Integrated general models of financial flows

The model in Figure 27 is not quite complete, because it shows the system from the banking sector’s perspective, but not their customers perspective—the “Non-Bank Public”. This is easily corrected by adding another Godley Table—see Figure 29—and then using Minsky’s capacity to keep track of the rule that “one entity’s Asset is another’s Liability”.[3]

Figure 29: Simplest model with a second Godley Table added

This is where the wedge you may have noticed in previous Godley Tables comes in—see Figure 30 where they are highlighted. If you click on the one below Asset, it will show you all Liabilities that have not yet been allocated as another entity’s Liability; the one below Liability does likewise about Assets.[4] Page 25 Integrated general models of financial flows

Figure 30: The matching Asset-Liability wedges in a Godley Table

From the Banking Sector’s perspective, there is only on Asset— Loans —and only one Liability— Deposits . When you click on the wedge for Assets, the Banking Sector’s Liability of Deposits will turn up as a potential Asset for the Non-Bank Public ( NBP in what follows)—See Figure 31.

Figure 31: The wedge for Assets clicked and the Banking Sector's Liability of Deposits showing

Click on Deposits , and all the operations that affect Deposits on the Bank’s Godley Table are replicated here. Do the same for the Liabilities column, and you will see Figure 32.

Figure 32: The Non-Bank Public's Godley Table, with some details not yet completed

There are several very important aspects to this table, which will turn up in any more elaborate model that you create:

1. The value of Deposits (800) is less than the value of Loans (900), so that the NBP is in negative financial equity—and this is precisely the same magnitude as the positive equity of

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the Banking Sector. This is a necessity . Given that a financial Asset is a claim on another entity, the sum of all financial assets is zero;[5] and

2. Operations which increased the Equity of the other entity—the Banking Sector in this case— are incomplete on this table and therefore show up in the checksum. We don’t automatically allocate them to the Equity column of this entity because of the possibility of A−L−E

multiple Equity columns (we may alter this in a later release).

The model is complete once you have entered those operations yourself in the NBP’s Equity column: see Figure 33, where I have also chosen “Editor Mode” for the display of the NBP ’s Godley Table, and enabled the display of the numerical values of its flows and stocks as the model is simulated.

Figure 33: The completed model with two Godley Tables

Notice that despite its negative equity position, the Non-Bank Public’s initial position is that its income exceeds its expenditure: interest payments of 45 per year are less than the Banking Sector’s Spend of 100 per year. This, however, necessarily means that the Banking Sector is losing equity at the same rate—this is not an equilibrium position (in more complex models, non-equilibrium positions can continue indefinitely, because nonlinear feedbacks make the equilibrium unstable, while also ensuring that the model itself doesn’t “break down” by generating unrealistic values).

Much more elaborate models than this can be built with numerous entities, and Minsky will keep track of the flows of money between them, no matter how complicated the model becomes. This is Minsky’s primary advantage over all other system dynamics programs for modelling financial Page 27 Integrated general models of financial flows

dynamics, and any process in which there are exclusive categories—such as process control in a factory, or a pandemic, or modelling the diffusion of a new product in product marketing.

There are also processes which don’t have exclusive categories, and for these the classic systemdynamics “flowchart” paradigm is appropriate.

Integrated general models of financial flows

Footnotes

3 This is for financial assets, which are claims on another entity. There are also nonfinancial assets, which are an Asset to their owners and a Liability to no-one. Minsky handles this via the device of multiple Equity columns, which enables nonfinancial assets to be shown as an Asset and an Equity of the owner.

4 When multiple Equity columns are enabled, the Equity dropdown will also show Assets of the same entity that have not yet been allocated as Liabilities of another entity—this enables the modelling of nonfinancial assets.

5 Nonfinancial assets enable aggregate positive equity.