Saving The System: Exposing The 4 Fallacies Of Modern Monetary Policy

Tyler Durden's picture

Submitted by Alasdair Macleod via GoldMoney.com,

Monetary policy, we are told, is all about staving off recession and stimulating economic growth.

However, not only is monetary debasement in any form counterproductive and destroys the personal wealth of the masses, but the economists who devised today’s monetarism have completely lost their way.

This article addresses the confusion surrounding this subject, and concludes the real reason for today’s global monetary policies is an ultimately futile attempt to prevent a systemic and economic crisis.

Wrong tools for wrong targets

Central banks set themselves targets, such as unemployment that is deemed to be “full”, in other words the optimal low rate that will not lead to a pick-up in price inflation. CPI is the second target, typically set at 2% per annum. The hope is that these targets will lead to sustainable growth in GDP.

Unfortunately, estimates of unemployment do not tell us whether or not people are being employed productively. The term productive conjures up questions as to whether or not a government employee who is not customer-driven is economically productive, or whether or not a temporary barman should be deemed properly employed. There is also considerable tension between low rates of official unemployment, and near-record levels of the labour force not in work.

Recorded price inflation is even more flaky, with large discrepancies between official CPI and independent estimates, such as those of Shadowstats.com and the Chapwood Index in America. Their independent statistics record a far higher rate of price inflation in the US than the official CPI, and there is little doubt people are experiencing the higher rate. Assuming the GDP deflator should approximate to the actual rate of price inflation, independent estimates tell us that the US economy has been in recession every year since the dot-com bubble burst.

The statistical tools are obviously useless, and so is the principal target. GDP is a money-total, no more, no less. Imagine an economy where the total quantities of money and credit never vary, and all credit is fully backed by money instead of conjured up out of thin air. Prices for individual goods and services are free to change, but the total money deployed cannot. Credit shifts from the failures to the successes. But because credit is wholly backed by sound money, if the credit is extinguished, the money lives on. Therefore, GDP does not increase or decrease.

Alternatively, imagine you construct a balance sheet of the economy, and you introduce some more money. The balance sheet totals will increase accordingly, but it does not tell you how productively the extra money is deployed. What we seek in GDP is not found there: what we really want to know is whether or not economic conditions for the vast majority of people are improving. The only evidence of this would be increasing average wealth for all employed classes, and we are not talking about measures of wealth denominated in unsound currencies, nor are we talking about the apparent wealth that results from credit inflation. It has to be real.

Equally, it cannot be measured, but framed that way, we can begin to get a better sense of perspective as to what economic policy should attempt to achieve.

Take the example of helicopter money, which is increasingly talked about. It would undoubtedly boost nominal GDP. But if we think in terms of economic progress, we quickly realise that helicopter money is actually economically destructive as can be easily demonstrated.

Let us assume that a central bank distributes money through the banking system to the bank accounts of consumers, who will undoubtedly spend most of this windfall. The immediate effect will be to increase the GDP total, as described above. But it creates a shortage of goods, so prices can be expected to quickly rise, nullifying any perceived benefit. And because the distribution is so well telegraphed, no sensible manufacturer is going to respond by increasing his production significantly for a one-off benefit. Therefore, as the money is spent its purchasing power will decline fairly rapidly, the costs of production will rise, and a slump will ensue. Unless, that is, there are continuing helicopter drops, but that, everyone can agree, is the path to wealth destruction through hyperinflation, and therefore the end of all economic progress.

Just by rephrasing the question, from fostering GDP growth to fostering economic progress, leads to some diametrically opposed answers, as the helicopter money example illustrates. In this vein, I shall now address four of the most destructive fallacies about the relationship between money, credit, and economic progress.

Fallacy 1: Monetary debasement benefits the economy

Modern economists mistakenly ignore the intertemporal effects of changes in the quantity of money. When money or credit is expanded, the first receivers of it get to spend it on existing products before anyone else. Therefore, they benefit from the extra money before prices have risen to reflect its addition into general circulation. The second receivers have a similar advantage, but incrementally less so. Therefore, after this new money has progressed through many hands with a tendency to drive up prices every time, the last receivers of the additional money find that prices for nearly all goods have already risen and the purchasing power of their wages and savings has effectively fallen.

