robert mckee wrote: >> So what are the issues at debate? [between "orthodox" Keynesians such as >> Krugman and MMT ones such as Keen]
>> The first is whether, in a modern capitalist economy, money is created >> endogenously i.e. demand for money drives its supply, rather than >> exogenously, namely by the printing or absorption of money by a central >> bank.<< I think that this issue is irrelevant in 2012, since the Fed has been focusing on interest rates for decades now. It treats the money supply as a mere tool for attaining the target the interest rate. (Some say that it has focused on interest rates for even longer, with the "Monetarist" phase under Volcker being a scam.) Usually, it aims to attain a target "fed funds rate" (the US version of the LIBOR). The key issue is then the link between this very short-term nominal interest rate and the real effective cost of longer-term credit, which is what helps determine actual spending on real GDP. Robert continues: >> But both Marx and the MMT guys agree that the so-called quantity theory of >> money as expounded in the past by Chicago economist Milton Friedman ... is >> wrong. Governments and central banks cannot ameliorate the booms and slumps >> in capitalism by trying to control the money supply. The dismal record of >> the current quantitative easing (QE) programmes adopted by major central >> banks to try and boost the economy confirms that. ...<< I don't think that QE is about that (increasing the money supply). It's about trying to maintain the stability of the banking system and to get long-term interest rates (and the real effective cost of longer-term credit) to fall more in line with short-term nominal rates. That's why the Fed has bought risky and/or long-term assets from banks. >> And over the same period, the so-called money multiplier (ratio of broad >> money in the economy to central bank money), upon which quantity theorists >> rely to judge whether the quantity of money is right, has just dived >> (M3/M1). In other words, central banks have tried to boost the money supply >> by ‘printing’ money, but it has had minimal or no effect on the real economy >> because the demand for borrowing has dropped away. >> The orthodox Keynesians like Krugman would say that the collapse of the >> money multiplier proves the phenomenon of the ‘liquidity trap’. This is >> when aggregate demand in an economy is so weak that people hoard their money >> and banks stop lending, so even if interest rates are lowered to zero (as >> they more or less are now), it does not spark an economic recovery. Then we >> need exogenous policies to kick-start it. The MMT guys would say because >> money creation is endogenous, purely monetary policies like quantitative >> easing will never work. Marxists would agree, as long as it is recognised >> that while banks may be able to create money out thin air, they won’t do so >> if capital accumulation has slumped. Credit growth depends on capital >> accumulation, even if it is never in line ...<< The problem on both the supply and demand sides. Banks don't want to lend (and thus hoard a lot of excess reserves) and non-financial businesses are reluctant to borrow. Banks are concerned about the riskiness of borrowers _and_ the fragility of their own balance sheet. Even though non-financial corporations have been doing real investment lately, it's still pretty anemic in my estimation, because consumer demand is very anemic, expectations are pretty pessimistic, and unused industrial capacity persists. Profitability is low. BTW, Krugman uses the phrase "liquidity trap" to refer to the fact that nominal interest rates can't go below zero (except for very short periods). The concept is broader, bringing in Keynes' original concept (extraordinary hoarding by financiers) and the "excess reserve trap" (extraordinary hoarding by bankers), which adds to the floor on nominal rates.[*] >> The second is whether the expansion >> of debt, particularly private credit, adds to demand in an economy, such >> that it can get way out of sync with the expansion of the production of >> things and services; and whether this is key to the capitalist crisis. I think that Robert's discussion points to a major gap in orthodox Keynesianism: there's not enough emphasis on Minsky's story, i.e., the way that sustained capitalist prosperity induces excessive leverage (indebtedness) which makes the economy more financially fragile (prone to collapse) and sets up the situation where, after the collapse occurs, excessive debt prevents recovery. In Marxian terms, the financial sector is "relatively autonomous" from the rest of the capitalist economy and can get far out of line, causing a big disjuncture, which screws up the operations of both finance and non-financial operations. What Marxian political economy adds to this Minskyan story is that even without fragile finance, the capitalist system has its own internal dynamics which can cause crises (by depressing the rate of profit and accumulation). The financial system then reinforces the negative effects of the non-financial crisis. >> And >> third, whether it is the inherent instability of the financial system that >> is the kernel of crisis and not just the lack of ‘effective demand’ as >> orthodox Keynesians argue. This is what I just said above. Of course, I'd bet that Robert and I would disagree about the exact causes of low profitability. One way to see the difference between the Keynesians (both "orthodox" and MMT) and the Marxians is to think of the profit rate as a function of the level of aggregate demand. Higher demand implies higher profit rates, all else constant, as the Keynesians say. But the Marxian view is that the function can be shifted (all else is not constant). In era #1 of capitalist accumulation (say, the mid-1960s in the US) the rate of profit measured at full employment output would be higher than in era #2 (the period since the 1970s). So if full employment is attained -- good idea! -- in our current era we'd still see inadequate profitability (from a capitalist point of view). Because the economy is collectively run by the capitalists, maintaining full employment would require debt accumulation and/or worsening inflation. -- Jim Devine / "An atheist is a man who has no invisible means of support." -- John Buchan [*] in the modern era, financiers usually don't "hoard" by holding normally-defined money but by holding T-bills. The extraordinary demand for T-bills boosts their price and lowers their yields, it is true, but the shift away from longer-term bonds that corporations use to finance expansion, lowering their prices and raising their yields. This makes financing real expansion more expensive. _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
