A Cou­ple of Gems

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One blog par­tic­i­pant brought a post by George Mon­biot to my atten­tion. I fre­quently com­ment that the finan­cial regime ini­ti­ated after WWII omit­ted key ideas that Keynes proposed–in par­tic­u­lar, a new cur­rency for inter­na­tional trade and con­trols on the behav­iour of sur­plus nations as well as those run­ning deficits. Mon­biot pro­vides the his­toric detail of these pro­pos­als and their defeat. It is well worth a read.

A link to my site from another blog alerted me to another post, from the oppo­site end of the spec­trum, which is a cert for my “Brick­bats” page–both for its con­tent and its tim­ing. On Jan­u­ary 19, 2007, Ger­ard Baker of The Times edi­to­ri­alised that “His­to­ri­ans will mar­vel at the sta­bil­ity of our era”. An excerpt for you:

Econ­o­mists are debat­ing the causes of the Great Mod­er­a­tion enthu­si­as­ti­cally and, unusu­ally, they are in broad agree­ment. Good pol­icy has played a part: cen­tral banks have got much bet­ter at tim­ing inter­est rate moves to smoothe out the curves of eco­nomic progress. But the really impor­tant rea­son tells us much more about the best way to man­age economies.

It is the lib­er­a­tion of mar­kets and the open­ing-up of choice that lie at the root of the trans­for­ma­tion. The dereg­u­la­tion of finan­cial mar­kets over the Anglo-Saxon world in the 1980s had a damp­ing effect on the fluc­tu­a­tions of the busi­ness cycle. These changes gave con­sumers a vast range of finan­cial instru­ments (credit cards, home equity loans) that enabled them to match their spend­ing with changes in their incomes over long peri­ods.

In the City of Lon­don and New York, the cre­ation of the sec­ondary mort­gage mar­ket, cush­ioned banks from the effect of a sharp down­turn in their core busi­ness. The glob­al­i­sa­tion of finance meant that down­turns in one mar­ket could be off­set by strength over­seas. The economies that took the most aggres­sive mea­sures to free their mar­kets reaped the biggest rewards.”

Yeah, right. In this con­text, I can’t help quot­ing myself from 1995, in the con­clu­sion to my paper on mod­el­ling Minsky’s Finan­cial Insta­bil­ity Hypoth­e­sis for the Jour­nal of Post Key­ne­sian Eco­nom­ics:

From the per­spec­tive of eco­nomic the­ory and pol­icy, [Minsky’s] vision of a cap­i­tal­ist econ­omy with finance requires us to go beyond that habit of mind which Keynes described so well, the exces­sive reliance on the (sta­ble) recent past as a guide to the future. The chaotic dynam­ics explored in this paper should warn us against accept­ing a period of rel­a­tive tran­quil­ity in a cap­i­tal­ist econ­omy as any­thing other than a lull before the storm.”

PS Paul Amery pro­vided a link to a paper by Bernanke on “The Great Mod­er­a­tion” too, but it was not the cor­rect link. Here it is–writ­ten in 2004 so it’s not as out­ra­geously badly timed as Baker’s blather. But I won­der how often Ben goes to bed won­der­ing “How on earth did it all come to this?”

About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.
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  • icon­o­clast

    pru­dentsaver, go and try to dump US$2T of trea­suries and see what you will get, cer­tainly not $2T.

    Pru­dentsaver, you are not mak­ing a valid com­par­i­son. The com­po­si­tion of the U.S. Feds. present day bal­ance sheet is not the same as in the 70’s, 80’s or 90’s. The com­po­si­tion of the bal­ance sheet as well as many other fac­tors, which did not exist in the 70’s and 80’s, like for exam­ple, BRIC coun­tries par­tic­i­pa­tion in world trade does mat­ter.

    The man­ner by which you make com­par­i­son will yield out­comes that are not real world.

