global financial crash yay!

[rumble]

On the subject of the Eurozone, I read some calls today for Germany to leave the EMU (rather than Spain or Greece or whoever). Since German CBers are liquidationists, and since Germany plays the same role for the Mediterranean states that China plays for America—running large surpluses within the EMU that can’t be adjusted for because of the exchange rate peg—the Germans should step outside where they could engage in these practices without causing as much harm.

That's probably a good idea. Unfortunately, if what I'm seeing on the BBC right now is correct, Greece, Portugal, etc. are actually going the fiscal austerity route. Bad idea. They're going to end up like Latvia.

One interesting / slightly weird aspect of NK is that it makes sticky prices and wages the cause of fluctuations in output and thus unemployment. This is pretty much the opposite of what Keynes wrote in the General Theory, IIRC.

Yeah, those accommodations to New Classical econ is why people call it "New Consensus" instead of "New Keynesian". The basic genealogy is this: Keynes was crossed with classical to make the neo-classical synthesis, then the neo-classical synthesiss was crossed again with hardcore New Classical to give us New Keynesianism. By that point, a lot of the Keynes had been 'bred' out of it.

Another QE related thought: I've heard Mosler saying that insofar as QE/CE brings down long rates, its effects on aggregate are uncertain, because although borrowers get lower rates, savers get reduced income (so the profit that the Fed makes on its investment portfolio is reducing AD because its interest income or capital gains lost to the private sector--effectively a stealth tax). The private sector's position WRT net lending or borrowing would also come into play, I guess, as well as distributional issues.

Not sure I'm following entirely, but aren't savers more likely to save that interest income? Isn't the Fed just shifting that income over to borrowers who have a higher MPC, increasing AD? I don't get a lot of Moslers stuff... it seems odd to me.

 

[vimothy]

That's probably a good idea. Unfortunately, if what I'm seeing on the BBC right now is correct, Greece, Portugal, etc. are actually going the fiscal austerity route. Bad idea. They're going to end up like Latvia.

All for no good reason. So sad and depressing:

Earlier, one of the principal architects of the euro warned against any financial rescue of Greece, saying it could destabilise the currency.

The German economist Otmar Issing told the BBC that after years of violating rules and cheating on its statistics, Greece had to reform its own economy without a bailout from Brussels.

"These reforms which are needed will be blood and tears... but without that, Greece will never overcome the difficulties," he said.

Recessions build character!

 

[vimothy]

Isn't the Fed just shifting that income over to borrowers who have a higher MPC, increasing AD?

I wonder if this is true / Fed rationale...

I just meant that, yeah, if both have the same MPC (good point), and probably if net savings are at zero, the effects on aggregate are a wash since the income gained by borrowers is the income that is lost to savers. I hadn't considered who has the higher MPC, and it makes sense that borrowers do (that's why they're net spenders). It could also be the case that there are distributional issues, like maybe savers already have lots of income and we would like more to go to spenders. I'm not sure how a net savings position plays into this but it seems like if there's a greater balance of savers than spenders there must be a greater total volume if income lost than if with the same balance we shifted income from borrowers/spenders to savers. In effect the government is reducing its net deficit position with respect to the private sector, because the government is net debtor--which is to say, the net spender/borrower in our story--to the private sector's net creditor / saver. Maybe that's why it makes sense to think of it as a tax.

Having trouble thinking clearly about this at present...

EDIT: Having thought about this some more, I think it's correct. "QE" shifts income from savers to borrowers. Since the government is the net borrower and the private sector the net saver in this context, on aggregate QE shifts income from the private sector to the government.

 

[rumble]

I think that's right. The other thing is that the income/distributional effects are probably secondary to the incentive effects, ie. lowering the interest rate not only shifts income from savers to borrowers, this also de-incentivizes saving, while incentivizing borrowing.

I don't really subscribe to the neo-chartalist stuff that Mosler is into. It's way too simplistic, and a lot of their conclusions don't make any sense to me. I think the Febrero is probably right about where chartalism goes wrong, and I'm pretty sure that Lavoie agrees with him:
http://www.ucm.es/info/ec/ecocri/cas/Febrero.pdf

The chartalism position that the price level is exogenous is why no-one takes them seriously (example: that's why Nick Rowe dismisses them). Godley does not share that position, but gets tarred with the same brush. What needs to happen right now is for G&L to really split with the chartalists if they want to be taken seriously. I'm not sure that the chartalists are that serious though, because they keep holding up Godley & Lavoie as a system that is consistent with their views, when it quite clearly is not. It makes me wonder if any of them have actually read the Godley stuff.

 

[vimothy]

I doubt that will happen -- they're all part of the same PK network centred around the Levy Institute. Just look at its list of scholars: loads of neo-chartalists. I think that Godley and Mosler also go back quite a bit, and there is a New Cambridge / Chartalist connection via the School of Land Economy.

