Monthly Archives: August 2011

Chart: U.S. Indebtedness

Posted on by
Leave a reply

The Net International Investment Position is measure of how indebted a nation is. Why is that so ? Combine all the balance sheets of the sectors of a nation. Debts between residents cancel out and one is left with assets held abroad and liabilities to non-residents. One can replace “residents” with “citizens” and define a slightly different system of accounts and hence there is more than one way of doing it. The difference between assets and liabilities is called the net international investment position or net asset position. Below you see how this has changed over the years for the United States and how it has moved from positive to negative number territory over the years.

There are many discussions we can have one this – never ending ones! This could range from sustainability of this to whether this is problematic since most of the liabilities to foreigners is in US Dollars. Also, there are many stories on the movement of this graph with puzzles such as the dark matter problem. Each is worthy of being analyzed in detail, but for now my viewpoint:

The fact that liabilities to foreigners is in US Dollars is advantageous to the United States not because of the usual reasons given but because the liabilities do not suffer from revaluation losses if the dollar depreciates. But only advantageous at best. Not more.

Enough stories over many future blogs.

bfn.

Conclusion Section Of Post #1

Posted on by
Leave a reply

Too excited to get my blog going, I finished my first post midway.

Sectoral Imbalances are of many kinds. The US private sector ran deficits for a long time and this lead to the financial crisis and the Great  Recession. Frequently, you hear about the shift in the distribution of income and this can also be studied with the Sectoral Balances Approach. Central bankers and policy makers have also realized that global imbalances are unsustainable.

This blog is about how to achieve sustainable growth in the short, medium and the long run and in the author’s opinion can come about only if international policies are coordinated. Policy coordination is not a new concept but for many years before the crisis, imbalances were allowed to continue even though many policy makers took notice of this. In my opinion, these were allowed to continue because the implicit assumption was that “market forces” will work toward resolving the imbalances.

When the world entered a period of catastrophe, governments took action and turned Keynesians overnight. So the G-20 made this statement in the Summit on Financial Markets and the World Economy in 2008:

Use fiscal measures to stimulate domestic demand to rapid effect, as appropriate, while maintaining a policy framework conducive to fiscal sustainability.

to prevent a bigger implosion and later in the 2011 summit

 Our aim is to promote external sustainability and ensure that G20 members pursue the full range of policies required to reduce excessive imbalances and maintain current account imbalances at sustainable levels.

However, the G-20 summit participants and the IMF seem to bring about the reversal of imbalances via fiscal contraction – as if there is no negative effect of the latter on domestic and world demand!

Wynne Godley and Francis Cripps [1] described confusions in the policy makers’ minds wonderfully in the Introduction of their 1983 book Macroeconomics

Our objective is most emphatically a practical one. To put it crudely, economics has got into an infernal muddle. This would be deplorable enough if the disorder was simply an academic matter. Unfortunately the confusion extends into the formation of economic policy itself. It has become pretty obvious that the governments of many countries, whatever their moral or political priorities, have no valid scientific rationale for their policies. Despite emphatic rhetoric they do not know what the consequences of their actions are going to be. Moreover, in a highly interdependent world system this confusion extends to the dealings of governments with one another who now have no rational basis for negotiation.

To conclude, the muddle in describing how economies work in Economics has been terrible for world demand (except periods of expansion through unsustainable private sector deficits which end in crises). My blog aims to bring forward ideas in Monetary Economics and how it can be used to achieve active management of economies rather than leaving the task to “market forces”.

References

  1. Wynne Godley and Francis Cripps, p13, Macroeconomics, Oxford University Press, 1983.

Horizontalism

Posted on by
Leave a reply

The central message of this book is that members of the economics profession, all the way from professors to students, are currently operating with a basically incorrect paradigm of the way modern banking systems operate and of the causal connection between wages, prices, on the one hand, and monetary developments, on the other. Currently, the standard paradigm, especially among economists in the United States, treats the central bank as determining the money base and thence the money stock. The growth of the money supply is held to be the main force determining the rate of growth of money income, wages, and prices.

… This book argues that the above order of causation should be reversed. Changes in wages and employment largely determine the demand for bank loans, which in turn determine the rate of growth of the money stock. Central banks have no alternative but to accept this course of events, their only option being to vary the short-term rate of interest at which they supply liquidity to the banking system on demand. Commercial banks are now in a position to supply whatever volume of credit to the economy their borrowers demand.

– Basil Moore, Horizontalists and Verticalists, 1988 [1]

Most economics books come nowhere close to starting like this. To be fair, when Moore wrote the book, many Post-Keynesians thought that this picture is too simplified. Only a few – such as Marc Lavoie – supported Moore’s view. He himself had been writing about the Post-Keynesian theory of money for some years, around that time. The supposed simplicity gave rise to the long debate Horizontalism versus Structuralism. There’s a lot of nice literature on this and its worth a read.

What do the terms horizontal and vertical refer to? Economists make supply-demand diagrams in which price is on the y-axis and quantity is on the x-axis. Moore called neoclassical economists Verticalists because according to them, the “money supply” is vertical in the diagram. “Money demand” is downward sloping. The interest rate at which the supply and demand curves meet is the market interest rate. Horizontalists, strongly believe that this is exactly wrong and the supply curve is horizontal at the rate determined by the central bank. The quantity of money, then, is the point at which the non-banking sector’s desire to hold money balances (as opposed to “demand”) determines the money stock (as opposed to “supply”). Of course, as explained by Louis-Philippe Rochon and Matias Vernengo [2], the idea of making supply-demand diagrams is only a second-best tool, the more important point being that money is endogenous.