  • pru­dentsaver

    In china the money mul­ti­plier, and the upwards long term trend in their bond yields is so strong, that I think China have the poten­tial to take over with the reserve cur­rency if the dol­lar was to crash, as china have a money mul­ti­plier around 5, and a lot of room to grow domes­tic credit growth if they choose to do so, the only pos­si­ble prob­lem in China are over­heat­ing. It’s so wildly dif­fer­ent to the US, where it’s impos­si­ble to get the money flow­ing where it should. I think China might have ambi­tions to make an Asian cur­rency zone, where the ren­minbi is the reserve cur­rency, or even make it the world cur­rency. I think it’s not long before our bonds break, sim­ply because they lack any back­ing in com­par­i­son to China, that have plenty of back­ing for their bonds.

  • icon­o­clast


    mis­read your post.

    Yes, I am aware that they are not ster­al­is­ing as they would under nor­mal cir­cum­stances. They have been expand­ing the lia­bil­ity side of their bal­ance sheet, but by no means in the man­ner the Japan­ese per­formed quan­ti­ta­tive eas­ing.

    In any case, my retort regard­ing ster­al­is­ing was in ref­er­ence to pru­dentsavers propo­si­tion that there is a sup­posed bond bub­ble and that when there is a big sell off, yield will do a moon shot and infla­tion will ensue. 

    I am sug­gest­ing that fol­low­ing the money is not that sim­ple!

    The model that pru­dentsaver puts up as a jus­ti­fi­ca­tion for infla­tion can be con­sid­ered far to sim­pli­fied.

  • pru­dentsaver

    The point is that if they buy­ers are not there, the price will crash, and then there will be a vac­uum, my guess is that cur­ren­cies that the ren­minbi will be floated and fixed to gold in a moment like that, the Yen also acts as a reserve cur­rency above the dol­lar, the moves in the cur­rency mar­kets clearly show the Yen is a emperor to the dol­lar. The Yuan is not a cur­rency that’s a joke like the dol­lar. How­ever. Fan­tasies, aside. I think the stag defla­tion of Roubini is inter­est­ing. It’s a remote pos­si­bil­ity, that we will fall into some­thing like japan, where the whole deven­loped world expe­ri­ence a com­bi­na­tion of domes­tic defla­tion and imported infla­tion from the BRIC coun­tries. In that sense, the lack of union power from the sev­en­ties, ‚etc, will cause us to avoid the wage price spi­ral, that will take hold in the emerg­ing world, in real­ity caus­ing a com­plete rever­sal of the trends of glob­al­i­sa­tion. Where food, gas, the things that mat­ters will creep up very bad, and the things that don’t mat­ters to most, the price of ser­vices, goes down.

  • pru­dentsaver


    I think this is some­how inter­est­ing:


    I think we are in some­thing that mir­rors 1998, and are on the way out. There was a huge prob­lem with infla­tion ear­lier this year. In my book, infla­tion ends when inter­est rates are raised. That have not hap­pened yet, so I assume that bonds will sell off like in 99, and will flow into some­thing, that will cause a bub­ble, I just don’t know what yet. That will cause inter­est rates to go up, and then the infla­tion we did see in june will be killed in the tra­di­tional fash­ion.

  • ned

    Hi icon­o­clast, I am curi­ous about the assets you say the Fed can sell to ster­ilise the Trea­suries they buy?? What will the get for the toxic waste CDO’s, Fanny and Fred­die debt and AIG shares that are on their bal­ance sheet?? I have a feel­ing that there will be as much inter­est in those “assets” as there was when the Fed over­paid for them, zero.

  • icon­o­clast


    China has the poten­tial to take up the role of a the world hege­mon in the future, no doubt about that. How­ever, they are not there in the here and now, and there are many things that can go wrong with the CPC plans. What mat­ters is what is hap­pen­ing now, not may hap­pen in twenty years time.

