Re: General Theory Seminar

[Warren Mosler <mosler@xxxxxxxx>]

And recognize that with a fixed exchange rate the nominal rate of
interest is unlikely to fall to that which it is convertible into, as then
the holders of the currency could eliminate the risk of devaluation by
converting, with little or no loss of interest.  So in HK, for example,
if the rate of interest in the $HK fell to that of the $US, it would
be expected that holders of $HK would convert to $US at the monetary
authority and eliminate any risk of devaluation without loss of interest.
The current interest rate differential between $HK and $US is the risk
premium, the risk being devaluation.

In Japan, on the other hand, there is no convertibility, so the rate can
be 0, as it is, without incident.

So perhaps a liquidity trap had not been seen in the time of Keynes because
all the currencies were convertible?

http://www.warrenmosler.com
see  'Exchange Rate Policy and Full Employment'

"J. Barkley Rosser, Jr." wrote:

> Paul,
>      Certainly on p. 202 Keynes lays out a general "squares"
> argument.  But on pp. 207-208 he talks about exceptional
> situations.  Thus (GT p. 207):
>      "There is the possibility, for the reasons discussed above,
> that after a rate of interest has fallen to a certain level, liquidity-
> preference may become virtually absolute in the sense that
> almost everyone prefers cash to holding a debt which yields so
> low a rate of interest.  In this event the monetary authority
> would have lost effective control over the rate of interest."
>        He then declares that he has never actually seen such a
> case.  But, he later says that he has seen the opposite int he
> "financial crisis of liquidation" in the US in 1932, "when scarcely
> anyone could be induced to part with holdings of money on any
> reasonable terms" (pp. 207-208).
>       Of course, mathematically it is possible to have the square
> root law and have a "liquidity trap" as long as there is a positive
> constant term so that the hypebola asymptotes to a positive
> interest rate.
> Barkley Rosser
> -----Original Message-----
> From: Paul Davidson <pdavidson@xxxxxxx>
> To: POST-KEYNESIAN THOUGHT <pkt@xxxxxxxxxxxxxxxx>
> Date: Monday, February 07, 2000 10:42 AM
> Subject: Re: General Theory Seminar
>
> >At 05:15 PM 02/05/2000 -0500, Barkley wrote:
> >>       Given the lively discussion that has come out of
> >>Chap. 12, I would like to see bringing in some of the
> >>material from the nearby Chapters as well, such as
> >>11, and 13-15.  One question:  is a crash best
> >>characterized as a surge of liquidity preference?
> >>Is a liquidity trap related to a crash, perhaps the result
> >>of one as in Japan?
> >
> >
> >the concept of a liquidity trap, i.e., a perfectly elastic
> >[horizontal]  segment of the speculative demand for money is a not a Keynes
> >concept--- as I ave pointed out at various times in the literature. On page
> >202 of the GT, Keynes points out that the speculative demand for money
> >follows a square root rule -- and is therefore a rectangular hyperbola --
> >which by definition never has a truly horizontal segment.  The liquidity
> >trap or what Milton Friedman calls "absolute liquidity preference" is
> >a  delusion -- not required (i.e., not a necessary condition) for Keynes's
> >liquidity preference analysis of involuntary unemployment equilibrium .
> >
> >moreover, as Keynes argued in his 1937 EJ  finance motive addendum to his
> >liquidity preference theory , an increased in planned spending  (an hence a
> >decrease in unemployment) can be held up  by a lack of sufficient
> >additional liquidity added to the system.  So it is not a "surge of
> >liquidity preference" in the sense of  a "surge" in bear holding position
> >that may prevent employment expansion, Barkley {See  chapter 8 in my POST
> >KEYNESIAN MACROECONOMIC THEORY book]
> >
> >>       BTW, I would note that we now have a rather complicated
> >>and nuanced collection of actors in financial markets, not
> >>just the old fundamentalists and chartists, but true-false
> >>switchers, insiders and outsiders, noise traders and quiet
> >>traders, informed and uninformed, and others, with few of
> >>these distinctions necessarily correlating with the others.
> >
> >But that is just Alan's pragmatic and realistic economists trying to
> >categorize each player as a separate entity . Of course if there are a
> >million players there may be a million differing reasons for each players
> >action.  Just as there are millions of humans -- most of whom do not look
> >very much alike.  We do not separate hunmans by say their height  or
> >weight,  etc-- when trying to explain market behavior. Taxonomy requires
> >that we categorize by the fewest necessary and sufficient properties and/
> >or functions into homogeneous groups -- despite individual differences
> >among members of the group. [ See , for example, page 33 of my PKMT book]
> >
> >Paul
> >Paul Davidson
> >Holly Chair of Excellence in Political Economy
> >Editor, JOURNAL OF POST KEYNESIAN ECONOMICS [JPKE]
> >Economics Department -- 523 SMC
> >University of Tennessee
> >Knoxville, Tennessee 37996-0550
> >email: Pdavidson@xxxxxxx;   phone: (865)974-4221;    fax: (865) 974-4601
> >http://econ.bus.utk.edu/Davidson.html
> >
> >