Anyway, this is only a big deal in a tiny piece of the blogosphere. In reality Chartalism in tangential to Godley and Lavoie's analysis. At the start of his textbook Godley lays out his influences: Tobin / New Haven, & Kaleckian / New Cambridge PK.

Cheers for the link though. I'd be interested in reading more criticism of the chartalists.

Also noted: http://www.nytimes.com/2010/02/05/world/asia/05diplo.html?hp

 

[vimothy]

If there are other people reading this thread who are having trouble with some of the concepts--or maybe its just me who finds Keynesian macro difficult--this Econtalk podcast with Steve Fazzari might help. The host Russ Roberts is a Chicagoan / Austrian microeconomist and he really struggles with macro -- but that's what makes the podcast so good. Everything gets explained so that a child could understand (er, but not Roberts).

 

[rumble]

I doubt that will happen -- they're all part of the same PK network centred around the Levy Institute. Just look at its list of scholars: loads of neo-chartalists. I think that Godley and Mosler also go back quite a bit, and there is a New Cambridge / Chartalist connection via the School of Land Economy.

Anyway, this is only a big deal in a tiny piece of the blogosphere. In reality Chartalism in tangential to Godley and Lavoie's analysis. At the start of his textbook Godley lays out his influences: Tobin / New Haven, & Kaleckian / New Cambridge PK.

Yeah it's not really a big deal, as it's still just a sort of rag-tag group at this point, but at a certain point there has to be a denouement. I've been reading a lot of Lavoie's presentations, and it seems like they really have found the Keynesian "holy grail". I still can't find any glaring errors in it, and the whole flow-of-fund/SFC approach seems to be very similar to the approach that I imagine the Fed and Treasury use. It seems like the way forward to me. The only problem is that the current proponents (MMTers) don't really seem to understand it, and if they did, they probably wouldn't agree. To me it seems kind of like a protest movement that is still in that "big tent" stage where anyone can grab the bullhorn and spout their own half-baked ideas and be applauded, just because everyone is 'on the same team'/'beggars can't be choosers when it comes to building a movement', but it really just makes the whole PK thing seem really incoherent (why I always considered myself just Keynesian, rather than post-keynesian). At this point I think that building consensus around SFC is more important than maintaining the big tent PK diaspora.

 

[vimothy]

There is no problem a priori with this neo-Chartalist argument from a logical-mathematical
viewpoint . But from an economic point of view, this means that if we fix a numeraire from the
outside (as neo-Chartalists do) and one distributive variable, for instance the rate of profit,
determined by the interest rate, as in Pivetti, 1991, or the rate of growth of output, as in Nell,
1998, then the nominal wage becomes predetermined. In other words, there is no margin for
nominal wage bargaining. However, this is difficult to reconcile with the fact (widely admitted by
postKeynesians) that banks create money to finance the payment of wages, and the purchase
of material inputs, amongst other things, leading to the conclusion that, in the general case,
changes in the money supply follow changes in prices and nominal wages, and not viceversa.
If production is essentially financed with bank credit (as neo-Chartalists admit) price increases
can occur as banks accommodate the money supply to an increasing demand from creditworthy
borrowers. Thus, we find it troublesome trying to reconcile the neo-Chartalist assertion that the
state can determine the value of money with the experience of wage-led inflation.

Can you just explain something--when you criticise chartalism for assuming that "the price level is exogenous", are you talking about this?

 

[rumble]

yes. How is money endogenous but not the price level? I don't get it

 

[vimothy]

Hmm, yes, it does seem rather strange.

 

[vimothy]

I've been reading a lot of Lavoie's presentations

Got links?

 

[rumble]

http://aix1.uottawa.ca/~robinson/Lavoie/presentations_e.html

 

[vimothy]

Ta

Since we're on the subject of Chartalism, how do you deal with money?

[Background -- I've been reading this: http://aix1.uottawa.ca/~robinson/Lavoie/Presentations/en/E22 PK Money, Credit and Finance.ppt ]

 

[rumble]

not sure exactly... I haven't really thought about it a whole lot until recently, TBH

I've been reading a bunch of the debates on at WCI, which has only helped to confuse things further. I guess you could say that I was sort of a neo-wicksellian horizontalist, maybe an upward sloping structuralist/new paradigm... now maybe a PK horizontalist? I'm not sure...

I'm thinking about this bit right now:

"Base rates:
Are set by the central bank

Liquidity preference:
Determines the differential relative to base rate"

It seems like the right way of looking at things to me

 

[vimothy]

I think that the neo-Wicksellian and horizontalist positions are correct:

the banks set not a quantity but a price. The banking system fixes a rate (or a set of rates) for the money market and then lends however much borrowers ask for, provided that they can offer satisfactory collaterals

1. The supply curve of money (or high powered money) can best be represented as a flat curve, at a given interest rate. The short-term interest rate can be viewed as exogenous, under the control of the central bank, within a reasonable range.
2. There can never be an excess supply of money.
3. The supply curve curve of credit can best be represented as flat curves, at a given interest rate (or set of interest rates).
4. Central banks cannot exert quantity constraints on the reserves of banks.

