Re: Keynesian Christmas!-- and the collapsiing international

["Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>]

"Alan G. Isaac" wrote:

> On Fri, 28 Dec 2001, Warren Mosler wrote:
> > The new currency will function just fine if it is acceptable for
> > payment of taxes.
>
> Thought experiment:
> A country introduces two currencies, both of which
> are acceptable in the payment of taxes but one of which has a higher
> expected rate of inflation.  (Keep things simple: only these point
> expectations matter for the asset decision.)  Who will hold the high
> inflation *currency*?
>
> As always, expectations are a crucial determinant of asset holding.

The market will hold both currencies if both are supported by
compensatory interest rates. The equation governing exchange rates,
inflation expectations, interest rates always results in constant
equilibrium.  Only when interest rates are arbitarily set by central
banks to support ideology, or to allegedly manipulate growth, or to
manage exchange values, or to fight inflation, that policy induced
market inefficiency (assuming market efficiency exists theoretically)
creates profit opportunities for arbitrage.  The whole bussiness of
structured finance (derivatives) grew out of the need and ability to
manage risks that have been arbitrarily created by the myth of
neo-liberal market fundamentalism, muddled by fiat monetary policy of
brain-dead central banks.  True market fundamentalism will demand that
central banks let the market fight inflation, and not through the
whimsical tightening of monetary policy. Greenspan's strategy of
reducing market regulation by substituting it with crisis intervention
is merely swapping the extension of the boom with increased severity of
the bust down the road - the exact opposite of the Keynesian approach.
Greenspan is no post-Keynesian, or neo-Keynesian, for his strategy is to
exacerbated the business cycle rather than to moderate it.