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A gathering storm?

from David Ruccio

René Magritte, Are we seeing the signs of a global economic meltdown?

Marxist and other radical economists often remind people of the inherent instability of capitalism—unlike their mainstream counterparts, who tend to focus on equilibrium and the invisible hand of free markets.

But, right now, the warnings about new sources of instability are coming from quarters that are anything but radical. And they’re all saying pretty much the same thing: National monetary policy is increasingly ineffective. Central banks are largely impotent. The IMF points to increased global economic risk because of impossible amounts of debt that will never be repaid. Creditors are way too overextended. Finance capital is out of control. Growth everywhere is threatened. China and emerging-market nations are mostly to “blame.” And so on and so forth.

Here’s a recent sample of three recent articles [ht: ja]: from the BBC, Reuters, and the Guardian.

Andrew Walker (for the BBC) cites the latest IMF World Economic Outlook, according to which emerging and developing economies will register slowing growth in 2015 for the fifth consecutive year, to argue that (a) economic growth in China is slowing down (and helping to pull down the rest of the world, both directly and indirectly) and (b) lackluster growth in rich countries is failing to pull the rest of the world along. In addition, according to the latest IMF’s Global Financial Stability Report, the explosion of dollar-denominated credit in recent years, along with the rise in the value of the dollar, is going to make it difficult to repay those debts, a growing problem which is in turn exacerbated by the reverse “flight to safety” of financial capital. And then, of course, there are the negative effects—in Russia, Brazil, Venezuela, and elsewhere—of falling oil prices.

David Chance (for Reuters) cites the recent report by the Group of Thirty according to which low interest-rate rates and money creation not only were not sufficient to revive economic growth, but risked becoming problems in their own right.

The flow of easy money has inflated asset prices like stocks and housing in many countries even as they failed to stimulate economic growth. With growth estimates trending lower and easy money increasing company leverage, the specter of a debt trap is now haunting advanced economies.

At the same time, we’re listening to a growing chorus, at least in the United States (first from Federal Reserve Governor Lael Brainard and then Fed governor Daniel Tarullo) against the prospect of changing central bank policy and raising interest-rates anytime soon.

Finally, Will Hutton (for the Guardian) warns that capital flight and bank fragility threaten to create new asset bubbles and the eventual bursting of such bubbles—and there’s no prospect of global coordination to prevent the resulting economic dislocations.*

The emergence of a global banking system means central banks are much less able to monitor and control what is going on. And because few countries now limit capital flows, in part because they want access to potential credit, cash generated out of nothing can be lent in countries where the economic prospects look superficially good. This provokes floods of credit, rather like the movements of refugees.

The upshot? My view is these three commentators are on to something, backed up by the research taking place within the IMF and other international entities. Clearly, they are concerned that the anarchy of production—the anarchy of both “real” production and of finance, within and across countries—and the absence of any new ways for central bankers to regulate that anarchy are creating new fissures and cracks within the global economy.

The problem of course is, the same search for profits mainstream economists and policymakers hoped would lead the recovery from the crash of 2007-08, along with the initially hesitant and then increasingly desperate measures central bankers have adopted to enhance the prospect of that search, now seems to be undermining that fragile recovery.

That’s the gathering storm they—and we—should be worried about.

*I do have one bone to pick with Hutton, who argues that excessive credit is created by banks lending out money based on existing deposits, which in turn is based on “the truth that not all depositors will want their money back simultaneously.” The latter may be the case but Hutton gets the order wrong: it’s bank credit that creates deposits (like fairy dust), not the collection of deposits that serve as the basis for the expansion of credit.

the painting: René Magritte, “Song of the Storm” (1937)

  1. October 16, 2015 at 2:09 pm

    Misplaced augurs of doom
    Comment on David Ruccio on ‘A gathering storm?’

    You say “Marxist and other radical economists often remind people of the inherent instability of capitalism — unlike their mainstream counterparts, who tend to focus on equilibrium and the invisible hand of free markets.” (See intro)

    Not only Marxists are in the doomsday business but the gold bugs, too, and the producers of survival kits, and the Armageddon-Christians, and the fiat money abolitionists, etcetera (see zerohedge or youtube for the daily doom menue).

