liquidity trap

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pages: 267 words: 71,123

End This Depression Now! by Paul Krugman

airline deregulation, Asian financial crisis, asset-backed security, bank run, banking crisis, Bretton Woods, business cycle, capital asset pricing model, Carmen Reinhart, centre right, correlation does not imply causation, credit crunch, Credit Default Swap, currency manipulation / currency intervention, debt deflation, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, Financial Instability Hypothesis, full employment, German hyperinflation, Gordon Gekko, Hyman Minsky, income inequality, inflation targeting, invisible hand, Joseph Schumpeter, Kenneth Rogoff, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, low skilled workers, Mark Zuckerberg, money market fund, moral hazard, mortgage debt, negative equity, paradox of thrift, Paul Samuelson, price stability, quantitative easing, rent-seeking, Robert Gordon, Ronald Reagan, Upton Sinclair, We are the 99%, working poor, Works Progress Administration

I wrote the original version of my book The Return of Depression Economics, back in 1999, mainly to warn Americans that Japan had already found itself in a position where printing money couldn’t revive its depressed economy, and that the same thing could happen to us. Back then a number of other economists shared my worries. Among them was none other than Ben Bernanke, now the Fed chairman. So what did happen to us? We found ourselves in the unhappy condition known as a “liquidity trap.” The Liquidity Trap In the middle years of the last decade, the U.S. economy was powered by two big things: lots of housing construction and strong consumer spending. Both of these things were, in turn, driven by high and rising housing prices, which led both to a building boom and to spending by consumers who felt rich. But the housing price rise was, it turns out, a bubble, based on unrealistic expectations.

But even then it makes no sense to argue that deficit spending actually works against monetary policy, which is what Ferguson seemed to claim. And it’s very much the wrong question to ask when the economy is depressed even though the Fed has cut the interest rates it can control all the way to zero—that is, when we’re in a liquidity trap, which we were in when Ferguson delivered those remarks (at a conference sponsored by PEN and the New York Review of Books) and which we are still in today. Recall from chapter 2 that a liquidity trap happens when even at a zero interest rate the world’s residents are collectively unwilling to buy as much stuff as they are willing to produce. Equivalently, the amount people want to save—that is, the income they don’t want to spend on current consumption—is more than the amount businesses are willing to invest.

With the Fed printing lots of money—for that, roughly speaking, is how it pays for all those bonds and mortgages it buys—and the federal government running trillion-dollar-plus deficits, why aren’t we seeing a sharp rise in inflation? The answer lies in depression economics, specifically in what I hope has become the familiar concept of the liquidity trap, in which even zero interest rates aren’t low enough to induce sufficient spending to restore full employment. When you’re not in a liquidity trap, printing lots of money is indeed inflationary. But when you are in one, it isn’t; in fact, the amount of money the Fed prints is very nearly irrelevant. Let’s talk basic concepts for a moment, then look at what has actually happened. Money, Demand, and Inflation (or Lack Thereof) Everybody knows that printing lots of money normally leads to inflation.


pages: 361 words: 97,787

The Curse of Cash by Kenneth S Rogoff

Andrei Shleifer, Asian financial crisis, bank run, Ben Bernanke: helicopter money, Berlin Wall, bitcoin, blockchain, Boris Johnson, Bretton Woods, business cycle, capital controls, Carmen Reinhart, cashless society, central bank independence, cryptocurrency, debt deflation, disruptive innovation, distributed ledger, Edward Snowden, Ethereum, ethereum blockchain, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial exclusion, financial intermediation, financial repression, forward guidance, frictionless, full employment, George Akerlof, German hyperinflation, illegal immigration, inflation targeting, informal economy, interest rate swap, Isaac Newton, Johann Wolfgang von Goethe, Johannes Kepler, Kenneth Rogoff, labor-force participation, large denomination, liquidity trap, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, moveable type in China, New Economic Geography, offshore financial centre, oil shock, open economy, payday loans, price stability, purchasing power parity, quantitative easing, RAND corporation, RFID, savings glut, secular stagnation, seigniorage, The Great Moderation, the payments system, The Rise and Fall of American Growth, transaction costs, unbanked and underbanked, unconventional monetary instruments, underbanked, unorthodox policies, Y2K, yield curve

The problem back then, as in many countries today, is that with short-term policy interest rates already at zero, monetary policy was stuck in a “liquidity trap,” with nothing more to do. Inspired by the maverick German thinker Silvio Gesell, Fisher penned a short 1933 book Stamp Scrip, exploring the idea of requiring people to periodically put new stamps on the back of their paper currency notes to keep them valid. This, of course, was a very primitive way of paying a negative interest rate on cash. Keynes praised the idea in his 1936 General Theory but rightly came to the conclusion that it was utterly impractical.7 Rejecting Gesell’s solution to the liquidity trap helped lead to Keynes’s famous conclusion that government spending was the key to propelling economies out of the Great Depression. Yet Keynes might have reached a very different conclusion in a world like today’s, where transactions have already increasingly migrated to electronic media, including credit cards, debit cards, and cell phones.

Certainly a part of the problem is that inflation-targeting evangelism—and there is really no other word for it—created institutions that were simply too inflexible to deal with the dramatic changes the world has experienced over the past 20 years. Inflation can be too low, and inflexible inflation-targetting regimes are not too good at dealing with it, especially as interest rates drift toward the zero lower bound, also known as the “liquidity trap.” The zero bound has become a stubbornly persistent problem for essentially three reasons. First and foremost, inflation has collapsed and inflation expectations along with it. Starting with New Zealand in 1989, most advanced-country central banks have gradually coalesced around an inflation target of about 2%, which in itself implies dramatically lower interest rates than when inflation averages 10%.

For example, some have argued that by running a larger deficit, a government can generate so much growth that a country’s ratio of debt to GDP actually comes down.6 Another line of thought is that certain kinds of structural reform are potentially counterproductive at the zero bound, lowering growth in the short run.7 In particular, if higher future productivity translates into expectations of lower future prices, the result is lower inflation expectations and therefore a higher real interest rate, assuming the monetary authority is paralyzed by the liquidity trap and unable to respond. In theory at least, this real interest rate channel can be so intense that it drives down today’s demand and output, even though in the long run higher future productivity growth is beneficial, and even though under ordinary circumstances consumers might feel richer immediately, thereby pushing demand up. By similar logic, structural reforms to increase price flexibility, which is normally associated with increased economic efficiency, can be problematic if the immediate impact is to lower inflation expectations.8 True, many of these results are far better viewed as cautionary counterexamples rather than central scenarios, but even so, they illustrate the cloud that the zero bound casts over many policy decisions apparently unrelated to monetary policy.


pages: 249 words: 66,383

House of Debt: How They (And You) Caused the Great Recession, and How We Can Prevent It From Happening Again by Atif Mian, Amir Sufi

"Robert Solow", Andrei Shleifer, asset-backed security, balance sheet recession, bank run, banking crisis, Ben Bernanke: helicopter money, break the buck, business cycle, Carmen Reinhart, collapse of Lehman Brothers, creative destruction, debt deflation, Edward Glaeser, en.wikipedia.org, financial innovation, full employment, high net worth, Home mortgage interest deduction, housing crisis, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, liquidity trap, Long Term Capital Management, market bubble, Martin Wolf, money market fund, moral hazard, mortgage debt, negative equity, paradox of thrift, quantitative easing, Robert Shiller, Robert Shiller, school choice, shareholder value, the payments system, the scientific method, tulip mania, young professional, zero-sum game

Prescott, “Theory Ahead of Business Cycle Measurement,” Federal Reserve Bank of Minneapolis Quarterly Review 10, no. 4 (1986): 9–21. 3. Robert Barro uses this example in chapter 2 of his textbook Macroeconomics, 5th ed. (Cambridge, MA: MIT Press, 1997). 4. In addition to our own work, four studies have influenced our thinking on these issues a great deal: Gauti Eggertsson and Paul Krugman, “Debt, Deleveraging, and the Liquidity Trap,” Quarterly Journal of Economics 127, no. 3 (2012): 1469–513; Veronica Guerrieri and Guido Lorenzoni, “Credit Crises, Precautionary Savings, and the Liquidity Trap” (working paper, University of Chicago Booth School of Business, July 2011); Robert E. Hall, “The Long Slump,” American Economic Review 101 (2011): 431–69; and Virgiliu Midrigan and Thomas Philippon, “Household Leverage and the Recession” (working paper, NYU Stern School of Business, April 2011). 5. A closely related reason for a pullback in spending after a wealth shock is precautionary savings, as in Christopher Carroll and Miles Kimball, “On the Concavity of the Consumption Function,” Econometrica 64 (1996): 981–92.

There must be frictions that prevent these adjustments—frictions that amplify the decline in spending by levered households into a nationwide recession with high unemployment. The Frictions The most well-known friction is called the zero lower bound on nominal interest rates.6 The zero lower bound means that interest rates cannot get low enough to actually induce savers in the economy to start buying. If interest rates cannot decrease enough, the gap in spending left by levered households cutting back remains unfilled. This is also referred to as the “liquidity trap,” because when an interest rate is kept at zero when it needs to be negative, people save their money in liquid instruments such as cash and U.S. government treasury bills. Instead of spending, savers hoard money in risk-free assets. The zero lower bound on interest rates exists because the government issues paper money—cash—which cannot have a negative return.7 We normally value cash for its transaction purposes: paying the babysitter or the parking valet at a restaurant.

