Obvious and Outrageous Defects of our economic system… Keynes
The more the Fed postpones raising of the Fed rate, the chances increase that it won’t rise at all before the next recession. Worry will mount about global growth. Worry will mount that the US is vulnerable. Pressure will build to keep the Fed rate low as the profits of more firms become increasingly vulnerable.
Many economists support the Fed postponing lift-off of the Fed rate far into the future of 2016… Wow! The list includes Brad DeLong and Charles Evans. (Read an article in the WSJ about Charles Evans today. Brad DeLong has said that he agrees with Charles Evans.)
They believe that an ever lower Fed rate will resuscitate inflation in spite of the Fisher Effect to lower inflation when the Fed rate is held constant and low for longer and longer periods into the future. We see inflation expectations falling once again in the US and Europe.
They believe that utilizing the great slack in the economy is attainable. But the tightening of global effective demand since the crisis lowers potential utilization of slack. The sensitivities for a recession will grow sabotaging their delusional dreams of returning to a normal economy.
Keynes gives a needed lesson on insufficient effective demand. (chapter 3 of General Theory)…
“If the propensity to consume and the rate of new investment result in a deficient effective demand, the actual level of employment will fall short of the supply of labour potentially available at the existing real wage…
“This analysis supplies us with an explanation of the paradox of poverty in the midst of plenty. For the mere existence of an insufficiency of effective demand may, and often will, bring the increase of employment to a standstill before a level of full employment has been reached.
“Moreover the richer the community, the wider will tend to be the gap between its actual and its potential production; and therefore the more obvious and outrageous the defects of the economic system.
“But worse still. Not only is the marginal propensity to consume weaker in a wealthy community (…with insufficient effective demand…), but, owing to its accumulation of capital being already larger, the opportunities for further investment are less attractive unless the rate of interest falls at a sufficiently rapid rate;”
The trap has been set. There are vulnerabilities that keep the Fed rate low. If the Fed even tries to raise the Fed rate, it probably won’t even reach 1% before the next recession. Wow!
Exit strategy? We ain’t got no exit strategy. We don’t need no exit strategy! I don’t have to show you any stinking exit strategy.
http://econospeak.blogspot.ca/2009/10/exit-strategy-redux.html
Sandwichman:
Do we have to assign someone to keep an eye on you?
“Keynes proposed an exit strategy: redistribute income and reduce hours. But nobody is talking about that yet. All we hear is, on the one hand, “more stimulus!” and, on the other “restraint!”. I would like to hear your views on the specific exit strategy that Keynes proposed. See, in particular, his 1943 memorandum,”
Nobody is going to talk about this as a strategy. We are all supposed to buck up and pull ourselves up by our own boot straps. It is a good post though
Edward,
“Many economists support the Fed postponing lift-off of the Fed rate far into the future of 2016… Wow! The list includes Brad DeLong and Charles Evans. (Read an article in the WSJ about Charles Evans today. Brad DeLong has said that he agrees with Charles Evans.)
They believe that an ever lower Fed rate will resuscitate inflation in spite of the Fisher Effect to lower inflation when the Fed rate is held constant and low for longer and longer periods into the future.”
Perhaps it is time for economists to abandon their pet theory for the cause of inflation. If inflation was caused by an excessive money supply then the Fed should have generated a little more by now, since they have certainly been increasing the money supply. The velocity of money has been driven to historically low levels and that is being blamed on the excessive supply of money.
Mainstream economists are lost. Nothing in their training or experience has prepared them for the Great Recession. They have spent their entire working lives looking at post war economic data and refining their economic theories based on that post war data. They have assumed that supply created its own demand. They have assumed that increasing the money supply would always put an end to a recession.
Focusing on the consumer takes them out of their comfort zone and they continue to resist. Plainly they should be concentrating on Effective Demand, but they are not ready to disconnect from their past theories.
We are approaching 7 years from the beginning of the Great Recession. Sooner or later and probably sooner, we will have another economic downturn and it will probably begin with the Effective Fed Funds Rate at about zero.
As you have pointed out in the past, corrections to employment are more likely to be made during recessions. So how high will unemployment go and how low will labor participation rates go after the next downturn???
Where is the urgency in dealing with our economy? I see none.
They have had almost 7 years to try their way, now it is time to raise tariffs and begin to force some production back to the United States. In addition to raising labor’s income, overseas producers would find the tariffs to be an unavoidable tax.
JimH,
Yep… everything you said.