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By Toby Baxendale, on 22 September 09
 No to Keynes' Circular Flow The essential idea of a Liquidity Trap as expounded by J M Keynes in this “General Theory” is that there is a point in time, when the interest rate has fallen so low, that investment bonds, be they public or private, are returning so little, that the investor then decides to keep all his money as a cash balance. This then snuffs out any further economic activity that may have been brought about by the former investments. There is a general freezing up in the economy and a Recession becomes a Depression.
It is fashionable in all sectors of the media, politicians and economists to say that they think this event is happening right in front of our very own eyes
In the famous circular flow of income that the Keynesians adhere to, one man’s spending is a another man’s income.
Is it possible that a person would not spend anything in a Liquidity Trap? I think not. All people have to buy their day to day food stuffs, pay for heating, pay for shelter and other such basics.
Having an excess cash balance simply means that you are choosing to keep your money as cash for later use. You produced goods and services in exchange for money (cash) which you have kept as money, ready to exchange for other goods and services at a moment of your choosing.
Please reflect on this very salient point: a rise in your personal demand for money held as cash does not effect the production of goods and services because money is only employed to exchange things. If it did effect production, an unlimited rise in the demand for money (IE a Liquidity Trap) would mean that no one was exchanging goods and services for other goods and services. Society would cease to be!
We actually have a situation where we have the balance sheets of Central Banks showing cash reserves increasing to startling percentages since the start of the recession in August 2007 with a massive uplift since the Lehman Brothers crash on September 15th 2008 at 07:58. In the USA there are $760 billion of extra cash reserves that now sit in the USA banking system, some 123% more than the same period a year ago. By July of this year, the BoE had increased its balance sheet by £153 billion or 158% over the same time last year.
It would seem that the Keynesians have a point: there is all this cash in the system, untold amounts of liquidity that we have never seen before, and it is not being spent. Is this not the classic Keynesian circumstance in which a Liquidity Trap emerges? This is when silly Monetarist ideas of sprinkling money “from a helicopter” come into vogue: I recently saw a very nutty idea being put forward in the FT by Wolfgan Manchau saying that we should have some electronic devise inserted into money that makes it expire as legal tender after a period of time so people are forced to spend:
Central banks could deploy policies to discourage cash hoarding. One extreme possibility would be to stamp cash, putting an expiry date on banknotes that would force their holders to pay a fee equivalent to the negative interest rates.
Seemingly, people with these views are so divorced from reality they have forgotten, or perhaps never knew, how real wealth is created. I have explained this within Can the Manipulation of Interest Rates Create Wealth?
I find it useful to point out here that if we all spend our salaries on consumption goods only each month, we would not be able to buy any capital goods such as a house or a car, unless we are paid each month a net equivalent to buy a house or a car. Clearly, only a handful of football players and bankers are in a position to do this. No savings would be made if this policy was ever recommended which, in the medium term, would lead to large scale impoverishment of society. From savings, you have the wellspring of investment to produce the new goods and services of the future.
The massive build up of liquidity has come about as the economy has gone into recession. Governments around the world have reacted by putting newly minted money into the economy.
Why did the boom turn into bust? I would always argue that it was the prior large scale expansion of liquidity that led to excessive credit creation under Gordon Brown’s Chancellorship and indeed his Prime Ministry. From 1997 to today, we have seen an increase in money supply (as measured by M4) from £700 billion to £2 trillion.
The bust happened because the structure of production had become so distorted that the production sector was producing goods that the consumer did not want and/or could not afford to buy. How could this collectively happen? For some help with the answers to this, I turn to Hayek which I summarise. I funded the publication of Prices and Production and Other Works, which prints Hayek’s works written during his time at the LSE.
