Re: Neglected prophets!

[thorthor <thorthor@xxxxxxxxxxxxx>]

>  paul davidson wrote:

> if the government insists on attempting to maintain a surplus ... to produce a
> deflationary (oversaving) force --- , then who -- or what sector - will ....
> maintain the high level of effective demand that the US has enjoyed in the last
> 2-3 years?

An interesting development in all of this is that  government expenditure is still
growing briskly, despite the accumulating surplus.  The government could
theoretically have a much larger surplus.

As for the over-saving argument, the households and corporations seem to be picking
up the slack, having become large dis-savers. The Fed Chairman recently opined this
was not a problem as a non-trivial share of the new credit was going towards
investments, raising potential output.

As for Godley´s argument about the seven unsustainable processes, not everyone
agrees with the timing or inevitability of adjustment. While he may eventually be
right (even tomorrow), the fact is that the US is a special case in the global
economy, and international politics seems to play a non-negligble part in keeping
the game going. After all the policy of ´benign neglect´ has been practiced for
many decades, the last two of which have been attended by ever larger imbalances.

Monetary policy is another element in all this. It can be still characterised as
being accommodative.  Along with the fiscal policy stance, the two represent a
´gradualist´ macro-policy approach, which has the sole aim of deftly defusing
inflationary pressures, while allowing the economy (and potential output) to grow,
while at the same time avoiding a full-blown correction in the stock market.

All we can say is: ´so far so good´. More recently, however, the increasing
divergence between the tech sector and the blue chip stocks must be an unwelcome
development in the financial markets. This kind of divergence is also becoming
prominent in Japan and Europe. Maybe we have entered the ´tulip mania´ phase?

> the surplus ... is the fundamental problem
> ... one manifestation ... would be the greater volatility of capital markets..

I actually think the surplus is a welcome development, and which I am sure JM
Keynes would have encouraged during boom times. As for the market volatility
argument, while share price volatility has increased, the implied volatilities of
the major share price indexes remain well below that seen in the second half of
1998.  I guess a correction will come when equity risk premia (a la Gordon) begin
to climb from their current low levels. The gradual withdrawal of a risk-less
reference instruments, like US Treasury Securities, could indeed contribute to such
a development, but much more is needed in my opinion. I would be worried about
investors losing their nerve if inflation suddenly spiked or a substantial
exogenous negative shock were to hit.

Well that´s my two centimes worth, anyway.