A long time ago (Feb 24, 2009), David B. Shemano wrote: > Regarding liquidity traps, stimuluses, liquidationists, etc., let me respond > by proposing my theory of the world.
> Let us think about the Madoff investors. A year ago, an investor would look > at his Madoff statement and see $100k. He would think, wow, I have $100k. > Because I have that $100k, I can afford to buy things even if the purchase > will stress my ordinary cash flow. I will go to Circuit City and buy a big > screen TV on credit because I can always draw down on my Madoff funds if I > need too. A year later, investor learns he doesn't have $100k. If he had > known his true financial state a year ago, he never would have bought the TV. > In addition, there is present consumption he is now going to forego. Maybe > he thought that this year he was going to buy a new car on credit, but now he > knows his true net worth, he chooses to defer the purchase for the time being. > Let us then picture the situation if Bernie Madoff was in charge of every > investment fund in America and our typical Madoff investor is multiplied by > the millions. We can easily see that the economy will suffer a sudden and > huge contraction/recession. < Not immediately: mass Madoff-ism can keep an economy booming for quite awhile, until some kid yells "the emperor has no assets!" or there is some other trigger which makes the Ponzi economy collapse. In a nutshell, that's the financial history of the US (and Iceland, etc., etc.) from 2003 or so to 2006. The deregulators and other "free market" types (e.g., Alan Greenspan) let the Madoffs run the asylum. But this is nit-picking... >On a national scale, we suddenly learn that our assets are significantly less >than we thought they were. However, our debt level is the same. Therefore, >there is going to be national effort to forego consumption and reduce debt, >either through asset sales, bankruptcy. etc. < Yes, that's the individually rational response: cut consumption if one's net worth turns out to be lower than previously thought. But is it the collectively rational response? Is it good from the citizen’s perspective? In terms of the shared interests of the capitalist class? The individually-rational spending cut-back implies the classic Keynesian “paradox of thrift,” in which the whole economy suffers if large numbers of people are doing it. There's a collective action problem (in which individual rationality contradicts collective goal attainment) and some sort of government action is needed (either monetary or fiscal policy). > In our Madoff world, I truly have no conception how a Keynesian stimulus > would work. The problem is not fear of investment or a flight to safety. The > problem is not that people are hoarding wealth and refusing to spend. The > problem is not a vicious cycle whereby people lose their job, so they spend > less, so people lose their job. The problem is that people are poorer, in > actual terms, than they thought they were. The recession/contraction is > simply a manifestation of the adjustment from illusion to reality concerning > asset levels and net worth. There are simply no underutilized assets in the > Madoff world that the government could borrow and then recirculate as > spending. > … The stimulus, conceptually, seems nothing more than an attempt to get us to > act as if we are not poorer. But we are poorer. Borrowing money and > recirculating it is not going to affect our national/global balance sheets. > The only thing that is going to affect the balance sheets is deleveraging, > and the momentum toward that deleveraging is going to overwhelm anything > governments can do unless they choose to hyperinflate, and even that would be > very temporary.< David, are you saying that there's no "flight to safety" or that it's not the fundamental problem? I'll assume that it's the latter, since it makes more sense. I thought this thread was about the (non)existence of liquidity traps and the like (CB’s original question), not about whether or not they were the most important economic problem faced by the US and the world, but no matter… Similarly, I'll assume that the statement that "the problem is not that people are hoarding" is simply saying that it's not the _fundamental_ problem. Some people _are_ refusing to put their assets into stocks or bonds because they fear the worst. (Most of us don't do so even in "normal" times because we lack the assets and can't afford to take risk.) In addition, a lot of finance companies and other bank-like organizations hoarding are refusing to lend, even to each other. However, if my assumption above is correct, then we agree this "excess reserve trap" (a variant of the liquidity trap) is only one part of the problem. But it's not the fundamental problem. In any event, the flight to safety and the liquidity trap (another name for mass hoarding) are arguments saying that standard, garden-variety, Keynesian-style expansionary monetary policy won't work as advertised. Bernanke has admitted as much. (There are other types of monetary policy, of course, for example the Mellon "purge them all" approach or the Friedmaniac "stay the course" strategy. Both of those involve saying we should stop worrying and learn to love the Bomb.) These phenomena say absolutely nothing about Keynesian-style expansionary fiscal policy, however. It's unclear what's meant by "there are no underutilized assets ... that the government could borrow." But there are definitely underutilized assets: with people losing their jobs, and thus spending less and causing others to lose their jobs (the original Keynesian multiplier process), a lot of factories and other _real_ (tangible) assets are underutilized. Of course, the important real asset called "labor-power" (people's ability to work) is becoming increasingly underutilized. This, of course, is more a _result_ of the economy’s collapse than it is the cause. However, rising unemployment makes the financial problem worse, by depressing housing prices further, etc. (Absent a successful stimulus plan, we should expect that housing prices will over-shoot their long-term trend for quite awhile.) A key problem here is the what determines the value of the _paper_ assets in the economy. Some of these assets have lost value big time -- or gone to zero -- because creeps and criminals like Madoff made unsustainable promises. But other assets have lost -- and are losing -- value because of the downward multiplier process just mentioned. In the absence of the collapsing Ponzi scheme, these assets would have values roughly determined by the income streams they promise when the economy is prospering by standard standards (steadily rising real GDP). The value of an asset depends not only on the character of its issuer but on the _context_ in which it's bought and sold. Put another way, the situation of GM right now is not