Re: Re: Re: Re: Re: RE: saving and aggregate demand

[Jim Devine <jdevine@xxxxxxxxxxxxxxx>]

At 02:51 PM 10/5/00 -0700, you wrote:
> A high rate of investment per se is not bad, but I confess that I would
> prefer a high rate of productive social investment.  While the Fed can
> make decisions quickly, it has to face a long lag.  The economy is only
> now slowing down after a slew of rate hikes over a long period of time.

yes, as Milton Friedman pointed out, there's a long and variable lag. The
Fed only controls short-term rates or small monetary aggregates (the
monetary base), whereas long-term real interest rates (along with credit
conditions and the like) or large monetary aggregates (the supply of
credit) are what's decisive in determining the workings of the economy.
Even so, the latter have little effect if there's a low rate of profit,
pessimistic long-term expectations, excessive private-sector indebtedness,
or extreme unused capacity (or over-building). The more that any of these
prevail -- or worse, a combination of these -- the more impotent the Fed
is. Of course, it's even worse in a more "globalized" economy that that of
the US...

Paul Volcker showed that monetary policy was powerful: it can smash
inflation the way dynamite is used to kill the termites in one's house.

Jim Devine jdevine@xxxxxxx &  http://bellarmine.lmu.edu/~jdevine