Information about the real economy is disappearing. Forecasting the affect the modern monetary system may have on policy and portfolio outcomes requires the creation of stock-flow consistent monetary circuit models that encompass both real and financial sides of the economy.
A system is typically defined to be complex if it exhibits the following two properties:
Objective: To create increasingly realistic stock-flow consistent monetary models from which to simulate the aggregate behaviours of an economic system. Models include, but are not limited to, households, firms, government and finance sectors. Real-world completeness demands models integrate central bank, banking sector and non-bank (shadow) financial institutions. Our world is non-ergodic; historic time matters. With this realisation may we begin to explain changes in physical assets and financial wealth.
Evolving capitalist goals are principally transmitted through the mutable characteristics of the monetary circuit. Open-ended analysis of the contemporary modern monetary circuit helps us to understand how macroeconomic policies necessarily affect sophisticated financial systems. Money, created ex nihilo, circulates in the modern banking and non-bank financial system. A realistic macro-accounting of the modern monetary circuit will provide a logically coherent starting point from which to model a macroeconomic system.
The architecture of a monetary circuit is by design the result of prevailing macroeconomic goals. Outcomes are complex. Reductionist metaphor themes offers no guide to either future risk or opportunity that may arise as a consequence of a contemporary monetary circuit. We need to absorb the rigour of stock-flow thinking into our decision-making - to have as a guide a matrix to clarify the catch phrase 'that everything comes from somewhere and everything goes somewhere'.
Drilling into the dynamics of the system requires we extend our knowledge of sectoral balances to the disaggregation of financial balances within the private domestic sector. The story of private domestic sector prosperity or stagnation unfolds in the interdependence between the financial economy (bank, non-bank financial firms) and the real economy of production.
Models must incorporate coherent monetary circuit accounting identities in order to realistically represent real and financial economy dynamics. The very nature of these accounting identities places limits to the extent to which stock-flow ratios can change within the system - allowing us to pin down overall behaviour - and conceivably model real-world system states of soundness, fragility and exhaustion.