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Credit Growth And Recession Forecasting

The tail end of my three-part discussion of banking (link) ended with the argument that the circular nature of funding flows means that they do not represent a constraint on debt growth, instead the willingness (and ability) to absorb credit risk is th…



The tail end of my three-part discussion of banking (link) ended with the argument that the circular nature of funding flows means that they do not represent a constraint on debt growth, instead the willingness (and ability) to absorb credit risk is the constraint. If we accept this, there is an important implication for our ability to forecast recessions that are driven by a contraction in “animal spirits.” I outlined this argument in the first volume of my (planned) two part texts on recessions. (I only have parts of the second volume completed, as I hit some difficult areas that I feel I need to think about more carefully.)

I only have an informal version of the argument, and it runs as follows. The usual driver of a business expansion is private investment, which normally needs to financing by the firms/households that are investing. This implies a need for financial firms to be willing to extend credit. This willingness — the “animal spirits” of firms and financiers — thus drives the cycle. So far, this is pretty much what Keynes wrote. The wrinkle — which may or may not be original — is that the credit markets are in fact markets. If we could predict credit market trends, that largely implies the ability to time markets. Which implies that recession forecasting runs into some version of the Efficient Markets Hypothesis.

There is a lot of academic controversy about the Efficient Markets Hypothesis, which I am not interested in. I am referring to a simplistic version of it: if you think you can predict the direction of markets reliably, why are you publishing academic articles and not on a yacht somewhere? My belief is that this is close to the intent of post-Keynesian views on the business cycle, but they do not frame it this way due to being allergic “market efficiency,” and so they use more confusing terminology to explain the concepts I discuss here.

Not All Recessions Credit-Driven

Although most historical recessions were associated with slowdowns in debt growth, it is possible for the economy to contract for other reasons — and such a possibility is a key risk at present. The figure above shows non-financial debt growth in the United States, along with recessions shading. We can see that credit growth historically coincided with slowing debt growth. In recent decades, the Savings and Loan Crisis was associated with the 1990 recession, the 2000 recession was associated with technology firms losing access to credit markets, and the 2008 recession was notoriously a debt crisis. These are the types of recessions I see as difficult to forecast.

However, we also can recessions driven by other causes — which force us to forecast those other drivers. We can have a policy-induced recession (e.g., Euro periphery), where we need to forecast policy. The recent recession was driven by a pandemic (and the response to the pandemic), which is a medical forecasting problem. We can also have downturns triggered by things like the loss of energy imports.

Currently, the most pressing problems seem to be of this type: the renewed lockdown in China, and the effects of constricted energy (and food) supplies. A credit contraction might be triggered by these events, but it is hard to see credit as the driver of any slowdown. As such, the comments here are not aimed at the current situation.

Problem for Macro Models

Credit risk being the constraint for debt growth is a problem for most macroeconomic models — agent-based models being the notable exception. It is hard for a mathematical model to capture the uncertainty associated with credit risk, and the tendency of risk appetites to change.

As a starting point, take the simplest macro model structure: stock-flow consistent (SFC) models. (I have a book on building SFC models in Python.) A SFC model has two categories of equations:

  1. equations that define the accounting structure of the model (“accounting identities”), and

  2. equations that determine the behaviour of sectors (that are constrained by the previous type of equations).

The arguments in my banking article can be re-phrased as follows: the accounting identities do not limit debt growth, rather it is driven entirely by behaviour.

We could imagine a model where there are some parameters in the model that act as a “credit growth” factor. That is, the model will settle in at a certain pace of private sector debt growth once other variables enter steady growth states. To then model a credit-driven recession, we could have the parameter(s) jump to new values that reduce debt growth, and this then has a knock-on effect on growth.

Although this technique will create a “teaching model” that helps explain why recessions occur, the problem is that it does not help forecasting. We need to forecast the parameter shift that leads to lower credit growth, which is no easier than forecasting a recession in the first place.

We could assume that the “credit growth parameters” are driven by variables within the model. We might then be able to forecast the parameter changes. However, that implies that we could use this technique to predict market developments (and therefore be on our way to yacht ownership).

DSGE Models?

