What you should draw from this is the following: The Great Moderation is revealed as an illusion once we reach the zero bound, where interest rates are near zero. At this point the asset-price reflation can no longer rely on interest rates alone, but must also use increasingly heavy-handed tactics to get the economy going. This is where we now are. Terminal Debt is fast approaching. Steve Keen believes we are at a Terminal Debt stage, where no more debt can possibly be accumulated to revive growth. However, I have presented you with evidence that this is not necessarily the case (see posts here and here). Nevertheless, it is fast approaching. The central bank is damned if it does and damned if it doesn't. This was the takeaway of the Scylla and Charybdis post: All roads lead to a W-style Japanese depression or a deflationary bust because deflation is secular (Terminal Debt) while inflation is cyclical (asset prices). An inflationary scenario will invite a policy response which kills the recovery. This is good for government bonds but not for risky assets. Longer-term, this is a good environment for government bonds. They are the risk-free asset in an environment of secular deflation. Shares are not a good investment in this situation despite huge rallies. Remember, we saw huge bear market rallies after 1929 and again in Japan after 1990. I believe we are in the reflationary period of a longer-term depression right now. As a result, there is substantial downside risk for the economy going forward. Like Munchau, I don't have any magic bullet solution to this dilemma - although I do have a number of ideas. Feel free to chime in with your thoughts on the way forward.
What you should draw from this is the following:
I believe we are in the reflationary period of a longer-term depression right now. As a result, there is substantial downside risk for the economy going forward. Like Munchau, I don't have any magic bullet solution to this dilemma - although I do have a number of ideas. Feel free to chime in with your thoughts on the way forward.
This is exactly what the economist Hyman Minsky predicted in his financial instability hypothesis.** He postulated that a world with a large financial sector and an excessive emphasis on the production of investment goods creates instability both in terms of output and prices. While, according to Minsky, these are the deep causes of instability, the mechanism through which instability comes about is the way governments and central banks respond to crises. The state has potent means to end a recession, but the policies it uses give rise to the next phase of instability. Minsky made that observation on the basis of data mostly from the 1970s and early 1980s, but his theory describes very well what has been happening to the global economy ever since, especially in the past decade. The world has witnessed a proliferation of financial bubbles and extreme economic instability that cannot be explained by any of the established macroeconomic models. Minsky is about all we have.His policy conclusions are disturbing, especially if contrasted with what is actually happening. In their crisis response, world leaders have focused on bonuses and other irrelevant side-issues. But they have failed to address the financial sector's overall size. So if Minsky is right, instability should continue and get worse.
This is exactly what the economist Hyman Minsky predicted in his financial instability hypothesis.** He postulated that a world with a large financial sector and an excessive emphasis on the production of investment goods creates instability both in terms of output and prices.
While, according to Minsky, these are the deep causes of instability, the mechanism through which instability comes about is the way governments and central banks respond to crises. The state has potent means to end a recession, but the policies it uses give rise to the next phase of instability. Minsky made that observation on the basis of data mostly from the 1970s and early 1980s, but his theory describes very well what has been happening to the global economy ever since, especially in the past decade. The world has witnessed a proliferation of financial bubbles and extreme economic instability that cannot be explained by any of the established macroeconomic models. Minsky is about all we have.
His policy conclusions are disturbing, especially if contrasted with what is actually happening. In their crisis response, world leaders have focused on bonuses and other irrelevant side-issues. But they have failed to address the financial sector's overall size. So if Minsky is right, instability should continue and get worse.
Not only were economists blind to Veblen 100 years ago but they forgot about Keynes' "when the capital development of a coutry becomes a byproduct of the activities of a casino the job is likely to be ill-done" within 20 years. But the more egregious blindness is really the one regarding Minsky.
Let's see if I got this right. Minsky, by then already a respectable economist, writes a book about financial instability in 1986. In 1987 the market has the largest one-day crash in history and yet it's only now that people say that his theory has become interesting because of the current crisis?
What about the Savings and Loans crisis, the Mexican currency crisis, the Asian crisis, Russian crisis, Argentina, .com bubble...
WTF is wrong with economists? En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
In their crisis response, world leaders have focused on bonuses and other irrelevant side-issues.
Dum-de-dum-de-dum.