In other words, true monetarism (as policy prescription) is impossible, not in any theoretical sense but in actual fact given existing institutional and operational arrangements. Likewise, the neo-Wicksellian / horizontalist position seems like the best able to positively describe the monetary system as it actually is.

That's what I find impressive about some of the Chartalists I've come across, especially Wray and Fullwiler. While there are some questionable aspects of Chartalism proper--discussed in the paper you linked to (weird myths about the original tax liability, etc)--some of the Chartalists I've come across do seem to have a very tight understanding of the operational realities of the international monetary system.

 

[vimothy]

So Keynes was on the wrong side of this one--like Friedman. But (and thinking of Wray), I did come across this recently, which I think is an excellent insight:

Both income and spending are in monetary terms; income received
but not spent means—in the first instance, at least—accumulation of money balances.
Returning specifically to the entrepreneurial decision, an alternative to producing is to
accumulate (again, at least initially) money balances. When entrepreneurial expectations
about revenues from production are low, they will prefer to hold money. As Kregel
(2007) explains, Hayek had argued that the market would automatically operate to ensure
a quick return to the full-employment level of production because labor would be
diverted to produce gold to satisfy the preference for accumulation of money over
production of other commodities. Keynes’s response was that gold is not money, rather,
money is an asset with “special properties”: nearly zero carrying costs, elasticity of
substitution, and elasticity of production. The last characteristic means that when the
demand for money rises, labor is not diverted to its production. So long as there is at least
one asset that is not produced by labor, it can become a bottomless sink of purchasing
power, overturning Say’s Law and subverting any market forces to return the system to
full employment.

http://www.levy.org/pubs/wp_514.pdf

EDIT: And the next para:

As mentioned, Keynes did not need to assume that expectations had been
disappointed, causing production to temporarily fall below the full-employment level.
Indeed, after publication of the General Theory, he argued that he could have assumed
that expectations are always fulfilled and still he would have obtained the same results.
All that is necessary is that entrepreneurs cannot be sure that their expectations will be
fulfilled. It is the uncertainty that generates a preference for liquid assets and thus, a
barrier to achieving full employment. Nor does the outcome require instability. While
some of Keynes’s best known passages (especially those in Chapter 12) do refer to
“whirlwinds of speculation” and other examples of instability, as Kregel (1976) has
argued, his favorite explanation of equilibrium with unemployment utilized a static model
in which expectations—both short-run and long-run—are held constant, uninfluenced by
outcome. Again, firms produce only what they expect to sell at profit, and it is not
necessary for them to have been disappointed or to be subject to unstable economic
forces in order for the sum of their individual production decisions to leave some labor
resources unutilized.

 

[rumble]

so apparently the Canadian Ministry of Finance has issued a G7 briefing putting pressure on China:
http://www.bloomberg.com/apps/news?pid=20601080&sid=ayv5906uYFGo

lol @ Mervyn King

 

[rumble]

Yes, having read up on this stuff I think the horizontalists are correct. It seems consistent with everything that has happened:
http://krugman.blogs.nytimes.com/2009/03/03/hey-who-you-callin-neo-wicksellian-wonkish/

 

[vimothy]

Craziness from the ECB:

But under the economic pressures of the past year, the Greek government budget has slipped into ever greater deficit and investors have increasingly become uncomfortable about the possibility of future default. This impending doom was postponed for a while by the ability of banks – mostly Greek – to use these bonds as collateral for loans from the European Central Bank (so-called “repos”).

But from the end of this year, the ECB will no longer accept bonds rated below A by major ratings agencies – and Greek government debt no longer falls into this category. The market can do this kind of math in about 20 seconds: If the ECB won’t, indirectly, lend to the Greek government, then interest rates will go up in the future; in anticipation of this, interest rates should go up now.

That is trouble enough for an economy like Greece – or any of the weaker eurozone countries that have been known, for some time and not in an endearing way as the “PIIGS”. But paying higher interest rates on government debt also implies a worsening of the budget; this is exactly the sort of debt dynamics that used to get countries like Brazil into big trouble.

http://baselinescenario.com/2010/02/06/is-tim-geithner-paying-attention-to-the-global-economy/

 

[rumble]

Yes, it's pretty senseless. I don't really understand what the EU leadership is thinking. Clearly they (Germany mainly) need to provide fiscal relief for the PIIGS, otherwise it looks like the EMU will either break apart or suffer a huge slowdown