Lowell Manning responds on M3 and housing

Hola all.   Lowell Manning was nice enough to write up a response, to Matt’s response, to his piece on M3 and the housing market on Rates Blog.  I am publishing it here.

Matt hasn’t read it yet – that would be cheating.  He’ll read it when it is on the internet.

I have no doubt Matt will respond to this saying why he fundamentally disagrees or agrees with points – from the bits he has spotted he already wants to respond.  But he will have to wait until July as he has too many urgent deadlines and planned posts between now and then 🙂

Feel free to discuss in the comments.


Thank you for your response above to my housing article. Much of my work is available from the Sustento.org.nz website. The latest versions of all that work is available from my brother’s website www.integrateddevelopment.org 

 Those files are presented in html so they can easily be read by anyone around the world with basic computer technology.

I’d first like to address the most basic point you raise (issue 3.5), that of causality, before briefly touching on the other matters.

 My simple debt model derived from the Fisher Equation of Exchange satisfies the basic accounting equation. Perhaps the best of my theoretical papers to start with are “The DNA -f the Debt-Based Economy” and “Capital is Debt”.  I think the double helix of the financial DNA will surprise you and maybe shock you.

 The present interest-based debt system grows endogenously. The debt “monster” has to be fed before any economic “growth” can take place. No new debt, no new growth. Insufficient debt to feed the beast, the economy will go into recession. Too much debt to both feed the beast and growth within economic resource constraints will produce a debt bubble leading to debt default and collapse. Having been through the US housing bubble, the world is being forced to the other extreme euphemistically called “austerity” with obvious outcomes. 

This happens because current orthodox economics depends on rationalising the irrational. It is based on faulty assumptions instead of working from first principles.

I try to work from first principles. I will just provide one example here. ORTHODOX ECONOMICS DOES NOT SATISFY THE BASIC ACCOUNTING EQUATION.

  Economic policy in recent decades has been founded on the Friedman Money Rule (monetarism) and Taylor type inflation targeting rules (neo-liberalism). Neither of these satisfies the basic accounting equation. (I have almost finished an article concentrating on this point – though I have discussed it exhaustively in the theoretical material, including my response to the recent IMF working paper by Benes and Kumhof on “The Chicago Plan Revisited”). 

The world economy has been wrecked for decades because orthodox economics has failed to add simple numbers and has overlooked the endogenous nature of interest-bearing debt growth. 

So, yes, of course there must be willing lenders and willing borrowers. If they are not willing they have to be enticed literally by hook, or as we have seen in recent years, by crook. Demand must be created (advertising and the like) but demand can only be created when incomes are sufficient to purchase the goods and services the economy creates. Hence Keynesianism/neo-Keynesianism styled economic stimulation. Incomes have not risen in real terms for the vast bulk of the population because of the endogenous transfer of income and wealth from income earners to deposit holders in the debt system.

It used to be that income redistribution “levelled” the playing field, but in recent decades the “trickle down” myth has intensified income and wealth inequality instead of reversing it. 

 My work demonstrates the underlying mechanisms at work in this process and quantifies their effects through a debt model that satisfies basic accounting rules. Steve Keen, in a recent post, seems to now realise how critical basic accounting is to macroeconomic modelling. Hopefully others will follow quickly.

 The present system is amoral (probably immoral) because it “force fits” economic decision making to arbitrary assumptions. To do so it requires all the concepts we read so much about …..profit, economic “growth” at all cost, self-interest, greed, “externalities”, enclosure of the commons, and all the rest. In respect of the housing article I am saying the present debt system is incompatible with affordable housing.

Here are a few very brief notes on the other points.

1. My work, unlike orthodox economics, gives the “why”.

Unfortunately that was a bit much to cover in a short article. I agree the “why” is not a balance sheet, but the explanations must satisfy the accounting equation (it’s even implied in the reconciliation at RBNZ Table C3 current as the paper I am working clearly demonstrates)

2. I agree with you about relationships, but I do invite you to reconsider the whole issue of causation.

3. Yes, agreed

4. The way I see it, orthodox economics has created unimaginable world-wide misery. It is incompatible with human happiness and wellbeing and even with the survival of the planet! It worked for a while when debt levels were small, productivity increases large and when economic activity could be easily monetised. But you can’t “take lower output to meet some social needs” in the present system. You can only redistribute output, and we as well as others are spectacularly failing to do that …. think education, health, housing, child poverty and the like.

Next note: Foreigners must invest here if we have a negative NIIP even if, in the limit, it is just lending to our banks on an arbitrage basis. Foreign debt = foreign ownership, pure and simple. You are asking too much of my article to cover all of the issues relating to foreign debt and “the prices of non-housing goods” but I can offer simple responses to the issues you raise.

Issue one Relative Price

Figure 1 and the text below it very briefly acknowledges the point you are making. Most of M3 makes up the investment pool. There are several ways to invest that money. The largest single segment is (I think) passive hoarding in interest-bearing bank accounts. The next largest is the property sector.  One reason the property sector is so large is that NZ has (no thanks too recent governments that have all failed to tackle the persistent exchange rate/current account problem)  a very low industrial base and therefore a relatively small equities sector.  There is always a balance among investment options that varies somewhat according to the financial settings and regulatory provisions. Figure 1 in the article reflects that clearly.

Issue two Building Costs.

