Re: Liquidity Preference and State Theory of Money

[Harry Veeder <eo200@xxxxxx>]

Gunnar,

>
> Harry:
>
> Re. the following:
>
>> Actually, I mentioned the critical interest rate concept in March 2001 on
>> pkt and Geoffrey Gardiner said "That is a very striking perception!" At
> that
>> time I described credit by the degree to which it is either supply or
> demand
>> constrained. Therefore on the graphic supply constrained means mainly
>> consumptive credit, and demand constrained means mainly productive credit.
>
> Comment:
>
> The idea that "productive credit" is "demand constrained" is the mirror
> image of Bentham's concept that, as I recall it from forty years ago, "the
> extent of industry is limited by capital".
>
> What, then, is "capital"?  From the vantage point of The Washington
> Consensus, the answer detailed in my message ---
>
>>> First.  All cooperative production activity is predicated on credit
>>> (formal or informal) - such "credit" is the finance "capital" equivalent of
>>> Factor Inputs which comprise the real "capital" which, in recent messages,
>>> I have referred to as Factor Investment in the Economy's Work in Progress.
>
> --- has revolutionary implications.

Are you saying from a macro (i.e.finance?) standpoint capital should be
regarded as a form of credit? If so, I tentatively agree. It also implies
income derived from capital is also form of interest.

> For, given the Law of Contract and an institutional setting for its
> enforcement, lack of "capital" cannot in principle be the root cause of
> Factor Unemployment.

Indeed, I am working on a theory of employment were the presence of
capital/credit is responsible for systemic under and over employment.
With more capital/credit, comes more under and over employment.

My graphic suggests that if the critical interest rate is lowered to zero,
credit (and capital) would vanish. So if my employment theory is correct, if
the CB continues to lower interest rates it under and over employment
would be reduced.

HOWEVER, this prediction is apparently contradicted by the situation in
Japan. BUT, it is also my contention that the current interest rate of zero
represents a conventional scale rather than an absolute scale, just as the
temperature of zero on the Celsius scale is does not represent absolute
zero. (Absolute zero is -273 degrees Celsius on the Kelvin scale)

AN ABSOLUTE ZERO INTEREST RATE FOR JAPAN'S CB IS THAT RATE WHICH
CORRESPONDS WITH FULL EMPLOYMENT. It could be -.1%, or -1%, or -10%.

> This has implications for the scenario sketched in your graph - for it
> implies that "supply" of "capital" cannot in principle be constrained by
> "liquidity preference" considerations.
>
> Ditto for "consumptive credit" insofar as it is "financed" through "new"
> credit creation rather than "recycled" savings out of factor incomes.
>



Harry Veeder