Capital Theory, the Structure of Production and Boom and Bust
From 1931-50, F A Hayek, the 1974 Nobel Price winner in Economics worked out the following in summary and was awarded the Prize for this work;
- A depression is always a shortening of the capital structure of production. Entrepreneurs have invested in things that people do not want in significant numbers such that when people collectively wake up to this fact, the bubble bursts and a realignment of production to the needs of the consumer takes place.
- This is caused by a concept that at the time was called “forced savings” as opposed to voluntary savings. To understand this further, we must look voluntary savings.
- When there are voluntary savings — in my business, using part of my cuts of meat to keep me sustained so I can invest in making a steel to sharpen my knives to “up” my productive output for any given time period — these can support the elongated structure of production that matches, via the interest rate, the prices and thus the needs of the consumers. This increase in voluntary savings causes a larger demand for producers’ goods in relation to consumers’ goods, so goods in the higher stages, those most removed from the production of consumer goods will see an increase in prices relative to the consumer good prices. The consequent narrowing of the spread or margin between the two furthest ends of the production structure and the consumer good end, or in other words, the lowering of the rate of interest, make possible a prolonged and indeed a permanent new process of production. This is steady capitalistic, very safe and very boring non boom growth.
- A lengthening of the structure of production caused by the opposite of voluntary savings — which Hayek called, in keeping with the time, “forced savings” — happens, simply put, when bank credit becomes more available via the demand deposit money creation multiplier described here or through the process known in modern parlance as “Quantitive Easing”. Both credit expansion and QE give the same signals to entrepreneurs that there is now a very low interest rate. This suggests there are plentiful real savings — money is cheap — therefore we can bring those production plans forward that we held at the margin of our thoughts and start investing. However, the consequent elongation of the structure of production is not sustainable because a reversal in the price spread between the producers’ goods and the consumers’ goods takes place as soon as the increase in the supply of cheap money via the private banking or central banking system slows or stops altogether. This is because the spending habits of the consumer have not actually changed.
- This has been compounded in our case by something else Hayek was hot on, if government expenditure rises , more is extracted from the citizens via either taxation or government-induced inflation. This too will cause a shortening of the process of production and a lengthening of the depression.
- If money were kept inelastic — i.e. a fixed supply in relation to the productive needs of the economy, then this could not happen.
In summary, any change in the money supply, through giving new loans to entrepreneurs or to consumers, first lengthens the production structure, then shortens it as real consumer needs have not changed.
Our problem arises from the prior elongation of the structure of production unbacked by real savings, brought about in particular via the low interest rate policy of Gordon Brown’s Government post 2000. This was enhanced by the massive and unprecedented increase in the money supply under his Chancellorship. That caused more investment in the heavy stages of production: the building of houses, or car factories, or to produce consumer goods that indeed, when push came to shove, not enough people could afford. The correction is now taking place. This is when entrepreneurs rebalance or redirect the factors of production that they have under their command to focus on the actual needs and demands of their customers.
There is no Liquidity Trap (I doubt that this is even a meaningful concept), just a badly misallocated structure of production which, despite the government, is in fact slowly but surely fixing itself.
Further reading
By Sean Corrigan, on 21 September 09
Sept. 17 (Bloomberg) — Private investors in China, the world’s largest metals user, have stockpiled “substantial” quantities of copper as the government ramps up stimulus spending to spur the economy, according to Sucden Financial Ltd.
Pig farmers and other speculators may have amassed more than 50,000 metric tons, Jeremy Goldwyn, who oversees business development in Asia for London-based Sucden, wrote in an e- mailed report after a visit to China. That’s about half the level of inventories tallied by the Shanghai Futures Exchange, which stood last week at a two-year high of 97,396 tons.
Many of us will have chuckled over the story that Chinese farmers are piling up base metals next to the barnyard muck-heap and as we do we will all be guilty of condescending to those sucked into a speculative whirl created when hot money met the Asian gambling instinct, forgetful of the fact that – though we have a penchant for intangibles rather than things you can stub your toe on – we are just as much at fault ourselves and for the very same reasons, to boot.