    Fear mongering is good business, but it is not the economist’s business. What is missing is a theoretically sound account of the famous ‘long run’. Note well that the classics and Marx based their projections on the law of the falling profit rate. This is something quite different from the current bubble/crash panic talk. Until this very day, the representative economist does not know what profit is, much less how it develops in the long run (2014; 2015). Hence, all crisis projections are not much more than journalistic extrapolations of surface phenomena.

    You sum up: “That’s the gathering storm they [policymakers, central bankers] — and we — should be worried about.”

    Yes, but in a quite different sense. Economic crises are, in the last instance, the result of a total lack of understanding of how the economy works, that is, of the manifest failure of economics as a science. This holds first and foremost for employment theory. It was Keynes who addressed the problem during the Great Depression but could not solve it satisfactorily, neither could the Post-Keynesians (2011), not to speak of New Keynesians and New Classics.

    Amidst the theoretical mess, what economists should be worried about is that they bear the intellectual responsibility for the next occurrence of mass unemployment and the accompanying societal devastation. Indeed, the future is bleak — for economists in particular.

    Egmont Kakarot-Handtke

    References
    Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. URL http://ssrn.com/abstract=1966438
    Kakarot-Handtke, E. (2014). Mathematical Proof of the Breakdown of Capitalism. SSRN Working Paper Series, 2375578: 1–21. URL
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2375578
    Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2624350

  2. October 16, 2015 at 2:21 pm

    Commentators look at the edifice of the economy and, correctly noticing some signs of trouble, they say “look here, the edifice is fragile”. Hence the great financial crisis of 2007 went down in popular culture as an event of fragility, or brittle failure of some complex system, rather than systemic imbalances before and after the rapid events of 2007-2008. There’s a move to make banks more robust, but not to question their role in money and credit creation.

    The true problems of the day, in my view, are that money creation is being used as a substitute for surplus recycling, and that not everyone has adjusted to the fact that credit is permanent so debts will not be repaid. Central banks continually create money because if they didn’t money would accumulate in the pockets of successful firms and their shareholders, inequality would be worse, and the real economy would shrink from lack of effective demand. They create the money as a stock of bonds that’s clearly too large to do anything with but roll them over, so that debt is effectively permanent. Discourse and policy hasn’t adjusted to these realities and the larger the discrepancy, such as in German dominated EU, the worse the outcomes.

    We need to adjust to the truth of unidirectional money flow from credit to profits and to the norm of permanent deficit and expanding debt. Then we need alternatives. If we’re not to funnel money one way from credit creation to accumulation, how do we cause surplus money to circulate instead? If we don’t like permanently expanding debt that’s also our money stock, what other monetary regime do we set up?

    • October 16, 2015 at 6:07 pm

      “If we’re not to funnel money one way from credit creation to accumulation, how do we cause surplus money to circulate instead? If we don’t like permanently expanding debt that’s also our money stock, what other monetary regime do we set up?”

      We don’t circulate surplus money. We have instead a credit card economy in which credit limits are personal and cash advances are merely tokens of future spending: which credit generates debt only insofar as it is spent and is written off so long as it is used to generate real profit in terms of the maintenance, regeneration and/or improvement of the wealth we already have, e.g. homes, food, education, health; and communal work-places, socialising places and communications infrastructures. In other words, debt is written off if we earn the credit looking after ourselves, our homes and our community, or otherwise replace the goods we use. Penalties for late payment and neglect of duties, indeed, but with adequate credit available as needed, no need for inheritance, interest on and and taxation of justifiasble ownership.

  3. October 16, 2015 at 3:40 pm

    One fork in the road that turns economic evolution away from total collapse is making balanced governmental budgets mandatory. Zero deficits for any reason simply because the evidence before our eyes is deficits destroy democracy.

    Assume for a moment that the world economy requires 1.5 Earths for pollution recycling and resources. Policies designed to spur growth run into increasing headwind in this milieu.

  4. October 16, 2015 at 4:46 pm

    Insisting on balanced budgets solves the accounting problem that a government with zero or low debt and no monetary authority cannot enter a path to bankruptcy. That’s not a very impressive solution. One would ask what government starts out with low debt, or why a government or supranational union would legislate away its monetary authority.

