This is very interesting. Where did it appear? Steve Diamond wrote:
> The avalanche of non-bank credit that has swept across the economic landscape > over the past 20 years has altered it > beyond recognition. On the one hand, it has enabled the monetary aggregates > to grow much more slowly than the credit aggregates, helping to keep > inflation lower. Doesn't this mean that the central banks have much less power? > On the other hand, the non-bank credit avalanche has > enabled a furious pace of fixed investment in physical assets that has > promoted structural global excess capacity in virtually all manufactured > products and exerted downward pressure on product prices. I am a bit skeptical about the above. It does not take a great deal of investment to build up the excess capacity, since most markets were already saturated. Telecommunications and the like was an exception. > The particularly > vigorous investment in information and communications technology has served > a dual purpose, through the spectacular lowering of capital goods prices and > by connecting disparate market participants to a common network and > database. What follows is nice. It supports endogenous money theory. > In these stressful episodes, it > is the financial markets themselves that are the principal driving force > behind the monetary expansion. Hence, there is relatively little monetary > impact on the product and labour markets, that is, on prices and wages. I don't understand the next sentences > central banks ... incite investment banks and other > willing parties to bet against a rise in the prices of gold, oil, base > metals, soft commodities or anything else that might be deemed an indicator > of inherent value. Their objective is to deprive the independent observer of > any reliable benchmark against which to measure the eroding value, not only > of the US dollar, but of all fiat currencies. Equally, their actions seek to > deny the investor the opportunity to hedge against the fragility of the > financial system by switching into a freely traded market for non-financial > assets. This next is interesting. It is relevant to the Ellen Frank/Jane d'Arista divergence on the role of the dollar. > > The key to understanding how this can happen is to consider how little > information the flow of funds accounts provides about the true ownership of > assets and liabilities. As far as the US external capital account is > concerned, hedge funds based in the Caribbean are overseas investors. The > activities of overseas branches of US commercial banks are also considered > to be foreign transactions. Also, London, and Zurich are clearing-houses for > all manner of nominee accounts and anonymous trusts. Around two-thirds of > all US bonds recorded as UK-owned belong to UK entities representing > non-residents. To fear that foreign investors will one day abstain from > fresh investment in US financial assets, leaving the current account deficit > uncovered and the US dollar prone, is to suppose that foreigners are the > sole instigators of these external financial flows in the first place. It is > quite likely that a substantial proportion of these external flow-demands > for US corporate bonds and equities are, in fact, US-originated. US > residents' subscriptions to leveraged hedge funds reappear as foreign > investment in US securities. US commercial banks' overseas branches borrow > in euros locally to invest the proceeds in US bonds, playing the yield > curve. > -- Michael Perelman Economics Department California State University [EMAIL PROTECTED] Chico, CA 95929 530-898-5321 fax 530-898-5901
