Date: Thu, 22 May 2003 13:08:05 -0400
To: pkt@xxxxxxxxxxxxxxxx
From: paul davidson <pdavidson@xxxxxxx>
Subject: The Sainthood of Central Bankers
At 12:28 PM 5/22/03 , you wrote:
The Federal Reserve is very nervous about deflation. The reason for this
is more than its awarenes of the grave danger of deflation on the
economy. The real reason is is that central banks in general, and the Fed
in particular, do not have the power or operative measures within their
discourse to deal with deflation. The exclusive dependence of central
banks on interest rate policy to fight inflation does not work for
fighting deflation, as a decade of data in Japan has shown. The Fed is now
following Japan's lead in trying to manage an exchange rate policy
(talking is not pushing the dollar down) to export deflation to its
trading partners.
This is a result of the 1970s Monetarist triumphant claim (and the
American Neoclassical Keynesian failure to refute) that monetary policy
was the only game in town -- and that fiscal policy was futile! Why was
this so? Because both monetarists and Old and New Keynesians accept the
neutrality of money axiom as relevant -- at least in the long run.
Consequently the Od --and later the New Keynesians logical theory could
only explain unemployment as due to sticky wages and prices. Once enough
unemployment of sufficient duration was experienced, Monetarists such as
Milton Friedman in essence argued, wages would fall ( -- or at least rise
by no more than productivity gains) , therefore inflation would be
conquered and Say's Law would return as the CB lowered interest rates to
an amount equal to the marginal productivity of capital at full
employment. Say's Law would be established and the central banker would
be elevated to sainthood by the Pope.
Unfortunately the neutrality of money axiom is equivalent to the axiom of
parallels in a non-Euclidean world--- and such fiction therefore is not
applicable to a world of falling prices, when there exists the
institutions of money and money contracts to organize production and
exchange processes. Hence the evidence just shows what Aesop's fables
the theories based on the neutrality of money are.
Paul Davidson