    You also have to ask what distributional effects a balanced government budget will have. Other entities, such as companies and regional economies, are allowed to take on debt and also importantly to have surpluses. If the private sector in some regions has persistent surpluses relative to other regions, how is that supposed to be balanced? Are governments allowed to tax and transfer? If balanced budgets is the thin edge of an ideology of small government, the natural outcome of economic imbalances is hard inequality and GDP loss. The regions and people who are privately in deficit will be forced to reduce consumption, and the surplus people will experience lower demand and lower income until the imbalances are reversed. It’s a solution, just not a good one. Also called a business cycle depression.

  5. October 16, 2015 at 4:54 pm

    “We need to adjust to the truth of unidirectional money flow from credit to profits and to the norm of permanent deficit and expanding debt. Then we need alternatives”,Pavlos.
    ” it’s bank credit that creates deposits (like fairy dust), not the collection of deposits that serve as the basis for the expansion of credit.”, David Ruccio
    https://rwer.wordpress.com/2015/10/16/a-gathering-storm/
    Please help this fool, any profound answer, or challenge that could prove
    Frederick Soddy got it wrong or that this fool has merely expressed a false opinion of his book “The Role Of Money”.(Entire book as a free download…) http://archive.org/details/roleofmoney032861mbp

    Thank you,” The RWER is a free open-access journal, but with access to the current issue restricted to its 25,818 subscribers (21/09/15).” for allowing access.

    TAXATION IS TAXATION.How To Lower Personal Federal Income Taxes and Lower National Debt at the same time !
    How To Lower Personal Federal Income Taxes and Lower National Debt at the same time !
    A simple understanding of -TAXATION.

    Excerpt fromhttp://en.wikipedia.org/wiki/Frederick_Soddy

    “In four books written from 1921 to 1934, Soddy carried on a “quixotic campaign for a radical restructuring of global monetary relationships”[this quote needs a citation], offering a perspective on economics rooted in physics—the laws of thermodynamics, in particular—and was “roundly dismissed as a crank”[this quote needs a citation]. While most of his proposals – “to abandon the gold standard, let international exchange rates float, use federal surpluses and deficits as macroeconomic policy tools that could counter cyclical trends, and establish bureaus of economic statistics (including a consumer price index) in order to facilitate this effort” – are now conventional practice, his critique of fractional-reserve banking still “remains outside the bounds of conventional wisdom”[this quote needs a citation]. Soddy wrote that financial debts grew exponentially at compound interest…”http://archive.org/…/role…/roleofmoney032861mbp_djvu.txt
    THE
    ROLE OF MONEY
    WHAT IT SHOULD BE, CONTRASTED WITH WHAT IT HAS BECOME By
    FREDERICK SODDY
    M.A. (Oxon) ; LL.D. (Glasgow) ; F.R.S. ; Nobel Laureate in Chemistry, 1921 ; Author of ” Science and Life ” ; ” Wealth, Virtual Wealth , and Debt ” ; ” Money versus Man ” ; etc.
    PREFACE …
    This book attempts to clear up the mystery of money in its social aspect. With the monetary
    system of the whole world in chaos, this mystery has never been so carefully fostered as it is to-day.
    And this is all the more curious inasmuch as there is not the slightest reason for this mystery.
    This book will show what money now is, what it does, and what it should do. From this will
    emerge the recognition of what has always been the true role of money. The standpoint from
    which most books on modern money are written has been reversed. In this book the subject is not
    treated from the point of view of the bankers as those are called who create by far the greater
    proportion of money but from that of the PUBLIC, who at present have to give up valuable
    goods and services to the bankers in return for the money that they have so cleverly created
    and create. This, surely, is what the public really wants to know about money.
    It was recognized in Athens and Sparta ten centuries before the birth of Christ that one
    of the most vital prerogatives of the State was the sole right to issue money. How curious that
    the unique quality of this prerogative is only now being re-discovered. The” money-power ” which
    has been able to overshadow ostensibly responsible government, is not the power of the merely ultra-
    rich, but is nothing more nor less than a new technique designed to create and destroy money
    by adding and withdrawing figures in bank ledgers, without the slightest concern for the interests of
    the community or the real role that money ought to perform therein.
    … It is concerned less with the details of particular schemes of monetary reform that have been advocated than with the general principles to which, in the author’s opinion, every monetary system must at long last conform, if it is to fulfil its proper role as the distributive mechanism of society. To allow it to become a source of revenue to private issuers is to create, first, a secret and illicit arm of the
    government and, last, a rival power strong enough ultimately to overthrow all other forms of
    government. ”
    “Capitalism is the “best” system to date devised by mankind. As it is administrated, perhaps, is where the “flaw” is manifested. If capitalism used its Central Bank properly,that is for the betterment of the common good, with equality and justice for all, capitalism would be the best ways and means to help “form a more perfect union….”, Pontifical Council.

