Re: NYTimes.com Article: A Fiscal Train Wreck

["Gunnar Tomasson" <gunnar.tomasson@xxxxxxxxxxx>]

Mat:

Evan's finding that "high interest rates cause higher deficits" is a
variation on what Keynes (tongue in cheek?) termed the Gibson Paradox.

Namely, historical data supporting the common sense notion that high
interest rates translate into high inflation - a 'paradox' to the
IMF/Washington Consensus and monetary theorists who subscribe to the General
Theory's thesis that Capita/Production Credit is Productive/Creates "value".

Gunnar


----- Original Message -----
From: "Forstater, Mathew" <ForstaterM@xxxxxxxx>
To: "pdavidso" <pdavidso@xxxxxxx>; "Javier Finkman" <finkman@xxxxxxxxxxxxx>
Cc: <pkt@xxxxxxxxxxxxxxxx>
Sent: Tuesday, March 18, 2003 11:52 AM
Subject: Re: NYTimes.com Article: A Fiscal Train Wreck


> See Paul Evans, 1985, "Do Large Deficits Produce High Interest Rates?"
> American Economic Review, Vol. 75, No. 1. (Mar., 1985), pp. 68-87.
>
> Evans looks at three periods in U.S. history (Civil War, WWI, WWII) as
well as the post WWII period (up to the time of his paper, obviously) and
shows that there is really no evidence at all supporting the idea that
deficits cause high interest rates. Eisner used to always say that if
anything the opposite may be true--high interest rates cause higher
deficits--but there doesn't seem to even be a correlation at all.  Of
course, Evans--elsewhere, if not in that article--put forward the view that
Ricardian equivalence may explain his evidence!
>
> -----Original Message-----
> From: pdavidso [mailto:pdavidso@xxxxxxx]
> Sent: Monday, March 17, 2003 9:00 AM
> To: Javier Finkman
> Cc: pkt@xxxxxxxxxxxxxxxx
> Subject: Re: NYTimes.com Article: A Fiscal Train Wreck
>
> >===== Original Message From Javier Finkman <finkman@xxxxxxxxxxxxx> =====
> >Essentially, Mosler reply to Krugman´s article disputes how interest
rates
> would react to higher fiscal deficits presumably financed with debt. The
rest
> follows from the different conclusion about rates behaviour (for both
sides).
> >
> >Krugman was too mechanical in his reasoning: rates could go up but not
> necessarily. The same applies to Mosler: rates could stay down but not
> necesarily. None of them had provided the dynamics (short pieces not
> incompetence, obviously).
>
> While all your statistics is interesting, you miss Warren Mosler's
point --
> namely that the Federal Reserve can always control short-term interest
rates--
> and if it wanted to deal with longer term government debt -- all interest
> rates.
>
> All you have to do is look at World War IUI whewre Roosevelt fought the
war
> with very low interest rates -- despite annual federal government deficits
> that reached over 40% of the GNP at the time.
>
>
> Again today is a much mor complex economy and with free international
capital
> mobility the problem for the Fed can be somewhat more difficult than in
the
> 1940s -- but it is not beyond the abaility of the US government to handle
such
> problems.
>
> Paul
> >
>
> Paul Davidson
> Editor, Journal of Post Keynesian Economics
> University of Tennessee
> SMC 503
> Knoxville, Tennessee 37996-0550
> phone # (561)369-1951; fax #(561)369-1951;
> email pdavidson@xxxxxxx
> http://econ.bus.utk.edu/davidsonextra/Davidson.html
>
>