Savers would consume in response to negative interest rates, therefore helping to offset the decline in spending by borrowers. But the zero lower bound on interest rates prevents interest rates from becoming negative. In the example above, if a bank tried to charge you $10 for putting money in a deposit account, you would take the money and put it in your safe at home, which would guarantee you a 0 percent return—hence, the zero lower bound. As a result, the economy is stuck in a liquidity trap. Borrowers cannot spend as they rebuild their balance sheets and face severe borrowing constraints. Savers refuse to spend because interest rates are not sufficiently negative to induce them to consume.8 Economic activity then becomes demand-driven. Anything that can induce households in the economy to spend will increase total output. It should come as no surprise that almost every major economic contraction in history is associated with very low nominal interest rates.


pages: 394 words: 85,734

The Global Minotaur by Yanis Varoufakis, Paul Mason

active measures, banking crisis, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, business climate, business cycle, capital controls, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, colonial rule, corporate governance, correlation coefficient, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, debt deflation, declining real wages, deindustrialization, endogenous growth, eurozone crisis, financial innovation, first-past-the-post, full employment, Hyman Minsky, industrial robot, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, labour market flexibility, light touch regulation, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, market fundamentalism, Mexican peso crisis / tequila crisis, money market fund, mortgage debt, Myron Scholes, negative equity, new economy, Northern Rock, paper trading, Paul Samuelson, planetary scale, post-oil, price stability, quantitative easing, reserve currency, rising living standards, Ronald Reagan, special economic zone, Steve Jobs, structural adjustment programs, systematic trading, too big to fail, trickle-down economics, urban renewal, War on Poverty, WikiLeaks, Yom Kippur War

The Fed responds with a new interest rate of between 0.25 per cent and 0 per cent (depending on the particulars of the lender). Desperate times obviously call for desperate measures. Nonetheless, it is a sobering moment when America becomes officially enmeshed in a state that economists had convinced themselves would never be seen again: a typical liquidity trap, not seen since 1929.1 Only this time it is worse. For unlike in 1929, our generation’s liquidity trap is global. Interest rates have reached rock bottom not only in the United States but throughout the West. As further evidence that the disease (which began with the CDO market and consumed the world’s financial sector) has spread to the real economy, where people actually produce things (as opposed to pushing paper around for ridiculous amounts of cash), President Bush declares that about $17.4 billion of the $700 billion facility will be diverted to America’s stricken car makers.

Had the state allowed the banks to write off their bad debts, the nation’s banking sector would have gone to the wall and the Japanese industrial miracle would have ended there and then. Instead, the government and the Bank of Japan injected as much liquidity as was required into the banks. Lamentably, most of these injections were absorbed by the black holes within the banks (the non-performing loans) without generating substantial new investment. For the first time since the mid-1930s, an advanced capitalist economy had been caught in a recessionary liquidity trap. Despite the monetary authorities’ best efforts to boost investment by pushing interest rates down to almost zero and pumping liquidity into the banks, Japan’s zombie banks could not deliver the hoped-for investments. The government tried one fiscal stimulus after the other. Roads were built, bridges were erected, railway projects criss-crossed the nation’s islands. Even though this activity helped keep the factories going, the ‘malaise’ could not be remedied.

Paradoxically, the ‘never again’ spirit that emerged from the wreck of the Latin American and South East Asian crises proved that the peripheral financial crises that criss-crossed the globe in a chain between 1994 and 2002 were part of an elaborate dress rehearsal for the Crash of 2008. After 2008, and the Global Minotaur’s forced abdication, the United States and Europe discovered to their horror that the Japanese liquidity trap had spread to them. At that point, all the chastisement that the Japanese authorities had received from American and European commentators for not having taken tough action against their zombie banks was quietly forgotten. Indeed, Europe and the United States followed the same recipes that delivered Japan’s lost decades. Zombie banks became a feature of the whole wide West. Moreover, unlike Japan’s zombie banks, which remain politically weak, America’s and Europe’s zombie banks rule the roost in the new socioeconomic configuration that I call bankruptocracy.


When the Money Runs Out: The End of Western Affluence by Stephen D. King

Albert Einstein, Asian financial crisis, asset-backed security, banking crisis, Basel III, Berlin Wall, Bernie Madoff, British Empire, business cycle, capital controls, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, congestion charging, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cross-subsidies, debt deflation, Deng Xiaoping, Diane Coyle, endowment effect, eurozone crisis, Fall of the Berlin Wall, financial innovation, financial repression, fixed income, floating exchange rates, full employment, George Akerlof, German hyperinflation, Hyman Minsky, income inequality, income per capita, inflation targeting, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Kickstarter, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, London Interbank Offered Rate, loss aversion, market clearing, mass immigration, moral hazard, mortgage debt, new economy, New Urbanism, Nick Leeson, Northern Rock, Occupy movement, oil shale / tar sands, oil shock, old age dependency ratio, price mechanism, price stability, quantitative easing, railway mania, rent-seeking, reserve currency, rising living standards, South Sea Bubble, sovereign wealth fund, technology bubble, The Market for Lemons, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, Tobin tax, too big to fail, trade route, trickle-down economics, Washington Consensus, women in the workforce, working-age population

The post-­financial crisis world is a deeply worrying place not so much because interest rates came down to such low levels initially but, instead, because the circumstances in which they might eventually go up again seem increasingly difficult to imagine. Central bankers know all this, which is why they have resorted to the use of increasingly unconventional monetary policies. They certainly don’t want to admit to be caught in the so-­called liquidity trap. Originally defined by Keynes as a situation where increases in the money supply would make no difference to the prevailing level of interest rates, the liquidity trap has been reinterpreted since Japan’s experience of zero interest rates and deflation in the 1990s to imply that monetary policy becomes impotent once interest rates drop to zero. Central bankers have no desire to admit to their impotence in these circumstances so they’ve had to think of something else. For the most part, it’s been quantitative easing in one form or another.

While the economic logic is sound enough, the commitment not to raise interest rates – in other words, the commitment to allow inflation to rise – needs to be completely credible. Instead, it sounds counterintuitive. All over the world, central banks have committed themselves to meeting inflation targets.15 If inflation rises, the public have been told – time and time again – that central banks will respond by raising interest rates. To escape from a liquidity trap, 87 4099.indd 87 29/03/13 2:23 PM When the Money Runs Out however, this is precisely what central banks must not do: and, moreover, the public have to be completely convinced that central banks will not do it.16 Many people, however, will presumably think that, with the first whiff of inflation, central banks would immediately shift interest rates back up again. Central bankers are, after all, conditioned to be the monetary equivalents of Pavlov’s dogs: when the inflationary bell rings, they immediately start to salivate.

purchasing $40 billion of mortgage-­backed securities each and every month until and unless there was a meaningful decline in the US unemployment rate. New Zealand kicked the process off at the end of the 1980s. In 2012, both the Federal Reserve and the Bank of Japan finally got around to adopting formal inflation targets, ironically after inflation targeting had failed to prevent the financial crisis. See, for example, P. Krugman, ‘It’s Baaack! Japan’s Slump and the Return of the Liquidity Trap’, Brookings Papers on Economic Activity, Washington, DC, 1998, or G. Eggertsson and M. Woodford, ‘The Zero Bound on Interest Rate and Optimal Monetary Policy’, Brookings Papers on Economic Activity, Washington, DC, 2003. See G. Eggertsson, ‘The Deflation Bias and Committing to being Irresponsible’, Journal of Money, Credit and Banking, 38 (2006). Ipsos MORI, ‘How Britain Voted in 2010’, 21 May 2010, at http://www.ipsos-­mori.com/ researchpublications/researcharchive/poll.aspx?


pages: 446 words: 117,660

Arguing With Zombies: Economics, Politics, and the Fight for a Better Future by Paul Krugman

affirmative action, Affordable Care Act / Obamacare, Andrei Shleifer, Asian financial crisis, bank run, banking crisis, basic income, Berlin Wall, Bernie Madoff, bitcoin, blockchain, Bonfire of the Vanities, business cycle, capital asset pricing model, carbon footprint, Carmen Reinhart, central bank independence, centre right, Climategate, cognitive dissonance, cryptocurrency, David Ricardo: comparative advantage, different worldview, Donald Trump, Edward Glaeser, employer provided health coverage, Eugene Fama: efficient market hypothesis, Fall of the Berlin Wall, fiat currency, financial deregulation, financial innovation, financial repression, frictionless, frictionless market, fudge factor, full employment, Growth in a Time of Debt, hiring and firing, illegal immigration, income inequality, index fund, indoor plumbing, invisible hand, job automation, John Snow's cholera map, Joseph Schumpeter, Kenneth Rogoff, knowledge worker, labor-force participation, large denomination, liquidity trap, London Whale, market bubble, market clearing, market fundamentalism, means of production, New Urbanism, obamacare, oil shock, open borders, Paul Samuelson, plutocrats, Plutocrats, Ponzi scheme, price stability, quantitative easing, road to serfdom, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, secular stagnation, The Chicago School, The Great Moderation, the map is not the territory, The Wealth of Nations by Adam Smith, trade liberalization, transaction costs, universal basic income, very high income, working-age population

Most spectacularly, IS-LM turns out to be very useful for thinking about extreme conditions like the present, in which private demand has fallen so far that the economy remains depressed even at a zero interest rate. In that case the picture looks like this: Why is the LM curve flat at zero? Because if the interest rate fell below zero, people would just hold cash instead of bonds. At the margin, then, money is just being held as a store of value, and changes in the money supply have no effect. This is, of course, the liquidity trap. And IS-LM makes some predictions about what happens in the liquidity trap. Budget deficits shift IS to the right; in the liquidity trap that has no effect on the interest rate. Increases in the money supply do nothing at all. That’s why in early 2009, when The Wall Street Journal, the Austrians, and the other usual suspects were screaming about soaring rates and runaway inflation, those who understood IS-LM were predicting that interest rates would stay low and that even a tripling of the monetary base would not be inflationary.

