tag:blogger.com,1999:blog-8764541874043694159.post1002510371093179598..comments2024-03-29T10:48:38.142+00:00Comments on Coppola Comment: Malinvestment and the endogeneity of moneyFrances Coppolahttp://www.blogger.com/profile/09399390283774592713noreply@blogger.comBlogger35125tag:blogger.com,1999:blog-8764541874043694159.post-89898362084153667222013-12-08T20:41:32.760+00:002013-12-08T20:41:32.760+00:00"Mal-investment" is unproductive investm..."Mal-investment" is unproductive investment. <br /><br />True... but buying commodities is not mal-investment, it is flight to safety. Ideally, buying commodities with a better store of value than money means the 'investor' has little faith in the ability of money to maintain value. If cash we had commodity money, the 'investor' would have preferred to hold that. That's why its savings... the investor looks for an asset that will store value until when he can find an investment worth his while. <br /><br />'The essence of Keynes's argument is that when saving exceeds productive investment opportunities, mal-investment is inevitable.' <br /><br />When savings exceeds investment opportunities, interest rates come down in a sustainable manner and society is able to make more risky investments that pay off longer thus improving the long term welfare of society. This is the reason that places like Germany are able to make capital goods and third world countries are unable to. No such thing as a glut in savings is my argument.<br /><br />Investment is the use that is made of savings, not the savings themselves... You argue that savings invested in commodities are productive in the long run...<br /><br />Again, my point is, purchase of commodities should rightly be seen as savings. e.g. If I have savings but I can't find an investment worth my while, what do I do? I buy oil and store it overseas. When I find an investment I like, I sell my oil and buy my assets. I have therefore used oil as a store of value. If the currency were a better store of value I wouldn't have bought the oil. Ergo, purchase of oil was actually savings. I cannot term that as mal-investment because the alternative is to choose from the investments I have available which would yield returns below my required rate of return hence a mal-investment. <br />The above would happen during a period when Central Banks are printing money aka QE. <br />If it were a true glut in savings and interest rates were coming down significantly and the local currency and there is no inflation or mild deflation, then we can argue that interest rates are sustainably low and the investor, as pointed out earlier, will look for long cycle investments such as mining or production of capital goods so that he can boost yield and in that way, society is richer for it... again, a la Germany/China<br />Johnsonhttps://www.blogger.com/profile/16147769199494946998noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-21435278188483987182013-12-08T20:17:12.185+00:002013-12-08T20:17:12.185+00:00Johnson,
Investment is the use that is made of sa...Johnson,<br /><br />Investment is the use that is made of savings, not the savings themselves. The use that is made of savings can be productive or unproductive. "Maliinvestment" is unproductive investment. <br /><br />The essence of Keynes's argument is that when saving exceeds productive investment opportunities, malinvestment is inevitable. I don't think you would fundamentally disagree with this, would you?<br /><br />You argue that savings invested in commodities are productive in the long run. I would agree with that under certain circumstances - for example, if there is a real risk of political collapse that seriously raises the risk of investing in government debt or cash. But those are extreme circumstances. I am not convinced that political risk is generally so severe as to warrant sizeable holdings of commodities. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-14786224885888967822013-12-08T19:24:31.443+00:002013-12-08T19:24:31.443+00:00That really depends on your definition of capital....That really depends on your definition of capital. Sometimes economists misuse the term capital and financing. By virtue of fractional central banking one could argue that financing can be deemed infinite but capital can't. Capital can be destroyed... when factories burn down or are closed because of under-utilization, that is capital destroyed. Of course that requires one to have a theory of capital... something most schools of economics do not have.<br />However, what you call purchase of safe assets... Keynes would may call that mal-investment. We call that savings. Especially when QE is destroying the value of money.<br />Savings are important to society. As government destroys value, it is those who save i.e. buy oil, gold or currency that is beyond the reach of the home government that serve their economy because they retain value which could come in handy in future.