This is known as the Cantillon effect. It amounts to a wealth transfer from the poorest in society, the unskilled workers, pensioners and small savers, to the government and its agents. Bankers, licensed to produce credit out of thin air at no cost, thrive. The second receivers, the businesses that benefit from bank credit and unfunded government contracts, do almost as well. The result is government, banks and their close supporters enjoy a wealth benefit at the expense of ordinary people.

It is therefore hardly surprising the establishment and its lobbyists strongly favour monetary expansion, but the Cantillon effect cannot be denied, in theory or empirically. It is the single most important reason why inflating money and credit will always be counterproductive. We see this effect today, with the gap between rich and poor widening dramatically. It is monetary policy that impoverishes the masses, more surely than anything else.

Fallacy 2: Low interest rates are beneficial

The emotional appeal of low interest rates has its origin in the old religious association of interest with usury. Keynes promoted this view, not expressed so blatantly in moral terms, but by conjuring up an image of work-shy capitalists profiting from the deployment of their money for interest. His term for these capitalists, rentiers, condemned them in his followers’ minds.

Keynes’s view is consistent with the idea that it is the rentiers who set the price for money, holding the entrepreneur to ransom, when in fact it is the other way round. In a free market where interest rates are set by consenting parties, it is the entrepreneur that sets the savings rate by bidding up the interest rate. It is this phenomenon that resulted in the long-held correlation between the price level and interest rates, demonstrated in Gibson’s paradox, which Keynes, Fischer and Friedman were all unable to explain.

The fact that this correlation demonstrably existed from 1730 up to the 1970s is clear evidence that entrepreneurs were prepared to pay a rate of interest that related to the one thing they knew better than anything else, and that was the price they expected to obtain for their product in the market. There can be no other credible explanation. Equally, it shows that central bank attempts to manage price inflation by varying the interest rate are doomed to fail, because there is no natural correlation between the two. 

This was certainly the case until the late 1970s, when the Fed raised interest rates to the point where normal business activity could not be financed profitably. Since then, monetary policy has taken over control of interest rates to the point where they ignore market forces entirely. The idea that central banks can manage unemployment, price inflation and GDP by varying interest rates has also been disproved by experience, yet they still persist in this crazy quest. 

The expansion of bank credit that accompanies suppressed interest rates will increase GDP, assuming the credit expansion is not aimed at non-GDP items, such as financial assets. But that is a very different matter from fostering economic progress, which requires an interest rate that correlates with the price level, and not the rate of price inflation.

Fallacy 3: Expanding money and bank credit stimulates business

In a sound-money environment, some businesses prosper and others fail. The ones that prosper do so through success, not subsidy, and there is no subsidy for the failures. The business environment is of necessity one of constant change, as mistakes are quickly rectified. Capital resources for profitable enterprises are released from those that are less so or even unprofitable. Assuming a steady savings rate, the release of inefficiently deployed capital is vital for successful enterprises to flourish. Importantly, there can be no credit-driven business cycle to disrupt economic progress.

This is not a happy environment for legacy industries, unwilling to face the change progress imposes, or no longer relevant to the future. Often these businesses dominate communities, and are costly and inefficient compared with their modern competitors operating in lower-cost conditions. They lobby hard and successfully for subsidies. And if there is free money and credit in the offing, all businesses well-connected to political circles want their share of the largesse.

This is why today’s monetary environment is of unsound money, the expansion of money and credit designed to increase GDP. The result is good businesses no longer have to attract capital resources from the less profitable and the failures. All businesses, the successful and the failures, draw on freely available credit, either for genuine production or to avoid failure. The consequence is a growing accumulation of unproductive debt, whose default is continually deferred.