But if you’re going to be an effective public intellectual, you deal with the world you have, not the one you want. ABOUT THIS BOOK I began writing for the Times in 2000. For several years prior I had written monthly columns for Fortune and Slate, but I was still mainly a research economist. In fact, I wrote what I personally consider possibly my best academic paper, “It’s Baaack: Japan’s Slump and the Return of the Liquidity Trap,” in 1998. The Times expected me to write almost entirely about business and economics. But I found myself in a position neither they nor I expected. The administration of George W. Bush was dishonest to a degree never before seen in U.S. politics (though now surpassed by the Trumpists), and it was obviously, it seemed to me, taking us to war on false pretenses. Yet nobody else with a column in a major newspaper seemed willing to point this out.

Japan, in particular, looked at a fundamental level a lot like us: a big, rich, educated, technologically advanced, politically stable nation with competent if not brilliant monetary and fiscal authorities. If Japan could find itself caught in a “lost decade” of stagnation and deflation, couldn’t the same thing happen here? I wrote about these concerns at the time, notably in a 1998 academic paper (“It’s Baaack: Japan’s Slump and the Return of the Liquidity Trap”) that has, I think, stood the test of time pretty well, and a 1999 book, The Return of Depression Economics. Others raised similar alarms, including a then-Princeton professor by the name of Ben Bernanke. But it wasn’t a message many wanted to hear. But the parallels between ourselves and Japan grew stronger over time. By 2005 or so I and many (but not enough) others had grown concerned about what looked like an immense housing bubble.


Money and Government: The Past and Future of Economics by Robert Skidelsky

anti-globalists, Asian financial crisis, asset-backed security, bank run, banking crisis, banks create money, barriers to entry, Basel III, basic income, Ben Bernanke: helicopter money, Big bang: deregulation of the City of London, Bretton Woods, British Empire, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, collective bargaining, constrained optimization, Corn Laws, correlation does not imply causation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, David Graeber, David Ricardo: comparative advantage, debt deflation, Deng Xiaoping, Donald Trump, Eugene Fama: efficient market hypothesis, eurozone crisis, financial deregulation, financial innovation, Financial Instability Hypothesis, forward guidance, Fractional reserve banking, full employment, Gini coefficient, Growth in a Time of Debt, Hyman Minsky, income inequality, incomplete markets, inflation targeting, invisible hand, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, law of one price, liberal capitalism, light touch regulation, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, market clearing, market friction, Martin Wolf, means of production, Mexican peso crisis / tequila crisis, mobile money, Mont Pelerin Society, moral hazard, mortgage debt, new economy, Nick Leeson, North Sea oil, Northern Rock, offshore financial centre, oil shock, open economy, paradox of thrift, Pareto efficiency, Paul Samuelson, placebo effect, price stability, profit maximization, quantitative easing, random walk, regulatory arbitrage, rent-seeking, reserve currency, Richard Thaler, rising living standards, risk/return, road to serfdom, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, secular stagnation, shareholder value, short selling, Simon Kuznets, structural adjustment programs, The Chicago School, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, too big to fail, trade liberalization, value at risk, Washington Consensus, yield curve, zero-sum game

That should encourage the banking system to expand the supply of broad money by lending to the private sector and also help companies to raise finance from capital market. 23 The theoretical case for QE was built on the idea of a liquidity trap. 254 t h e n e w mon e t a r i s m Rate of interest Figure 41. Liquidity trap LM IS GDP The liquidity trap IS The situation which produces the ‘trap’ is one in which the expected rate of return on investment (Wicksell’s ‘natural rate of interest’) is lower than the lowest rate of interest banks are willing to charge for loans. The zero bound is the limit of what interest rate policy can achieve to lower commercial banks’ lending rate. At the zero lower bound (ZLB) the demand for money to hold becomes perfectly interest elastic (expands without limit).* This is because the sense of * See Krugman (1998). While both Krugman and Keynes pointed to the existence of a liquidity trap, their ideas are subtly different. According to Paul Krugman a liquidity trap – and consequently the need for QE – occurs when ‘a zero short-term interest rate isn’t low enough to produce full employment’ (Krugman (2014)).

Adjustment of labour supply in response to an external shock 241 35. Post-crash outcomes: UK, USA and Eurozone 242 36. Post-crash outcomes: Germany, Greece and Eurozone 243 37. UK austerity – counterfactual medicine, 2007–2013 244 38. The transmission mechanism of monetary policy 250 39. Output growth and inflation in the advanced economies during the Great Moderation 253 40. Cutting interest rates: central banks’ base rates, 2003–2016 254 41. Liquidity trap 255 42. Four key monetary debates 260 43. Good and bad outcomes of QE 264 44. Growth in UK bank (M4) lending, 2000–2016 266 45. UK exchange rate and current account, and QE, 2006–2016 267 46. Growth in UK money supply and money lending post-crash 268 xiv F ig u r e s 47. UK broad money (M4) growth, 2000–2016 269 48. UK output and unemployment, 2005–2016 270 49. UK CPI inflation and QE, 2006–2016 271 50.

It is a tenable argument that Roosevelt’s deficits, while being too small to bring about complete recovery until the Second World War, dented business confidence sufficiently to produce little net effect. So some ‘crowding out’ may have been going on, despite the mass of unused resources. Lowe (1965), p. 192. Viner (1936), p. 149. Keynes (1945), p. 385. Allsopp and Mayes (1985), pp. 374, 370. 404 No t e s 77 This is an immediate result of pure neo-classical theories, but also one in the IS/LM model when the LM curve is not flat (i.e. ‘liquidity trap’) or when monetary policy is not accommodating fiscal expansion. 6. T h e K e y n e si a n A sc e n da nc y 1 Letter to Bernard Shaw, 1 January 1935. Quoted in Skidelsky (1992), pp. 520–21. 2 More precisely: AD = AS balance should include both full employment and external balance (stable foreign exchange reserves). 3 Tobin (1987), p. 41. 4 Hicks (1937). For further details, see p. 173 in Chapter 7. 5 Keynes was not keen on nationalization, but he believed the state should play a larger role in the direction and financing of production, as well as being ‘insurer of last resort’. 6 See Schumpeter (1997 (1952)), ch. 10, esp. pp. 274–5. 7 The acronym is from Maddison (1983). 8 Gerber (1994).


pages: 479 words: 113,510

Fed Up: An Insider's Take on Why the Federal Reserve Is Bad for America by Danielle Dimartino Booth

Affordable Care Act / Obamacare, asset-backed security, bank run, barriers to entry, Basel III, Bernie Sanders, break the buck, Bretton Woods, business cycle, central bank independence, collateralized debt obligation, corporate raider, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Donald Trump, financial deregulation, financial innovation, fixed income, Flash crash, forward guidance, full employment, George Akerlof, greed is good, high net worth, housing crisis, income inequality, index fund, inflation targeting, interest rate swap, invisible hand, John Meriwether, Joseph Schumpeter, liquidity trap, London Whale, Long Term Capital Management, margin call, market bubble, Mexican peso crisis / tequila crisis, money market fund, moral hazard, Myron Scholes, natural language processing, negative equity, new economy, Northern Rock, obamacare, price stability, pushing on a string, quantitative easing, regulatory arbitrage, Robert Shiller, Robert Shiller, Ronald Reagan, selection bias, short selling, side project, Silicon Valley, The Great Moderation, The Wealth of Nations by Adam Smith, too big to fail, trickle-down economics, yield curve

That would turn off the money machine. I preferred to think of QE2 as a “liquidity trap.” A liquidity trap, as defined years ago by Keynes, occurs when interest rates have been pushed so low that the expected rates of return on investments follow them down. When investment falls, the economy stagnates and cash holdings in banks rise. The cash is trapped, despite the central bank’s exertions. Chicago’s Evans, a dove, acknowledged that monetary policy was hitting its outer bounds. “Normally, monetary policy could reduce the incentives to save and stimulate spending by lowering short-term nominal interest rates,” Evans said. “But with the federal funds rate already essentially at zero, we are in a liquidity trap.” Evans suggested the way out was to increase inflation expectations such that “the opportunity costs of holding cash goes up, tripping incentives toward higher spending and lending.”

Signs had emerged that investors were becoming desperate in response to continued zero interest rates. The search for yield took on greater intensity. On February 18, 2011, junk bond yields hit a low of 6.80 percent, dipping below the prior December 2004 record of 6.86 percent. Not only were corporations mired in a liquidity trap, so were households. Policymakers couldn’t grasp that the longer interest rates stayed at the zero bound, the more savings consumers would have to siphon from their available funds for spending. You can’t force all of Grandma’s money into the casino. Hence, the “trap” in the “liquidity trap” for households. Household formation, or the lack thereof, acted as a ball and chain on the economy. Census data showed that household formation had contracted in 2010 for the first time since World War II. This was backed by a Pew report that found a record one in six American households were multigenerational.