<br />To summarize, what you are calling mal-investment, I would call savings.Johnsonhttps://www.blogger.com/profile/16147769199494946998noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-62750869402130807892013-12-08T17:13:55.270+00:002013-12-08T17:13:55.270+00:00Actually, I think / hope that we are now in agreem...Actually, I think / hope that we are now in agreement - in normal economic times, a positive risk-free rate of interest is reasonable, and quite possibly to be expected. A couple of implications follow about which I am much less sure, especially as inflation falls. One is whether the abnormal negative risk-free rate now prevailing is part of the solution (as Keynesians would have it) or the problem. The other is that, in fact in global terms, economic growth is presently about average rather than low, and capital markets are quite open, so what does a locally negative risk-free rate do for capital flows (eg into London property). Again, thanks for the discussion, Frances.Tim Youngnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-28164426854266236112013-12-08T15:42:36.713+00:002013-12-08T15:42:36.713+00:00Yes, the standard CAPM diagram does show the risk-...Yes, the standard CAPM diagram does show the risk-free rate as above zero. And near-risk-free assets have in the past had positive interest rates. But these are not normal times. We are in Nick Rowe's "weird world" where the natural interest rate is lower than the rate of growth. The standard CAPM diagram does not anticipate zero or negative risk-free rates. Indeed this will be the subject of another post - negative rates have considerable implications for cost of capital calculations. <br /><br />If the risk-free rate of interest is zero or lower, then savers have no right to expect positive returns unless they are prepared to accept losses. Really, therefore, what we are arguing about is whether the risk-free rate of interest is above zero. You are in effect saying that because the risk-free rate has always been above zero in the past, therefore it should be now too, and the only reason it isn't is central bank interference. I can see that you might not want to believe that "this time is different", but that doesn't mean it isn't. <br /><br />Much of my writing at the moment is an attempt to explain the reasons for Rowe's "weird world". Central bank interventions certainly play a part, but in the absence of counterfactuals it's impossible to establish whether the risk-free rate would be higher without them. It could even be lower: some people think that the natural rate is well below zero, and there's no doubt that central banks are propping up short rates (that's what positive interest on reserves does). <br /><br />This discussion isn't really relevant to the zombie firms post, either, given that the conclusion of the post was that they don't exist and prematurely raising rates would be likely to kill off the next generation of firms. I think email would be a better place for this discussion. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-41007736440863368952013-12-08T15:26:48.137+00:002013-12-08T15:26:48.137+00:00"There is no such thing as a risk-free asset...."There is no such thing as a risk-free asset." I feared that we would get bogged down in that one! Correct, but, as I explained earlier, you can find assets that are so close to risk-free that it seems implausible to ascribe anything but the tiniest positive return to the existence of these residual risks. And since such assets, like overnight repo, have tended to command significantly positive returns, that suggests that an imputed / theoretical completely risk-free rate is normally non-zero - which the link on the risk-free asset you posted does not deny.<br /><br />I am aware of standard portfolio theory as I used to teach it, and it certainly does not say that the risk/return tradeoff runs through the origin - you have probably seen the typical CAPM diagram with the capital market line cutting the return axis above zero? The reference you give is not clear on this point, but it does say (my emphasis): "According to the risk-return tradeoff, invested money can render HIGHER profits only if it is subject to the possibility of being lost."<br /><br />I suspect that this discussion is relevant to your next post (on zombie firms), which I think is informative and interesting, so if necessary, we can continue it there. In the meantime, thanks for going this far.Tim Youngnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-46188622855382912042013-12-08T12:42:28.086+00:002013-12-08T12:42:28.086+00:00Tim,
I have shown my workings. Repeatedly, actual...Tim,<br /><br />I have shown my workings. Repeatedly, actually. Just not in this post. And others have also written on the same thing.<br /><br />There is no such thing as a risk free asset. That is a standard criticism of the idea that certain types of assets (such as insured deposits and government debt) carry no risk. Intrinsically, they do. That's why under normal circumstances even a "risk-free" asset carries a positive interest rate. http://financial-dictionary.thefreedictionary.com/Riskless+or+Risk-Free+Asset<br /><br />However, the widespread belief that debt assets, in particular (bonds and deposits) should be completely risk free is what drives the explicit support given by governments and central banks to asset prices for the last six years. It's so that asset holders (including your savers) don't have to take huge losses. In effect, governments/CBs are reducing the risk of these assets. But the consequence of that is depression of real returns. <br /><br />Of course, if savers were prepared to accept that their assets could lose value - haircuts on deposits in failing banks, for example - then they would be able to demand a higher interest rate. But demanding a positive rate of return on investment while expecting others to take the risk is rent-seeking. While asset holders expect to be protected from losses due to commercial realities, and there is no growth to justify positive rents, nothing - or even negative - is the correct rate of return.