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Saturday, January 22, 2005

The Error of Modern Macroeconomic Policy 

From: Gunnar Tómasson
To:
gang8@yahoogroups.com
Sent: Friday, January 21, 2005 8:32 PM
Subject: Re: [gang8] Correction: Re: Re: Richebacher: The Missing Link - reflections on trade
James,

I agree with you "that, antecedent to the collapse of the IMF and, indeed, a crucial cause of it, was the misunderstanding of interest-rate and fiscal effects, especially in relation to inflation from 1969 onwards."

In this respect, I thought I should repost my earlier message of November 15, 2003 commenting on the analysis of related issues presented in your book The Indigent Rich back in the early 1970s.

In due course - and these things do take time! - I am sure that economic historians will

(a) note the fact that, well before anyone else, you saw through the polished surface of the ramshackle affair that is contemporary economic orthodoxy and called its bluff while there was still time to avoid the economic policy mistakes which, by now, threaten to unleash world-wide financial, economic, and social instability; and

(b) regret that a solitary voice of sanity was not heard.

The fact that Jan - rated by Randy as "the best economist in the world", as I recall it - and the great majority of his mainstream, monetarist, and heterodox peers still don't get it reaffirms what Robert Lekachman suggested in 1976:

"Young economists emerge uneducated, Ph. Ds in hand, for want of knowledge of the history of their own subject."

Gunnar

*******

Here is my message of November 15, 2003:


Dear James:

As it happens, I just finished reading your book The Indigent Rich, having read the first nine chapters when I received it months ago - my mind has been preoccupied with some other things.

For those who have not had an opportunity to read the book, here are the opening paragraphs of your Introduction:

"It is strange that we can be so wrong about so many things for so long. We seem to be guilty of recurrent economic idiocy. Not just a small idiocy, but idiocy on a grand scale. And it happens about every generation. J. K. Galbraith was probably thinking, inter alia, of something like this when he wrote about the error of 'conventional wisdom'. But he has been guilty of the same error himself, along with a multitude of his professional colleagues.

"We always think that the same economic problems recur and require the same solutions. History is, in our minds, constantly repeating itself. But, in fact, it isn't. We know full well, from experience, that economic history, despite the old saw, does not repeat itself. But we go on acting as though it does.

"Consequently, we go on causing ourselves much more trouble - and causing a great many people a great deal more distress - than is necessary. This trouble and distress afflict the domestic economy but their scale is such that they also afflict other economies and, inter alia, damage the relationships between the developing countries and the whole of the developing world.

"There is a curious similarity between the error into which we have recently fallen and the error into which economists and policy-makers fell in the pre-Keynesian period of the 1930's. Then the theories and policies intensified the very diseases which they were intended to remedy or avert. The same thing is happening now. Not entirely, but in part. Fundamentally, we try to solve our problems of economic disequilibrium by measures which - in practice - intensify them. As in the 1930's, so now we could scarcely do worse if we tried. We act as we do because we think we are still solving economic problems in the context of the 1930's. We are not; but we think so. And the error goes on being repeated however long it would seem to be obvious that the solutions are just as outdated as our conception of the economic environment in which they are being tackled.

"To put this a little more specifically, we seek to maintain domestic economic stability by applying or reversing the means which brought us such splendid success at the advent of the Keynesian era. When we are confronted with inflation, we immediately react with policies reversing the fiscal and monetary stimulation which is thought to have caused the inflation. Modern economic policies have created and maintained full employment through active and generally invigorating fiscal and monetary measures. Therefore, the pundits argue that, if these measures go too far and create unacceptable inflation, the solution is to take them off. It is all so simple. Turn on the tap to move the economy up; turn it off to move the economy down.

"Almost every economist worth his salt sings or dances to this canticle. Not only do they believe it but they act upon it. And they nod sagely when anyone else - even their political enemies - act upon it.

"That it doesn't work is, for them, almost an obiter dictum. It should work. All the economists agree it should work. If it seems not to work, then, say the economists, it is because the politicians or the bankers or both have not had the courage or the competence to do the job properly; or the trade unions don't know what is good for them and the country; or the employers don't; or there are 'special factors' which have ruined a good policy in the hands of sincere people.

"But the plain fact of the matter is that it does not work. The examples of countries and situations in which it has not worked are now far too many for there to be any doubt that it does not work...."

Now fast-forward to the present of The Washington Consensus:

All the economists agree it should work. If it seems not to work, then, say the economists, it is because the politicians or the bankers or both have not had the courage or the competence to do the job properly; or [X, Y, and Z - now that trade unions don't matter much any more] don't know what is good for them and the country; or the employers don't; or there are 'special factors' which have ruined a good policy in the hands of sincere people.

James, you were right then, and now!

