"If you want to know what God thinks of money, just look at the people he gave it to."
- Dorothy ParkerSee Donald Trump. Sure there are good rich people. Of course. Conservatives and the corporate media would like you to believe they are virtuous and blessed by God. But pop culture seems to be coming around. For example:
But the RBC theorists never seem to go there; it’s right into calibration and statistical moments, with never a break for intuition. And because they never do the simple version, they don’t realize (or at any rate don’t admit to themselves) how fundamentally silly the whole thing sounds, how much it’s at odds with lived experience.
The Bank of England must be given a new mandate to upgrade our economy to invest in new large scale housing, energy, transport and digital projects.
It seems unlikely that the influence of banking policy on the rate of interest will be sufficient by itself to determine an optimum rate of investment. I conceive, therefore, that a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment; though this need not exclude all manner of compromises and of devices by which public authority will co-operate with private initiative. (General Theory, ch 24)
But the problem for monetary theory is that without a real-value equivalent to assign to money, the value of money in our macroeconomic models became theoretically indeterminate. If the value of money is theoretically indeterminate, so, too, is the rate of inflation. The value of money and the rate of inflation are simply, as Fischer Black understood, whatever people in the aggregate expect them to be. Nevertheless, our basic mental processes for understanding how central banks can use an interest-rate instrument to control the value of money are carryovers from an earlier epoch when the value of money was determined, most of the time and in most places, by convertibility, either actual or expected, into gold or silver. The interest-rate instrument of central banks was not primarily designed as a method for controlling the value of money; it was the mechanism by which the central bank could control the amount of reserves on its balance sheet and the amount of gold or silver in its vaults. There was only an indirect connection – at least until the 1920s — between a central bank setting its interest-rate instrument to control its balance sheet and the effect on prices and inflation. The rules of monetary policy developed under a gold standard are not necessarily applicable to an economic system in which the value of money is fundamentally indeterminate.
Viewed from this perspective, the Neo-Fisherian Revolution appears as a kind of reductio ad absurdum of the present confused state of monetary theory in which the price level and the rate of inflation are entirely subjective and determined totally by expectations.
In the Marxist intellectual tradition, from which many senior members of Syriza hail, progress comes about gradually. To overthrow the existing order, you have to first mobilize the masses by stripping back the democratic veil and showing the real workings of the system: only then will the “objective conditions” be ripe for revolutionary change. Tsipras and Syriza didn’t create the conditions for change. But in bringing Greece to the brink, and demonstrating that its creditors were willing to see it collapse if it didn’t buckle to their demands, they did, arguably, succeed in showing up the eurozone as a deflationary straightjacket dominated by creditors. And they did this with all of the world watching. “One must know who the enemy is, in order to fight the enemy,” Alex Andreou, a Greek blogger who is sympathetic to Tsipras, wrote last week. “Syriza has achieved that. Now, it is over to you, Spain. Take what we’ve learned and apply it wisely.”
Under this analysis, Syriza’s surrender wasn’t necessarily an ignominious one. As Lenin commented of the failed 1905 revolution in Russia, it was a retreat for a new attack, which ultimately proved successful. “I’m not going to sugarcoat this and pass it off as a success story,” Tsipras said to parliament on Wednesday, prior to the vote, acknowledging that the spending cuts and tax increases contained in the agreement would deal another blow to the Greek economy. However, that wasn’t the full story, Tsipras insisted. “We have left a heritage of dignity and democracy to Europe,” he said. “This fight will bear fruit.”
Only time will tell if that was wishful thinking.
Under flexible exchange rates this competitiveness adjustment could happen immediately. Things are not quite so simple in a monetary union: competitiveness cannot immediately adjust because of wage and price rigidities. A period of ‘excess unemployment’ will be required to push wages and prices down if the country is uncompetitive in relation to required primary surpluses. However the excess unemployment can be relatively modest. In fact, because of the structure of the standard Phillips curve, it is much more efficient to achieve gains in competitiveness gradually through a measured increase in unemployment than quickly through a rapid rise in unemployment, for reasons I outlined here when talking about Latvia.