    SOLUTION.
    “LEGISLATE FOR “We the People” WHAT WE HAD LEGISLATED THE CENTRAL BANK TO DO FOR THE Private For Profit Banks (PFPB) ! ISSUE OUR OWN MONEY AS LOANS AND CHARGE A TAX CALLED INTEREST ! ! ! ”
    Create an honest Central Bank that shall fund-
    ““We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defense, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity,…””

    There is a solution. Reverse what is causing the problems.
    As Einstein said,”Make it simple.”
    DISCOVER THE REAL CAUSE.
    READ ( http://michael-hudson.com/…/the-mathematical-economics…/
    By Michael Hudson
    “…. The Mathematics of Compound Interest
    A syndicate of less than one hundred American capitalists, if allowed to collect interest on their capital at a low rate and re-invest for 150 years or less, would at the end of that time own the earth and all real and personal property thereon. This is a simple mathematical proposition, capable of exact demonstration, and any one who doubts the truth of this statement may set all doubts at rest by computing compound interest on one and one-half billions of dollars for one hundred and fifty years, at five per cent per annum.
    …Flürscheim elaborated that “All exertions, all improvements in the methods and tools of labor, the strictest economy, the severest self-denial, are powerless to compete with the rapidity of self-increase possessed by capital placed at compound interest, and they cannot keep up with its demands.” To illustrate the dynamic at work, he composed an allegory (pp. 327ff.). Many ages after man was driven from Paradise and told “to earn his bread by the sweat of his brow, mercy began to prevail. A loving angel was sent down by the Great Master, charged with the task of lightening the burden. The angel’s name was Spirit of Invention. He began his work by teaching man to make useful tools” and tame animals, and in time to mobilize water power, air and wind power, fire and steam power to drive machinery.
    “It seemed that at last the golden era had come of which men had dreamed for ages past,” but “that envious spirit, that fallen angel, Satan,” was jealous that his own empire would soon be over for ever. Among the follies of man, one little imp, called Interest, managed to attract his attention. “‘What is the matter with you, Interest?’ he asked the saucy imp. ‘You don’t seem to be so dejected as your comrades are?’”
    “‘Why should I be dejected, master?’ replied the spirit, ‘Am I not one of your favorite soldiers? Haven’t I always been victorious under your august guidance?’”
    But Satan answered sadly, “Alas, You are no match for the Spirit of Invention.” The Interest imp, however, volunteered to demonstrate his prowess in a dual, helped by his son, Compound Interest.
    At this point, Flürscheim introduced an image that Napier had suggested at the outset of his second book on logarithms in 1617, the Robdologia, likening the principle of geometric increase to that of a chess-board on which each square doubled the number assigned to the preceding one. An old Persian proverb told of a Shah who wished to reward the inventor of chess, a subject, and asked what he would like. To the Shah’s surprise, the man asked “as his only reward that the Shah would give him a single grain of corn, which was to be put on the first square of the chess-board, and to be doubled on each successive square; which, to the surprise of the king, produced an amount larger than the treasures of his whole kingdom could buy. It is this kind of chess-game which capital is continually playing with labor.” The remarkable growth of compound interest soon swallowed “products, capital, the earth and even the workers.” This was in essence the ploy that Flürscheim’s Compound Interest demon used. “Look at this chess-board,” he told the angel against whom Satan had pitted him. “It seems just like any other chess-board, with sixty-four squares,” but it “had the peculiar quality of extending the dimensions of the squares, so as always to be large enough” to hold whatever was placed on them. Instead of asking for grains of wheat to be placed on them, the Interest Imp asked for soldiers. “Now, listen well to what I propose,” he said to the angel, pointing to the latter’s huge army. I enter the first square with my son, and you match one of your warriors against us. We enter the second square doubled in number; you send two more warriors – and so on every succeeding square. An old Persian proverb told of a Shah who wished to reward the inventor of chess, a subject, and asked what he would like. To the Shah’s surprise, the man asked “as his only reward that the Shah would give him a single grain of corn, which was to be put on the first square of the chess-board, and to be doubled on each successive square; which, to the surprise of the king, produced an amount larger than the treasures of his whole kingdom could buy. It is this kind of chess-game which capital is continually playing with labor.” The remarkable growth of compound interest soon swallowed “products, capital, the earth and even the workers.” This was in essence the ploy that Flürscheim’s Compound Interest demon used. “Look at this chess-board,” he told the angel against whom Satan had pitted him. “It seems just like any other chess-board, with sixty-four squares,” but it “had the peculiar quality of extending the dimensions of the squares, so as always to be large enough” to hold whatever was placed on them. Instead of asking for grains of wheat to be placed on them, the Interest Imp asked for soldiers. “Now, listen well to what I propose,” he said to the angel, pointing to the latter’s huge army. I enter the first square with my son, and you match one of your warriors against us. We enter the second square doubled in number; you send two more warriors – and so on every succeeding square. .