Of course we agree building costs have changed but they are not driving property “values”.  Your point about “real terms” is stretching the point, though, because most property transactions occur in the TA’s where prices have risen. Naturally there are resource constraints affecting building prices … perhaps you might like to consider why  it is that all existing property prices rise in sympathy?  That’s all about “expectations” and ability to service loans, isn’t it? The bottom line is the available investment pool choices. People choose to invest in property when they think they can get more “profit” there than from other forms of investment.

Issue three  M3

The main drivers of M3 are the CA and the systemic inflation of the debt system.  The productive sector itself uses only a small part of M3 (about 5.5% of GDP in NZ on my preliminary figures).  Of course some of that M3 growth is represented by net capital investment in the first instance.  The shocks to the system arise largely from misdirected monetary policy … like a 1% increase in interest rates will collapse nominal GDP growth by around 1.5% in NZ.  So interest rates are no longer a useful tool for monetary policy as can easily be seen in US, Japan and Germany where the central bank rates are already zero.   I’ve touched on inflation targeting above.

Issue 3.5   is already dealt with above.

Issue 4 regression

Yes, one has to be careful with the regressions, but I chose to use the scatter diagram (figure 2) to demonstrate the correlation. Then I have used Figure 3 to show how the correlation arises and why the exponentials are different.  I think that’s fair enough.

Issue 5  Non-productive is not a nice term

The stream of “housing services” are like heaps of other things. They are not measured in GDP.  I agree that GDP is a terrible measure of economic performance because it lumps in heaps of “bads” as goods, while leaving out (apparently more than half of all) goods and services like unpaid work, use of the commons, non-monetised resource consumption and a host of other items).  Orthodox economics forces us to watch just the cash register ticking over and I don’t think it is appropriate to say housing provides uncounted goods and services unless you also consider the much broader perspective as well.

So let’s change the change the measurement methodology and the financial system so it serves us instead of enslaving us?

Issue 6  Foreign Ownership is not the source of the bubble

Yes it is in substantial measure.  Every dollar of money used to fund the accumulated current account deficit (use NIIP if you like) must be created domestically. It is included in domestic credit. It is then “spent” to buy trinkets from China and fund foreign interest and profit repatriation.  Since nobody wants to hold NZ dollars (Stephen Hulme is right of course in his comments on my article, but I was  trying  there to keep the issue easily understandable)  that flow offshore is offset by “return capital flows”, that is, (mainly) foreign ownership of NZ productive capacity and resources.  A little is invested in new production and a little in land. Having given away our productive capacity for trinkets the foreign owners get their pound of flesh by repatriating interest and profits offshore. It’s a self reinforcing nightmare. As others like Preston have said, the bulk of today’s CA deficit is the funding cost of  foreign ownership.  If we do not deal with this immediately we will be approaching financial collapse within the next decade or two …. owned by the foreign company store, as it were.

When foreign investors buy up NZ inc, the sellers are left holding NZ$.  Those dollars are part of the investment pool and therefore available to purchase existing assets in NZ, pushing up their prices.  I think you are very seriously underestimating the impact of the CA and find that a little strange given the compassion and concern you express elsewhere for community and the public good. That foreign ownership has to be satisfied in terms of profit … it’s a first mortgage over our economic output!

Issue seven  Conclusion

Just a little on the Foreign Transactions Surcharge (FTS) that you seem to have misunderstood.  The FTS paper is available at both the websites I listed at the start of this post.  It is unidirectional. It applies to ALL outward transactions across the Forex interface, not incoming ones.  The revenue collected from the levy is ring-fenced to reduce domestic taxation (so it is tax neutral) other than for any amount set aside to repurchase alienated assets.

Yes, there will be some losers (mainly importers) but nearly everyone else will be a winner because the current subsidy of foreign exchange users by foreign exchange savers (read largely lower income groups) will be corrected.   There is far too much to the proposal to go into here… I suggest we take the matter up again after you have found time to read the paper.  The FTS will change the SHAPE of the NZ economy as well as correcting the CA and the exchange rate.

Lowell Manning








  • Hi Lowell,

    I don’t think we need to give economic ideas “subjective names” quite so quickly. Instead, let’s focus on the core of the ideas we are discussing and work from there. A lot of the trickle down, neo-liberal, etc business you mention here is truly irrelevant to both your point and what I am discussing – so when I do post, I hope you don’t mind if I try to move past that and focus on “description” 🙂

    Working from monetary aggregates is not first principles – it involves hidden judgments about the structure of the underlying causes. All economics uses accounting relation, but we can only interpret them by having behavioural relationships that link things! There are behavioural assumptions here that we have to make apparent. The behavioural relationships we will ultimately be discussing are of course about underlying “demand” – so we will need to make sure these are transparent.

    I’ll pop up my thoughts in a month or so (still getting ready for NZAE, have an economic history post to do here, and have our core product at work and university work to get on top of in the interim!), I am sure I’ll see you before then so we can have a chat before I do a blog reply 😉

    And just a pick point on issue 4. Using an R2 from a regression in levels, and claiming causation, on the back of that graph is incredibly misleading – it is not appropriate, and that is the sort of thing that economists of all backgrounds need to be incredibly careful about. Even when trying to simplify to the public.

    Your causal relationship comes from your assumptions around behavioural relationships and should stand on those grounds – the graph adds “false certainty” in those regards, which is something all economists should be trying to avoid 🙂

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