See also District Banks; Federal Open Market Committee (FOMC) auditing of, calls for, 253–54 author’s hiring by and early experience at, 30–42, 46 DiMartino Booth’s recommendations for, 263–66 chairman of, 42–43 (See also specific Chairman) creation of, 2 economists of, 46–50, 62–64 financial crisis of 2008 and (See financial crisis of 2008) hubris and myopia of, 46–50, 236 Keynesian wealth effect model of, 6–7 lack of diversity at, 63–64 liquidity trap created by, 209–11 organization of, 42–45 politics and, 42–44 potential consequences of policies of, 252–53 profits and expenses of, 35–36 purpose of, 2, 41–42 shadow banking system and, 167–69 stress tests and, 170–71 fed funds interest rate, 3, 42, 212 September 2007 rate cut, 91 2008 decisions regarding, 102–3, 118, 119, 154–55, 157–63 Yellen raises, December 2015, 262 zero-interest-rate policy, 3, 8, 159–63, 175, 176, 218–21 Feldstein, Martin, 82 Ferguson, Niall, 56, 198 financial crisis of 2008, 2–10 AIG bailout and, 138–39 Bear Stearns’ collapse and, 105–16 Bear Stearns hedge fund bankruptcies and, 89–90 discount window opened to bond dealers in, 118 fed funds rate decisions in response to, 102–3, 118, 119, 154–55, 157–63 FOMC meetings during, 152–63 housing bubble and (See housing bubble) Lehman Brothers collapse and, 130–37, 145–47 losses from credit crunch reported during, 120–21 money market fund’s breaking the buck and, 140–42 PWG recommendations, 104–5 quantitative easing, adoption of, 160 Rajan’s paper warning of banking risks and, 93–96 shadow banking system and, 121–29, 167–69 short selling, temporary ban on, 143 TARP and, 142–43 Washington Mutual sale to JP Morgan & Chase, 143 yen carry trade, unwinding of, 90–91 zero-interest-rate policy, adoption of, 159–63 Financial Times, 108–9, 121 Fischer, Stanley, 234, 246–47 Fisher, Leslie, 67–68 Fisher, Richard, 19–20, 23–24, 61–62, 67–73, 76–77, 90, 147, 173, 212–13, 228–30, 234, 248–49, 254, 260 DiMartino Booth’s daily briefings for, 100–101 calls for end to QE2, 214–15 campaigns to dismantle too-big-to-fail banks, 186–87 defends Fed lending facilities, 169 education of, 68–69 extension of ZIRP to 2013, dissent to, 219–21 Fed bull market, consequences of, 238–39 at FOMC meetings, 76–78, 81–84 housing bubble and, 89 Operation Twist, dissent to, 224 opposition to QE and ZIRP of, 169, 175, 179–81 pre-briefings for, 164–67 QE2 and, 195, 197 on Texas economy’s outperformance, 226–27 2008 fed funds rate decisions and, 103, 118, 119, 154–55, 157–60, 161–63 Fitch Ratings, 27 flash crash, 189–90 Foreign Exchange (FX), 168 Foroohar, Rana, 7 Fortune, 112 forward guidance, 81 Frank, Barney, 120, 139, 220 Freddie Mac, 22, 120 Free to Choose (Friedman & Friedman), 59 Free to Choose (TV series), 59 Friedman, Milton, 48, 59–60, 87, 101 Friedman, Rose, 59 Friedman, Stephen, 148 Fuld, Dick, 29, 131–37, 146–47 Fundamental REO, 232 Galbraith, John Kenneth, 46 Geithner, Timothy, 51–55, 89–90, 113, 143–44, 147, 200 AIG bailout and, 138–39 appointed Treasury Secretary, 170 Bear Stearns rescue and, 109–12, 114 failure to see housing bubble, 55 Lehman collapse and, 135–36 money market fund’s breaking the buck and, 140–42 General Electric, 47, 169 General Motors, 46 Gingrich, Newt, 223 Globalization and Monetary Policy Institute, 82 Glucksman, Lew, 132 GMAC, 169 Goldman Sachs, 14, 115, 133, 143–45, 147–48, 168, 232, 257–60 Goldsborough, Alan, 119 Goncalves, George, 31 González, Henry B., 36 Gorton, Gary, 125–27, 128 government shutdown, 234 Grant, James, 198 Great Depression, 177 Great Moderation, 65, 87 Greece, bailout of, 188–89 Greenburg, Alan, 105 Greenspan, Alan, 6, 13, 16–17, 19, 26, 47, 60, 77, 78, 91, 153, 220 Black Friday and, 64–65 education of, 48–49 financial crisis and, 167 housing bubble and, 8, 20–21, 23, 27, 50 inflation targeting and, 195–96 irrational exuberance comment of, 11, 12 Long-Term Capital Management crisis and, 14, 15 on too-big-to-fail banks, 187 Greenspan Put, 64–65 Gregory, Joe, 131 groupthink, 9, 50, 166, 197 Gunther, Jeffrey, 207, 208 Hackett, Jim, 71 Haines, Mark, 216 Harker, Patrick, 259 Hartnett, Michael, 1 Hatzius, Jan, 29 Hayes, Samuel L., 144 Hayman Capital Management, 115 high-frequency trading, 190 Hilsenrath, Jon, 80, 195, 223, 228, 233, 237, 245, 260, 262 Hoenig, Thomas, 181, 197, 210, 213 household formation, 211 housing bubble, 6, 20–29 adjustable rate mortgages (ARMs) and, 22 author’s warnings regarding, 23–26 Bernanke and, 23, 74 Fisher on, 89 FOMC conclusions regarding lack of, 78–79 Geithner’s failure to anticipate, 55 Greenspan and, 8, 20–21, 23, 27, 50 lowered mortgage standards and, 21–22 reinflating of, in 2012, 232 subprime mortgages and, 21, 22, 27, 28, 74–75 systemic risk and, 26, 28 Yellen’s failure to see, 86–87, 88–89 housing market, 4–5, 215.


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Big Three in Economics: Adam Smith, Karl Marx, and John Maynard Keynes by Mark Skousen

"Robert Solow", Albert Einstein, banking crisis, Berlin Wall, Bretton Woods, business climate, business cycle, creative destruction, David Ricardo: comparative advantage, delayed gratification, experimental economics, financial independence, Financial Instability Hypothesis, full employment, Hernando de Soto, housing crisis, Hyman Minsky, inflation targeting, invisible hand, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Joseph Schumpeter, Kenneth Arrow, laissez-faire capitalism, liberation theology, liquidity trap, means of production, microcredit, minimum wage unemployment, money market fund, open economy, paradox of thrift, Pareto efficiency, Paul Samuelson, price stability, pushing on a string, rent control, Richard Thaler, rising living standards, road to serfdom, Robert Shiller, Robert Shiller, rolodex, Ronald Coase, Ronald Reagan, school choice, secular stagnation, Simon Kuznets, The Chicago School, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, Tobin tax, unorthodox policies, Vilfredo Pareto, zero-sum game

The Pigou Effect: The First Assault But over time critics have chipped away at the Keynesian structure. The first objection was the "liquidity trap" doctrine, Keynes's fear that the economy could be trapped indefinitely in a deep depression where interest rates are so low and "liquidity preference" so high that reducing interest rates further would have no effect (Keynes 1973a 2. A popular work coinciding with Samuelson's support of deficit spending was A Primer on Governmen t Spending, by Robert L. Heilbroner and Peter L. Bernstein. It stated, "Recent experience indicates that the economy grows faster when the government runs a deficit and slower when revenues exceed outlays" (1963, 119). [1936], 207). The man who first countered the liquidity-trap doctrine was Arthur C. Pigou, ironically the straw man Keynes vilified in The General Theory.

Keynes Favors Public Works over Monetary Inflation Keynes felt that tinkering with fiscal policy (changes in spending and taxes) was more effective than monetary policy (changes in the money supply and interest rates). He had lost faith in monetary policy and the Federal Reserve in the 1930s, when interest rates were so low that reducing them wouldn't have made much difference (see Figure 5.2). Inducing the Federal Reserve to expand the money supply would not be very effective either, because banks refused to lend excess reserves anyway. Keynes called this a "liquidity trap." The new money would just pile up unspent and uninvested because of "liquidity preference," the desire to hold cash during a severe depression (1973 a [1936], 207). How the Multiplier Generates Full Employment Public works would serve several benefits. First, public works are positive spending, putting people to work and money into business's pockets. Moreover, they have a multiplier effect, based on the nation's marginal propensity to consume.

