Re: Neglected prophets!

["Gunnar Tomasson" <tomasson@xxxxxxxx>]

Keynes commented on analogous problems in Preface to 'A Tract on Monetary
Reform'.

As I recall it, his point of departure was to note that separation of the
Ownership and Managerial functions in entrepreneurial market economies had
been associated historically with build-up of paper assets/debts that, in
due course, would over-burden the debt-servicing capacity of the production
process.

Keynes went on to suggest that, while the technically appropriate solution
was discretionary debt cancellation, it was fair surmise that it would never
be applied in the real world.  Indeed, INFLATION had been the historical
remedy for excessive build-up of paper assets.

The collapse of the Bretton Woods system in the early 1970s paved the way
for U.S. financial policies, whose short- and medium-term effects were to
stimulate and sustain economic expansion at home and abroad while the
long-term effects are now with us in the form of excessive paper assets
relative to the availability of "safe" havens for their owners.

In these circumstances, neutralization of some part thereof by public debt
at the national level and "funding" of external U.S. dollar balances through
the IMF's SDR mechanism at the international level would mitigate the
immediate danger of destabilization in U.S. and world financial markets
without addressing the root cause of the problem - the financial policy
stance of the United States since the 1970s.


----- Original Message -----
From: Sven R Larson <larson@xxxxxx>
To: POST-KEYNESIAN THOUGHT <pkt@xxxxxxxxxxxxxxxx>
Sent: Tuesday, February 22, 2000 7:00 AM
Subject: Re: Neglected prophets!


> The threat from shrinking public debt has been hanging over Europe for a
> long time now. I imagine the persistent debt in the US has compensated
> for the effects of European debt reduction. Debt slashing will continue
> in the EU (with Austria now joining Sweden as the unsurpassed herald on
> the Dante-style descent into the abyss of austerity) and when you
> combine that with what e.g. John McCain has suggested the US should to -
> I think too many will have too many occasions to regret they didn't
> listen to Paul & Jamie.
>
> /srl
>
> Gunnar Tomasson wrote:
> >
> > Point well taken.
> >
> > Yet, by the same token, nervous investors in Thailand, South Korea, and
> > Indonesia might have stayed put rather than plunge these erstwhile
"tiger"
> > economies into chaos if "secure" government paper had offered them an
> > alternative to capital flight.
> >
> > In the case of the U.S. economy, while "debt redution" might be the
> > proximate cause of destabilization in financial markets, the ultimate
cause
> > would be the build-up of paper assets relative to the economy's real
assets
> > which has fueled the long-running boom that has made the U.S. economy
the
> > envy of the world.
> >
> > In this respect, "the dangers of debt reduction" effectively
underscore -
> > and are one with - those of "the more naive inflationist fallacies"
(a.k.a.
> > American "keynesianism") that have informed U.S. financial policies
after
> > the early 1970s.
> >
> > Gunnar Tomasson
> >
> > ----- Original Message -----
> > From: Paul Davidson <pdavidson@xxxxxxx>
> > To: POST-KEYNESIAN THOUGHT <pkt@xxxxxxxxxxxxxxxx>
> > Cc: <galbraith@xxxxxxxxxxxxxxx>
> > Sent: Monday, February 21, 2000 2:09 PM
> > Subject: Neglected prophets!
> >
> > > In an article entitled "The Dangers of Debt Reduction" on the
editorial
> > > page of the March 3, 1999 WALL STREET JOURNAL, Professor James
Galbraith
> > > and I wrote "The promised buy-down of the government's own debt, poses
> > > another set of dangers. U.S. government bonds are a safe asset,
completely
> > > free of default risk. Their vast abundance are stabilizing elements in
> > > world finance. Take them away and... private investors will be forced
to
> > > seek safety in hedging, which tends to destabilize financial markets".
> > >
> > > The same theme has suddenly been discovered in a major article in the
> > > February 17, 2000 issue of The New York Times entitled "Shrinking
Treasury
> > > Debt Creates Uncertain World". The Times reports that with the U.S.
> > > repurchasing Treasury bonds "...the debt securities that remain in the
> > > shrinking market are expected to be much more prone to wild swings in
> > price
> > > and therefore riskier to investors".
> > >
> > > It took the New York Times almost a year to discover what was obvious
to
> > > Galbraith and myself.
> > >
> > > 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
> > >
> > >
>
> --
> -----
> Sven R Larson
> Department of Social Sciences, Bldg. 22.1
> Roskilde University
> Pb 260
> DK-4000 Roskilde, Denmark
> Phone: (+45) 4674 2910
> Fax: (+45) 4674 3080
> Rigor rei publicae forum populi delit;
> forum populi deletum rei publicae dissipationem veniat.
>
>