As the bad businesses compete with the good for scarce labour and raw materials, which unlike unsound money cannot be conjured out of thin air, prices begin to rise. And as higher prices work through to final products, easy money encourages consumers to alter their money-preferences in favour of goods. After all, unemployment is low and things are booming, so why go without?

At this point, central banks are forced to interrupt their expansionary policies and raise interest rates to curb unforeseen price inflation, and to only stop raising rates when widespread bankruptcies are threatened.

For anyone interested in promoting economic progress as opposed to just growing the GDP numbers, inflating money and credit is obviously not the way to go about it. Those who do not grasp the difference between real economic progress and raising GDP are likely to persist in trying to grow GDP, putting the lessons of experience behind them. Welcome to the world of central banking.

Fallacy 4: Lower exchange rates benefit the economy

This is a policy of giving preference to exporters at the expense of everyone else, and in that sense is another variation of the Cantillon effect. It is a deliberate policy of reducing the value of the wages of exporters’ employees and other domestic costs, a wealth-transfer that eventually affects everyone. It destroys personal wealth, particularly for those who can least afford it.

Economic planners appear to be blind to the true origin of trade deficits. In a sound money environment, everyone is forced to pay their bills. If you buy something, whatever its origin, you will have earned or borrowed sound money from someone else to pay for the goods purchased. Therefore, trade deficits, other than those arising from self-correcting timing differences on settlements, cannot exist. Attempts to correct trade deficits by manipulating the exchange rate, while pursuing unsound monetary policies, are in consequence futile.

It is no accident that a trade deficit is often accompanied by a government budget deficit, because the latter is bound to lead to the first, assuming the savings rate remains unchanged. The reason has already been stated above: the private sector pays its bills, so trade deficits can only arise from unsound money and unfunded government deficits. 

Empirical evidence and analysis of national accounts support this analysis, yet nearly everyone automatically subscribes to the fallacy that reducing the exchange rate is a good thing for the economy. Devaluing the currency does not correct trade deficits, and the policy amounts to an ongoing destruction of a currency’s purchasing power for no gain.

Devaluations, which go hand in glove with unsound monetary practices, can be expected to lead to an increase in the money-total of GDP, but they hinder economic progress by destroying the wealth central to the financing of market-driven industrial investment. The post-war experience of Germany with its strong mark, compared with that of Britain with its weak sterling, refers.

The real reason behind unsound money policies

The neo-classical economists that populate government and central banks are finding out the hard way that their fallacies and their dishonest use of the state’s seigniorage of money and credit have lead everyone into a dead-end debt trap. They show no understanding of how they got us all here, but are becoming acutely aware of the consequences.

Unsound monetary practices favour debt financing over financing from genuine savings, because of the wealth-transfer effect that benefits debtors. The result of decades of unsound monetary policies is that the major welfare economies have become overloaded with an accumulation of government debt, which can never be repaid, only devalued. Additionally, escalating welfare liabilities have to be financed, which means that the welfare-states’ need for low-cost financing through the expansion of bank credit and raw money has now become more or less infinite.

It is obvious that a government can only discharge its welfare liabilities by acquiring yet more of the private sector’s wealth. The wealth destruction suffered by the private sector simply detracts from its ability to fund future government spending. <b/p>

Not only are the private sectors in welfare states burdened with increasing state depredations on their wealth, they themselves have accumulated large amounts of unproductive debt as a result of decades of easy under-priced bank credit. The result is evident in very low rates of genuinely productive employment, and the impoverishment of the masses. While these problems are more evident in some nations than in others, all welfare states are affected. 

Some countries like France conceal their unemployment problem by socialising large swathes of the economy, either directly or indirectly. Unemployment is officially recorded at about 10%, the state accounts for the majority of economic activity, and there is a large agricultural sector of predominantly subsistence-farming smallholders. The whole economic structure is inherently unproductive. In other welfare nations, the unemployment problem is more obvious.