The increased value of these liquid assets raises aggregate demand and provides the funds to generate new buying power and hire new workers when the economy bottoms out (Pigou 1943,1947). This positive real wealth effect, or what Israeli economist Don Patinkin later named the "real balance effect" in his influential Money, Interest and Prices (1956), did much to undermine the Keynesian doctrine of a liquidity trap and unemployed equilibrium. The Pigou "wealth" or "real balance" effect can also be extended to the issue of wage cuts during a downturn. Keynes rejected the classical argument that wage cuts are necessary to adjust the economy to new equilibrium conditions, from which a solid recovery could occur. Arguing against the conventional view that persistent unemployment is caused by excessive wage rates, Keynes claimed that wage cuts would simply depress demand further and do nothing to reduce unemployment.


pages: 436 words: 98,538

The Upside of Inequality by Edward Conard

affirmative action, Affordable Care Act / Obamacare, agricultural Revolution, Albert Einstein, assortative mating, bank run, Berlin Wall, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Climatic Research Unit, cloud computing, corporate governance, creative destruction, Credit Default Swap, crony capitalism, disruptive innovation, diversified portfolio, Donald Trump, en.wikipedia.org, Erik Brynjolfsson, Fall of the Berlin Wall, full employment, future of work, Gini coefficient, illegal immigration, immigration reform, income inequality, informal economy, information asymmetry, intangible asset, Intergovernmental Panel on Climate Change (IPCC), invention of the telephone, invisible hand, Isaac Newton, Jeff Bezos, Joseph Schumpeter, Kenneth Rogoff, Kodak vs Instagram, labor-force participation, liquidity trap, longitudinal study, low skilled workers, manufacturing employment, Mark Zuckerberg, Martin Wolf, mass immigration, means of production, meta analysis, meta-analysis, new economy, offshore financial centre, paradox of thrift, Paul Samuelson, pushing on a string, quantitative easing, randomized controlled trial, risk-adjusted returns, Robert Gordon, Ronald Reagan, Second Machine Age, secular stagnation, selection bias, Silicon Valley, Simon Kuznets, Snapchat, Steve Jobs, survivorship bias, The Rise and Fall of American Growth, total factor productivity, twin studies, Tyler Cowen: Great Stagnation, University of East Anglia, upwardly mobile, War on Poverty, winner-take-all economy, women in the workforce, working poor, working-age population, zero-sum game

Louis (2015), https://research.stlouisfed.org/fred2/series/FYGFGDQ188S. 38. Valerie Ramey, “Identifying Government Spending Shocks: It’s All in the Timing,” Quarterly Journal of Economic Affairs, 2011, http://qje.oxfordjournals.org/content/early/2011/03/21/qje.qjq008.full. 39. Paul Krugman, “The Conscience of a Liberal: Nobody Understand the Liquidity Trap (Wonkish),” New York Times, July 14, 2010, http://krugman.blogs.nytimes.com/2010/07/14/nobody-understands-the-liquidity-trap-wonkish. 40. Paul Krugman, “Failure to Rise,” New York Times, February 12, 2009, http://www.nytimes.com/2009/02/13/opinion/13krugman.html?ref=paulkrugman. 41. Lawrence Summers, “Why Public Investment Really Is a Free Lunch,” Financial Times, October 6, 2014, http://www.ft.com/intl/cms/s/2/9b591f98-4997-11e4-8d68-00144feab7de.html#axzz3mNLQzKa6. 42.

Bradford DeLong, “The Tragedy of Ben Bernanke,” Project Syndicate, October 29, 2015, https://www.project-syndicate.org/commentary/bernanke-memoir-monetary-policy-lessons-by-j—bradford-delong-2015-10. 52. Angus Deaton, “Measuring and Understanding Behavior, Welfare and Poverty,” Nobel Prize Lecture, December 8, 2015, http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2015/deaton-lecture.html. 53. Paul Krugman, “The Conscience of a Liberal: Monetary Policy in a Liquidity Trap,” New York Times, April 11, 2013, http://krugman.blogs.nytimes.com/2013/04/11/monetary-policy-in-a-liquidity-trap. 54. Martin Wolf, “Lunch with the FT: Ben Bernanke,” Financial Times, October 23, 2015, http://www.ft.com/intl/cms/s/0/0c07ba88-7822-11e5-a95a-27d368e1ddf7.html. 55. “Pushing on a String,” Wikipedia, accessed December 18, 2015, https://en.wikipedia.org/wiki/Pushing_on_a_string. 56. Paul Krugman, “The Conscience of a Liberal: Rethinking Japan,” New York Times, October 20, 2015, http://krugman.blogs.nytimes.com/2015/10/20/rethinking-japan. 57.

See also talent empirical studies on trade, immigration, and, 54–59 low-skilled immigration and slowing wage growth, 47–52, 57–58 trade deficits and slowing wage growth, 52–53 labor unions, 97, 109, 112–13, 146, 211, 217, 227–28 Lawrence, Robert, 55, 163–64 Leadership on the Line (Heifetz and Linsky), 93–94 Lee, Chul-In, 178 Leibniz, Gottfried, 68 life expectancy, 158–59 liquidity trap, 149n lone geniuses, 67–70 Lorentz, Hendrik, 68 lotteries, 32–33, 124 low-skilled immigration, 4, 39, 60–61, 157–58, 215–16, 246–48 empirical studies on slowing wage growth and, 54–59 straining constrained resources and slowing growth, 47–52 low-wage economies, 4, 13–14, 38 slowing middle-class wage growth and trade, 40–47 Lucas, Robert, 143–44 Luddites, 45, 156 Mankiw, Greg, 233–34 manufacturing, 12, 13, 18–19, 37, 42, 44, 57, 126 value of technology companies vs., 128, 128–29 marginal tax rates, 72–73 Mariel boatlift, 54–55, 56 market efficiency, 110 marriage effect on income mobility, 181, 181–82 growing success of women and value of, 156, 166–69 Massachusetts test scores, 221–23 Mead, Lawrence, 208 median household income, 11–12, 159–63, 174 all full-time workers, 25 to 64 years old, 161, 161 full-time African American workers, 25 to 64 years old, 159, 160 full-time white workers, 25 to 64 years old, 159–62, 160 growth in incomes by level of income, 10, 10–11, 40 income growth by income quintile over time, 162–63, 163 Massachusetts vs.


pages: 466 words: 127,728

The Death of Money: The Coming Collapse of the International Monetary System by James Rickards

Affordable Care Act / Obamacare, Asian financial crisis, asset allocation, Ayatollah Khomeini, bank run, banking crisis, Ben Bernanke: helicopter money, bitcoin, Black Swan, Bretton Woods, BRICs, business climate, business cycle, buy and hold, capital controls, Carmen Reinhart, central bank independence, centre right, collateralized debt obligation, collective bargaining, complexity theory, computer age, credit crunch, currency peg, David Graeber, debt deflation, Deng Xiaoping, diversification, Edward Snowden, eurozone crisis, fiat currency, financial innovation, financial intermediation, financial repression, fixed income, Flash crash, floating exchange rates, forward guidance, G4S, George Akerlof, global reserve currency, global supply chain, Growth in a Time of Debt, income inequality, inflation targeting, information asymmetry, invisible hand, jitney, John Meriwether, Kenneth Rogoff, labor-force participation, Lao Tzu, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, market clearing, market design, money market fund, money: store of value / unit of account / medium of exchange, mutually assured destruction, obamacare, offshore financial centre, oil shale / tar sands, open economy, plutocrats, Plutocrats, Ponzi scheme, price stability, quantitative easing, RAND corporation, reserve currency, risk-adjusted returns, Rod Stewart played at Stephen Schwarzman birthday party, Ronald Reagan, Satoshi Nakamoto, Silicon Valley, Silicon Valley startup, Skype, sovereign wealth fund, special drawing rights, Stuxnet, The Market for Lemons, Thomas Kuhn: the structure of scientific revolutions, Thomas L Friedman, too big to fail, trade route, undersea cable, uranium enrichment, Washington Consensus, working-age population, yield curve

Those price declines then add further economic stress, leading to additional asset sales, more unemployment, and so on in a feedback loop. In deflation, the real value of cash increases, so individuals and businesses hoard cash instead of spending it or investing in new land, plant, and equipment. This entire process of asset sales, hoarding, and price declines is called a liquidity trap, famously described by Irving Fisher in his 1933 work The Debt-Deflation Theory of Great Depressions and by John Maynard Keynes in his most influential work, The General Theory of Employment, Interest and Money. In a liquidity trap, the response to money printing is generally weak, and from a Keynesian perspective, fiscal policy is the preferred medicine. While the response to money printing may be weak, it is not nil. Working against potential deflation has been a massive money-printing operation by the Federal Reserve.

New Yorker, February 11, 2008, http://www.newyorker.com/reporting/2008/02/11/080211fa_fact_stewart. Subbotin, Alexander. “A Multi-Horizon Scale for Volatility.” Centre d’Economie de la Sorbonne, working paper, March 3, 2008. Swensson, Lars E. O. “The Zero Bound in an Open Economy: A Foolproof Way of Escaping from a Liquidity Trap.” National Bureau of Economic Research, Working Paper no. 7957, October 2000, http://www.nber.org/papers/w7957. ———. “Escaping from a Liquidity Trap and Deflation: The Foolproof Way and Others.” National Bureau of Economic Research, Working Paper no. 10195, December 2003, http://www.nber.org/papers/w10195. Taylor, Jason E., and Richard K. Vedder. “Stimulus by Spending Cuts: Lessons from 1946.” Cato Institute, Cato Policy Report, May–June 2010, http://www.cato.org/policy-report/mayjune-2010/stimulus-spending-cuts-lessons-1946.

