Sunday, February 22, 2009

A gate not a lever

... I've had this piece from Steve Keen's Debt Watch stuck in my head for a couple of weeks now.  It's long and complicated, and I'm not sure I completely understand it (I certainly don't understand it well enough to tell you whether I think it proves we cannot get inflation unless it is hyperinflation, which is one of the actionable claims it makes -- ie. don't buy gold, buy options on gold) but I do think there is something important here that I don't want to lose track of. 

The basic point seems to be that the Fed's control of the money supply is more like a gate than a lever.  Normally, we think of the Fed printing money as a lever that pushes on other parts of the mechanism down the line, which directly and causally influences the level of lending and prices.  Keen suggests that this is in error, and that the government sanctioned money supply just works like a gate -- they can open the gate more or shut the gate more, but they don't control the flow through it.  This is almost the same thing as saying that they control the total amount of money, but not its velocity.  On this view, the private banks are the ones who actually create money in the first instance, and the Fed simply ratifies the decision or vetoes it. 

If this is right it would explain a few things, like how you can get stuck in a liquidity trap where nobody wants to lend and nobody wants to borrow despite the gate being wide open (zero interest rates), as well as how you can fall asleep at the wheel and leave the gate open too long (sorry about the mixed metaphor) and then cause all hell to break loose when you shut the thing, resulting in the implicit veto of all those lending decisions by not printing enough money to fulfill them. 

It also goes some way towards the recuperation of Marx that has been percolating through by brain ever since reading The Main Currents of Marxism.  If the inevitable ratchet-like logic that Marx had in mind was a feature of capitalism rather than of markets, a feature of a system where capital makes more capital because the winners manage to re-write the rules and the business interests to capture the government -- well, then he makes a lot more sense.  Fundamentally, Marx may not have been criticizing free markets at all, but government involvement in free markets that creates feedback loops in an otherwise equilibrium tending system. 

One of the basic things we have placed in the hands of the government in the last 70 years is the control of the money supply.  Would it be so surprising if certain business interests managed to capture the lever/gate mechanism for their own self-sustaining benefit?  If they did mange to, even once, what would stop them from continuing to exploit it?  Revolution?

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