DSGE models have notorious difficulties with credit. The entire premise of the models is that entities (households, firms) have a starting amount of tradeable goods and services, and then they trade these endowments amongst themselves to reach an optimal outcome.

“Money” in these models correspond to government money, created by policy, and so policy rules constrain its growth. Since those models are typically mainly used to discuss policy, this is not a problem.

The addition of private credit creates inherent problems with the optimisation-driven strategy of these models.

  • The models are built around forward prices of everything that are traded in forward markets. If firms can buy and sell everything forward, there is no fundamental uncertainty that can lead to defaults.

  • Since private credit “comes out of thin air,” there is no initial “endowment” for trading. Trying to impose a repayment constraint (“no Ponzi condition”) runs into the problem that if every firm can issue credit, there is no reason for nominal income growth to result in a finite limit if nominal interest rates are bounded. All the entities in the private sector can grow their balance sheets in concert, creating nominal income that allows for debt service.

  • The models rely upon representative agents that stand in for a sector, or part of a sector. If they are indeed representative, all the firms that are represented would default at the same time.

The methodology is not suited to handle credit risk, and so the best that can be hoped for is adding some heuristic behaviour that allegedly captures credit dynamics. We end up in the same position as SFC models: we need to forecast changes in model parameters.

Agent-Based Models

Agent-based models are in a better position to capture credit dynamics, since they have entities that face the same information limitations that face lenders and borrowers in the real world. As such, it should be possible to create models that generate business cycles driven by credit.

The problem with such models is attempting to fit them to observed data, as they contain an extremely large number of state variables. Although there is research moving in that direction, the fitting problem is always going to be difficult to solve.

Concluding Remarks

Mathematical economic models have a difficult time with modelling credit dynamics, since they are driven by herd psychology. They might be able to explain why the economy contracts if lending seizes up, but predicting such a seizure is just as difficult as predicting the direction of markets.

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(c) Brian Romanchuk 2022

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Coronavirus may be linked to cases of severe hepatitis in children

A chain of events possibly triggered by unrecognized infection with the SARS-CoV-2 coronavirus could be causing the mysterious cases of severe hepatitis…



Coronavirus may be linked to cases of severe hepatitis in children


(Reuters) – The following is a summary of some recent studies on COVID-19. They include research that warrants further study to corroborate the findings and that has yet to be certified by peer review.

SARS-CoV-2 could be at root of mysterious hepatitis in kids

A chain of events possibly triggered by unrecognized infection with the SARS-CoV-2 coronavirus could be causing the mysterious cases of severe hepatitis reported in hundreds of young children around the world, researchers suggest.

Children with COVID-19 are at significantly increased risk for liver dysfunction afterward, according to a report posted on Saturday on medRxiv ahead of peer review. But most of the children with acute hepatitis – which is generally rare in that age group – do not report a previous SARS-CoV-2 infection. Instead, the majority have been found to be infected with an adenovirus called 41F, which is not known to attack the liver. It is possible that the affected children, many of whom are too young to be vaccinated, may have had mild or asymptomatic COVID infections that went unnoticed, a separate team of researchers suggest in The Lancet Gastroenterology & Hepatology. If that were true, they theorize, then lingering particles of the coronavirus in the gastrointestinal tract in these children could be priming the immune system to over-react to adenovirus-41F with high amounts of inflammatory proteins that ultimately damage the liver.

A firefighter from the Marins-Pompiers of Marseille (Marseille Naval Fire Battalion) administers a nasal swab to a child at a testing site for coronavirus disease (COVID-19) in Marseille, France, September 17, 2020. REUTERS/Eric Gaillard

“We suggest that children with acute hepatitis be investigated for SARS-CoV-2 persistence in stool” and for other signals that the liver damage is happening because the spike protein of the coronavirus is a “superantigen” that over-sensitizes the immune system, they said.

Face-down position unhelpful for awake patients

For hospitalized COVID-19 patients who are breathing on their own but with supplemental oxygen, lying face down might not help prevent them from eventually needing mechanical ventilation, according to a new study.