Euro skeptics suffer from the legacy of misguided Keynesian economics and the sticky-wage myth, technically called downward nominal wage rigidity. Keynesians rely on a theory of sticky wages to justify inflation, or theft from savers. The idea is that wages will rise during periods of inflation but will not decline easily during periods of deflation; they will tend to stick at the old nominal wage levels. As a result, wages fail to adjust downward, employers fire workers, unemployment rises, and aggregate demand is weakened. A liquidity trap then develops, and deflation becomes worse as the cycle feeds on itself, resulting in impossibly high debt, bankruptcies, and depression. Inflation is considered advisable policy because it allows employers to give workers a nominal raise, even if there is no raise in real terms due to higher prices. Workers receive raises in nominal terms, while wages adjust downward in real terms. This is a form of money illusion or deception of workers by central banks, but it works in theory to lower real unit labor costs.


pages: 464 words: 139,088

The End of Alchemy: Money, Banking and the Future of the Global Economy by Mervyn King

"Robert Solow", Andrei Shleifer, Asian financial crisis, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, Bretton Woods, British Empire, business cycle, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, centre right, collapse of Lehman Brothers, creative destruction, Credit Default Swap, crowdsourcing, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, distributed generation, Doha Development Round, Edmond Halley, Fall of the Berlin Wall, falling living standards, fiat currency, financial innovation, financial intermediation, floating exchange rates, forward guidance, Fractional reserve banking, Francis Fukuyama: the end of history, full employment, German hyperinflation, Hyman Minsky, inflation targeting, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, labour market flexibility, large denomination, lateral thinking, liquidity trap, Long Term Capital Management, manufacturing employment, market clearing, Martin Wolf, Mexican peso crisis / tequila crisis, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, Nick Leeson, North Sea oil, Northern Rock, oil shale / tar sands, oil shock, open economy, paradox of thrift, Paul Samuelson, Ponzi scheme, price mechanism, price stability, purchasing power parity, quantitative easing, rent-seeking, reserve currency, Richard Thaler, rising living standards, Robert Shiller, Robert Shiller, Satoshi Nakamoto, savings glut, secular stagnation, seigniorage, stem cell, Steve Jobs, The Great Moderation, the payments system, The Rise and Fall of American Growth, Thomas Malthus, too big to fail, transaction costs, Tyler Cowen: Great Stagnation, yield curve, Yom Kippur War, zero-sum game

Keynes argued that when short-term and long-term interest rates had reached their respective lower bounds, further increases in the money supply would just be absorbed by the hoarding of money and would not lead to lower interest rates and higher spending. Once caught in this liquidity trap, the economy could persist in a depressed state indefinitely. Since economies were likely to find themselves in such conditions only infrequently, Hicks described Keynes’s theory as special rather than general, and relevant only to depression conditions. And this has remained the textbook interpretation of Keynes ever since. Its main implication is that in a liquidity trap monetary policy is impotent, whereas fiscal policy is powerful because additional government expenditure is quickly translated into higher output. This ‘modern’ view of Keynes does not, however, do full justice to the fundamental nature of the coordination problems in a capitalist economy. Even when the economy is not in a liquidity trap, the inability to coordinate spending plans may inhibit the response of total demand to monetary and fiscal stimulus.

The second, and related, question was why would an increase in money supply not stimulate spending, returning the economy to full employment? Keynes’s reply was that in a slump the demand for liquidity – emergency money – was so high that further injections of money would simply be absorbed in idle cash balances as a claim on generalised future purchasing power without any impact on current spending. The economy would be stuck in a ‘liquidity trap’. The argument was set out in Chapters 13 and 14 of The General Theory. They are among the more difficult and obscure parts of the book. It was left to Britain’s first Nobel Laureate in Economic Science, Sir John Hicks, to explain them in a famous article published in 1937 entitled ‘Mr Keynes and the Classics’. Even almost eighty years on, the article remains a tour de force and a brilliant exposition of the Keynesian framework translated into more modern language.

If you are told, for example, that all your assets held in accounts fixed in money terms will be subject to a 5-percentage-point wealth tax, you might, it is true, decide to spend today, but you might well, fearful of what the government could do next year, batten down the hatches and cut spending. Households and businesses might simply conserve their resources to cope with an unpredictable and unknowable future. The outcome will depend on expectations. The analysis of the ‘liquidity trap’ that has underpinned much recent analysis of the reason for slow growth is based on the model of the economics of ‘stuff’ rather than the economics of ‘stuff happens’. The common failing of Keynesian and neoclassical models of fluctuations in the economy as a whole is that they are concerned with the economics of ‘stuff’. By this I mean that they focus on total spending – aggregate demand – rather than take seriously the fact that it is the very multiplicity of things which households could buy that creates problems in coordinating spending plans in the economy.


pages: 270 words: 73,485

Hubris: Why Economists Failed to Predict the Crisis and How to Avoid the Next One by Meghnad Desai

"Robert Solow", 3D printing, bank run, banking crisis, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, BRICs, British Empire, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, correlation coefficient, correlation does not imply causation, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, deindustrialization, demographic dividend, Eugene Fama: efficient market hypothesis, eurozone crisis, experimental economics, Fall of the Berlin Wall, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, German hyperinflation, Gunnar Myrdal, Home mortgage interest deduction, imperial preference, income inequality, inflation targeting, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, laissez-faire capitalism, liquidity trap, Long Term Capital Management, market bubble, market clearing, means of production, Mexican peso crisis / tequila crisis, mortgage debt, Myron Scholes, negative equity, Northern Rock, oil shale / tar sands, oil shock, open economy, Paul Samuelson, price stability, purchasing power parity, pushing on a string, quantitative easing, reserve currency, rising living standards, risk/return, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, secular stagnation, seigniorage, Silicon Valley, Simon Kuznets, The Chicago School, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, women in the workforce

For its actual value is largely governed by the prevailing view as to what its value is expected to be.”2 The monetary authorities might try to pump more money into the system but people would prefer to leave the money idle, earning zero interest, than exchange it for bonds. There was a liquidity trap where the rate of interest reached a floor, and no further fall could be engineered by the monetary authorities. Recent policies of quantitative easing have seen Central Banks buying bonds and other assets on the open market to lower the rate of interest, both short term and long run. The short rate has reached a floor of below 0.5 percent and that is what a liquidity trap looks like. The novelty of terms such as consumption function and the marginal propensity to consume attracted the younger generation of economists. These terms looked more scientific and in tune with the then fashionable psychology.

The Policy Legacy of Keynes Yet, at the outset, there was much less disagreement about the effectiveness of Keynes’s policy nostrums, or rather nostrums derived from his message by civil servants and Treasuries. This was more so in Anglo-Saxon economies than in continental European ones. In the UK especially, the Treasury, the bête noire of Keynes during much of his professional life, was won over completely. The notion of monetary policy being ineffective due to the liquidity trap became an accepted part of British policy. Fiscal policy – manipulation of public spending and budget deficits and surpluses – was taken to be central to all macro policy-making. Keynes’s ideas led to legislation that set up “built-in stabilizers.” Unemployment benefits, for example, ensured that even if unemployment rose the incomes of the unemployed did not fall precipitously, because benefits kicked in.

(i), (ii) Keynes, John Maynard (i), (ii), (iii), (iv), (v), (vi), (vii) approach and argument (i) at Bretton woods (i) challenge to Ricardo’s theory (i) circus (i) The Economic Consequences of the Peace (i) economic vocabulary (i), (ii), (iii) The General Theory of Employment, Interest and Money (i), (ii), (iii), (iv), (v), (vi), (vii), (viii), (ix), (x) intentions (i) on interest rates (i) liquidity preference (i) The Means to Prosperity (i) monetary theory (i) personality (i) theory of investment (i) A Tract on Monetary Reform (i) The Treatise on Money (i) on trade cycles (i) wheat (i) Keynesian models (i) argument (i) Cross diagram (i) challenges to (i) and cyclical behavior (i) development of (i) in different national contexts (i) equilibrium (i) evaluation of (i) Friedman’s challenge (i), (ii) full employment (i) highpoint (i) inapplicability (i) inflation (i) loss of faith in (i) loss of ground (i) policy legacy (i) in practice (i) public debt (i) recession (i) reduction of (i) rejectionist responses (i) renewed attack on (i) scope of influence (i) stagflation (i) stock disequilibrium (i) Keynesianism effect of policies (i) responses to Great recession (i) Keynesian Revolution, development of theory (i) King, Gregory (i) King, Mervyn, Lord (i), (ii) kings, borrowing (i) Kitchin, Joseph (i) Klein, Lawrence (i), (ii), (iii), (iv), (v) Economic Fluctuations in the United States, 1921–1941, (i) Klein-type models see econometric modeling knowledge demands (i) Kohl, Helmut (i) Kondratieff cycles (i), (ii), (iii), (iv), (v) Kondratieff, Nikolai Dimitrievich (i) labor, free movement (i) labor theory of value (i) laissez-faire (i), (ii) land values (i) Law of Population (Malthus) (i) laws of motion (i) Lehman Brothers (i), (ii) lender of last resort (i) lending (i), (ii), (iii) Lenin, Vladimir (i) less-developed countries, crises (i) Lesseps, Ferdinand de (i) Lévy, Dominique (i) Liberal Party, social reform (i) liberalization (i), (ii), (iii) limited liability (i) LINK project (i) liquidity injecting (i), (ii), (iii) see also quantitative easing liquidity preference (i), (ii) liquidity trap (i) living standards (i) loans, interest (i) local knowledge (i) Locke, John (i) London, stock market crash (i) long boom (i), (ii), (iii), (iv) long cycles (i) Long Depression (i), (ii) long perspective (i) long-run equilibrium (i) long-run rate of interest (i) long swings (i) Long-Term Capital Management (i), (ii) Louis XVI, execution (i) Lucas, Robert (i), (ii), (iii), (iv) Luddites (i) machinery, effects on relative value (i) MacMillan, Harold (i) macro-modeling (i), (ii) macroeconomic models (i) macroeconomics (i) teaching of (i) mal-investments (i) Malthus, Thomas (i) Essay on Population (i) Law of Population (i) use of statistics (i) Mandel, Ernest (i), (ii) manufacturing, relocation (i), (ii), (iii), (iv) marginal costs (i) marginal disutility of work (i) marginal efficiency of capital (MEC) (i), (ii), (iii) marginal propensity to consume (MPC) (i), (ii), (iii) market economy equilibrium (i) globalization (i) market rate of interest (i) market regulation (i) markets perfect (i) and profit (i) single (i) theory of (Ricardo) (i) Marshall Aid (i) Marshall, Alfred (i), (ii) The Economics of Industry (with Mary Marshall) (i) Marshall, Mary (i) Marshallian Cross (i), (ii) Marshall’s theory of competition (i) Marx, Karl (i), (ii), (iii), (iv) The Communist Menifesto (with Friedrich Engels) (i) Das Kapital (i) Marxian view collapse of capitalism (i) extension of (i) revival of (i) mathematical representation, of economic theory (i) mathematical techniques, misleading (i) mathematics, usefulness (i) McCarthy, Sen.