Italy is a good example, with a youth unemployment rate of 37%. The state accounts for about 52% of GDP, and non-performing loans on the banking sector’s balance sheets are recorded at 18% of GDP. Stripping out the state, NPLs are 37.5% of private sector GDP. It is therefore clear that not only is the private sector collapsing under the weight of its own debt, but there must be a growing incentive for companies which can service their debt not to do so, because their banks might not be around in the future to reward them by extending more credit. Those that see the Italian crisis as a banking problem miss the point. It is the Italian economy that’s the problem, and the banks are merely the prosciutto in the sandwich.

Italy is in the vanguard of welfare state failures. Central banks formulating monetary policy are becoming increasingly aware of this fact and the similarities with their own position. Their priority now is to avoid a global debt-induced economic crises. They see this being staved off by increasingly desperate attempts to promote GDP growth. They will pursue this policy at accelerating speed right into the buffers at the end of the line. 

The partying is over. The days of transferring wealth from the middle-classes and the poor through monetary debasement to benefit the welfare states, the banks and their preferred customers, are now numbered. The implications for future monetary policy are simple: the Fed, Bank of Japan, European Central Bank and Bank of England are working together to keep their respective GDPs from falling. The Bank of Japan is leading the way into deepening negative interest rates and more asset-supporting quantitative easing, and the others are all set to follow its example.

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junction's picture

Under Fed chair Volcker in 1978, monetary policy ruined the USA.

Tall Tom's picture

 

 

 

 

It was Volcker who convinced Nixon to divorce Gold back in 1971 when he was the NY Fed Governor. That doomed us.

InsaneBane's picture

Believing in the system is like your divine other half has cheated on you, it will never heal.

U.S. (Corporate)
U.S.A. (Sovereign)

So what will it be my fellow man? Sometimes it will need necessary evil to bring it down!

indio007's picture

No incorporeal legal fiction can be sovereign.

 

see Calvin's Case

InsaneBane's picture

True it's the sovereign individual and sovereign individuals as a group that create reality.

SidSays's picture

Actually it was Woodrow Wilson that doomed us.

"I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated governments in the civilized world. No longer a government by free opinion, no longer a government by conviction and the vote of the majority, but a government by the opinion and duress of a small group of dominant men."


~ Woodrow Wilson

It just took 58 years and 4 wars for the People to forget what real prosperity was.

PS: I doubt it was unwittingly.

InsaneBane's picture

Tom Hanks and his relationship with a football named Wilson is the allegory of the state of 'We the people'..castaway nothing to say

Tall Tom's picture

 

 

 

THERE IS NO HOPE FOR SAVING IT.  NOT A CHANCE.  NONE.

 

It is a corrupted system which has too much debt and a Derivatives Bubble that will ultimately burst and wipe it all out.

 

TICK TOCK.

JusticeTBuford's picture

And the batteries are almost dead...

junction's picture

Instead of the dead battery metaphor, I prefer comparing the current situation to trying to land a plane dead stick.

True Blue's picture

More like a freight train that some jackass super-glued bedsheet wings to and called a plane -right before driving it off a cliff; with the ghostly cackle of J. Maynard Keynes over the PA in the passenger cars telling us everything is OK, we just need moar.

SidSays's picture

Indeed Tom,

WROL...

Tick...toc...

nmb's picture
nmb (not verified) Aug 6, 2016 6:19 PM

Costas Lapavitsas describes shortly and accurately how the corrupted politicians used the state to save the banking parasites:

https://www.youtube.com/watch?v=55ARTx_rQik

SidSays's picture

Thanks for the info nmb.

I fear that the People have forgotten just how desperate the situation was in 2008/09.

I hope that they remember soon.

I remind my friends and family every chance I get these days.

shovelhead's picture

The situation was nowhere near desperate except that bankers did not want to suffer ANY losses so they made up the bullshit collapse story that Paulson dramatized to great effect and dumped their worst paper on the taxpayers.