In the study, 400 patients were randomly assigned to usual care or to standard care plus intermittently lying on their stomach, a position known to improve the course of illness in sedated patients on mechanical ventilators. Over the next 30 days, 34.1% in the prone-positioning group and 40.5% in the usual-care group needed to be intubated and put on a ventilator, a difference that was not statistically significant. There might have been a reduction in the risk for intubation with prone positioning among some of the patients, researchers said on Monday in JAMA, but they could not confirm it statistically from their data. The average duration of prone positioning per day was roughly five hours, less than the target of eight to 10 hours per day.

“Long hours of awake prone positioning are challenging and highly influenced by patient comfort and preference,” the researchers said. “The most common reason for interruption of prone positioning was patient request, which might have been related to overall subjective improvement or related to discomfort from prone positioning.”

Click for a Reuters graphic on vaccines in development.

Reporting by Nancy Lapid and Megan Brooks; Editing by Bill Berkrot

Our Standards: The Thomson Reuters Trust Principles.


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The Battle For Control Of Your Mind

The Battle For Control Of Your Mind

Authored by Aaron Kheriaty via The Brownstone Institute

In his classic dystopian novel 1984, George…



The Battle For Control Of Your Mind

Authored by Aaron Kheriaty via The Brownstone Institute

In his classic dystopian novel 1984, George Orwell famously wrote, “If you want a picture of the future, imagine a boot stamping on a human face—for ever.” This striking image served as a potent symbol for totalitarianism in the 20th Century. But as Caylan Ford recently observed, with the advent of digital health passports in the emerging biomedical security state, the new symbol of totalitarian repression is “not a boot, but an algorithm in the cloud: emotionless, impervious to appeal, silently shaping the biomass.”

These new digital surveillance and control mechanisms will be no less oppressive for being virtual rather than physical. Contact tracing apps, for example, have proliferated with at least 120 different apps in used in 71 different states, and 60 other digital contact-tracing measures have been used across 38 countries. There is currently no evidence that contact tracing apps or other methods of digital surveillance have helped to slow the spread of covid; but as with so many of our pandemic policies, this does not seem to have deterred their use.

Other advanced technologies were deployed in what one writer has called, with a nod to Orwell, “the stomp reflex,” to describe governments’ propensity to abuse emergency powers. Twenty-two countries used surveillance drones to monitor their populations for covid rule-breakers, others deployed facial recognition technologies, twenty-eight countries used internet censorship and thirteen countries resorted to internet shutdowns to manage populations during covid. A total of thirty-two countries have used militaries or military ordnances to enforce rules, which has included casualties. In Angola, for example, police shot and killed several citizens while imposing a lockdown.

Orwell explored the power of language to shape our thinking, including the power of sloppy or degraded language to distort thought. He articulated these concerns not only in his novels Animal Farm and 1984 but in his classic essay, “Politics and the English Language,” where he argues that “if thought corrupts language, language can also corrupt thought.”

The totalitarian regime depicted in 1984 requires citizens to communicate in Newspeak, a carefully controlled language of simplified grammar and restricted vocabulary designed to limit the individual’s ability to think or articulate subversive concepts such as personal identity, self-expression, and free will. With this bastardization of language, complete thoughts are reduced to simple terms conveying only simplistic meaning.  

Newspeak eliminates the possibility of nuance, rendering impossible consideration and communication of shades of meaning. The Party also intends with Newspeak’s short words to make speech physically automatic and thereby make speech largely unconscious, which further diminishes the possibility of genuinely critical thought.

In the novel, character Syme discusses his editorial work on the latest edition of the Newspeak Dictionary:

By 2050—earlier, probably—all real knowledge of Oldspeak [standard English] will have disappeared. The whole literature of the past will have been destroyed. Chaucer, Shakespeare, Milton, Byron—they’ll exist only in Newspeak versions, not merely changed into something different, but actually contradictory of what they used to be. Even the literature of The Party will change. Even the slogans will change. How could you have a slogan like Freedom is Slavery when the concept of freedom has been abolished? The whole climate of thought will be different. In fact, there will be no thought, as we understand it now. Orthodoxy means not thinking—not needing to think. Orthodoxy is unconsciousness.