For, if we look behind the surface, we must see that our Oriental Farmer Giles’ actions are not exactly an irrational response to the vast monetary over-supply prevalent in a China where prospectively profitable outlets for all that ‘stimulus’ money are in decidedly short supply. The result is a ‘Flucht in die Sachwerte’ as Mises put it – a “flight to real values”.
We can already see that the brief stock market pullback which occurred when they feathered the throttle earlier this summer has completely terrified the Chinese authorities – helping them realize they have what Hayek called a ‘tiger by the tail’. By this we mean that they know no good can come of holding to their present course, but that they are also aware they will be instantly eaten alive if they dare to let go. As a result, PboC Vice Governor Su Ning was on the newswires today talking of continuing the present ‘moderately loose policy’ – i.e., naked inflationism – out into 2010. Heaven help us all!
But no illusions of Occidental superiority should be allowed to intrude, for we cannot expect our worthy central bankers to be any less pusillanimous when their turn comes to act – for all the current rumour-mongering about tough talk behind closed doors at the Fed.
As we said almost from Day One of the crisis, Bernanke’s utter misreading of the 1930s has fixed the Fed’s ‘mistake’ of 1937 just a large in his sights as that of 1930. Needless to say, while they focus on the drama of that one, blighted decade, he and his peers completely neglect the whole sad chronicle of mistakes committed during the years 1913-1929 and 1938-2009, as its flawed doctrines and political biddability have combined to gut the far more pure ‘capitalism’ which preceded the Fed’s establishment and which have promoted in its place the pandemonium of bank-led, crony corporatist welfare we practice so disastrously today.
At present, the main difficulty we face in our own work is that of not being too repetitive in laying out what he have been saying since the Crisis started (and hinting at long before then): namely, that Government activism + central bank accommodation = more money despite lowered levels of direct commercial bank lending to the private sector and that this, in turn, is enough to set the stage for an ill-founded revival in real-side activity.
This, of course, is already proving enough to bedazzle the intellectual goldfish who teem in our waters and it is certainly providing plentiful ammunition for our recently state-sponsored stock promoting class – this even though the upswing is becoming ever more dependent on a government interventionism littered with ‘broken windows’ and scarred with the smoking craters of economic collateral damage. Furthermore – and much sooner than anyone really credits it – it will also result in higher goods prices despite the presence of the so-called ‘output gaps’ (i.e., the many abandoned factories, deserted shipyards, uncompetitive vehicle assembly lines, and dust-blown construction sites) which, despite their evident disutility, are deemed to offer a safety valve, according to the tenets of Keynesian Groupthink.
As a result, it is very likely – if not quite fully guaranteed – that we have, as predicted, avoided our 1931-33 reprise. So, let’s hand it to those recidivist drunk drivers, Ben and Merv and Jean-Claude, for being canny enough to ferry some of their victims straight to the local hospital in the hope of impressing the judge at their hearing.
The sad truth is that, whether we are spared our mini-1937 moment as the stimulus is wound down (if only in real, not nominal, magnitude, and probably not in its application, per se), or whether the avid desire to avoid the stutter of a ‘double-dip’ is to forego all meaningful attempt at Cold Turkey, the central bankers’ much-acclaimed ‘success’ implies that we will fully realise our impoverishment amid a re-run of the stagflationary 1970s instead.
This will come about as a direct result of the way in which the over-extension of monetary loosening and the intensification of an already gross degree of state interference will impede the necessary healing processes of private entrepreneurialism while fostering both a divisive economic nationalism across borders and a febrile social factionalism within them.