"There was never a remote threat of a Great Depression 2.0 or of a financial nuclear winter, contrary to the dire warnings of Ben S. Bernanke, the Fed chairman since 2006. The Great Fear — manifested by the stock market plunge when the House voted down the TARP bailout before caving and passing it — was purely another Wall Street concoction. Had President Bush and his Goldman Sachs adviser (a k a Treasury Secretary) Henry M. Paulson Jr. stood firm, the crisis would have burned out on its own and meted out to speculators the losses they so richly deserved. The Main Street banking system was never in serious jeopardy, ATMs were not going dark and the money market industry was not imploding."

http://www.nytimes.com/2013/03/31/opinion/sunday/sundown-in-america.html...

SidSays's picture

Thanks Shovelhead for the sober insight.

The losses should have been taken by those that did the mis-management and the resources that remained should have been auctioned to more capable actors.

I do agree that the desperation was a result of the act put on by Paulson et.al. 

I will clean the desperation rhetoric up in the future, which will be more productive.  The presentation by Renegade Inc. (formerly Renegade Economist) is a thoughtful, fact based production without the "desperation" rhetoric.

 

conraddobler's picture

He's actually a progressive.

It's the Bernie Sanders problem.  Accurate diagnosis of some of the problem with terribly harmful proposals in terms of how to fix it.

The problem is the power, it's the God damn power.   

First of all when you make everything private, public, what you have done is removed the profit incentive which is both incentive and a self regulating mandaate and now people are operating with some amorphous "Public Good" mandate which means they are more or less free to crony the shit out of their position as long as they can maintiain any semblence of actually "caring" which they don't.

It's the perfect enviroment to do whatever the fuck you feel like without worrying about profit as the task master.

Crony capitalism in contrast has profit as it's master and there you just need financialization and book cooking to get that monkey off your back.

When you really look at the problem in both cases the people running things are cheating to preserve their own turf.

The solution is simple we have to remove peoples turf utterly and give them nothing more than a God damned pin head to stand on.

It's the power stupid in all things.

We need to re-examine ALL power structures and tear them the fuck down, down to the fucking ground.

It's forever and always the power.

SidSays's picture

"If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered.... I believe that banking institutions are more dangerous to our liberties than standing armies.... The issuing power should be taken from the banks and restored to the people, to whom it properly belongs."

-Thomas Jefferson

Are we there yet?

jfb's picture

When you have widespread ignorance it's easy to guess that the ones who will gain politically from this are not the libertarians but the communists who will promote a Venezuelian scenario. I wouldn't be surprised if you see many, many ultra-leftis organisations financed by guys like Soros eing promoted y the media in order to avoid an explosion. 95% of the times the trick wil work. 

overmedicatedundersexed's picture

you can rob the people if you control the government..example W Buffet, J Corzine..add in co's like amazon and google..hillary thinks the government owns us all and she is running it.

The banks and Fed and IRS..provide the means of robbing the people.. they providing tribute to the kings and queens of government..

you can never own property as Tax is due every year.

economics without factoring in CRIME is fiction..the cost of crime and corruption has eaten the productivity of the economy by mal investments like Solyndra and Tesla, and Clinton world foundations..concentrating all wealth in fewer and fewer hands.

overmedicatedundersexed's picture

our economies are built on crime and legal systems are corrupt..the ave person cannot trust police, lawyers or courts to obtain justice..thugs dressed as secret service, fbi, atf, many police..now serve criminals willingly while pretending they are for the law ..

illuminatus's picture

' the economists who devised today’s monetarism have completely lost their way'

You lost me with that statement. It wasn't economists who devised our monetary system, but the banksters. Now they have the means through control and issue of fiat to buy up everything real and control the world.

True Blue's picture

Lost me at the same point; for them, everything is going according to plan; debase the currency and snap up the real assets with worthless paper.

The simple fact that they are planning to monetize the debt shows that their ultimate intention is to make it worthless.

GreatUncle's picture

The power of FIAT when you can create without end.

WolfgangCire's picture

shatter the system

Wantoknow's picture

There is far too much in this article to respond to in one relatively brief comment.  Let us just try to make some points.