Gunnar
----- Original Messa
ge -----
From:
James Cumes
To:
gang8@yahoogroups.com
Sent: Friday, January 21, 2005 12:25 PM
Subject: Re: [gang8] Correction: Re: Re: Richebacher: The Missing Link - reflections on trade
Gunnar,

Yes, you know that I agree with you in most of what you say.
But don't forget that, antecedent to the collapse of the IMF and, indeed, a crucial cause of it, was the misunderstanding of interest-rate and fiscal effects, especially in relation to inflation from 1969 onwards.
That is the basis on which Gang 8 was created and has - largely - been built.
Geoffrey's book, "Towards True Monetarism" is, in many ways, the bible to be consulted to get the hang of how the whole inflation problem was mishandled and how the consequences of that mishandling then - see my own books - brought about a shift of the inflationary impact from domestic consumer-price rises to deficits in the balance of trade/payments, to the creation of export economies dependent for their prosperity and rapid economic development on the persistence of supply shortages and consequent deficits in the external trade and payments of the hyper-consumer economies and to the tangle of dollar weakness, lower-income poverty and inequality, major and fundamental shifts of economic, political and strategic power, and all the rest.
Whatever the surplus economies may wish and however complacent the American managers may be, a major adjustment in the plates of the Earth's economic crust just must take place, one would think pretty soon now. The resultant earthquake could well be a Force 9 or even above, and the tsunami that it will precipitate could well sweep away, not only much of what remains of the former glory of the United States economy - and even the political and strategic dominance that it has so far enjoyed - but also much of what we value in the other continents, sadly including my own country of Australia.


James Cumes
http://www.authorsden.com/jameswcumes
----- Original Message -----
From: Gunnar Tómasson
To: gang8@yahoogroups.com
Sent: Friday, January 21, 2005 2:59 PM
Subject: Re: [gang8] Correction: Re: Re: Richebacher: The Missing Link - reflections on trade
Geoffrey,

Re. the following:

Jan made the point that so long as the rest of the world wants dollar assets, there is nothing the US can do about it.

Comment:

True - but besides the point!

For the decades-long U.S. consumption binge and attendant transformation of the U.S. domestic economic structure is the direct result of the U.S. government's decision to

1. Scuttle the Bretton Woods system unilaterally; and

2. Oppose any multilateral replacement thereof.

As noted by then IMF Deputy Managing Director Stanley Fischer in an address commemorating its fiftieth anniversary, this left the IMF - (the rest of the world) without any say over world monetary arrangements.

In this respect, the merit of the Bretton Woods system was that the U.S. and other nations of the world were essentially on a level playing field insofar as their "overdrafts" on the rest of the world were concerned.

That is not the world we live in now.

At the national level, Jan's argument translates into the proposition -

- that so long as the rest of the domestic economy wants pound/Euro/etc. assets cranked out by national financial systems, there is nothing national authorities can do about it.

Why, then, should there be any constraint on domestic credit creation?

Gunnar


----- Original Message -----
From: Geoffrey Gardiner
To: gang8@yahoogroups.com
Sent: Friday, January 21, 2005 7:57 AM
Subject: Re: [gang8] Correction: Re: Re: Richebacher: The Missing Link - reflections on trade
Gunnar,

When this point was raised at Philip Arestis' conference in March, following addresses by Jan Kregel and Randy Wray, I pointed out that the transfer of capital to North America appears to have taken place continually for 400 years, with the exception of brief periods during and after the two world wars of the 20th century. Do we have any figures for the level of that transfer? Did it represent the same percentage of GDP as now?

I cannot buy the idea that it is the fault of anyone in America. Jan made the point that so long as the rest of the world wants dollar assets, there is nothing the US can do about it. The odd thing is that European countries would scream murder if the US stopped importing their products.



Geoff

----- Original Message -----
From: vze288fn@verizon.net
To: gang8@yahoogroups.com
Sent: Wednesday, January 12, 2005 5:55 PM
Subject: [gang8] Correction: Re: Re: Richebacher: The Missing Link - reflections on trade
Oops! Arno,The problem is not free trade - but free lunch!For the past three decades, the US has fueled domestic nominal demand for goods and services through credit creation which has been vastly excessive relative to the requirements of a growing domestic output of goods and services.What's wrong with that?In the 1970s, I recall reading a Newsweek column by Milton Friedman in which he "reasoned" that there was no need for the US to worry about its trade deficit for, so long as Japan and others were ready to add to their US dollar investment portfolios, the US was in fact exchanging paper for products.The downside of this is, among other things, that the inflation of US domestic nominal demand through credit creation has NOT spilled over into US domestic price inflation thanks to the supply of goods and services from the rest of the world.This has skewed the structure of relative US domestic prices in a way which discourages productive investment as distinct from investment in the financial services sector and speculative activity (asset price inflation).The culprit is not free trade - but the Friedmanite notion that a mature economy can go on decades-long debt-financed consumption binge supported by the rest of the world WITHOUT serious adverse effects on its domestic economic structure.
Gunnar

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