simply due to its own problems (producing shoddy cars, making promises to workers it likely didn’t mean to keep but show up on their balance sheet as debt anyway, etc.) It’s also due to the rapid shut-down in auto demand. The latter has hurt Toyota too: in fact, the problem that Toyota faces seems to be entirely other people’s doing. This is a case of Toyota suffering from (what economists call) the external costs imposed by the Madoff world. It’s due to the fall in aggregate demand (and the fact that durable goods demand gets hit first). Toyota and other (relatively) well-behaved corporate citizens are being punished for the Madoff economy’s sins, as are large numbers of truly innocent civilians. The Ponzi scheme’s collapse imposes collateral damage. This damage opens the door for the use of Keynesian expansionary fiscal policy (a stimulus package of the sort that Obama has instituted). This does not involve borrowing unused tangible assets; instead, it’s getting them in operation again. It does involve borrowing financial assets (money), but these days people (including those outside the U.S.) seem very willing to lend to the U.S. federal government. It’s much, much less likely to end up in the tender mercies of bankruptcy lawyers than people and companies in the private sector; it’s got a great credit rating. What Keynesian stimulus does is prevent or moderate or reverse the under-utilization of tangible assets, including factories and labor-power. This prevents sustained deflation and debt-deflation, raises real GDP, corporate cash flow, and the earnings of both stockholders and workers. Despite any environmental consequences of a typical economic boom, it does have the effect of (1) raising the value of the “innocent” assets like Toyota’s or labor-power, moderating the collateral damage; and (2) making the impact of the fall of Ponzi asset values less deadly for their holders, especially if their assets are diversified. Debts become less important to the extent that cash-flow is boosted. If done right (via investment in infrastructure, basic research, public health, education, and the like) Keynesian stimulus helps not only the demand side but the supply-side grow. If done really right, the supply-side would also become greener. The Mellon perspective says that this kind of Keynesian stimulus should _never_ be pursued. It ignores the rampant under-utilization of real assets and the concomitant gross inefficiency (low production, low incomes, human misery) that it implies; it is based on Say's discredited Law. Even though Mellon was wrong about his policy of destroying the economy to save it (because he assumed that the economy could deviate from full employment only temporarily), his attitude _did_ apply to the assets that were based on Ponzi schemes, irrational exuberance, and other misdeeds of the speculators and financiers. Thus, we agree that _that_ problem cannot be abolished via Keynesian stimulus. Instead, what needs to be done is to make the financiers who own equity in banks that own toxic assets take their medicine. If Mellon were alive today, it would be his friends who would suffer: they’d find the value of their stock in Ponzi-related companies that are now zombies (CitiBank, etc.) fall to zero.[*] The zombie banks would be nationalized (without compensation) and the toxic assets pulped. After the smoke had cleared, the government could then sell stock of the cleaned-up banks on the market (in a better, but still capitalist, world). Obviously, there are a lot of imprudent rich people who got involved in high-paying Ponzi schemes and the like and. worse, didn’t diversify enough. They’d have to tighten their belts, cutting back on their European vacations and purchases of mink. But a Keynesian stimulus plan (if done right) would replace this demand. Of course, so could military Keynesianism or fascism. Either way, the state saves the capitalist’s bacon, fitting with Engels’ notion of increasing overt socialization of production as a response to, and as a temporary solution to, capitalism's contradiction (between socialized production and individual appropriation). In practice, I'm currently expecting that the stimulus plan will be insufficient while Geithner and company will botch the financial fix-up. If so, it will be a lot like Japan's lost decade, though it could stretch out longer. Mass popular pressure may push the government toward a more civilian version of Keynesianism, but you never know. > The tone of Jim and Charles is that this deleveraging in light of reduced > asset values and net worth is a choice... I don't think it is a choice…< This is the standard right-wing view that There Is No Alternative (following Maggie T’s slogan). In the current context, it’s ignoring the way in which Keynesian fiscal policy can (but may not) prevent the capitalist roller-coaster from spinning off the rails. It's based on the assumption that capitalism can't fall off the rails, that serious depressions can't feed on themselves (and on people) and make themselves worse. It's based on Say's Silly Saying. The only choice, it seems, is to "hyperinflate." This is quite unlikely in the US economy at this time, since there's absolutely no problem of "too few goods" to cause "too much money" to cause inflation. Instead of going to buy goods and services, the monetary injection is going to buy financial paper. On this subject, I looked at the St. Louis Fed's data on the money supply [http://research.stlouisfed.org/fred2/categories/24]. Looking at percentage changes over the past year, M1 has been surging during the (officially-defined) recession but hasn't ended the recession or the rise in unemployment. There was a similar but milder rise during the previous recession and it didn't cause any inflation problems that I can see (using the standard definition of inflation). Most economists (including Milton Friedman) see M2 as more relevant to the economy. Its surge during the current recession so far has been clearly milder than during the 2001 one. (This also true for MZM, a measure they developed to fit Monetarist theory.) Again, there has been no inflation problem as a result of the 2001 monetary surge. The money supply has become detached from the inflation rate by financial innovation. (Did an increased money supply cause _asset-price_ inflation? Maybe it helped, but the amount of money in the system also depends on demand, much of which stemmed from the Big Bubble.) -- Jim Devine / "Segui il tuo corso, e lascia dir le genti." (Go your own way and let people talk.) -- Karl, paraphrasing Dante. [*] Perhaps this is one reason why he wanted to deflate: it would spread the damage around so his friends wouldn't be hurt much. If so, he was wrong: the damage to the innocent would bounce back to hurt the economy and his friends. _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
