Re: [OPE-L] Crashes, adjustment, and the long-run

From: Alejandro Valle Baeza (valle@SERVIDOR.UNAM.MX)
Date: Wed Mar 22 2006 - 02:07:41 EST

Jerry Levy wrote:

>> I sent to ope-l messages about a US economy crash possibility in
>> 2000 or so. I have articles discussing this issue since 1989 or so.
>> The crash possibility had pointed out by quite different economist:
>> Roubini (coauthor in Setser article) is an economist from
>> establishment, by example.  The main reason for predicting a crash
>> is that disequilibrium can not remain for a long time and there are not
>> balancing variables for correcting such disequilibrium in  a smoothing
>> path.
> Hi Alejandro,
> I don't think anyone from a Marxian perspective denies the _possibility_
> that there will be a crash of the US economy.   I doubt that even Doug
> Henwood would deny that.   In recognizing such a possibility, though,
> one is not necessarily _predicting_ a crash or even a period of
> stagnation in
> the short- to medium-term.
> What I find unconvincing for your "main reason for predicting a crash"
> is an implicit belief about disequilibrium, the adjustment mechanism,
> and the long-run.    Mainstream economics offers its own definitions
> of short-term, medium-term, long-run, very-long-run.  These definitions,
> which are accepted by many heterodox economists,  embody a certain
> conception of logical time  and are tied to mainstream methodologies
> including the method of comparative statics.
> From a Marxian perspective,  when there is 'disequilibrium',
> -- this is normal for capitalism (i.e. disequilibrium in _real_ time is
> the norm; equilibrium is the exception historically);
> -- the process of 'adjustment' could be thought of as being ongoing,
> but uneven with significant temporal lags and certainly not harmonious,
> and not necessarily or even ordinarily yielding a new equilibrium;
> -- one has to consider how classes are affected by this disequilibrium
> and in the course of their struggle can mollify or exacerbate
> disequilibrium.  In that sense, the process of 'adjustment' is the
> process of class struggle.
> You may agree with all of the above (or not).
> What I want to ask, though, is: *how do you define a 'long time'?*
> Clearly, your prediction of a crash is related to the assertion that
> "disequilibrium can not remain for a long time."  So, how long
> _in years_ is a long-time (approximations are OK, but I really
> think this question has to be answered, since otherwise one
> could say 3, 5, 10, 20, 50, or 100, etc. years and hence the
> prediction becomes meaningless.)
> I think this is a general question which Marxians should be able
> to answer:  how do we define long-run?;  is our definition
> different than that used in mainstream economic theory?
>  (I think it is.)
>> [...] there are many different ways of adjustment: a crash, or
>> several recessions in few years, or stagnation during several
>> years, as in Japan happened.
> Well, yes, but there is quite a difference between predicting a
> a) crash;
> b) recessions;
> c)  multi-year period of stagnation.
> If the prediction is going to be meaningful, I think that one has
> to be more specific.
> *What determines whether a), b) or c) will occur?*
> *What determines whether the 'adjustment' will occur this year,
> next year, 5 years from now, 10 years from now, 20 years from now,
> etc.?*
>> Even a great crash like 1929 have not  occurred yet; it do not
>> mean a great crisis can not happen again.
> Indeed.  Neither does it necessarily mean that a "great crisis"
> will occur in the foreseeable future.
> There is another issue as well: *even if* there is a crash/recession/
> stagnation, what will be the cause?  For instance, the reasons offered
> by Loren Goldner  or the "prudent bear" are quite different -- it seems
> to me -- from the reasons offered by Anwar Shaikh, Dimitri
> Papadimitriou,  Claudio do Santos and Gennaro Zezza  in "How
> Fragile is the US Economy"
> (can be downloaded at
> <> ).
> In solidarity, Jerry

Jerry. sorry for the delay for answering this. I needed more time to
answer all questions you adress; I have not enough time. Hence , I
discuss a few things:

1. Disequilibrium is the rule in capitalist economies. Yes, but there
are disequilibrium that can not last for several years.  By example,
CAD use to produce a currency crisis.  CAD lower than US CAD (in % of
GDP) produced currency crisis in Thailandia and in Argentina recently.
Take a look to this graph::

from: The Levy Economics Institute of Bard College
Strategic Analysis
September 2005
Wynne Godley,Ddimitri b. Papadimitriou,
Claudio H. Dos Santos, and Gennaro Zezza1

Such graph showed an increasing disequilibrium for US current account.
CAD of 6% is unbelievable for any other country. It requires huge
amounts of foreign investment. US economy got such investment until now
and the stock is about 2 trillion dollars greater than US investment
stock abroad.  How long investment will flow to US economy? No body knows.
However there is another interpretation of graph 3. Because US economy
is so healthy; investment flows and produce huge trade deficits.
Cooper, Richard (2004)."America's current account deficit is not only
sustainable, it is perfectly logical given the world's hunger for investment
returns and dollar reserves," Financial Times, November 1st.

I think that US economy is not in good shape and CAD is a symptom of
disease not of good health.


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