Monday, May 4, 2015

The Arthurian — This is the problem that topples nations


Art Shipman puts his finger on it, and it is endemic in capitalism with a monetary production economy in which most of the money is created through private lending.

However, this doesn't entirely absolve governments. It's not the spending, though but the lending. Where this is no central bank as the lender of last resort, excessive lending leads to boom-bust cycles that liquidate bad debt and this prevents extended periods of inflation as a tradeoff for recurrent depressions and panics. When central banking and the lender of last resort function is added, deep depressions are prevented but private debt is never deeply liquidated and the result can be demand-driven inflation.

While Austrian economic recommends liquidation of excessive debt, the powers that be have decided that recurrent depressions, panics and the potential for financial breakdown is too costly socially, politically and economically, and so have opted for central banking and the lender of lasts resort function. To counter inflation central banks are given politically independent control of monetary policy on the assumption that inflation can be controlled through managing the interest rate, the discount rate, and the reserve ratio.

Abba Lerner recommended using functional finance to manage fiscal policy instead of relying on "sound money" and monetary policy.

These are the principal approaches being put forward today, with central banking and monetary policy being dominant.

What Art doesn't mention is that while monetary policy might be able to contain inflation theoretically, historically it has affected the value of assets more than wages and prices. So the Fed's attempt to stoke some price inflation after the crisis in order to head of a deflation, the result has been largely a run up in financial asset markets, which are more sensitive interest rates than wages, prices, firm investment, or household consumption. 

So while the measures of inflation based on price level are almost unchanging in spite of the monetary "stimulus," what some would call "asset inflation" has been hot as asset valuation exceeds economic performance, which asset values are supposed to reflect. May be we need to start talking about "asset inflation" rather than the single category of asset appreciation regardless of circumstances.

The New Arthurian
This is the problem that topples nations
The Arthurian

Art has been working on this for some time. Download his paper, The New Arthurian Economics, 2009, at MPRA.

2 comments:

Anonymous said...

I've got no idea how to read that chart. It seems to show that in most years there was a 100% + change in total private credit market liabilities vs. the previous year. That's obviously absurd, so what is going on there?

The Arthurian said...


Dan -- you're not the only one with questions about the graph. I thought I linked to the FRED source page but I forgot to do that.

The graph shows billions of dollars added to the economy each year by
1. the Federal Reserve (red),
2. The US Treasury (blue), and
3. borrowers other than the Federal government (TCMDO - FGTCMDODNS) (green)

It is a stacked graph shown as percent (a FRED option) so the tiny red is a tiny percent of (red+blue+green). The green is a large percent of (red+blue+green).

I wanted to show the money (billions of dollars) added into the economy each year by the three sources. I wanted to compare the sizes of the three annual additions.

Sorry about the confusion.