To achieve this efficient outcome may well require the government to reduce its primary deficits gradually, because without this fiscal support while competitiveness adjusts output could fall rapidly. This in turn will require more government borrowing, and if the government cannot do this from the markets, the IMF or other governments should step in to ensure this efficient adjustment can take place and avoid the waste and suffering of unnecessary unemployment.
This is what failed to happen in the case of Greece.
"And with respect to the external balance, the evidence, both historical and contemporary, suggests that financial markets do not in fact punish defaulters. (And why should they? — the extinction of unserviceable debt almost by definition makes a government a better credit risk post-default, and capitalists are no more capable of putting principle ahead of profit in this case than in others). The costs of default, rather, are the punishment imposed by the creditors, in this case by the ECB. The actual cost of default is being paid already — in the form of shuttered Greek banks, the result of the refusal of the Bank of Greece to extend them the liquidity they need to honor depositors’ withdrawal requests."and
"1. The Greek government takes control of the Bank of Greece. It replaces the BoG’s current leadership — holdovers from the old conservative government, appointed at the 11th hour when Syriza was on the brink of power — with suitably qualified people who support the program of Greece’s elected government. The argument is made that the central bank has abused its mandate, and failed in its fundamental duty to maintain the integrity of the banking system, in order to advance a political agenda.
Either legislation could be passed explicitly subordinating the BoG to the elected government, or use could be made of existing provisions for removal of central bank officials for cause. The latter may not be feasible and we don’t want to get bogged down in formalities. Central bankers have critical public function and if they won’t do it, they must be replaced with others who will. Whatever the law may say.
2. The new Bank of Greece leadership commit publicly to maintain the integrity of the Greek payments system, to protect deposits in Greek banks and to prevent bank runs — the same commitment the ECB has repeatedly made for banks elsewhere in Europe. The Greek government asserts its rights to license banks and resolve bank failures. Capital controls are imposed. Greek banks reopen.
3. If necessary, the BoG resumes Emergency Liquidity Assistance (ELA) or equivalent loans to Greek banks. While the promise to do this is important, it probably won’t be necessary to actually resume ELA on any significant scale because:
– removing the previous threats to withdraw support from Greek banks will end the bank run and probably lead to the voluntary return of deposits to Greek banks.
– capital controls and, if necessary, continued limits on cash withdrawals, block any channels for deposits to leave the Greek banking system.
– resumption of Greek payments to public employees, pensioners, etc., to be soon followed by resumed economic growth, will automatically increase the deposit base of Greek banks."
Brüning expected that the policy of deflation would temporarily worsen the economic situation before it began to improve, quickly increasing the German economy's competitiveness and then restoring its creditworthiness. His long-term view was that deflation would, in any case, be the best way to help the economy. His primary goal was to remove Germany's reparation payments by convincing the Allies that they could no longer be paid.[44] Anton Erkelenz, chairman of the German Democratic Party and a contemporary critic of Brüning, famously said that the policy of deflation is a:
rightful attempt to release Germany from the grip of reparation payments, but in reality it meant nothing else than committing suicide because of fearing death. The deflation policy causes much more damage than the reparation payments of 20 years ... Fighting against Hitler is fighting against deflation, the enormous destruction of production factors.[45]
In 1933, the American economist Irving Fisher developed the theory of debt deflation. He explained that a deflation causes a decline of profits, asset prices and a still greater decline in the net worth of businesses. Even healthy companies, therefore, may appear over-indebted and facing bankruptcy.[43] The consensus today is that Brüning's policies exacerbated the German economic crisis and the population's growing frustration with democracy, contributing enormously to the increase in support for Hitler's NSDAP.[1]
MADRID — Ada Colau, 41, was not even born when Manuela Carmena, 71, joined Spain’s underground Communist party and started her legal career by attacking labor restrictions imposed by Francisco Franco, the Spanish dictator.