To sum it up in a quote:-
“We are currently in a market where government bonds, corporate bonds, industrial commodities, precious metals, major and emerging market stocks are ALL rising while the volatilities and risk spreads associated with of most of the above are falling. This is not a bull market for gold and silver – it’s a bear market for paper currencies, led by the USD and driven by a deliberate, rapid inflation of the narrow money supply almost everywhere you look. Do not expect this policy to be reversed anytime soon”
By Sean Corrigan, on 10 September 09
 Lord Timon's Purse In Lord Timon’s Purse, Sean Corrigan explores the causes of the forty US banking failures of 2009 and sets out some of the basics of money and bank credit.
Despite the US seeing its fortieth banking failure of the calendar year – the greatest number in sixteen years ‐ financial markets are managing their usual feat of deluding themselves that a Goldilocks outcome is in prospect.
News articles abound in sighting of what, in the tiresome horticultural parlance, are invariably referred to as ‘green shoots’; a back up in bond yields is rationalized away as a ‘re‐normalization’ from crazily‐depressed levels (a view with which we actually have some sympathy); rising commodity prices are not to be feared, being merely the expression of an understandable eagerness to indulge in ‘recovery’ plays; slack labour markets and the widespread under‐utilization of capacity is seen to allow central banks to maintain their current accommodative stance for many months to come and – mindful of the ‘mistakes’ made in 1937 – when the unwinding process finally arrives, it will be well‐signalled and gentle.
So, ‘Out of the eater came forth meat; out of the strong came forth sweetness’ and out of banking weakness comes forth equity delight – or so the Street desperately hopes.
Away from the sales pitches and book‐talking, opinion is still, as ever, divided over the outlook for prices. The old war of words is being rehashed between those who see a long, gloomy stretch of near‐deflation as the outcome and those beginning to fret over a resurgence of inflation almost as soon as the real economy regains some traction.
Inevitably, this polemic has degenerated into yet another battle pitting Gold Bugs against New Dealers and Dollar Permabears vs. card‐carrying Keynesians – a Prosperian dialogue light on intellectual substance and generally lacking in insight.
Sean revisits some of the basics (emphasis mine):
On such observations as these [on bank lending and bond issuance] rests the case of those Deflationists who do at least possess sufficient sophistication not to regard a mere drop in the CPI index (and one highly influenced by the fall in over‐elevated energy prices, at that) as the Alpha and Omega of the argument. However, these sages then usually make at least one of two further mistakes in their analysis; viz., that they confound Money with Credit and that they then entirely neglect what is fast becoming the primary mechanism by which new money is being introduced to the economy.
In order to dispel the confusion, we must here digress to reprise a few basics.
ʹMoneyʹ‐ for now disregarding the question of its particular composition ‐ is above all the medium of exchange whose other commonly‐cited attributes as a unit of account and a store of value are decidedly derivative, emergent functions, the first of which is not strictly commensurate with current money itself – e.g., SDRs ‐ and the second of which is sadly more often an aspiration rather than a statement of fact.
In order to function as the medium of exchange, money must be widely and unequivocally accepted ‐ indeed, it must be THE most widely accepted ‐ substitute for the specific consumable goods we seek in a typical trade when we surrender a different batch of consumables to our counterparty but have no use for the goods which he, in turn, is offering for sale. The upshot of this is that money is itself a present good, that is, one instantly utilisable in the here and now.
Again, to emphasise the crucial point, money must be thought of as THE present good par excellence (not, incidentally, just a mere representation of such goods) the one for which there is always a ready market: to say otherwise is an existential denial that it is money at all. While this may have been easier to grasp when money actually took the form of a tangible good ‐ whether cowrie shells, cattle, or silver crowns ‐ it is no less the case today when it has largely been robbed of physical expression.
Money, then, is the medium in which we can make final settlement of any transaction, as is recognised by those étatiste legal tender laws which Leviathan wields to force free individuals to use the bastard versions to whose creation it reserves to itself the exclusive right of sanction and from whose creation it thereby intends mischievously to profit.
By contrast, ‘Credit’ is an assignation of the right of command over present goods to another, whether for a fixed or an indeterminate period. Entailed in this alienation is a sacrifice for which we seek recompense by charging a fee ‐ namely, interest.