1)  Monetary Debasement

This is to some extent a pejorative for any money printing.  Money must always be created to serve an expanding economy at fixed prices.  The concepts of inflation or deflation amount to cheating by putting one's thumb on the scales.  At constant prices real growth requires the increase in the money stock moving at constant velocity to transfer real goods and services among the agents of an ever expanding economy.  The model presented here denies the possibility of real growth.

Certainly in any real economy some agents will receive new money before others.  The question is not who receives the money but what they do with it.  Yes, as currently conceived, money can be paid into the hands of the issuer's cronies who will use the money to purchase existing assets, but this need not be the case.

The money might be lent to those who can create the greatest real return.  This would favor industries which are the most productive and abandon those who are least productive.  It is a matter of honest interest in real growth.  Something always assumed to exist but does not in the current economy where money is lent to the highest speculative return and is essentially the capture of existing wealth.  Our kind of monetary policy represents dyed in the wool political and legal corruption meant to serve wealth capturing speculation.

As an introduction to comment below, creation of new money is assumed incapable of inducing the creation of new goods and services; a falsehood which will be returned to later.  Just note that this is classical monetarism in which real output is set in the real sector and money has no effect. Money does affect production and trade or we would not be using it.

2) Low interest rates are beneficial

They are, as such, neither beneficial nor detrimental.  The only interest rates that matter are equilibrium interest rates.  Attempting to force interest rates up or down is an effort to manipulate a general equilibrium solution without the necessary policy tools in hand.  Macro policy is dominated by two variables, the money stock and aggregate demand.  Institutionally, central banks control the money stock and the political authority influences aggregate demand through marginal expenditure. The public's animal spirits too may help or hinder aggregate demand management.

Of course central banks cannot by themselves control interest rates for they do not control aggregate demand.  Since this variable is not under their command monetary manipulation will not give consistent results, period.  Entrepreneurs do not control the interest rate.  They will bid up the price of funds only if the demand they face for their product is also rising.  Then they will have motive to pay up for money.  But demand for product in total is aggregate demand and is set by the demand in the economy for goods and services.

The problem with economic theory is the failure to clearly identify a pump.  Think of the flows of money through an economy as a complex mass of glass piping carrying colored water.  A small pump forces the water through the complex of tubing which is essentially a modeling of a fixed price vector. One turns on the pump and observes the flow of water through the piping.  Increasing the force of the pump pushes the water faster.

The problem with most economic theory is the assumption that there is no pump and that the water moves by itself.  Such models imply free scaling of the economy so that the speed of the moving water can be set freely.  A random shock that raises the speed of the water or lowers it offers no correction.  The new setting is metastable and will continue until another shock.  This is nonsense.

The pump exists and is called aggregate demand.  It is the organized will of the population to create more or less of any bundle of goods of services.  This will involves politics as well as conventional economics and is generally represented as aggregate demand.  The usual assumption is that aggregate demand is passive and freely adjusts giving us the freely scaling model of the piping analogy in which the pump does not exist.  It does exist.  It is an abstraction of economic and political will in the economic arena and is set by popular will and modified by government action.

It can be modified and changed by exhortation, will and the production of new money spent directly into the economy. When people are willing to believe in the importance of an economic action creating and spending money to organize, channel and direct that action can be immensely effective. The output of war goods during the second world war in which the public committed to the defense industries, price controls and accepted the necessity of military production is a case in point.

3)  Expanding Money and Bank Credit Stimulates Business

Not necessarily but possibly.  Expanding money and bank credit can finance (organize) the will represented by aggregate demand.  When that will does not exist bank stimulus will fall flat.  The will of aggregate demand is certainly shaped by the level of debt.  High debts require high returns to generate the income to pay down the debt.  Given a history of major mistakes in investment the carried debt will be so great that any reasonable investment plan will not generate a return sufficient to cover past mistakes even at higher rates.  The return of will and aggregate demand requires the repudiation in some form of the debt which is an act of political will.  There must be a reset.  Part of the recovery in aggregate demand is the return of a will to reorder the economy.  