<br /><br />The relationship of risk and return is not something I am making up. It is standard portfolio theory. Go look it up. http://www.investopedia.com/terms/r/riskreturntradeoff.asp<br /><br />I am not prepared to discuss this any more on this post, as it is off topic. If you wish to discuss further, please do so by email. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-38454890885177512502013-12-08T11:14:54.515+00:002013-12-08T11:14:54.515+00:00"I really don't need to give a reference ..."I really don't need to give a reference for this, surely. It's common sense."<br /><br />The issue here is whether a positive return on lending can (or even should) be expected without taking risk is vital to several of your posts, so yes, I do think that you should provide evidence to support that idea, or give it up. As I say, it is not common sense - the textbook explanation of capital markets and interest includes a production possibility frontier and consumer preferences and abstracts from risk (I presume because this could be allowed for by restating the PPF in terms of expected production possibilities), yet does not rule out a positive interest rate.<br /><br />You probably think that I am being fussy about this point, but I think that is hard to underestimate its importance at the moment. The reason why is that it is vital to understand where the risk-free interest rate would be in a well-functioning economy in normal times so that we can get an idea of how far away from normal we are. The Keynesian approach is to accept as given that the risk-free "natural rate" of interest is negative at present and try to lower market rates of interest to get negative return projects funded, but I would question whether this is wise. If the normal natural rate of interest is positive, then this approach is going to build up a stock of investment projects that would need to be worked off before we can get back to normal, and if the authorities dare not allow this work-off process to proceed, the economy will remain abnormal indefinitely. In that case, a more sensible approach might be to understand why the natural rate is negative, and try to fix that.<br /><br />I would particularly value being able to convince you about this, Frances, because you have been a prominent advocate of the view that savers should not expect positive risk-free returns, but I cannot explain why I think you are wrong if you don't show your working.Tim Youngnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-63480427292355911862013-12-07T23:31:35.305+00:002013-12-07T23:31:35.305+00:00There is no such thing as risk-free lending, Tim. ...There is no such thing as risk-free lending, Tim. It is merely a question of the degree of risk. In general, higher risks require higher returns. Your overnight repo doesn't carry much risk, so the the return is tiny. But it is not zero. Collateralising a loan does reduce its risk, particularly if there is a substantial haircut. But it doesn't eliminate the risk completely. Collateral values can fall, as I said. Indeed fast falling collateral values were one of the principal drivers of the financial crisis. <br /><br />I really don't need to give a reference for this, surely. It's common sense. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-48928500833654440512013-12-07T23:25:48.902+00:002013-12-07T23:25:48.902+00:00Umm. Johnson, in a recession there is no less capi...Umm. Johnson, in a recession there is no less capital, but it is not productively deployed because investors are hoarding safe assets. That is malinvestment, not under-investment. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-54001806827058005382013-12-07T23:08:24.726+00:002013-12-07T23:08:24.726+00:00Tim,
"Ex post" means after the loan is...Tim, <br /><br />"Ex post" means after the loan is agreed and the accounting entries have been made. Banks do not have to obtain reserves in advance of lending. They may not even have to obtain them in advance of settlement, if the central bank provides a daylight overdraft facility - as the Bank of England does, for example (free intraday repo). <br /><br />Your account hangs entirely on the existence of reserve requirements. But as I have already pointed out twice, not all countries have these. The Bank of Canada, Bank of Australia and Bank of New Zealand, for example, all had zero reserve requirements prior to the crisis. They aren't the only ones, either. You say the Bank of England had reserve requirements prior to the crisis. This is not entirely true: it had a voluntary reserve scheme, but to what extent a bank participated in the scheme was a matter for negotiation. <br /><br />Reserves do have to be topped up at some point. Exactly when depends on the regulatory requirements in a particular jurisdiction. But in NO jurisdiction do they have to be obtained in advance of lending. As I said before, it is not the stock of reserves that acts as a brake on lending, but their price. If funding costs are high, banks are likely to be cautious about lending. <br /><br />You are not the only person who is irritated. I find it irritating that you treat me as ignorant and allege that I am making things up. I assure you I am not. How reserve accounting works, the irrelevance of the money multiplier and the flaws in the loanable funds theory are not simply figments of my imagination. There is a considerable body of evidence regarding all of these - including from the Federal Reserve itself. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-66117997614920503082013-12-07T19:39:53.755+00:002013-12-07T19:39:53.755+00:00I am not entirely clear what you mean by ex post, ...I am not entirely clear what you mean by ex post, Frances; to me the key question is whether or not a bank can wait until a deposit created by a loan is drawn before it needs reserves, and my answer is that it cannot. That said, I think I have given enough explanation of my point of view to be happy for readers to make their own choice between our differing accounts.<br /><br />I apologise if my irritation shows when you respond to my initial argument by asserting the opposite, Frances. I am not without practical experience in these matters myself, but I try to give independent evidence like my link to the Fed website (and before the financial crisis, the ECB, BoJ and BoE also had reserve requirements) to back my arguments.Tim Youngnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-21148144169999088542013-12-07T19:10:07.755+00:002013-12-07T19:10:07.755+00:00I agree with you that just as underpricing is unde...I agree with you that just as underpricing is undesirable, overpricing is... however, I wouldn't call the result of overpricing mal-investment. I would call it under-investment. Here's the catch... if you proceed down this road, then the free market (i.e. free of government intervention including the Monetary Authorities' intervention) is desirable as a means to set the price of money. We are talking loanable funds here so that we don't have over-pricing neither do we have underpricing.<br />Austrians concentrate on underpricing for a reason... most if not all governments, are usually net borrowers and therefore usually tilt the market to their side. This is only natural and that's why the work of Austrians focuses more on underpricing of money. Like I've intimated earlier, Austrians prefer that markets set prices as opposed to one set of participants who are likely to be driven by certain biases or lack of market information or dynamics so that the market is allowed to correct itself every time it has excesses on whichever side...Johnsonhttps://www.blogger.com/profile/16147769199494946998noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-22611083168142475502013-12-07T19:04:22.747+00:002013-12-07T19:04:22.747+00:00I am thinking it through - I appreciate that there...I am thinking it through - I appreciate that there are residual risks in, say, overnight repo, but they are so tiny as to be unable to account for anything but a miniscule positive real rate.<br /><br />I am trying not to be rude to you, Frances, but when you tell me that I am making a "complete misunderstanding" and justify that by asserting a "definition" without reference, I get a little irritated.Tim Youngnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-16643039686182884212013-12-07T17:41:20.682+00:002013-12-07T17:41:20.682+00:00No, I am not making this up. Think it through. The...No, I am not making this up. Think it through. There is no such thing as risk-free lending. There is market risk in overnight reverse repo (collateral values can drop very fast). The yield on the 3-month UST is usually used as the proxy for the risk-free rate in WACC calculations, but even that is not completely free of risk. Therefore "loanable funds" (to the extent that they exist at all) are "at risk". <br /><br />I will block you if you are rude to me again. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-74470378798029265012013-12-07T17:36:22.543+00:002013-12-07T17:36:22.543+00:00Tim,
You are confusing how reserve requirements a...Tim,<br /><br />You are confusing how reserve requirements are determined with how reserves are actually used. Reserve requirements do indeed depend on balance sheet size. But as I've already pointed out, not all countries have reserve requirements. And even in those that do, reserves are obtained EX POST. <br /><br />In normal times, creation of reserves lags lending. Therefore reserves cannot in any way be regarded as a "factor of production" of loans: rather, it would be correct to regard loans (or rather their associated deposits) as factors of production of reserves, since no central bank will refuse to create reserves if required to enable banks to settle loans already agreed (or meet reserve requirements if those exist). The stock of reserves DOES NOT determine the volume of lending, though their price does influence lending decisions. You have the causation the wrong way round. <br /><br />I really object to my remarks, which are founded on actual experience in banking and loan accounting, being described as "rubbish". I've warned you before about being rude to me. Be polite, or be blocked. <br /><br />Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-57241227462841061452013-12-07T17:19:54.131+00:002013-12-07T17:19:54.131+00:00"Reserves are not required at the time a loan..."Reserves are not required at the time a loan is made. They are needed to fund PAYMENTS, not loans."