[NB: contra the mainstream misconception, interest is not the price of money (that can only mean its reciprocal value expressed in the other goods for which it exchanges), but the price of the time which passes while we forego enjoyment of our property]
Read more here.
By Sean Corrigan, on 9 September 09
In the 1 September 2009 edition of Material Evidence, Sean Corrigan explains why the stock market is rising and why the appearance of prosperity will not last.
 Corrigan, Material Evidence … the CRB equal‐weight index has put in a six‐month burst only topped in half a century in the run‐up to 2008’s peak and during the severe dislocation of the first oil shock, while the DJ Industrials ‐ lagging by a couple of months – have just registered their best half year since 1933 itself.
Without stopping to rehearse the entire thesis (laid out most recently in the last two editions of Tangible Ideas, viz., ‘Lord Timon’s Purse’ – oriented towards money and credit ‐ and ‘Goodbye to All That’ – which dealt with their real‐side impact), this ‘bullishness’ may have imparted the impression that we have something of a schizophrenic mindset since, in all other respects, our outlook has been jaundiced, to say the least. To the contrary, the two are not at all incompatible, but, rather, interrelated, since what we have all along said would drive a rapid rebound in asset prices would be continued central bank laxity, supercharged by the monetization of soaring government deficits and magnified by the market’s utter misunderstanding of the nature of the ‘recovery’ this has engendered as the liquidity crisis of ‘Snowball Earth’ has partially thawed to a still glacial Little Ice Age of misallocated capital and sorely impaired balance sheets.
Thus we continue to try to look past the breathlessly‐reported headline ‘numbers’ (which, presumably, is somewhat fundamental to the very business of analysis) with the aim of trying to ascertain whether any genuine and abiding improvement of private business is in train or whether all we are seeing is the overspill of state‐led, monetary‐fiscal orgiastics which are therefore doomed to end in another debacle at some indeterminate – but hardly indefinitely postponable ‐ point in the future.
Update
See also:
Hopes for a flurry of company takeovers and growing belief in the strength of economic recovery on Wednesday propelled the FTSE 100 index through the 5,000 level for the first time in almost a year.
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Graham Secker, equity strategist at Morgan Stanley, said that equities, helped by the improving economic outlook and continued support from the world’s central banks, were enjoying a “sweet spot” that would sustain the rally for now.
“Growth is picking up and the stimulus taps are still full on. That is a pretty good environment for stocks,” he said.
via FT.com / Markets / UK – Footsie pushes above 5,000 and our Why is the FTSE going up?
By Steven Baker MP, on 2 September 09
 Responding to an article in The Times, Steven Baker indicates the origins of our views on the economic situation and its causes, of our prospects and of the best route to sustainable prosperity.
For the Times, Jim O’Neill, Chief Economist at Goldman Sachs, writes:
Based on the evidence I have seen this month, it looks as though the world moved out of recession in the second quarter. When we see the evidence for this, in the third-quarter data, it is likely that many areas will have returned to close to trend growth.
He goes on to explain the emotional and subjective criticism he has received in response to previous articles, the evidence and his optimistic outlook for the world economy, concluding:
Since March, close to the time that developed stock markets bottomed, our GLI has shown a vigorous bounce and, indeed, for the past two months the monthly increases have been the sharpest we can find. The chart of the monthly changes, as you can see, looks pretty much like a V, not a W. Right now, it suggests a much stronger bounce in the world in the next six months than consensus and, along with other data, is why in our latest forecasts we predict that world GDP will recover by 4 per cent in 2010. This will include the UK because, despite all its challenges, it is an economy small and open enough to be greatly influenced by the rest of the world.