    . . . . When we arrive at the last square, and you have a single soldier left after occupying the same, we shall declare ourselves vanquished, and Satan with all his troops will leave this world for ever. If I win, you and your army are to be at the commands of my master. Are you agreed?
    The angel agreed, expecting his horde of soldiers to easily exceed the number that the Interest Imp and his son, Compound Interest, seemed likely to accrue.
    In the beginning the angel laughed, for, though twenty squares were passed, no noticeable diminution of his forces was perceptible. Demon Interest said nothing, but attended to business, quietly doubling his army on every succeeding square. At the thirtieth square the angel ceased to laugh, and soon saw he was lost.
    ‘I despised you, little fellow,’ he signed despairingly, ‘and I am punished for my vanity. I see there is no use fighting against you. Demon Interest is more powerful than the Spirit of Invention. I am your slave. Command your servant!’”
    (THIS IS THE TIPPING POINT ! WHERE WE WENT WRONG.)
    Justaluckyfool’s comment explained in next paragraph)
    ‘I am the only servant of my great master,’ dryly replied the demon.
    “Here I see him coming. He will give you his orders.’
    And Satan gave his orders. He commanded that the angel was to continue in his work with all his troops, which were to be increased with all possible exertion, so that humanity – which did not know the nature of the antagonist it had to fight against – would always keep in fresh hope of final success when the new troops were forthcoming. But as fast as they appeared, Demon Interest was to send forth a larger army to capture the new forces, to enslave them, and – instead of their benefiting man – make them increase the slave-chains which weigh him down.
    HOW WE COULD FIX IT !!! WHAT IF DEMON INTEREST WERE TO ANSWER?
    (Justaluckyfool’s comment )
    “I will now be the servant of a new master,one that will pursue happiness for all mankind.”
    The answer lies in how you redistribute the wealth, not in how you make it.
    As for the worlds wealth, there is the possibility of total accumulation through compound interest (the most powerful force in the universe) which then begs the question, “How would that wealth be redistributed ? Who will be the master?
    We must go back to “In God We Trust” and use that ‘most powerful force’(compounding) to fund
    “…a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defense, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity,…”
    hy,why do all the head politicians all agree that “Entitlements and Debt Service” are killing us and are unsustainable. Then never attack the cost of the debt service or even why we have to pay interest on our own money, instead just attack any attempts to…” establish Justice, insure domestic Tranquility, provide for the common defense, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity,
    READ: How To Lower Personal Federal Income Taxes and Lower National Debt at the same time !
    A simple understanding of -TAXATION.************************ It should always be “TAX and SPEND”, trillions if properly and justly done.When will we learn, A HONEST CENTRAL BANK using a Capitalistic system can and should allow a monetary sovereign government to form a more perfect community.
    “Capitalism is the “best” system to date devised by mankind. As it is administrated, perhaps, is where the “flaw” is manifested. If capitalism used its Central Bank properly,that is for the betterment of the common good, with equality and justice for all, capitalism would be the best ways and means to help “form a more perfect union….”, Pontifical Council.

    Part one of two…

    • October 16, 2015 at 8:03 pm

      Guidelines for Comments:
      • Try not to flood discussion threads with only your comments.
      • Do not post slight variations of the same comment under multiple posts.