pages: 226 words: 59,080

Economics Rules: The Rights and Wrongs of the Dismal Science by Dani Rodrik

airline deregulation, Albert Einstein, bank run, barriers to entry, Bretton Woods, business cycle, butterfly effect, capital controls, Carmen Reinhart, central bank independence, collective bargaining, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, distributed generation, Donald Davies, Edward Glaeser, endogenous growth, Eugene Fama: efficient market hypothesis, Everything should be made as simple as possible, Fellow of the Royal Society, financial deregulation, financial innovation, floating exchange rates, fudge factor, full employment, George Akerlof, Gini coefficient, Growth in a Time of Debt, income inequality, inflation targeting, informal economy, information asymmetry, invisible hand, Jean Tirole, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, labor-force participation, liquidity trap, loss aversion, low skilled workers, market design, market fundamentalism, minimum wage unemployment, oil shock, open economy, Pareto efficiency, Paul Samuelson, price stability, prisoner's dilemma, profit maximization, quantitative easing, randomized controlled trial, rent control, rent-seeking, Richard Thaler, risk/return, Robert Shiller, Robert Shiller, school vouchers, South Sea Bubble, spectrum auction, The Market for Lemons, the scientific method, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, Thomas Malthus, trade liberalization, trade route, ultimatum game, University of East Anglia, unorthodox policies, Vilfredo Pareto, Washington Consensus, white flight

., 135n Jevons, William Stanley, 119 Kahneman, Daniel, 203 Kenya, 106–7 Keynes, John Maynard, 1–2, 31, 46, 165 on business cycles, 127–37 on liquidity traps, 130 see also models, Keynesian types of Klemperer, Paul, 36n Klinger, Bailey, 111n Korea, South, 163, 164, 166 Kremer, Michael, 106–7 Krugman, Paul, 136, 148 Kuhn, Thomas, 64n Kupers, Roland, 85 Kydland, Finn E., 101n labor markets, 41, 52, 56, 57, 92, 102, 108, 111, 119, 163 labor productivity, 123–24, 141 labor theory of value, 117–19 Lancaster, Kelvin, 59 Latin America, Washington Consensus and, 159–63, 166 Leamer, Edward, 139 learning, rule-based vs. case-based forms of, 72 Leijonhufvud, Axel, 9–10 Lepenies, Philipp H., 211n leverage, 154 Levitt, Steven, 7 Levy, Santiago, 3–4, 105–6 Lewis, W. Arthur, 32–33 “Life among the Econ” (Leijonhufvud), 9–10 Lincoln, Abraham, 52 Lipsey, Richard, 59 liquidity, 134–35, 155, 185 liquidity traps, 130 locational advantages, 108 London, England, congestion pricing and, 3 Lucas, Robert, 130, 131–32, 134–36 “Machiavelli’s Mistake: Why Good Laws Are No Substitute for Good Citizens” (Bowles), 71n macroeconomics, 39–40, 87, 102, 107, 143, 157n, 181 business cycles and, 125–37 capital flow and, 165–66 classical questions of, 101 demand-side view of, 128–30, 136–37 globalization and, 165–66 Madison, James, 187 Mäki, Uskali, 22n malaria, randomized testing and, 106, 204 Malthus, Thomas, 118 Manchester University, 197 Mankiw, Greg, 149, 150, 171n, 197 manufacturing: economic growth and, 163–64 exchange rate and, 100, 163 income inequality and, 141 marginal costs, 121, 122 marginalist economics, 119–22 marginal productivity, 120–21, 122–25 marginal utility, 121, 122 Mariel boatlift (1980), 57 market design models, 5 “Market for ‘Lemons’, The” (Akerlof), 69n market fundamentalism, 160, 178 markets: asymmetric information in, 68–69, 70, 71 behavioral economics and, 69–71, 104–7, 202–4 economic models and, see models economics courses and, 198 economists’ bias toward, 169–71, 182–83 efficiency in, xiii, 14, 21, 34, 48, 50, 51, 67, 98, 125, 147, 148, 150, 156–58, 161, 165, 170, 192–95, 196 general-equilibrium interactions in, 41, 56–58, 69n, 91, 120 in Great Recession, 156–59 imperfectly competitive types of, 67–69, 70, 136, 150, 162 incentives in, 7, 170, 172, 188–92 institutions and, 98, 161, 202 likely outcomes in, 17–18 multiple equilibria in, 16–17 perfectly competitive types of, 21, 27, 28, 47, 69n, 71, 122, 180 prisoners’ dilemma in, 14–15, 20, 21, 61–62, 187, 200 self-interest in, 21, 104, 158, 186–88, 190 social cooperation in, 195–96 supply and demand in, 13–14, 20, 99, 119, 122, 128–30, 136–37, 170 values in, 186–96 Washington Consensus and, 159–67, 169 Marshall, Alfred, 13n, 32, 119 “Marshallian Cross Diagrams and Their Uses before Alfred Marshall: The Origins of Supply and Demand Geometry” (Humphrey), 13n Marx, Groucho, 26 Marx, Karl, xi, 31, 116, 118 Massachusetts, University of (Amherst), 77 Massachusetts Institute of Technology (MIT), 107, 108, 165, 206 mathematical economics, 35 mathematical optimization, 30, 101, 202–3 mathematics: economic models and, 29–37, 47 social sciences and, 33–34 Maxwell’s equations, 66n Meade, James, 58 methodological individualism, 181 Mexico: antipoverty programs in, 3–4, 105–6 globalization and, 141, 166 microeconomics, 125–26, 131 microfounded models, 101 Miguel, Ted, 106–7 Milan, Italy, congestion pricing and, 3 Milgrom, Paul, 36n minimum wages, employment and, 17–18, 28n, 114, 115, 124, 143, 150, 151 Minnesota, University of, 131 Mishel, Lawrence, 124n models: authority and criticism of, 76–80 big data and, 38–39, 40 causal factors and, 40–41, 85–86, 99–100, 114–15, 179, 184, 200, 201, 204 coherent argument and clarity in, 80–81 common sense in, 11 comparative advantage principle and, 52–55, 58n, 59–60, 139, 170 compensation for risk and, 110 computers and, 38, 41 contextual truth in, 20, 174 contingency and, 25, 145, 173–74, 185 coordination and, 16–17, 42, 200 critical assumptions in, 18, 26–29, 94–98, 150–51, 180, 183–84, 202 criticisms of, 10–11, 178, 179–85 decision trees and, 89–90, 90 diagnostic analysis and, 86–93, 90, 97, 110–11 direct implications and, 100–109 dual economy forms of, 88 efficient-markets hypothesis and, 156–58 empirical method and, xii, 7, 46, 65, 72–76, 77–78, 137, 173–74, 183, 199–206 endogenous growth types of, 88 experiments compared with, 21–25 fables compared with, 18–21 field experiments and, 23–24, 105–8, 173, 202–5 general-equilibrium interactions and, 41, 56–58, 69n, 91, 120 goods and services and, 12 Great Recession and, 155–59 horizontal vs. vertical development and, 64n, 67, 71 hypotheses and, 46, 47–56 imperfectly competitive markets and, 67–69, 70, 136, 150, 162 incidental implications and, 109–11 institutions and, 12, 98, 202 intuition and, 46, 56–63 Keynesian types of, 40, 88, 101, 102, 127–30, 131, 133–34, 136–37 knowledge and, 46, 47, 63–72 main elements of, 31 mathematics and, 29–37, 47 neoclassical types of, 40, 88, 90–91, 121, 122 new classical approach to, 130–34, 136–37 parables and, 20 partial-equilibrium analysis and, 56, 58, 91 perfectly competitive markets and, 21, 27, 28, 47, 69n, 71, 122, 180 predictability and, 26–28, 38, 40–41, 85, 104, 105, 108, 115, 132, 133, 139–40, 184–85, 202 principle-agent types of, 155 questions and, 114–16 rationality postulate and, 202–3 real world application of, 171–72 rules of formulation in, 199–202 scale economy vs. local advantage in, 108 scientific advances by progressive formulations of, 63–72 scientific character of, 45–81 second-best theory and, 58–61, 163–64, 166 selection of, 83–112, 136–37, 178, 183–84, 208 simplicity and specificity of, 11, 179–80, 210 simplicity vs. complexity of, 37–44 social reality of, 65–67, 179 static vs. dynamic types of, 68 strategic interactions and, 61–62, 63 of supply and demand, 3, 13–14, 20, 99, 119, 122, 128–30, 136–37 theories and, 113–45 time-inconsistent preferences in, 62–63 tipping points arising from, 42 in trade agreements, 41 unrealistic assumptions in, 25–29, 180–81 validity of, 23–24, 66–67, 112 variety of, 11, 12–18, 26, 68, 72, 73, 114, 130, 198, 202, 208, 210 verbal vs. mathematical types of, 34 verification in selection of, 93–112 see also economics; macroeconomics; markets “Models Are Experiments, Experiments are Models” (Mäki), 22n monetary policies, 87 monopolies, 161 in imperfectly competitive markets, 67–68 in perfectly competitive markets, 122 price controls and, 28, 94–97, 150 Montesquieu, Charles-Louis de Secondat, Baron de La Brède et de, 196 mortality rates, 206 mortgage-backed securities, 155 mortgage finance, 39, 155 mosquito nets, randomized testing of, 106, 204 “Mr.