Now, we have already explained why the FTSE is rising, the cause of the appearance of prosperity (also Corrigan) and that uninterrupted growth in the stock market never indicates favourable economic conditions. We have shown that our understanding of the nature of money produces a measure which, in contrast to the Bank of England’s M4, correlates to economic activity. We have introduced a better measure of private prosperity than GDP. We have indicated here and here alternative prognoses for the global economy. Our primer introduces our supporting literature.
Mr O’Neil is a senior economist and Goldman Sachs makes a great deal of money. So why do we disagree?
There are three important schools of economic thought: Keynesian, Monetarist and Austrian. We follow the Austrian School. In contrast to the others, it has a robust capital theory and an understanding of the interest rate as the price which coordinates the economy across time. Unfortunately, Mr O’Neill’s economic thinking causes him to look at the immediate empirical evidence and make pronouncements which, while superficially justified, lack a deep theoretical understanding of the situation, that is, the distortions in the capital structure of production.
Of course, this is not to assert that money cannot be made by bankers in the short term under the present system. The question is whether that system of thinking can explain our predicament and the best route out.
Continue reading “Now it’s looking like V for victory over recession – Times Online”
By Gordon Kerr, on 19 August 09
Gordon Kerr, a banker with expertise in derivatives and foreign exchange, explores the evidence of moral hazard in the bank bail outs.
By rescuing the banks with taxpayers funds the Government won the approval of many who were horrified at the prospect of repeats of the TV footage of depositors queuing to try and take their money out of the first failure, Northern Rock.
Whilst the protection of depositors is to be welcomed, that protection could have been achieved by the adoption into the UK banking business model of the ‘honest money’ policies familiar to frequent visitors to this site.
What commentators dwelt less on at the time of the UK bailouts were the distortive effects on the market of continuing taxpayer support. The market’s cries for the emergence of new brands, perhaps even the revival of the genuinely mutual template, remain stifled. Why would depositors choose such new brands when the old mismanaged failures enjoy a government guarantee, albeit in some cases implicit rather than explicit?
If the frightening consequences of the new era of zombie banking were not plain enough, the report in today’s Daily Telegraph by Philip Aldrick removes any iota of doubt:
Northern Rock should not be allowed to complete a planned restructuring without paying financial penalties, Britain’s building societies have told European competition regulators, on the grounds that the nationalised mortgage lender will otherwise have an unfair advantage.
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Northern Rock is planning to split into a “good bank”, BankCo, which will continue to lend, and a “bad bank”, AssetCo, which will house and run down the bad loans. The BSA, which represents Britain’s mutual lenders including Nationwide, said the break-up will allow BankCo “to lend freely, without having to absorb losses from non-performing loans, unlike all of its competitors”.
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Northern Rock has one of the worst lending records of all UK banks. Some 39pc of its £62bn of mortgages are in negative equity, and it made a £724m loss in the first half on the back of £602m of bad debts. Without hiving off the loss-making mortgages, Northern Rock would only be able to lend profitably by charging uncompetitively high rates.
The lender has stressed, however that the restructuring is in taxpayer’s best interests as it will allow the bank to operate without further capital injections.
– via Mutuals fear Rock plan will distort market – Telegraph.
In Scandinavia, in the early 1990s, mass bank failures were resolved by the ringfencing and liquidation of ‘bad’ assets in ‘bad banks’ to enable the brands to continue with the performing loans or ‘good’ assets.
The difference between Scandinavia then and the UK now is twofold: firstly the scale of the failures was small – the banks were restored by the excision of a relatively modest amount of nonperforming property loans; secondly the miscreant senior managers were pursued in the courts for personal restitution. It is worth noting that in today’s money the average annual compensation of very senior bankers in Northern Europe at that time would have been around the £100,000 mark. Whatever restitution funds were actually extracted were clearly therefore meaningless when measured against the taxpayer cost of the bailouts.
However the pursuit of those deemed responsible dealt with the worst possible consequence of the bailout, moral hazard. This pursuit removed any temptation that the next generation of bankers might otherwise have sensed to overleverage their banks in reliance on the state on the basis that they personally would have nothing to lose.
