Lessons from the Long Depression

A version of this post appeared on Pieria in December 2013. 
In my post “The desert of plenty”, I described 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. America experienced this in the Great Depression and narrowly avoided it in the Great Recession. More recently, at least one European country has felt the effects 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, supp…

The desert of plenty

This post first appeared on Pieria in November 2013. 
Throughout history, humans have dreamed of plenty. They have longed for there to be abundant supplies not only of essentials, but of luxuries. The promise made to the Israelites wandering in the desert was that they would eventually come to a land “flowing with milk and honey”. And the vision of the New Jerusalem in Revelation is of riches beyond imagination.
Recent forecasts of forthcoming abundance, too, have focused on the benefits. Imagine a world in which everything was so plentiful that not only the essentials of life but the luxuries, too, were free. There would be no need for money, because nothing could be bought or sold; and there would be no need to work, because there would be no need for income. And if everyone believed that such “superabundance” would last forever, then there would be no need to worry about the future – no need to save or prepare in anyway. There would be no point in deferring consumption in expectat…

Keynes and the death of capitalism

In a recent article for the New Statesman, the economics commentator Grace Blakeley makes an extraordinary claim. Writing about the origins of the IMF, she says:
Seventy-five years have passed since these international financial institutions were created in Bretton Woods, New Hampshire, in 1944. Back then, delegates sought to tame the power of international finance, the growth of which helped to cause the 1929 Wall Street Crash and the ensuing Great Depression. JM Keynes – who led the British delegation – arrived at Bretton Woods with the aim of “euthanising” a financial elite he viewed as parasitic on productive economic activity. I thought that Bretton Woods was about free trade and economic cooperation, not "taming the power of international finance." But I can be wrong. So I checked it out.

According to the U.S. State Department, Bretton Woods was indeed born from the U.S.'s dreadful experience in the worldwide depression of the early 1930s. But it was not internat…

Weird Is Normal

This post was originally published on Pieria in December 2013. Since then, the idea that the long-term real equilibrium interest rate must be equal to or lower than the long-term sustainable growth rate has become much more mainstream. I am just amazed that anyone ever thought it could be otherwise. A long-term real interest rate persistently above the sustainable growth rate cannot possibly be an "equilibrium" rate. As I show in this piece, it can only be maintained through rising inequality. It is by definition ponzi and therefore unsustainable. Periodic financial crashes are inevitable in any system in which growth does not cover the interest on debt. 

Three years ago, Nick Rowe produced this post describing a “weird world” – a world in which the equilibrium interest rate is at or below the long-term growth rate of the economy, rather than above it as we are used to. In such a world, bubbles are inevitably created as investors search for positive yield. This is also the w…

Why Central Bankers Don't Understand Inflation

My debut post at CapX develops a theme I have written about many times. Central bankers are tasked with controlling inflation, but they don't understand it.
For the last decade, central banks in developed countries have been pursuing policies designed to raise inflation. Quantitative easing, cheap funding for banks, tinkering with yield curves, low and negative interest rates – all aim to raise inflation to the ubiquitous 2% target. Understandably, central banks’ inflation forecasts assume that their policies will return inflation to target over the medium term. But as time goes by, and inflation stays stubbornly low, their forecasts are becoming increasingly difficult to believe. This does not bode well for central banks that depend above all on credibility..... Read on here.

Related reading:

Inflation is always and everywhere a political phenomenon

Image is of the Bank of England's note printing centre at Debden. Image by Benj Roberts - originally posted to Flickr as The Royal…

Inflation Is Always And Everywhere A Political Phenomenon

We don't understand inflation. Those who lived through the high inflation of the 1970s are convinced that inflation is always and everywhere caused by wage-price spirals. Germans, economic Austrians and Bitcoiners are convinced that inflation is always and everywhere caused by central bank money printing. Small-state supporters are convinced that inflation is always and everywhere caused by profligate governments borrowing and spending excessively. Hard money enthusiasts are convinced that inflation is always and everywhere caused by currency devaluation. Every school of economics has its own theory of inflation.

We don't even know what we mean by inflation. As the Cleveland Fed entertainingly discusses, inflation originally meant expansion of (paper) currency in a manner that resulted in higher prices. But over time, that definition has widened to mean anything and everything that raises prices, not just monetary expansion. And not only consumer prices, either. We now talk a…

A Fine Example of Crypto Ignorance

The video blogger Crypto Eri (@sentosumosaba) thinks she has evidence that the American Bankers' Association (ABA) wants the Federal Reserve to adopt Ripple/XRP as its cross-border settlement system. She has found a letter from the ABA which makes three requests to facilitate faster interbank settlement:
A liquidity management toolInteroperabilityAccess for chartered financial institutions Hey hey everybody, this looks just like Ripple's bag, doesn't it? "You are going to see how perfectly matched XRP is to meet their request," she says.

I've tracked down the ABA's letter to which she refers. It responds to a Federal Reserve request for comment on proposals for actions to support interbank settlement of Faster Payments. Faster Payments are domestic online and automated payments, not cross-border payments in foreign currencies. A bridging currency such as XRP is completely unnecessary for domestic payments. Indeed, it adds complexity and FX risk. I fear Cr…