Several terms of disparagement were repeatedly deployed during the pandemic, phrases whose only function was to halt the possibility of critical thought. These included, among others, ‘covid denier,’ ‘anti-vax,’ and ‘conspiracy theorist’. Some commentators will doubtless mischaracterize this book, and particularly this chapter, using these and similar terms—ready-made shortcuts that save critics the trouble of reading the book or critically engaging my evidence or arguments.

A brief comment on each of these may be helpful in illustrating how they function.

The first term, ‘covid denier,’ requires little attention. Those who sling this charge at any critic of our pandemic response recklessly equate covid with the Holocaust, which suggests that antisemitism continues to infect discourse on both the right and the left. We need not detain ourselves with more commentary on this phrase.

The epithet ‘anti-vax,’ deployed to characterize anyone who raises questions about the mass vaccination campaign or the safety and efficacy of covid vaccines, functions similarly as a conversation stopper rather than an accurately descriptive label. When people ask me whether I am anti-vax for challenging vaccine mandates I can only respond that the question makes about as much sense to me as the question, “Dr. Kheriaty, are you ‘pro-medication’ or ‘anti-medication’?” The answer is obviously contingent and nuanced: which medication, for which patient or patient population, under what circumstances, and for what indications? There is clearly no such thing as a medication, or a vaccine for that matter, that’s always good for everyone in every circumstance and all the time.

Regarding the term “conspiracy theorist,” Agamben notes that its indiscriminate deployment “demonstrates a surprising historical ignorance.” For anyone familiar with history knows that the stories historians recount retrace and reconstruct the actions of individuals, groups, and factions working in common purpose to achieve their goals using all available means. He mentions three examples from among thousands in the historical record.

In 415 B.C. Alcibiades deployed his influence and money to convince the Athenians to embark on an expedition to Sicily, a venture that turned out disastrously and marked the end of Athenian supremacy. In retaliation, Alcibiades enemies hired false witnesses and conspired against him to condemn him to death. In 1799 Napoleon Bonaparte violated his oath of fidelity to the Republic’s Constitution, overthrowing the directory in a coup, assumed full powers, and ending the Revolution. Days prior, he had met with co-conspirators to fine-tune their strategy against the anticipated opposition of the Council of Five Hundred.

Closer to our own day, he mentions the March on Rome by 25,000 Italian fascists in October 1922. Leading up to this even, Mussolini prepared the march with three collaborators, initiated contacts with the Prime Minister and powerful figures from the business world (some even maintain that Mussolini secretly met with the King to explore possible allegiances). The fascists rehearsed their occupation of Rome by a military occupation of Ancona two months prior.

Countless other examples, from the murder of Julius Caesar to the Bolshevik revolution, will occur to any student of history. In all these cases, individuals gathering in groups or parties to strategize goals and tactics, anticipate obstacles, then act resolutely to achieve their aims. Agamben acknowledges that this does not mean it is always necessary to aver to ‘conspiracies’ to explain historical events. “But anyone who labelled a historical who tried to reconstruct in detail the plots that triggered such events as a ‘conspiracy theorist’ would most definitely be demonstrating their own ignorance, if not idiocy.”

Anyone who mentioned “The Great Reset” in 2019 was accused of buying into a conspiracy theory—that is, until World Economic Forum founder and executive chairman Klaus Schwab published a book in 2020 laying out the WEF agenda with the helpful title,Covid-19: The Great Reset. Following new revelations about the lab leak hypothesis, U.S. funding of gain-of-function research at the Wuhan Institute of Virology, vaccine safety issues willfully suppressed, and coordinated media censorship and government smear campaigns against dissident voices, it seems the only difference between a conspiracy theory and credible news was about six months.

*  *  *

Originally posted at 'Human Flourishing' Substack.

Tyler Durden Mon, 05/16/2022 - 23:45

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World-first study reveals why people with COPD are more susceptible to COVID-19

Researchers from the Centenary Institute and the University of Technology Sydney have published the first study showing why people with chronic obstructive…



Researchers from the Centenary Institute and the University of Technology Sydney have published the first study showing why people with chronic obstructive pulmonary disease (COPD) are at higher risk of developing severe COVID-19.

