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

Monetary stance CHEAPDEAR EASY TIGHT

1. More likely under dear money 2. Begins in corporate sector 1. Credit creation against expected incomes 2. Real expansion 3. Outcomes relative to expectations 4. Shortfalls, leading to distress borrowing and debt inflation 5. Financial collapse (August 2007); debt deflation 6. Real collapse (ongoing)

1. Money and Interest

Monetary Stance CHEAPDEAR EASY TIGHT

Funding complex M0M0 r0r0 LP schedule M r

Tap issue M0M0 M1M1 r1r1 r0r0 LP schedule M r

Tap issue M0M0 M1M1 r1r1 r0r0 LP schedule M r M2M2

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

The Report of the National Debt Enquiry 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.

Monetary stance CHEAPDEAR EASY TIGHT

2. Money, Interest and Activity

Investment demand r0r0 I0I0 MEC schedule r I

Animal spirits r0r0 I0I0 I1I1 MEC schedule r I I2I2

Dear and easy money r0r0 I0I0 I1I1 correct MEC schedule r I MEC 1

3. Financial considerations

Dear and easy money r0r0 I0I0 I1I1 correct MEC schedule r I MEC 1

4. Prevention

Cheap and tight money r1r1 r0r0 I0I0 I1I1 Correct MEC schedule r I

5. The evidence of experience

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

Monetary stance CHEAPDEAR EASY70s s – US TIGHT s – UK 08-09

US GDP: contributions

The debt inflation

“ ” “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 interactions that we should not pretend to fully understand.” The BIS in their 75th Annual Report, 2005

6. Beyond the corporate sector

Conventional opinion (April, 2008) 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)Wolf said. 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)

“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)

7. Keynes and Marx

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

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)