>Ellen Frank wrote:
>>I think we're using terms differently here. The term
>>hoarding (in Keynes usage) means a preference for
>>liquidity. This is usually broadly interpreted today to
>>mean keeping wealth in near-cash assets like short-term
>>bank deposits or commercial paper.
Doug replies:
>
>Exactly - the individual is hoarding, or trying to. But a bank
>deposit or CP is likely to find its way into the real economy. Keynes
>also wrote as if the choice for investors was between securities and
>real investments, but in fact the purchase of securities and the
>purchase of stocks and bonds are activities undertaken by different
>groups of people. So while I get the theory, the practice is a little
>harder to figure out.
But why should a bank deposit find its way into the real economy?
What if the bank hoards it? Isn't this exactly what happens during
credit crunches when banks try to raise their capital and reserve
ratios? Also, finding its way into the real economy may not be
enough to offset a decline in real investment. So a bank might make
a six month loan to finance inventory but be unwilling to make a
six year loan to finance office construction.
I don't think Keynes assumed the same people were deciding
between paper and real investments. Keynes was pretty
clear in the General Theory on the distinction between what
he called rentiers and entreprenuers. The problem, as he described
it, is that rentiers want high returns and liquidity and control
not only the flow of new savings into financial markets,
but also the form in which existing wealth is held. If they
become spooked and try to liquidate wealth -- as in a stock
market crash -- this means that entreprenuers will be unable
to obtain financing.
At least this has always been my understanding of Keynes.
Keynes ideas about hoarding seem to describe
behavior during a financial crisis or in the wake of
a business downturn that generates financial failures
-- panicked selling, flights to quality, attempts to keep
funds as liquid as possible -- not during good times.
Ellen
>
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