investment savings equilibrium r=mec
Money markets equilibrium M/p=L(I,O)

Supply side determined by equilibrium in supply side markets which determine output.

Output feeds into IS-LM, giving interest rates. But the economy can also attain higher investment rates and an hence higher output through lower interest rates and higher price, and hence higher output, lower productivity supply side equilibriums.

Bifurcation of short and long run. Cyclical accelerators work when y in quantity of money equation is unfixed. In the long run they affect prices only.

"In the IS-LM model with a Keynesian labour market, income and the interest rate are determined by the dominant simultaneous satisfaction of the equilibrium conditions in the commodity and money markets, the income so determined yields the amount of labour employed [via the employment function], and given the productivity of labour and the wage rate, yields the price level."

Money has an unemployment rate. The employment rate of money serves to equilibrate the marginal efficiency of capital with the implicit returns to holding money - which is also the discount rate on future consumption. The lower the MEC, the higher the uncertainty, or the higher the deflation rate, the higher the unemployment rate of money.

Return= yield - carrying cost + liquidity premium

Velocity of money determines changes in liquidity premiums, which determine the relative price of liquid and non liquid assets.

In booms, liquidity premiums are low, so less liquid assets eg, property price increase. In contracting credit, liquidity premiums rise, so cash (deflation) and gold increase in price, while stocks and property face sudden reversals.

Of course, credit fueled investment changes the real yield on assets over the longer term, and the yields reflected in prices are expected yields. Hence the beneficiaries of a boom are mostly the investors during the subsequent bust, with the liquidity premium reversals, or 'reverse yield arbitrages'.

3 slips and spreads between lip (printing money) and cup (higher investment): 1) liquidity and interest rates due to liquidity traps 2) Debt interest rates and the marginal efficiency of capital due to fluctuating capitalization factor, or equity risk premiums 3) the marginal efficiency of capital, or required earnings yield, and the prospective yield on capital assets.

In booms, net demand for liquidity increases, while net return in capital falls, which creates an inherently unstable dynamic. Interaction effects with the real economy, and monetary policy to manage liquidity conditions, may sustain the boom.

In busts, negative feedback between tightening credit and liquidity conditions, asset prices, demand for investment, consumption and employment. Recursive debt-income deflationary process could be triggered, including unemployment, depression and deflation.