Credit: Centenary Institute

Researchers from the Centenary Institute and the University of Technology Sydney have published the first study showing why people with chronic obstructive pulmonary disease (COPD) are at higher risk of developing severe COVID-19.

The findings, reported in the American Journal of Respiratory and Critical Care Medicine, could lead to the development of new therapeutic interventions that reduce COVID-19 infection in COPD patients.

An inflammatory lung condition, COPD causes airway blockage and makes it difficult to breathe. It affects around 400 million people globally. The increased susceptibility to COVID-19 of COPD patients is still to be fully understood.

In the study, the researchers infected differentiated airway cells from COPD patients and healthy people with SARS-CoV-2 (the virus that causes COVID-19).

The researchers found that the COPD airway cells had 24-fold greater infection with SARS-CoV-2 than the healthy cells.

“We examined the genetic information of infected cells through advanced single cell RNA-sequencing analysis,” said lead author of the study, Dr Matt Johansen, from the Centenary UTS Centre for Inflammation.

“Seven days after SARS-CoV-2 infection, there was a 24-fold increase of viral load in the COPD patient airway cells compared to the cells taken from healthy individuals.”

Significantly, the team found that the infected COPD cells had increased levels of transmembrane protease serine 2 (TMPRSS2) and cathepsin B (CTSB). Both are enzymes that SARS-CoV-2 uses to enter into the host cell.

“These two enzymes are increased in COPD patients and favour greater SARS-CoV-2 infection compared to healthy people. Simply put, easier and increased cell infection makes it far more likely that individuals with COPD will have more severe disease outcomes,” said Dr Johansen.

Other results from the study showed additional reasons for COPD patient susceptibility to severe COVID-19.

Key anti-viral proteins (interferons) that protect against infection were largely blunted in the COPD patient airway cells. This was a likely trigger in causing increased viral production in COPD patients.

Dr Johansen said that infected COPD patient airway cells also had higher levels of pro-inflammatory cytokines, which are linked to more severe COVID-19 and COPD outcomes.

“COPD is an inflammatory disease with patients having increased inflammation at baseline compared to healthy people. It’s highly likely that SARS-CoV-2 exacerbates this existing high inflammation level which leads to even poorer outcomes,” he said.

Initial laboratory drug testing by the researchers, to inhibit the enzymes TMPRSS2 and CTSB, and to target the high inflammation levels, successfully and substantially reduced SARS-CoV-2 viral levels in COPD patient cells, ultimately confirming the study’s results.

“Collectively, these findings have allowed us to understand the mechanisms of increased COVID-19 susceptibility in COPD patients,” said Professor Phil Hansbro, the study’s senior author and Director of the Centenary UTS Centre for Inflammation.

“We believe that new drug treatments targeting relevant enzymes and pro-inflammatory responses in SARS-CoV-2 infection could have excellent therapeutic potential in reducing the severity of COVID-19 in patients with COPD.”

Professor Hansbro said the research was critical with hundreds of millions of people affected by COPD globally and with COVID-19 likely to be around for many years to come.



Increased SARS-CoV-2 Infection, Protease and Inflammatory Responses in COPD Primary Bronchial Epithelial Cells Defined with Single Cell RNA-Sequencing.


Dr Matt Johansen:


Professor Phil Hansbro:


For all media and interview enquiries, please contact

Tony Crawshaw, Media and Communications Manager, Centenary Institute on 0402 770 403 or email:


About the Centenary Institute

The Centenary Institute is a world-leading independent medical research institute, closely affiliated to the University of Sydney and the Royal Prince Alfred Hospital. Our research focuses on three key areas: cancer, inflammation and cardiovascular disease. Our strength lies in uncovering disease mechanisms and applying this knowledge to improve diagnostics and treatments for patients.

For more information about the Centenary Institute, visit


About the University of Technology Sydney (UTS)

The University of Technology Sydney (UTS), located in central Sydney, is one of

Australia’s leading universities of technology. It is known for fusing innovation, creativity

and technology in its teaching and research and for being an industry-focused university.

For more information go to

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