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>From: Basil Moore <bjm@xxxxxxxxxxxxxxxx>
>To: pkt@xxxxxxxxxxxxxxxx
>Subject: Fwd: gross substitution
>Date: Fri, Mar 9, 2001, 3:21 pm
>
>
>>To: pdavidson@xxxxxxx
>>From: Basil Moore <bjm@xxxxxxxxxxxxxxxx>
>>Subject: Fwd: gross substitution
>>
>>Paul
>>OK, I accept that K. was here talking as if money has zero elasticity of
>>production.
>>But since credit money is not constant or given, and can be increased
>>without the use of labor, K's argument is at least misleading, and I could
>>even argue 'wrong'.
>>
>>As we now know, money is not a commodity like other commodities. It is
>>rather a social convention, like language, (which is also "produced" by
>>labor).
>>
>>K. was arguing that since people wanted more money, and since additional
>>quantities could not be produced by labor, this was the cause of AD
>>deficiency.The argument was exactly like that of an excess demand to hoard
>>land.
>>
>>This leads people naturally to think that the supply of money is too
>>small, so the government or CB should produce (create) more.
>>
>>But the real reason for AD insufficiency is not because the supply of
>>money is too small, but because the rate of interest is too high.
>>
>>Additional credit money can always be created. The problem is not because
>>the supply of money is given. The supply of credit money is
>>demand-determined, by the demand for bank credit. If interest rates are
>>lowered by the CB, this will lead to an increase in the demand for bank
>>credit, and an increase in the MS and in AD.
>>
>>Agreed??
>>
>>Basil
This analysis does not really agree with financial practice. Consider the
volume of
private credit supplied at various interest rates. According to you, the
supply
of cheap credit (approaching zero interest) should be infinite, but it is
not.
In fact, below a certain interest rate, it only makes sense for the supply
credit
to fall to zero as interest falls to zero. Can you get a loan that has zero
interest
in perpetuity?
So there is a critical interest rate, above which credit is demand
constrained,
and below which credit is supply constrained.
Harry Veeder