Sunday, 8 December 2013

Making the Desert of Plenty bloom

My latest post at Pieria delves back into the history of the Long Depression in the 19th Century to find lessons for today's "secular stagnation". Persistent excess of supply over demand is anything but benign and surprisingly difficult to deal with.

"In my post “The desert of plenty”, I describe a world in which goods and services are so cheap to produce that less and less capital is required for investment , and so easy to produce that less and less labour is required to produce them. Prices therefore go into freefall and there is a glut of both capital and labour. This is deflation.
There are two kinds of deflation. There is the “bad” kind, where asset prices go into a tailspin and banks and businesses fail in droves, bankrupting households and governments and resulting in massive unemployment, poverty and social collapse. We have seen this in the past, in the Great Depression; we narrowly avoided it in the Great Recession; and there are currently places in Europe that are skirting dangerously around the edge of this catastrophe.
But there is also another kind. This is where falling costs and increasing efficiency of production create a glut of consumer goods and services. In other words, supply persistently exceeds demand."
Read on here.


  1. Labor productivity is growing faster than GDP. Aggregate demand should be stimulated.

    1. Demand should be stimulated? Quite right: at least that’s certainly right for the US. Problem is that so called “professional” economists are so DISASTROUSLY INCOMPETENT that they don’t know how to boost demand at the zero bound.

      It’s plain as a pike staff that Lawrence Summers doesn’t know how to do it to judge by his ridiculous “secular stagnation” idea. And (surprisingly) Paul Krugman is no better. See:

      In contrast, every advocate of Modern Monetary Theory knows how to do it. Indeed, Warren Mosler, one of the leading lights of MMT set out the solution in one sentence (in yellow) at the top of his site. See:

    2. With Krugman I do read between the lines that the government should run budget deficits. I think the biggest difference between him and MMT is how these should be financed.
      See also this recent post by Krugman:

    3. Mysjkin,

      I’m very grateful to you for pointing me in the direction of that Krugman article. Having read it, I’m now even more baffled as to what’s going on in his brain.

      He starts off by making a distinction between funding government by “printing money as opposed to selling bonds.” Now what do those two options, as conventionally understood, consist of? Let’s take “selling bonds” first.

      That’s pure fiscal policy. I.e. the treasury borrows $X, spends it, and gives $X of bonds to those it has borrowed from. Now for Krugman’s “printing money”.

      In a regime where there’s a nominal separation between central bank and treasury, as indeed there is in most countries, what happens is that the treasury borrows $X, spends it and gives $X of bonds to those it has borrowed from (as above). But then the central bank prints money and buys the bonds. At which point the bonds are effectively meaningless: they’re just a debt owed by one arm of government to another.

      In his 4th paragraph, he then proceeds to “compare two cases”. Case No.1 is the 2nd above option (treasury borrows $X, spends the money, gives bonds worth $X to those it has borrowed from and then the central bank prints $X and buys back the bonds). And his case No.2 is: “the government pays for deficits simply by “printing money”, that is, adding to the monetary base.”

      But what on Earth does No.2 actually consist of? Put another way, since No.1 consists of the government / central bank machine funding government spending by printing money, in what way is his No.2 “printing money” any different from the first? I’m baffled.

      But all is revealed: Krugman himself then says that No.1 and No.2 are the same thing!!!! He says “..the government’s financial position is exactly the same..” At which point he’s completely lost me.

      Then in his final paragraph he says “What you need to get monetary traction . . . is to convince everyone that the monetary base will stay larger — to credibly promise to be irresponsible.”

      Complete nonsense!! There’s no need to be “irresponsible”. There is simply a need (as MMTers keep pointing out) to adjust the size of the monetary base to whatever size is needed to keep the private sector spending at a rate that brings full employment without excess inflation.

      Of course that’s easier said than done, but then whatever method is used to adjust aggregate demand, it’s never possible to gauge the amount of stimulus exactly right.

      Also, as Krugman implies, some private sector agents won’t spend the additional money they come by as a result of money printing. But the empirical evidence is (revelation of the century this) that a significant proportion of households increase their spending when their stock of cash rises and when their incomes rise.

      Thus Krugman is wrong to say that “everyone” needs to be convinced that government will be irresponsible.

    4. Ralph, Krugman is making a point about credibility. Forward guidance only works to the extent that markets believe what the central bank says. So if the Fed "commits" to a permanent increase in the monetary base, markets have to believe it. One way to achieve this would be actually to cancel the purchased Treasuries and MBS. That would then put the combination of the government and the Fed in the same position as if they had funded government spending by directly increasing the monetary base. If they really want to increase inflation expectations, that would be far and away the best way of doing it, because it will give investors the Weimar horrors. But while the Fed is holding uncancelled Treasuries and MBS it is subliminally indicating that at some point it intends to shrink the monetary base. So overt statements about monetary base expansion being permanent are simply not credible. Consequently markets will do exactly what they are doing at the moment, namely betting on when the Fed will start shrinking the monetary base. That is Krugman's point.

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