      I know this is difficult, Lucky, when you have a lot to contribute and not much response. Stiil, this argument could have been reduced to a brief abstract with a link to last time you used it.

      About its ending, I am not clear what the Pontifical Commission actually said, but the dishonesty of capitalism (pretending easily stolen monetary savings in a bank are equivalent to storing real goods in a barn) has not only misled administration but generated insurance/share/derivative selling industries whose sole purpose is not human welfare but to make money.

      Pavlos (above) makes valid points which I hadn’t addressed in my own (earlier) comment. The early Christians pooled ownership and distributed (already existing surplus) goods on a basis of need rather than contribution, with the proviso “those who won’t work won’t eat”. It seems to me such a separation of consumption from production variables is necessary to go beyond justice to give graciously to those in need from the surplus (profits) from not just ours but Nature’s labours. Nor are those labours confined to production: they include development work and the coordinating work of government. All of which can be accounted for without taxation in a credit card rather than a taxation-based economic system, with industry reproducing what card-holders with adequate credit are actually wanting to buy.

      • October 16, 2015 at 10:51 pm

        First, Thank you for your reply. I will improve as I am grateful for any comments.
        Dave Taylor, ” the dishonesty of capitalism (pretending easily stolen monetary savings in a bank are equivalent to storing real goods in a barn) has not only misled administration but generated insurance/share/derivative selling industries whose sole purpose is not human welfare but to make money.”
        This is not a ‘dishonesty of capitalism’ (Capitalism with a honest central bank would not allow anything other than real lending.) The dishonesty comes into play as an administrative function of a dishonest central bank that allows a member bank to issue duplicate currency as a loan, money that already has one owner. And they do not take away any of the rights from the copied money thereby creating a double demand on the sovereigntyty’s wealth when the loan is deposited.
        This is an administrative flaw.
        A True and Honest Central Bank would be a guardian of the value of the sovereigns currency and as Soddy stated…
        “It was recognized in Athens and Sparta ten
        centuries before the birth of Christ that one
        of the most vital prerogatives of the State was
        the sole right to issue money. How curious that
        the unique quality of this prerogative is only now
        being re-discovered. The” money-power
        ” which has been able to overshadow ostensibly responsible
        government, is not the power of the merely ultrarich,
        but is nothing more nor less than a new
        technique designed to create and destroy money
        by adding and withdrawing figures in bank ledgers,
        without the slightest concern for the interests of
        the community or the real role that money ought
        to perform therein.”

        PLEASE HELP THIS FOOL!

        How can one reach, or cry out to 25,818 subscribers (21/09/15) and get one or two so they will…
        ***** “Believe nothing merely because you have been told it…But whatsoever, after due examination and analysis,you find to be kind, conducive to the good, the benefit,the welfare of all beings – that doctrine believe and cling to,and take it as your guide.”- Buddha[Gautama Siddharta] (563 – 483 BC),
        Comments by Justaluckyfool ( http://bit.ly/MlQWNs )
        ( “You are always welcome to share, copy, plagiarize, improve, etc..any comments.)
        Read and challenge:
        Frederick Soddy writings, namely “The Role Of Money”
        (Entire book as a free download…) http://archive.org/details/roleofmoney032861mbp