Yet to suppose that President Hoover was engaged only in organizing further reassurance is to do him a serious injustice. He was also conducting one of the oldest, most important - and, unhappily, one of the least understood - rites in American life. This is the rite of the meeting which is called not to do business but to do no business. It is a rite which is still much practised in our time. It is worth examining for a moment. Men meet together for many reasons in the course of business. They need to instruct or persuade each other. They must agree on a course of action. They find thinking in public more productive or less painful than thinking in private. But there are at least as many reasons for meetings to transact no business. Meetings are held because men seek companionship or, at a minimum, wish to escape the tedium of solitary duties. They yearn for the prestige which accrues to the man who presides over meetings, and this leads them to convoke assemblages over which they can preside. Finally, there is the meeting which is called not because there is business to be done, but because it is necessary to create the impression that business is being done. Such meetings are more than a substitute for action. They are widely regarded as action. The fact that no business is transacted at a no-business meeting is normally not a serious cause of embarrassment to those attending. - J.K. Galbraith, The Great Crash of 1929
Yet to suppose that President Hoover was engaged only in organizing further reassurance is to do him a serious injustice. He was also conducting one of the oldest, most important - and, unhappily, one of the least understood - rites in American life. This is the rite of the meeting which is called not to do business but to do no business. It is a rite which is still much practised in our time. It is worth examining for a moment. Men meet together for many reasons in the course of business. They need to instruct or persuade each other. They must agree on a course of action. They find thinking in public more productive or less painful than thinking in private. But there are at least as many reasons for meetings to transact no business. Meetings are held because men seek companionship or, at a minimum, wish to escape the tedium of solitary duties. They yearn for the prestige which accrues to the man who presides over meetings, and this leads them to convoke assemblages over which they can preside. Finally, there is the meeting which is called not because there is business to be done, but because it is necessary to create the impression that business is being done. Such meetings are more than a substitute for action. They are widely regarded as action. The fact that no business is transacted at a no-business meeting is normally not a serious cause of embarrassment to those attending.
Men meet together for many reasons in the course of business. They need to instruct or persuade each other. They must agree on a course of action. They find thinking in public more productive or less painful than thinking in private. But there are at least as many reasons for meetings to transact no business. Meetings are held because men seek companionship or, at a minimum, wish to escape the tedium of solitary duties. They yearn for the prestige which accrues to the man who presides over meetings, and this leads them to convoke assemblages over which they can preside. Finally, there is the meeting which is called not because there is business to be done, but because it is necessary to create the impression that business is being done. Such meetings are more than a substitute for action. They are widely regarded as action.
The fact that no business is transacted at a no-business meeting is normally not a serious cause of embarrassment to those attending.
- J.K. Galbraith, The Great Crash of 1929
WTF is wrong with economists?
Ahh, I thik you have mistaken the function of economists as being analogous to physicists. If there is a demonstrated problem with physics, physicists go and examine their theories, design hypothesies about why they've gone wrong and then adjust the theories which describe the phenomenon to adjust to reality.
Economists are not that kind of beast.
The best way I can describe it is thus : The Queen of England thinks the world smells of fresh paint. This is because everywhere she goes people ensure that all is clean and freshly painted so that she gets the best impression possible of anything she sees.
Economists perform a similar function as the painters, they are there to adjust reality so that, whichever way a politician or commentator regards the economy, there is always a rosy glow to to the scene. keep to the Fen Causeway
Economists perform a similar function as the painters, they are there to adjust reality so that, whichever way a politician or commentator regards the economy, there is always a rosy glow to to the scene.
(Using the word 'school' to mean 'large group of predatory fish', presumably.)
So if Minsky is right, instability should continue and get worse.
In other words, there is danger no matter how the central banks react. Successful monetary policy could be like walking along a perilous ridge, on either side of which lies a precipice of instability.
As Krugman never tires to say, we're in a Keynesian liquidity trap, against the zero lower bound of interest rates, and conventional monetary policy has ceased to have any effect (good or bad). En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
asset-price reflation can no longer rely on interest rates alone, but must also use increasingly heavy-handed tactics to get the economy going
As Geezer says in his diary;-
When the "home equity loan" became the source of funds for consumption, we bailed out. We knew it was over- that the motors were now finally silent, that the system was losing altitude fast, and had to crash very soon.
To us this seems a statement of the bleeding obvious. However this obviousness seems to elude most commentators, politicians and their appointed administrators. keep to the Fen Causeway
The implication is that asset-price inflation is needed to get the economy going. Discuss.
as in say, housing prices going up again, so everyone with a toe-hold in the middle class feels rich enough to be a confident consumer again?
what other assets might be on the table for this?
carbon tax credits for bicyclists?
satyagraha spinning wheels?
can you have 'asset-price inflation' without it bubbling sooner or later, as all the speck-ers smell opportunity, and cluster, jacking and jockeying the asset's reputed value high enough to pay a foodchain of middlemen to suck as much as they can out of it as it attains necessary 'velocity'on its way from raw material to 'end-user'? ~"When an inner situation is not made conscious, it appears outside as fate." Karl Jung~
Oddly reminiscent of most of what passes for economics, certainly.
The wheels are spinning, people are earning merit, but nothing much is happening.
