Re: Central Banks and Deflation

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

Re. the following:

> 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.

Comment:

>From the vantage point of Creditary Economics, the "neutrality of money
axiom" does not merit serious debate - for it implies that the COMPOSITION
of credit creation and/or fiscal expenditures is a matter of indifference.

In this respect, it would seem that the "neutrality of money axiom" is, if
not implied by, a natural outgrowth of the MACRO approach to monetary and
fiscal policy issues popularized by the General Theory.

For it is obvious at the MICRO level, for example, that credit creation can
feed Asset Price Inflation rather than Productive Investment and that the
employment impact of fiscal outlays is partly a function of their
composition.

Gunnar






----- Original Message -----
From: "paul davidson" <pdavidson@xxxxxxx>
To: "Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>
Cc: <pkt@xxxxxxxxxxxxxxxx>
Sent: Thursday, May 22, 2003 1:01 PM
Subject: Re: Central Banks and Deflation


> 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 Sy'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
> made a Saint by the
>
> >The Chinese economy has been accused by some Japanese economists as
> >exporting deflation by stripping non-Chinese companies of their pricing
> >power. That is an obvious fact, but the cause of this does not origninal
> >from inside China.  As I pointed out in an earlier post (Dollar's slide
> >and PPP), the Chinese currency, the RMB, is actually depreciating against
> >the dollar on a PPP adjusted basis, despite a nominal peg.  Thus with the
> >US pushing the dollar down, it will only exacerbate China's deflation
export.
> >
> >The problem is not the relative value of the dollar, but the dollar's
role
> >as the dominant reserve currency for trade.  The use of exchange rates to
> >manage trade is a destructive move, regardless who does it. Exchange
rates
> >need to be stable and to change only gradually and infrequently.  Trade
> >needs to be structured to increase domestic wages rather than to push
> >domestic wages down.  Pushing wages down decreases purchaing power
> >domestically which directly contracts international trade.
> >
> >Central banks must change their theology of protector of the value of
> >money and start promoting full employment and rising wages worldwide and
> >alter an economic system that rewards corporate policies of layoffs and
> >cost cutting, to one that rewards job creation and expansion.
> >
> >
> >Henry C.K. Liu
>
> Louise Davidson
> Editorial Office Manager
> JOURNAL OF POST KEYNESIAN ECONOMICS
> SMC 501
> Department of Economics
> University of Tennessee
> Knoxville, Tennessee 37996-0550
> phone: (865) 974-4221
> fax: (865) 974-1686