  6. October 16, 2015 at 6:46 pm

    Since 1994 when I joined Federal University of Paraná, Brazil, to teach macroeconomics I have been demonstrating that monetary policy implies printing unbaked money recklessly. Actually, monetary policy open market operations of selling T-bonds are not money withdrawing but money borrowing, that is, a commitment to pay interests when the T-bond sellers decide so. Monetary policy is the instrument through which central bankers realise their power of printing money redeeming T-bonds; thus, monetary policy is a necessary weapon to command the economy for central bankers own sake. Most probably it is not appropriate to state that “Central banks are largely impotent” for they are doing what they were created to.
    Central bankers also prevent governments from printing money thus ruling out fiscal policy without debt. Governments therefore make loans but as demonstrated in the paper Public Debt Is Economic Nonsense, presented at the previous WEA conference (Ideas towards a new international financial architecture?) most probably the money borrowed and the money printed by central banks to pay interests are not spent in such a way as to generate sufficient new tax receipts to pay the government’s expenditure in interests and deficits become usual. Consequently, it may be expected that normally public debts follow explosive trends. Moreover, the stock of money printed by central banks to pay interests when assuring liquidity to T-bonds grows endlessly.
    The paper “Supply and Demand Is Not a Neoclassical Concern” (http://mpra.ub.uni-muenchen.de/63135/), referred to in a comment to the post “The guessing game” (July 28, 2015), outlines the effects of fiscal and monetary policy on GDP and price index level in an aggregate supply and demand, obviously non or anti-neoclassical, approach. Results obtained in a US case experiment suggests that, as expected, ceteris paribus the public debt and government interest expenses, fiscal policy shifts the aggregate demand to the right thus leading to more production of better products and services, more price level and hence more worker’s income. On the opposite direction monetary policy causes unemployment to grow and price to raise thus impoverishing workers and enriching the Treasury bonds elite.
    In the present WEA conference, “The European Crisis”, the paper Economic Policy and Political Power in European Crises aims to stress that the Keynesian without debt fiscal policy, if allowed to be done, may increase production, employment, social wealth, and so on. On the opposite direction monetary policy certainly causes GDP to fall, prices to rise, stupid wealth and income concentrations and much more disgraces. Deprived of free-cost fiscal policy and submitted to the monetary policy 90% of people in private central banks dominated countries are watching a Gathering storm. This thesis must be discussed by ethical economists and, if an economics consensus arrives, to help politicians in finding a new political policy that while providing conditions for society economic improvement does not challenge democracy.

  7. October 17, 2015 at 5:04 pm

    Crisis, cranks, and scientists
    Comment on David Ruccio on ‘A gathering storm?’

    The normal course of events is this: people look at the global/national economy or their regional/personal environment and see an acute or chronic defect (distribution of income/wealth/power/resources, unemployment, stagnation, exploitation, pollution/depletion/extinction, asset bubbles, inflation/deflation, abuse/fraud/hype/deceit/corruption, dysfunctional institutions, etc) and then come forward with the solution.

    “A sure sign of a crisis is the prevalence of cranks. It is characteristic of a crisis in theory that cranks get a hearing from the public which orthodoxy is failing to satisfy. In the thirties we had Major Douglas, and social credit — it can all be done with a fountain pen — and Warren and Pearson who convinced President Roosevelt that raising the dollar price of gold would raise the price of everything else and bring the slump to an end. The cranks are to be preferred to the orthodox because they see that there is a problem. Nowadays we have plenty of cranks taking up the problems that the economists overlook.” (Robinson, 1972, p. 8)

    This is certainly not what science is all about. Broadly speaking: economics, understood as the collective scientific knowledge of economists, can tell with a sufficiently high degree of certainty how the economy works, what the critical functions are, how institutions have to be designed to guarantee the proper functioning of subsystems and the integrated whole and thereby contribute to the prevention of major crises in the short and long run. Thus defined, there is no economics.

    Crises are the high time for political economists and the normal course of events is that suggestive quick fixes are applied. A grossly simplified example is to fight unemployment with prolonged deficit spending, which leads to growing debt, which at some point calls for helicopter money, which then can ‘be done with a fountain pen’.

    There is not much to say against deficit spending or helicopter money as a commonsensical quick fix in case of emergency except that it has no sound foundation in something resembling a valid economic theory. No economist is needed to figure out this kind of ‘solutions’. In many cases they are not even innovative, e.g.: “Public works to relieve the unemployed is an idea as old as the Bible; …” (Blaug, 1998, p. 662). The same holds for debt jubilees.

    When a Heterodox economist sees a meltdown coming three ideas immediately cross his mind (i) confirmation, i.e. Orthodoxy is indeed a failed approach, and (ii), regret, i.e. Heterodoxy has failed to come up in due time with the superior paradigm, and (iii), to go with panic makers and cranks is not exactly what Heterodoxy is meant to be.

    The grand task of Heterodoxy was and still is to figure out what an economy looks like that is free of major crises in a way that is scientifically more convincing than general equilibrium theory.

    Egmont Kakarot-Handtke

    References
    Blaug, M. (1998). Economic Theory in Retrospect. Cambridge: Cambridge University Press, 5th edition.
    Robinson, J. (1972). The Second Crisis of Economic Theory. American Economic Review, 62(1/2): 1–10. URL http://www.jstor.org/stable/1821517.

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