However, that will  may exist.  In that case low rates and cheap credit encourage as stated the investment in low return projects.  If those low returns are met then the interest can be paid.  The numbers balance in money terms.  Whether the returns are great enough in real terms is another matter.  If not the rate of interest is too low and the destruction of capital through use in low return projects will increase the scarcity of capital and force a rise in real rates.  An age dominated by the will to perform foolish economic actions will find the financing to do so.  The trouble comes later as described in the paragraph above.  Then aggregate demand and will collapses awaiting an upheaval that will make a recovery possible.

4)  Lower exchange rates benefit the economy

I will not spend much time on this one.  

Lowering exchange rates is equivalent to lowering ones price for goods sold abroad.  This will lower the rate of profit in domestic money and imply accepting lower returns.  This kind of activity can be financed only at lower interest rates and is similar to investing in low return domestic projects.  it is all of one piece.  The usual motive for this is a kind of busywork creation to keep economic organizations together and avoid disbanding workforces in the hopes that aggregate demand will recover.  As an act of self protection it is not totally stupid, but real solutions lie elsewhere.  Namely, within a recovery of aggregate demand both domestic and foreign.

 The problem with this writer's analysis is the failure to adequately address the concept of aggregate demand.  At best he identifies the will of entrepreneurs with aggregate demand which is hardly sufficient.  Entrepreneurs do not invest unless they see a pickup in aggregate demand.  They are much too passive to play the role assigned above.  There are other players.  For all the attack on monetary policy the writer still argues that monetary policy is the only game in town.  There are two games simultaneously and both must be acknowledged.

 

Nor is wealth finite.  It is created continuously and anew by the will and action of people and changes its form from age to age.  But it is also true there are ages when wealth is consumed in foolish actions.  We continue to assume now that wealth still exists in the form of the massive debt overhang when it no longer does.  Current real investment cannot pay a return large enough to cover these past mistakes.  The economies of the Western world need to declare bankruptcy and the people who must be hurt the most are the ones holding that worthless paper.  A great reset is needed, but it still does not mean that monetary policy alone will bring recovery. People will not borrow if there is no return on investment and, ultimately, return on investment is set not just by the available money stock but also by the level of aggregate demand which is not a monetary variable.

overmedicatedundersexed's picture

you forgot the "rule of law"..why invest when it will be stolen from you? you forgot crime, "the taking of value with out just payment"..

it is more than obvious that the current economic status of a majority of the world is based on "crime"..the taking of property and labor with out just payment.

monopolies and oligarchs grow on the qe and bail outs and nwo free trade..with banking being a good example..buffet and the google /fb/amazon gangs..supported by jew bucks from fed and .gov largess

all economic theory pump priming and aggregate demand ..become unrecognizable and unpredictable in outcome..as long as basic laws are ignored by those who rule the land, rights of the people are ignored.

somebody needs to go to jail, but, not the kid selling tax free cigs.. elite crime seems not to attract your attention  wonder why?

thurstjo63's picture

Breathtaking in your religious beliefs of so-called "modern economics". Let's review:
1. "Certainly in any real economy some agents will receive new money before others" - As though economies were not "real" before money printing became the standard in the late 20th century!?! Yes even the US were in the latter part of the 19th century when there was no inflation and during the majority of this period prices were falling (shock! horror!) and people's purchasing power tripled I guess that wasn't a "real economy"!?! You know when the money supply is stable, and the means of production are improving such that producers are able to lower prices so that MORE people are able to afford a particular good (like mobile phones).
2. "Institutionally, central banks control the money stock and the political authority influences aggregate demand through marginal expenditure". Yes because central authorities are best placed to know what is the price of money!?! Not those who actually need it on the ground!?! As for the government, throughout the history of civilisation, they have been looking for any con they could use to extract the wealth of the population without requiring a recourse to blatant violent force. Because obviously we all want to hand our money over to the government because bureaucrats know best what to do with it!?!
3. "Expanding Money and Bank Credit Stimulates Business" - Yes because allowing for anyone be it a bank, or central bank to print money on demand is a good thing! If that was true let the genius explain why growth exploded in the US without an expansion of the money supply!
4. "Lowering exchange rates is equivalent to lowering ones price for goods sold abroad. This will lower the rate of profit in domestic money and imply accepting lower returns. This kind of activity can be financed only at lower interest rates and is similar to investing in low return domestic projects. it is all of one piece." - Of course because having an artificially low exchange rate doesn't distort the economy by pushing manufacturers to export at the expense of the local population as well as harming those manufacturers who need to import products for their own production nor is artificially low interest rates. It all happens at the same time!?! Because as soon as the exchange rate is lowered the central banks immediately lower the interest rate!?! Even now when all central banks are printing ad infinatum the USD exchange rate is just so low and that's why the Fed is looking to raise interest rates because it's all one thing!?! Finally the fool keeps talking about aggregate demand as though it is something real and tangible and isn't just another made up concept like CPI that has no real value. Cows exists. Herds of cows don't exists. People exist and for different reasons demand a product or service, aggregate demand doesn't exist. Both are just terms used for collections. A collection is not real, a person is. Unfortunately this basic thing is not understood by @Wantoknow.

