[OPE] Prof. Rogoff on expansionary stance

Prof. Rogoff writes with a dry sense of humor:

"As Carmen Reinhart and I have shown in our research on the history of international financial crises, governments in every corner of the world showed themselves perfectly capable of achieving very high rates of inflation long before they had the assistance of modern unions*." http://www.ft.com/cms/s/0/29a40a90-5d6f-11dd-8129-000077b07658,dwp_uuid=698e638e-e39a-11dc-8799-0000779fd2ac.html

(*The paper is This Time is Different: A Panoramic View of Eight Centuries of Financial Crises, NBER Working Paper 13882, March 2008 http://www.nber.org/papers/w13882 ).

He is very concerned about inflation getting out of hand, with some justification, I mean, think of Zimbabwe (previously mentioned by the Professor). But I think there's a weakness in his argument, which is the presumption that inflation rates are just a matter of or outcome of policy. If financial institutions or other economic agents did not HAVE to buy and sell credit, there would not be a so-called "liquidity problem" in the first place. The liquidity problem is there, because you cannot very well stop creating credit, you cannot very easily stop or cut back lending and borrowing. It's like, your hands are stained by past activity, and the stigmata are starting to show. That is precisely the problem, and there's as a sense in which it signifies a politicised bankers' war, although this does not hit the press so much. So the idea here is, that you might get additional inflation whether you like it or not; fact of the matter is that Reserve Banks or Treasuries cannot "set" inflation rates anymore, insofar as other institutions can independently create credit money. Even if people buy less, inflation might still rise.

So really the argument is more about "controllable inflation" as contrasted with "runaway inflation" - it's a question of how you can influence the level of inflation, and limit it, if you like, the "inflation regime". As Marxists and monetarists predicted ten years in advance, Keynesian policies ultimately result in runaway inflation. But surely the point is that the classical Keynesian framework is no longer valid to understand modern globalised realities nowadays? Think of M3. The worry Prof. Rogoff really has is that some countries will inflate, and that this inflation will feed into the rest of the world.

Well, as post-Keynesians (I think validly) argue, "a bit" of extra inflation (provided it does not become totally uncontrollable and rampant) does not matter for business, and if that is the price of getting people into jobs and keeping them into jobs, it's not a price too high to pay, provided we get back to more honest trading based on fact, rather than a ruse to make money. From a social democratic perspective, the issue is whether the burdens of austerity (belt-tightening) are spread fairly evenly. From a socialist perspective, the main issue is who pays for the crisis; those who are responsible for causing the crisis, should pay, it's unfair to ask people who did not cause it, to pay for it (in which case you have to explain who caused what). From a Marxist perspective, the problem is the whole capitalist way of doing things; we can get even, without any use of money whatever (that's an ideal I still have, whatever episodic monetary inconveniences there may be).

The biggest challenge in this crisis is, whether we can see beyond petty huckstering and keep the great problems of humanity firmly in mind. What are we all here for, on earth? What keeps us from doing what we know in our hearts to be good, wholesome and just? My favourite here, I'll confess, is Lewis Caroll - "the question is who is master, that is all". Of course, these days, I have to add "mistress". Fortunately, women are able to relativise men's competitive battles, and that's part of the solution of the crisis.

Jurriaan

Put ragged clothes upon your back and sleep upon the ground,
And tell police about your rights as they drag you down,
And ask them as they lead you to some deserted door,
Yes, I know you're set for fightin', but what are you fightin' for?
But the hardest thing I'll ask you, if you will only try
Is take your children by their hands and look into their eyes
And there you'll see the answer you should have seen before
If you'll win the wars at home, there'll be no fighting anymore

- Phil Ochs, "What are you fighting for?"

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Received on Tue Oct 21 14:28:08 2008