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Thoughts about macroeconomics-

by on 31/08/2013

Dear Patrice, i feel sorry for the devastation of the forest close to your home and has nothing to add. As contrary to it, to your ideas about economy i have a lot to add and most of it rather complementary than contrary.

1. You correctly said macroeconomics is far from being a science in way as the natural sciences are, where most of the predictions are verifiable. Macroeconomics as all the other social “sciences” speak most of the time about tendencies and not necessary outcomes. The Fed’s policy of Quantitative Easing‘s  aim is to try to increase the aggregate demand in the economy. It’s very partial success was caused by the TENDENCY of the US public since 2008 to decrease their borrowings, and the commercial banks TENDENCIES to keep their liquid money reserves above the required minimum rather in the Fed’s vault than borrowing it. As you can see i used twice the world tendency and not even once the world “the outcome will be”. By the way, if these tendencies would not exist but would be to the opposite direction, the inflation would “PROBABLY” rise its head. I say probably and not for sure, because the production capacities are unemployed. Probably the inflation if appears, it will be caused by the energy and/or other commonality price increase rather than limits of production capacities, that seem to be unlimited.
2. The golden standard money is history, and even more, a false history. The coins never really represented real value even when minted out of pure gold (it can’t be done even technically). Because of scarcity of certain metal the rulers used to mint coins, they needed to limit themselves and this gave credibility to the system. Still inflation existed also before the invention of the paper money.
Since 2008 the US and European governments have overdone with printing money. The trillions of dollars sounds very frightening, yet surprise, no inflation. But what if??? What if the tendencies of the public to save will go again down and the tendencies of the banks to borrow will go up? The answer is the government has many instruments how to influence the monetary liquidity which have bigger impact on money circulation in the economy than the money printing itself. For example the minimum reserve rate requirement from the commercial banks. The problem is, if used these tools, the leading role in the monetary system will be transferred from the commercial banks to the government. But this is already more a political question than a economic question, i just would add that seeing the performances of the banksters in the last years i wouldn’t see it as such a big catastrophe.
3. The external debt of US is much more disturbing. If one day the Chinese would decide to stop to finance the US current deficit, again rather for some political reason than economic reason, it could cause a big shakeup with the world economy. Lets hope this change will be rather gradual than one step act.
4. As to the fraction reserve system. Since the minimum reserve rate requirement went down in the last 40 decades to disturbing low levels, (In England and i think in Australia too, it is “0”), so the system actually transferred the right to print money from governments to the privately owned banks. (The result among others are the unprecedented rewards of the banksters). How and why it happened is a good question and i really don’t have the answer for it. Probably because the governments have done pretty lousy job, while siting on the printing machine.
Now the new Basel regulations try mildly to correct the situation with the new equity requirements. I can’t go into explaining this issue, it is explained in my book;

Important to say is, that as result of changing the fraction reserve system will be necessarily return of the role of money printing to the government. Maybe again it is not such a bad idea, but it is rather a political issue than an economic one.

richard reinhofer Says:

The Chinese own a very small piece of our debt, we could pay them off any time we wish. And if they decided to stop buying Treasuries the Fed could replace them with a keystroke.

EugenR Says:

I would say the reality is much more complicated than this. If the Chinese, or any other net importer will decide to stop to lend to US, It means they have to stop to export to the US all their products. Then if they go even farther and start to sell their Treasury securities, this may have two possible consequences. a. the Fed will not intervene and the Treasury price will go down, it means the interest rate will go up. Not good for economy and employment. b. The Fed will purchase the treasuries. If it happens when the resources are stretched to their limits, it will cause inflation. This will happen exactly at times when the imported merchandise will have to be replaced by local production, this means other pressure on the resources. Conclusion; instability to the US economy.
But what will happen to the Chinese and the World economy? Probably the Chinese will have to re-valuate their currency against the US Dollar, to reduce their surplus in the trade. Otherwise the only way to reduce their export to the US can be done only administratively, this means over regulated economy, and this even the Chinese don’t want. And what about Europe. Europe will on one side enjoy the revaluation of the Chinese Yuan, but on the other side its own import from China will be much more expensive.

I can continue to develop the scenario on and on, but the main thing is that until US lives on borrowed money, the real decision about what will happen in the world economy is in Beijing and not in Washington. If you believe you can trust them, they make always the right decisions, then you can calm down. Probably they are not worse decision makers than the guys in Washington, but……..

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