Re: Controlling Inflation in Capital Asset Prices

[Dennis R Redmond <dredmond@xxxxxxxxxxxxxxxxxxxxx>]

On Fri, 31 Oct 1997, Per Gunnar Berglund wrote:

> For economic _decision-making_, however, the actual distinction between
> owner and user, debtor and creditor, and the actual transactions occurring
> between the two, are of paramount importance. We may regard a non-zero
> capital cost as a kind of "tax" (the revenue of which accrues to the
> creditor) on credit (hiring, lending) arrangements. Obviously taxes will
> tend to diminish the volume of such transactions, a restriction which will
> tend to reduce the efficiency of the resource allocation: the right capital
> object might not reach the right user, so to speak. The higher the rate of
> "taxation", the graver this problem will be. Interestingly, the problem of
> misallocation will also obtain whenever the "tax" goes BELOW the zero level,
> meaning that credit arrangements are "subsidised".

This might apply to First World countries with relatively deep financial
markets. But what about a country, say, like South Korea, where negative
taxation of capital costs is routinely practiced, i.e. credit subsidies
for exporters and chaebol firms? Or would you argue that these subsidies
are counterbalanced by very high internal savings rates? (Incidentally,
the East Asian tigers could be a real-life example of the benefits of Very
High National Debt policies: the costs of such are socialized internally,
via credit rationing, tight import restrictions, and the various other
tentacles of that classic Swedish invention, the developmental
state). Will a Keynesian strategy for 2000-2010 therefore have to adopt,
not just industry-oriented fiscal policy, but more organized forms of
savings as well -- e.g. greater taxation of speculation, of the wealthy,
of financial markets, etc.? (This augurs, if nothing else, a considerable
expansion of the role of the state a.k.a. extension into development
finance, R & D, innovation policies, etc., instead of its current
rollback.)

> 4. PASSIVE ADAPTION OF r TO g(API)
> The policy of keeping r = g(API) must not be mistaken for an attempt to
> directly control the API (even if this may be necessary at extremely
> depressed states of the economy, corresponding to the schoolbook Keynesian
> "liquidity trap"). The normal procedure will be to let the API go where it
> will, and to adapt r ex post to the g(API). Of course the central bank may
> opt for setting r slightly higher than the g(API) if there are good reasons
> to expect an acceleration of the latter in the near future. But basically,
> capital asset prices should be allowed to go whereever they will, and the
> rate of interest should take a more passive "back seat" role in the
> interplay.

I'd argue that the Central European economies already have many of the
elements of such a policy: rents are state-influenced if not controlledf
outright, banks and financial centers are geared towards industrial
accumulation and not financial speculation, German and Swiss banks are
legendary for their accounting conservativism (though this may be
changing, what with the spate of investment bank buyouts by Deutsche Bank
and others) and governments routinely intervene in industrial policy, wage
disputes, etc., the upshot being that asset prices are probably more
reasonably correlated to the fortunes of the shop-floor than, say,
bubble-mad America. Would it be fair, then, to say that your strategy aims
at controlling the high ground of loan finance, and using such as a tool
of quashing capital's agenda, precisely where global finance capital is
trying to run the world economy as a planetary-sized stock market casino?
Or am I misreading you here?

-- Dennis