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Liberal finance, dear money and economic crisis

Liberal finance, dear money and economic crisis. Geoff Tily July 2009. Monetary stance. 1. More likely under dear money 2. Begins in corporate sector. Credit creation against expected incomes Real expansion Outcomes relative to expectations

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Liberal finance, dear money and economic crisis

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  1. Liberal finance, dear money and economic crisis Geoff Tily July 2009

  2. Monetary stance

  3. 1. More likely under dear money2. Begins in corporate sector • Credit creation against expected incomes • Real expansion • Outcomes relative to expectations • Shortfalls, leading to distress borrowing and debt inflation • Financial collapse (August 2007); debt deflation • Real collapse (ongoing)

  4. 1. Money and Interest

  5. Monetary Stance

  6. Funding complex r r0 LP schedule M0 M

  7. Tap issue r r0 LP schedule r1 M0 M1 M

  8. Tap issue r r0 LP schedule r1 M0 M2 M1 M

  9. De-financialisation • Bank rate set aside • Changes to debt management policy: • Tap issue • Wider range of maturities • Extension to floating debt • Treasury deposit receipts • Capital control • Exchange management

  10. The Report of the National Debt Enquiry • III • 30. We suggest the following programme of initial procedure – the date of its introduction is discussed below. • (a) Treasury Bill rate to be brought down to 1/2% and Treasury Deposit Receipts to carry 5/8%; probably a special rate of 1% (broadly the present rate) to apply to overseas money now in Treasury Bills and the like. • (b) Subject to action on (a), 5 year Exchequer Bonds at 11/2% and • 10 year Bonds at 2% to be issued on tap, a new series to be started annually. • (c) 3% Savings Bonds to be issued on tap, a new series to be issued annually, with an option to the Treasury to repay after 10 years with, preferably, no final maturity (or if necessary a fixed latest date of • repayment after 35 years). • (b) follows upon (a); (c) could either follow (a) or precede it.

  11. Monetary stance

  12. 2. Money, Interest and Activity

  13. Investment demand I MEC schedule I0 r0 r

  14. Animal spirits I I1 I0 MEC schedule I2 r0 r

  15. Dear and easy money I I1 MEC 1 I0 correct MEC schedule r0 r

  16. 3. Financial considerations

  17. Dear and easy money I I1 MEC 1 I0 correct MEC schedule r0 r

  18. 4. Prevention

  19. Cheap and tight money I I1 I0 Correct MEC schedule r1 r0 r

  20. 5. The evidence of experience

  21. Real interest rates on United States corporate bonds (Moody’s BAA)

  22. Monetary stance

  23. US GDP: contributions

  24. The debt inflation

  25. “The build-up of debt levels over time, both domestically and internationally, can eventually also lead to economic problems with attendant and often substantial costs. … Any or all of these numbers might well revert to the mean, with associated implications for global economic growth. Such an unwinding might be gradual, and possibly benign, but it could also be rapid and disruptive. In large part, what happens will be determined by real–financial interactionsthat we should not pretend to fully understand.” The BIS in their 75th Annual Report, 2005

  26. 6. Beyond the corporate sector

  27. Conventional opinion • Chiefly: Greenspan did not create low, long-term interest rates. The low, long-term rates were caused primarily by a global savings glut, Wolf said. (See: China's savings rate.) (April, 2008) • Ben Bernanke, the US Federal Reserve Chairman, has argued that this creates a global savings glut and can also help to explain also why long-term interest rates are so low across the developed world. (Sentence, March 2007)

  28. “new macrofinancial stability framework”: To be more specific, monetary policy might be tightened even with projected inflation under control, given a sufficiently worrisome combination of rapid credit growth, rising asset prices and distorted spending or production patterns. In focusing on a combination of systemic indicators, this proposal is quite different from simply targeting asset prices. (BIS, 2007, p. 148)

  29. 7. Keynes and Marx

  30. Investment demand I IFE, T+1 IFE, T Correct MEC schedule r FE, T r r FE, T+1

  31. Keynes’s obituary in the Economic Journal Austin Robinson, March 1947 Indeed it is difficult not to be impressed by the consistency of his main strategic objectives: the full employment of resources; the achievement of balance of payments for all countries by methods that would not be inconsistent with full employment; as a means to this, a system of exchange rates that would combine the short-term virtues of fixity and predictability with the long-term virtues of flexibility; and, as a means to full employment, low interest rates. (Robinson 1947, p. 45)

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