Recommend Moore’s book. I had previewed the book at amazon.com but had to search the whole internet to get it. I tried a Greek and a French seller and ordered online, only to be told later I should expect a refund since that the book is out of stock and wrongly mentioned on the website as available. I finally found a seller at Amazon France selling a used copy for €175.38 but would deliver only to a few countries. I had to get it shipped to a friend in the US and ask him to ship it to me, which cost me an extra $94.

References

  1. Basil Moore, Horizontalists and Verticalists, The Macroeconomics Of Credit Money, Cambridge University Press, 1988.
  2. Louis-Philippe Rochon and Matias Vernengo, Introduction, p2, Credit, Interest Rates And The Open Economy: Essays On Horizontalism, ed. Louis-Philippe Rochon and Matias Vernengo, Edward Elgar Publishing, 2001.

Update: 4 Jan 2012: Fixed some errors in the quote.

The Quick Rise And Fall Of Keynesianism

Posted on by
Leave a reply

Welcome to my blog!

This blog post is about the Great Recession, the imbalances which led to it, the use of Keynesian principles by governments of all nations to prevent a deep implosion and how and why the Keynesian mini-revolution didn’t last long. Suddenly, nobody is asking Are We Keynesians Now? and the economics profession has lost lines of communications with governments. Like a Guns ‘N Roses song that goes

What we’ve got here is failure to communicate, some men you just can’t reach.

Will it take another crisis to revive Keynesianism? While, the author is a die-hard Keynesian, he believes that fiscal policy alone cannot resolve the crisis. Governments are aware of this but government officials give only vague replies when taken to task.

The blog in general is/will be about an approach which has roots in the New Cambridge approach to studying economies and how it can be applied to find political economic solutions to put the world in a sustainable path of growth and achieve full employment. It is also about about the Post-Keynesian theory of Endogenous Money and the Stock Flow Coherent Approach. Using the blogosphere as a medium to satiate my crave to put forth my understanding of how economies work, I aim to make a difference. Post-Keynesians emphasize that monetary economies function differently from the chimerical neoclassical story and money cannot but be endogenous. I plan to take the reader into how the monetary and financial system works, the role of various sectors (individuals and institutions) in a demand-led process, their behaviour and what can be done to reverse sectoral imbalances that have built up. 

Why Keynesianism was short-lived in the Great Recession is a difficult question to tackle in a single post. Before the 1970s, for many years, the world was run using Keynesian principles and suddenly it fell apart. To me, the situation right now is very reminiscent of what went on during the 70s and the 80s (I am not that old!).

Francis Cripps wrote this brilliantly in a 1983 article What Is Wrong With Monetarism [1]

The conclusion which has to be drawn is that, if a modern economic system is to function properly, a mechanism is required for the management of aggregate demand. Now it happens that the need for management of aggregate demand within a closed national economy can be met rather easily. It is easily met because national economies have an institution called the state which is unique in that it has virtually unlimited powers of credit creation or borrowing (or would have within a closed national economy). Keynesians gave up at this point, thinking that once the need for demand management had been pointed out, and the possibility for demand management by a national government had been understood, the problem of demand management was solved once and for all. Unfortunately, there is no such thing as the state in the contemporary international economy at the international level and the absence of the state as such at the international level is, I believe, a sufficient explanation of why the world economy has run into serious problems of recession …

… The important point is rather that in an international economy the possibilities of national demand management are strictly limited. They are limited by problems of balance of payments adjustment and international finance. Governments that wish to regulate national demand so as to sustain full employment run into problems of increasing trade deficits and, in economics with liberal exchange regimes, loss or confidence and outflows of capital. It is actual or potential balance of payments crises which have been decisive in breaking the habit or Keynesian demand management at the national level. Many national governments are still trying but they are trying under difficulties and they are frightened of balance of payments problems that would result if they tried too hard.

Further, as Francis Cripps concluded, in that brilliant article,

… [U]ntil the economists in our society get around to tackling this problem, we risk being stuck with periods of long recession, even if we are occasionally and accidentally favoured with periods of world boom.

In the book From Keynesianism To Monetarism: The Evolution Of UK Macroeconometric Models [2], Peter Kenway writes:

… There is, however, a greater sense in which the development of the Cambridge Group in that period is more important than the model that came to represent them. That sense stems from the historical significance of those ideas…. the ideas were therefore more ‘anti-Keynesian’ than ‘Keynesian’… what makes the anti-Keynesian views of the 1970s Cambridge Economic Policy Group so significant is that they grew out of the very heart of Keynesianism itself …

… On the one hand, as far as the goals it espoused are concerned, of full employment, of steady growth and of government’s responsibility to pursue these ends, the Group’s commitment to Keynesianism never wavered. But on the other hand, as far as the practice of Keynesianism was concerned, and especially the conceptualization of the reasons for the increasing and evident failure of that practice, the Policy Group not only was part of, but in some respects actually led the revolution against Keynesianism in the UK …

(No) Conclusion

Think my blog posts should be short, but this being the introduction needed to longer. Come back for some Kaldorian Monetary Economics!

References

  1. Francis Cripps, What Is Wrong With Monetarism, pp 55-68, Monetarism Economic Crisis And The Third World, ed. Karel Jansen, Frank Cass, 1983.
  2. Peter Kenway, p 92, From Keynesianism To Monetarism: The Evolution Of UK Macroeconometric Models, Routledge, 1994 (2011 reprint).