The Northern Rock ‘good bank’ will continue with the state guarantee. Rather than emphasise the importance of ending this or paying for it, Northern Rock believe that the continuance of the guarantee is in the taxpayer’s best interests since it “will allow the bank to continue to operate without further capital injections.” The failure of the spokesman to make any reference to the source of such future “capital injections” (you and me), or to imply any doubt that such ‘further capital’ would be available if required, is staggering. The most worrying aspect of the quotation is the apparent absence of irony.
All UK big banks are now explicitly, not just implicitly, state guaranteed. That is why sterling has fallen, entrepreneurialism hindered, and bank shares have risen. Certain Parliamentarians have invoked the term “casino banking” to summarise the banking malpractice that has created the failure (nobody really believes the ‘global crisis’ explanation beloved of the PM).
The UK holy trinity of treasury, regulator and central bank have not only failed to deal with the moral hazard point, their actions have sadly exacerbated it. Senior bankers are enjoying the highest levels of compensation with even less personal risk than before.
Unfortunately for the trinity however, market forces remain at work. The authorities’ failure to even recognise, let alone address, the moral hazard issue regrettably enhances the probability of a new wave of ‘casino banking’ failures.
An afterthought — moral hazard defined
Moral hazard refers to the idea that certain types of insurance systems might cause individuals to act in a more dangerous way than normal, causing a difference between the private marginal cost and the marginal social cost of the same action.
– S Ross, ‘The Economic Theory of Agency: the Principal’s Problem’, American Economic Review, vol. LXIII (1973), 134-39
By Toby Baxendale, on 5 August 09
 Entrepreneur and economist Toby Baxendale responds to warnings over errors in output gap data by explaining that there is no output gap, only lost capacity to produce goods no one can afford once cheap credit comes to an end.
Via FT.com / FTfm / Columnists – Beware of errors in output gap data:
Massive fiscal deficits and unorthodox monetary policies have left many market participants worried that the Federal Reserve will unleash the inflation genie at some stage. Fed chairman Ben Bernanke insists that he is committed to price stability and has the means to achieve it. That may well be so. What’s less clear is whether Helicopter Ben, or anyone else at the Fed, will know exactly when to employ his anti-inflationary toolkit.
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Rather, the Fed will likely remain passive until the economy is running near full capacity, or what economists call the “output gap” has narrowed. This sounds sensible. After all, inflation comes about when too much money chases too few goods and services, causing the economy to overheat.The trouble is that the track record of economists measuring the output gap in real time is rather patchy, to say the least.
In the Financial Times of August the 3rd, Edward Chancellor warns us we should not assume, just because we have high unemployment and idle capacity in factories, that we have spare capacity which can be employed before inflationary pressures start to work their way though the economy. Chancellor warns that economists’ track record of measuring the output gap is “rather patchy”. The conventional wisdom is that if we have idle resources, we must have spare capacity which will be employed without any price pressure on the economy when demand starts to rocket.
Conventional wisdom reasons further that one can create money out of thin air — “Quantitive Easing” or “Open Market Operations” by the central bank to stimulate demand — and that new money will not be inflationary, if the circumstances are right. The massive growth on central banks balance sheets that is potentially inflationary would be un-wound before any inflation emerged by placing bonds back in the market.
Thus the central banks around the world would manipulate the economy back to health like magic!
Continue reading “FT.com – “Beware of errors in output gap data””
By Steven Baker MP, on 4 July 09
Via FT.com / Columnists / Martin Wolf – The cautious approach to fixing banks will not work:
With one bound the banks are free, or so it seems. Already, the panic of the autumn of 2008 is fading. The period within which lessons can be learnt and changes made is closing. Yet without radical changes, another crisis is certain. It may not even be that long delayed.
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With their current capital structure, big financial institutions are a licence to gamble taxpayers’ money
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