  • pru­dentsaver

    I think China’s econ­omy is the sec­ond largest econ­omy in the world. If you mea­sure it prop­erly.
    I don’t think it’s as far away. If it ends with them as with japan in 1989, (I think china now is like japan in 1975), or if they achieve world dom­i­nance remains to be seen.

    ned, my take on that mat­ter is that the fed only needs to worry about those assets after the econ­omy recover, and then value will recover to the toxic waste to, per­haps, but not likely mak­ing them a profit after adjust­ing for infla­tion, it will then help them take money out of the econ­omy.

  • icon­o­clast


    the Fed has pur­chased MBS, CMBS, high qual­ity com­mer­cial paper, major stakes in the recap­i­talised bank­ing and insur­ance indus­try all with sig­nif­i­cant hair­cuts, which are also earn­ing them money as well. 

    The toxic junk is already writ­ten off, the tax payer will cop that fair and square between the eyes!

    Any­one who sug­gests that bal­loon­ing of the Feds. bal­ance sheet rep­re­sent infla­tion­ary pres­sure or the Fed mon­etis­ing the deficit sim­ply doesn’t know what they’re talk­ing about. Banks are sit­ting on the reserves, not with­draw­ing them as cash. When mar­kets set­tle down, the Fed can and will absorb those reserves back in with ster­il­is­ing sales of Trea­sury secu­ri­ties, just as it did in 2001 or after the more mod­est spike in August 2007. 

    Pro­vid­ing new reserves aggres­sively is absolutely and unques­tion­ably the way the Fed needs to respond to this kind of devel­op­ment.

  • icon­o­clast

    pru­dentsaver, you sug­gest there will be a vac­uum, because there will be no buy­ers, well there will be a buyer, the Fed. The buyer of last resort if nec­es­sary.

  • pru­dentsaver

    If that hap­pens, then I think the dol­lar will enter free fall, the only rem­edy for that will be for the fed to increase inter­est rates like crazy. I think it’s sim­i­lar to the asian cri­sis, only it’s kind of reverse, the deven­lop­ing world hav­ing bor­rowed to the deven­loped, hence, the deven­loped are end­ing up with hik­ing inter­est rates, and crash­ing cur­ren­cies ‚to des­per­ately attract buy­ers, from the deven­lop­ing world.


  • icon­o­clast


    they will of course ster­alise those pur­chases.

    This whole game is going to be played out in the forex mar­ket, with read­just­ments in some cur­ren­cies but not oth­ers that are fix­ated on peg­ging to the U.S.

    It may all end up in trade ten­sions and resolved under the WTO, on the other hand the Black Swan always likes to show itself dur­ing these times, and it could all turn very nasty.

  • Bull­turned­bear

    Hi Pru­dent and Icon,

    You guys have been going for it.

    The thing I love about you Pru­dent is that you just don’t quit. A very admirable qual­ity.

    I do agree with Icon, I think your analy­sis is shal­low. You are ignor­ing debt lev­els, risk aversion/sentiment changes and deleveraging/debt defla­tion and wealth destruc­tion.

    What con­cerns me greatly, is that I don’t think you are read­ing and accept­ing what Steve and the other blog­gers on this site (and other bear­ish sites like Mish) are say­ing. I don’t under­stand why you bother read­ing this site. You do not seem to accept any of the the­o­ries pro­posed.

    You may well be right, time will tell. Cer­tainly to date there is no lead­ing indi­ca­tors or recent his­tor­i­cal data to sup­port you pre­dic­tions.

    My fear is that you have taken huge bull­ish posi­tions based on your pre­dic­tions. I try to trade just like that. That is, pre­dict­ing the future as opposed to fol­low­ing the herd. Well in the­ory any­way!

    Please take care. The Macro econ­omy and sen­ti­ment mea­sures are crash­ing. These are lead­ing indi­ca­tors for falling demand. These do not sup­port a quick turn around. 

    Despite this, I do expect a large multi month relief rally in equi­ties and com­modi­ties dur­ing 2009. But I expect it to be all bad, very bad by the end of 2009. Any­way, what do I know?

    Please be cau­tious as the bears are rul­ing and that trend has not changed yet. Despite what CNBC and all the “hope it will improve soon” crew says.