<br /><br />Rubbish, Frances: reserves are required as a proportion of deposit liabilities - see eg here: http://www.federalreserve.gov/monetarypolicy/reservereq.htm. If the loan creates a deposit, then reserves will be required within days if not immediately, whether that deposit has been used to make a payment or not. <br /><br />If reserves are required for balance sheet expansion, then reserves are clearly a factor of production in loan production (let's assume for simplicity that banks' business is to make loans, rather than, say, to buy securities), as is capital. If the cost of a factor of production falls, production can be expected to increase, and if the cost of reserves is related to the supply, it follows that there will be a positive and causal relationship between the stock of reserves and the stock of deposits (whether it is sufficiently close to being linear to be accurately described as a "multiplier" depends on the form of the relationships involved - eg elasticity). What is wrong with that?<br /><br />(of course, when a bank is holding an abnormally large amount of reserves for other reasons - eg as safe asset - their cost as a factor of loan production is effectively zero, so it would be foolish to expect QE to work through the money multiplier in those circumstances)Tim Youngnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-48292924502042536152013-12-07T16:38:41.186+00:002013-12-07T16:38:41.186+00:00""Loanable funds" by definition are...""Loanable funds" by definition are placed at risk" Where is this defined? You are just making this up, Frances.<br /><br />I dare say that in normal times (ie when the central bank is not doing unconventional easing), an overnight reverse repo loan, which is about as risk-free as you can get, would normally command a positive real rate of interest.Tim Youngnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-36420677270741032272013-12-07T12:29:15.037+00:002013-12-07T12:29:15.037+00:00Tim,
What I said is correct. Reserves are not req...Tim,<br /><br />What I said is correct. Reserves are not required at the time a loan is made. They are needed to fund PAYMENTS, not loans. <br /><br />The "reserve requirement" argument is spurious. Many countries don't have have reserve requirements. And even in those that do, reserves are not obtained in advance of loan agreement. They are obtained ex post. Which is what I said. <br /><br />Increased reserves do increase the balance sheet of the banking system of a whole. But that does NOT necessarily mean a "money multiplier" effect in the sense of an increase in lending. Banks do not lend out reserves. The constraints on bank lending are capital and risk, not reserves.<br /><br />What an increase in reserves does, if it is not matched by a corresponding increase in lending, is raise the proportion of the asset side of the bank balance sheet that is devoted to safe assets. If reserves were increased enough (or QE continued for long enough), we would eventually have all deposits backed with reserves - i.e. full reserve banking. This does nothing whatsoever to increase lending. Indeed, as Peter Stella has argued, the "deadwood" effect of reserves on bank balance sheets may actually reduce it. <br /><br />The "money multiplier" theory is a mathematical construct that has no foundation in how lending actually works. It does indicate the relationship between base and broad money, but says absolutely nothing about the direction of causation. An increase in base money does not necessarily result in an increase in broad money. Banks are not passive intermediaries.Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-85375744876511601132013-12-07T12:15:46.473+00:002013-12-07T12:15:46.473+00:00"because the entries are balanced, there is n..."because the entries are balanced, there is no need for additional reserves at this point."<br /><br />I don't think this is correct in general. In a system with reserves requirements, a bank will be required to hold additional reserves as soon as the balance sheet expansion counts towards its reserve requirement. While it is true that this will in most cases lag balance sheet expansion because of features like reserves maintenance periods, the key point is that reserves will be required fairly soon after the loan has been created, whether the loan is drawn down or not.<br /><br />I think this is another area of economics that seems to be subject to unproductive dogmatic and non-converging argument between entrenched "schools". I appreciate that loans can drive deposits, but struggle to see why an inflow of bank deposits would not encourage a bank to expand its lending as much as make its deposit terms worse, or why, ceteris paribus, an increased supply of reserves from the central bank (which necessarily goes hand in hand with a marginal fall in reserves-settled inter-bank lending rates) would not lead to an increase in the size of the banking system balance sheet and hence be manifested as a money multiplier.Tim Youngnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-37157082029725428462013-12-07T11:29:42.147+00:002013-12-07T11:29:42.147+00:00Tim,