But even if separated by a generation, Ms. Colau and Ms. Carmena both found themselves claiming similar left-wing victories by upstart candidates over Spain’s political establishment, after Sunday’s regional and municipal elections.
So you get in a position where there is a kind of two-dimensional struggle: left-right/inside-outside. The Social Democrats were now ‘inside’, the new core of the so-called Weimar coalition that held power through the 20’s. The traditional, Wilhelmine conservative forces were still insiders, by any reasonable calculation. They had tremendous social and institutional leverage everywhere – not to mention most of the money – but they couldn’t compete electorally for a time. Some really strange stuff happened. Some of the most vicious in-fighting was on the left, especially between the social democrats and the communists, starting right in 1918.
From the balcony of the Reichstag building, the SPD leader Philipp Scheidemann proclaimed a German Republic. A couple of hundred meters away, from the balcony of the royal palace, the famed radical socialist and antiwar activist Karl Liebknecht proclaimed a socialist republic. Ebert [a social democrat who didn’t like the suddenness of it all] was furious. He discounted Liebknecht, recently released from the kaiser’s jails, as a wild radical who might just as well have languished longer in prison. But Scheidemann was his close colleague, and no recognized body, no government, not even a political party, had authorized the proclamation of a republic. There had not even been a discussion. (Eric D. Weitz, Weimar Germany: Promise and Tragedy, p. 19)
The Social Democrats where forever fighting with the communists, after that. So, on the one hand, the SD’s were solidifying a grand coalition with more centrist parties, proclaiming women’s rights, a free press, freedom of religion, an expanded welfare state; on the other hand, they were forced to use the proto-Nazi Freikorps to put down the Spartacist League, leading to the murders of Leibknecht and Rosa Luxemburg. Forced because they literally had no police/military alternative. Right-wing paramilitaries were the only available muscle. The SD’s had to work with the powers-that-still-were. Obviously the correct conclusion to draw is not that the SD’s were really right-wingers themselves – or that the Freikorps had left-wing sympathies. Each group tried to use the other. The SD’s wanted to save the Weimar Republic, by any means necessary. The Freikorps wanted to murder communists and gain the sort of legitimacy that might allow them, eventually, to overthrow the Republic – to whose existence they were not reconciled.-----------
DeLong Speech
Yet by the standard of the pre-2007 period we have a depressed level and anemic growth, combined with acceptance of these as the new normal. Thus the North Atlantic is on track to have thrown away 10% of their potential wealth. And there have been insufficient changes in financial-sector regulation or in automatic stabilizers or in other institutions to keep the North Atlantic from once again developing the vulnerabilities it turned out to have in 2007.
We conclude that a comprehensive policy effort to expand output is needed to sustainably raise private investment. Fiscal and monetary policies can encourage firms to invest, although such policies are unlikely to fully return restore investment fully to precrisis trends. More public infrastructure investment could also spur demand in the short term, raise supply in the medium term, and thus 'crowd in’ private investment where conditions are right. And structural reforms, – such as those to strengthen labor force participation, – could improve the outlook for potential output and thus encourage private investment. Finally, to the extent that financial constraints hold back private investment, there is also a role for policies aimed at relieving crisis-related financial constraints, including through tackling debt overhang and cleaning up bank balance sheets.
