Re: [Pen-l] Re: Thoughts on Fictitious Capital

["Jim Devine" <jdevine03@xxxxxxxxx>]

Sabri Oncu wrote:
> But, what if there is no "real-economy" left in the US? Of course,
> this is an exaggeration, but much of the "real-economy" in the US in
> these days consists of production of services, not consumption goods.
> The production of much of the consumption, and to a large extent
> capital, goods has been outsourced and the US imports them.

Not all services are financial services. The services that show up as
part of GDP (haircuts, etc.) are just as real as goods. They can't be
accumulated, it's true, but they're real, wanted, and necessary (and
profitable to capitalist employers). I don't share Adam Smith's
disdain for services (he saw them as "unproductive").

By the way, if the US$ gets more in line with long-term fundamentals
there will be a tilt toward more domestic production of goods.

In any event, the US produces a lot of agricultural goods, etc. In
recent years, services have represented about 58% of US GDP. That's up
from about 41% in 1959, but it's not equal to 100%. (source ERP 2008,
table B-8.)

> But, what is more important is the exponential growth of debt in the
> US since the 1970s. I am not talking about just the government debt.
> It is the non-government debt that I am more concerned with. The total
> US debt as of 2006 was $44 trillion and only about $6 trillion was
> government debt (Federal, State and Local). Of this $44 trillion, $14
> trillion belonged to the financial sector in 2006, which does not
> produce anything.

The private debt is a big issue. Unlike the Federal government, people
and organizations in the private sector can go bankrupt, as Lehman
knows. (The Fed gov't _could_ do that, but we're a few decades away
from that, I think.)

The financial sector "does not produce anything"? that's generally
true, since all they do is shuffle paper promises, buying and selling
claims. But at a rock-bottom level, all economies need some sort of
financial intermediation. The capitalist finance sector does that job,
but then (because it's capitalist) gets into all sorts of crazy paper
asset-creation and speculation, while lobbying the government to allow
them free reign (not misspelled) and to bail them out when they get
into trouble.

> Another important change is the disconnect between inflation (as
> measure by the CPI) and the money supply. In these days in the US,
> there are no reserve requirements for banks for non-transaction
> accounts (for accounts other than checking, basically). So, banks can
> create money indefinitely, in these days. And so they did. "Money"
> grew exponentially over the past decade, yet the CPI did not. Instead,
> we had "asset price" inflation, that is, bubbles of various sorts,
> which do not show in the CPI.

Right. I think that it's a mistake to focus on the money supply,
though. the velocities of both M1 and M2 are less predictable than
they were in the olden days (1960s, 1970s), which is why Monetarism
has faded to be replaced by interest rate-oriented Greenspanism.

Both the money supplies and velocities have increased rapidly in
recent decades. But that has not been expressed as domestic US
inflation very much (as you say). That's partly because real GDP
increased at the same time that the CPI has been redefined in a way
that reduces the inflation rate (cf. Dean Baker).

Another part of what was happening -- especially in the late 1990s --
was that high interest rates attracted foreign funds and drove the US$
upward, which put a lid on US domestic price increases. Oil prices
also cooperated during the 1990s. Also, with wages generally stagnant
(due to structural changes in labor-power markets) there were fewer
cost pressures on business.

Then, as you say, the increased M*V has spilled over into financial
markets, encouraging financial bubbles (including the one in housing).
In the current political economy (with non-credit financed/non-luxury
consumption spending generally stagnant), however, it sure looks like
the real economy would not be able to enjoy even the somewhat anemic
boom of the Dubya years without being associated with a financial
bubble. (Of course, a military-spending boom could pull off the trick,
as could any expansionary fiscal policy. Export booms have the
down-side of stealing demand from other economies.)

> How is this connected to the "real-economy" fragility?

When I used the phrase "real-economy" fragility, I was referring to
the 1920s, not to the current period. My only point was that it could
be applied now, not that it should be applied.

That _was_ my point, but I can go further now: there are major
elements of real-economy fragility in the present era. With the
rock-solid base of the US economy's demand-side growth (non-credit
financed/non-luxury consumption spending) generally stagnant, and
without large government deficits to replace it, the demand growth
seen during the last two decades has been increasingly unstable
(fragile). Demand-side growth has become increasingly dependent on
credit-based working-class consumption spending, luxury spending by
the rich, and fixed investment, including housing investment. All of
these are more volatile kinds of spending than basic consumption, so
as they rise relative to GDP, the economy becomes more prone to
fluctuations, including recessions. We can see GDP growth, it is true,
but more and more it has based on self-fulfilling prophecies:
businesses do fixed investment because they think that the economy is
growing -- and therefore it grows, etc. Such power of prophecy can and
does work in the downward direction, of course. (US exports have not
been a significant source of demand growth until recently. In any
event, that might hurt other economies' demand growth.)

The parallel growth of the credit system -- and its increasing
instability due to deregulation -- meant that credit-based thorns that
can pop the real bubble have become more likely. And of course, these
thorns are what are occupying financial headlines of late.

> By the way, since the on-set of this crisis, the money supply is
> contracting bad, so I expect that the on-going "asset price" deflation
> will start hitting the consumption goods prices, too. I believe that
> the ongoing oil price deflation is associated with that.

That's likely. However, the Fed's efforts to save the financial
sector's bad boys does encourage the money supplies to rise.
-- 
Jim Devine / "Segui il tuo corso, e lascia dir le genti." (Go your own
way and let people talk.) -- Karl, paraphrasing Dante.
_______________________________________________
pen-l mailing list
pen-l@xxxxxxxxxxxxxxxxxx
https://lists.csuchico.edu/mailman/listinfo/pen-l