I think you need to be extremely careful wh...Tim, <br /><br />I think you need to be extremely careful when abstracting from macro to micro. There may be individual examples of "good" capital realloction, but that does not mean that overall capital is reallocated in a more efficient or effective way. <br /><br />On loanable funds - no, that is a complete misunderstanding. "Loanable funds" by definition are placed at risk: when you make a loan there is always the possibility that you won't get your money back. It is not possible to generate a positive return without placing capital at risk.<br />Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-43944592125958898222013-12-07T11:15:27.661+00:002013-12-07T11:15:27.661+00:00Sometimes I despair at the partisan nature of econ...Sometimes I despair at the partisan nature of economics. While I struggle to buy in to the full Austrian story about the varying length of production processes, it seems common sense to me that a misleading boom leads to a flow and hence a remaining stock of investment that is unwise in hindsight - eg in the UK, estate agencies. It is surely wrong to say that capital is not reallocated in the bust phase - that is what bankruptcy does (did you see "The man who buys anything" this week on Channel 4?), and is probably not being allowed to do enough of. Also Frances, I am sceptical about your idea that "in order for capital to be used productively it must be placed at risk" - the textbook story about loanable funds demand abstracts from risk altogether, but it is still reasonable.Tim Youngnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-2322223677878726962013-12-03T09:27:44.709+00:002013-12-03T09:27:44.709+00:00Nice post. Unlike many others, the accounting on b...Nice post. Unlike many others, the accounting on banking and money is correct. Still much discusison on effects of QE, ref. recent debate on QE and deflation. But, even if QE results in broad money increasing, there is no guarantee they will be used. Could be stuck with non-bank financial institutions, who only invest in high-yielding assets and create asset price bubble, and no employment. Better than to have central banks buy stuff from ordinary people, that could generate real demand, ref. Policy Note from Levy Economics Institute on this, see http://www.levyinstitute.org/publications/?docid=1851 This would be tax relief without concurrent increase in govenrment debt. <br /><br />Basic problem is huge profits and cash piles on corporate balance sheets that sits idle due to extreme (but rational) risk aversion. As some have alluded to, better than to tax (part of) it, and have the governement increase public investment and growth. Ref. Keynes who was very clear about this in the GT (pp. 377-78): It seems unlikely that the influence of banking policy on the rate of interest will be sufficient by itself to determine the optimum rate of investment. I conceive, therefore, that a somewhat comprehensive socialization of investment will prove the only means of securing an approximation to full employmentAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-9622996346586669762013-12-03T06:59:27.363+00:002013-12-03T06:59:27.363+00:00Hi Brick,
Good points. Yes, I agree that QE can h...Hi Brick,<br /><br />Good points. Yes, I agree that QE can have some very damaging effects in other economies. I'm certainly no fan of QE. And I agree that this is due to investor behaviour not government action. One thing I didn't touch on the article is the search for yield that is leading those investors who are less risk averse to move funds to higher-risk investments. This can be seen as a productive use - indeed it was one of the aims of QE - but there is of course a danger that these flows can suddenly reverse, as we saw when Bernanke suggested tapering. Sudden reversal of capital flows is incredibly damaging. We are playing with fire. <br /><br />Personally I would prefer to see governments investing more in infrastructure and long-term projects, rather than central banks creating lots of money with no ability to influence where it is invested. It is my firm belief that when the private sector will not invest - because of what amounts to a collective funk - the public sector must. The slow recovery in my view is because the UK government joined in the funk (heavily influenced by markets and international opinion, admittedly) and foolishly cut public investment to the bone in a misguided attempt to cut the deficit before the private sector was able or willing to increase investment. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-75109535123804377472013-12-03T06:46:40.105+00:002013-12-03T06:46:40.105+00:00The fundamental error you make is in assuming that...The fundamental error you make is in assuming that in the bust phase capital reallocates itself to productive enterprises. No it does not. In a recession, investors are over-cautious and capital flies to safe havens. Safe havens by their very nature do not use capital productively - in order for capital to be used productively it must be placed at risk. Therefore there is as much malinvestment going on in the bust phase as the boom phase, just in the opposite direction. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.com