GreatUncle's picture

Most of the article has been written about time and again so nothing new was learned.

It is what is missing is the problem ... the economic crisis etc. the central bankers deferred for now at substantial cost cannot be deferred forever. Full retard stagnation is around the next corner without the bust / recession / depression to expunge the bad debt / malinvestment.

All those new shoots since 2008? All built on the current ongoing economic crisis that will be susceptible to ruin when this is finally resolved.

The central banks laid the foundations of post 2008 on quicksand and they wonder why it keeps sinking the more and more they need to throw at it to just standstill.

Actually from the above can actually realise a way out of this situation but they do not have the mind to grasp it with all the Keynesian spending bullshit infrastrucuture project just get swallowed up in the same quicksand ...

falak pema's picture

The best way to destroy the capitalist system is to debauch the currency. Vladimir Lenin

Pax Americana’s Imperial Oligarchy --pictured below in all its NWO unilateralist glory-- seems to be doing the job Lenin so presciently defined but failed to achieve himself.

(As I can't post the picture I have to fill in the blanks with words!)

Julius : Reagan; Augustus : Bush Snr; Tiberius : Clinton ; Caligula : Bush Jnr ; Claudius : Obama

NERO : Hillary or the Duck !!!

What a repetition of past Hubris and corruption.

frankly scarlet's picture

In a nutshell the neo classical economists think that their erroneous modelling at the micro is applicable to the macro. In their micro modeling they ignore the effects of debt, banking and money on the economy. They are quite simply wrong and their modeling cannot even allow them to see where they are wrong.

https://www.youtube.com/watch?v=KIaXVntqlUE

https://www.youtube.com/watch?v=pXSmaPGmEVU

conraddobler's picture

What is needed is as new God damn idea instead of trying to make old creaking ponzi schemes one size fits all we need to redo the entire fucking thing.

After a lifetime of looking at this problem I am convinced the solution lies in obliterating all positions of power and returning it all to the people.

The problem with progressives is that their own power structures they erect as proxies for the failed crony captialist systems ends up being worse than the fascism they replace.

They are just replacing fascism with socialism.

Socialism is just code for another type of crony system.

The problem is the crony problem it's the problem of people nest feathering and favoritism that has nothing to do with actual problem solving but is all about creating little fiefdoms.

That's how humans tend to organize in hierarchies and those are THE PROBLEM!

MASTER OF UNIVERSE's picture

The 'System' is a closed-looped cybernetic system that has run it's course in terms of Ponzi usefulness, and has degraded to a point where it no longer allows the Ponzi banksters to claim that a centrally planned Global Economy is functionally workable, or possible. Moreover, they will allow the entire world to devolve into thermonuclear hot war just to cover up their misdeeds, and largesse. The money was all looted, and now the only choice the system has is to implode in on itself like all closed-looped systems eventually do.

MASTER OF UNIVERSE's picture

another duplicate post problem that is recurring repeatedly over the last two weeks??????????????