…Without that language, TARP would not have passed…. The Bush administration… used none of the first tranche on mortgage relief, nor did Treasury Secretary Henry Paulson use any leverage over firms receiving the money to persuade them to lower mortgage balances and prevent foreclosures. Frank made his anger clear over this ignoring of Congress’ intentions at a hearing with Paulson that November…. Frank writes, ‘Paulson agreed to include homeowner relief in his upcoming request for a second tranche of TARP funding. But there was one condition: He would only do it if the President-elect asked him to.’…Obama rejected the request, saying ‘we have only one president at a time.’ Frank writes, ‘my frustrated response was that he had overstated the number of presidents currently on duty’…. Obama’s unwillingness to take responsibility before holding full authority doesn’t match other decisions made at that time. We know from David Axelrod’s book that the Obama transition did urge the Bush administration to provide TARP loans to GM and Chrysler…. It was OK to help auto companies prior to Inauguration Day, just not homeowners. In the end, the Obama transition wrote a letter promising to get to the foreclosure relief later, if Congress would only pass the second tranche of TARP funds. Congress fulfilled its obligation, and the Administration didn’t….Frank… first leveled [this] in May 2012 in an interview with New York magazine. Nobody in the Obama Administration has ever denied the anecdote…. I suppose those reviewing ’Frank’ can offer an excuse about this being ‘old news’…. The political media’s allergy to policy is a clear culprit here. Jamie Kirchick’s blanket statement in his review of ‘Frank’ that ‘readers’ eyes will glaze over’ at the recounting of the financial crisis is a typical attitude. But… people [who] suffered needlessly for Wall Street’s sins… would perhaps be interested in understanding why…
It could hardly be more obvious that this is not about money or fiscal sustainability, but about politics. This is a government that European authorities didn’t want, and they wish to show who is boss. And they really don’t want this government to succeed, which would encourage Spanish voters to opt for a democratic alternative — Podemos — later this year.
The IMF projected the economy to grow by 2.9 percent this year, and until the last month or so, there was good reason to believe that — as in 2014, after years of gross overestimates — its forecast would be on target. This growth would likely have kept Syriza’s approval ratings high, together with its measures to provide food and electricity to needy households and other progressive changes. The ECB’s actions, by destabilizing the economy and discouraging investment and consumption, will almost certainly slow Greece’s recovery and could be expected to undermine the government’s support.
If carried too far, European officials’ actions could inadvertently force Greece out of the euro — a dangerous strategy for all concerned. They should stop undermining the economic recovery that Greece will need if it is to achieve fiscal sustainability.
We come from the land of the ice and snow,
From the midnight sun where the hot springs flow.
The hammer of the gods will drive our ships to new lands,
To fight the horde, sing and cry: Valhalla, I am coming.
So, can we say anything about how the recent move in the euro fits into this story? One way, I’d suggest, is to ask how much of the move can be explained by changes in the real interest differential with the United States. US real 10-year rates are about the same as they were in the spring of 2014; German real rates at similar maturities (which I use as the comparable safe asset) have fallen from about 0 to minus 0.9. If people expected the euro/dollar rate to return to long-term normal a decade from now, this would imply a 9 percent decline right now.
What we actually see is almost three times that move, suggesting that the main driver here is the perception of permanent, or at any rate very long term European weakness. And that’s a situation in which Europe’s weakness will be largely shared with the rest of the world — Europe will have its fall cushioned by trade surpluses, but the rest of us will be dragged down by the counterpart deficits.
Now, this is not how most analysts approach the problem. They make a forecast for the exchange rate, then run this through some set of trade elasticities to get the effects on trade and hence on GDP. Such estimates currently indicate that the dollar will be a moderate-sized drag on US recovery, but no more. What the economic logic says, however, is that if that’s really true, the dollar will just keep heading higher until the drag gets less moderate.
We shouldn't overstate the case: we're not back to the economic misery of the 1970's. But the fact that we're already experiencing mild stagflation means that there will be no good options if something else goes wrong.
Suppose, for example, that the consumer pullback visible in recent data turns out to be bigger than we now think, and growth stalls. (Not that long ago many economists thought that an oil price in the 50's would cause a recession.) Can the Fed stop raising interest rates and go back to rate cuts without causing the dollar to plunge and inflation to soar?
Or suppose that there's some kind of oil supply disruption - or that warnings about declining production from Saudi oil fields turn out to be right. Suppose that Asian central banks decide that they already have too many dollars. Suppose that the housing bubble bursts. Any of these events could easily turn our mild case of stagflation into something much more serious.