Since household saving depends on the household’s income, a reduction in output (and therefore incomes and employment) also lowers saving and brings it closer to equality with investment. Moreover, in situations of economic depression, where unemployment has shot up, people may want to hoard money so much that the interest rate becomes essentially insensitive to changes in economic circumstances. This is the Keynesian “liquidity trap.” In this scenario the adjustment can arrive only through a sufficiently large drop in output and employment. The high level of saving among individual households proves, collectively, self-defeating. Recession follows. In this model of autonomous changes in aggregate demand, business cycle fluctuations are the result. Insufficient demand is the fundamental cause of unemployment. An increase in private investment or consumption spending, were it to happen, would fix the problem.


pages: 492 words: 118,882

The Blockchain Alternative: Rethinking Macroeconomic Policy and Economic Theory by Kariappa Bheemaiah

accounting loophole / creative accounting, Ada Lovelace, Airbnb, algorithmic trading, asset allocation, autonomous vehicles, balance sheet recession, bank run, banks create money, Basel III, basic income, Ben Bernanke: helicopter money, bitcoin, blockchain, Bretton Woods, business cycle, business process, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, cashless society, cellular automata, central bank independence, Claude Shannon: information theory, cloud computing, cognitive dissonance, collateralized debt obligation, commoditize, complexity theory, constrained optimization, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crowdsourcing, cryptocurrency, David Graeber, deskilling, Diane Coyle, discrete time, disruptive innovation, distributed ledger, diversification, double entry bookkeeping, Ethereum, ethereum blockchain, fiat currency, financial innovation, financial intermediation, Flash crash, floating exchange rates, Fractional reserve banking, full employment, George Akerlof, illegal immigration, income inequality, income per capita, inflation targeting, information asymmetry, interest rate derivative, inventory management, invisible hand, John Maynard Keynes: technological unemployment, John von Neumann, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, Kevin Kelly, knowledge economy, large denomination, liquidity trap, London Whale, low skilled workers, M-Pesa, Marc Andreessen, market bubble, market fundamentalism, Mexican peso crisis / tequila crisis, MITM: man-in-the-middle, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, natural language processing, Network effects, new economy, Nikolai Kondratiev, offshore financial centre, packet switching, Pareto efficiency, pattern recognition, peer-to-peer lending, Ponzi scheme, precariat, pre–internet, price mechanism, price stability, private sector deleveraging, profit maximization, QR code, quantitative easing, quantitative trading / quantitative finance, Ray Kurzweil, Real Time Gross Settlement, rent control, rent-seeking, Satoshi Nakamoto, Satyajit Das, savings glut, seigniorage, Silicon Valley, Skype, smart contracts, software as a service, software is eating the world, speech recognition, statistical model, Stephen Hawking, supply-chain management, technology bubble, The Chicago School, The Future of Employment, The Great Moderation, the market place, The Nature of the Firm, the payments system, the scientific method, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, too big to fail, trade liberalization, transaction costs, Turing machine, Turing test, universal basic income, Von Neumann architecture, Washington Consensus

If prices were to fall, then the value of the debt would increase and reduce investor investment. Second, if prices were to fall, i.e., inflation is too low, then borrowing goes down and it becomes difficult for the central bank to stimulate the economy with low interest rates (see the note below on liquidity trap*). The only option in this situation would be that central banks would begin to apply negative interest rates. But if consumers can convert their bank funds into cash, such a measure would turn out to be ineffective. This is known as the zero lower bound for interest rates and can cause a liquidity trap. Hence a consensus merged that inflation needs to be low, but positive – at around 2% which would be accompanied with a nominal GDP growth rate of 4-5% (Turner, 2015). For several decades prior to the crisis, this is what was seen: nominal GDP did grow at an average of 5% per year and inflation near 1–3%.

In fact, one of the crucial conclusions of the author’s model was that by using separate policy control instruments, especially in terms of controlling money supply, the quantity of bank lending and the interest rate at which the government lends money to banks, the central bank has a better grip on controlling inflation and interest rates and would be able to address the zero limit bound problem and eliminate the liquidity trap. In their words, “…a zero bound does not apply to this rate, which makes it feasible to keep steady state inflation at zero without worrying about the fact that nominal policy rates are, in that case, more likely to reach zero or negative values.” ----------------------------------------------------------------------------------------*(The liquidity trap is a situation in which cash injections from the central bank to the private sector fail to decrease interest rates. Consumers prefer to save rather than borrow and invest, as they believe that the interest rates will soon rise and it is just a matter of time.

If inflation were to become unstable, then paying negative interest rates would be a better approach to adopt. The reason why negative interest rates have been in the news over the past year is mainly because of the persistently ultra-low inflation and near-zero interest rates (in most developed countries) over the past few years. When inflation becomes too low, it becomes harder for governments to deal with it, especially as interest rates drift toward the zero lower bound (also known as the “liquidity trap”). Second, since the crisis, world markets have seen a greater amount of economic volatility. The greater the volatility, the more likely it is that economies will be face severe downturns requiring central bank interest rate cuts (Rogoff, 2016), and therefore the more likely that we will need to indulge in negative interest rates. Third, an increasing tendency to save in emerging economies coupled with ageing populations in developed economies have had a net effect of reduced investment, and hence further perpetuate low interest rates.


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Stuff Matters: Exploring the Marvelous Materials That Shape Our Man-Made World by Mark Miodownik

3D printing, active measures, British Empire, Buckminster Fuller, California gold rush, invention of the printing press, Isaac Newton, liquidity trap, New Urbanism, stem cell, trade route

Aerogels were not of alien origin, I found out, but they nevertheless had a very strange back-story: they were invented in the 1930s by a man called Samuel Kistler, an American farmer turned chemist, who conjured them into existence solely to satisfy his curiosity about jelly. Jelly? What was jelly? he asked. He knew that it wasn’t a liquid, but it wasn’t really a solid either. It was, he decided, a liquid trapped in a solid prison, but one in which the prison bars were like an invisibly thin mesh. In the case of edible jelly, the mesh is made from long molecules of gelatin, which is derived from the protein, collagen, that makes up most connective tissues, such as tendons, skin, and cartilage. When added to water, these gelatin molecules unravel and connect with one another to form a mesh that traps the liquid within it and prevents it from flowing.

The surface tension forces inside the mesh are strong enough for the water to be unable to escape the jelly, but weak enough for it to slosh around—which is why jelly wobbles. It’s also why jelly feels so amazing when you eat it: it’s almost 100 percent water, and with a melting point of 35°C the internal gelatin network promptly melts, freeing the water to burst in your mouth. The simple explanation—a liquid trapped by a solid internal mesh—was not enough for Samuel Kistler. He wanted to know whether the invisible gelatin mesh within a jelly was all of a piece. In other words, was it a coherent, independent internal skeleton, such that if you could find a way to remove all of the liquid from it, the mesh could stand on its own? To answer the question he conducted a series of experiments, the results of which he published in a letter to the scientific journal Nature in 1931 (no. 3211, vol. 127, p.741).

., [>] Hephaistos, [>] high-carbon steel, [>], [>] hip joints formation of in womb, [>] replacements for, [>]–[>] Hirst, Damien (For the Love of God), [>] historical records, and importance of paper, [>] Honduras cocoa farms, [>] Hoover Dam, [>] hot chocolate, [>] human body aging, impact on joints, [>] aging process, [>] ball-and-socket joints, [>] blood supply development, [>] cartilage, function of, [>]–[>] cartilage, rebuilding, [>]–[>] diverse structures in, limited atomic underpinnings, [>] hip joints, [>]–[>] integration of different scales into, [>] knee joints, [>] ligaments, function, [>] macrostructures in, [>] self-healing capacity, [>]–[>] self-repair capacity, [>] tolerance for titanium, [>] transplants for, impact of shortages, [>] human scale, [>], [>]–[>] Hyatt, John Wesley celluloid film, [>]–[>] creation of first usable synthetic plastic, [>], [>] effort to craft celluloid dentures, [>]–[>] experiments using nitrocellulose in alcohol, [>] patent challenge by Daniel Spill, [>]–[>] plastic-coated billiard balls, [>]–[>] ice, melting, [>]–[>] identification cards/photos, [>] immunosuppressant drugs, [>] implants dental, [>] and romanticizing of bionic devices, [>]–[>] human windpipe, [>]–[>], [>] and improved quality of life, [>] synthetic, limitations of, [>]–[>] using scaffolding and adult stem cells, [>]–[>] Inchtuthil, Scotland, Roman nails at, [>]–[>] India, diamonds from, [>] industrial design, cultural meanings, [>]–[>] Industrial Revolution dependence on steel, [>] and early use of cast iron, [>] and production of pool tables, [>] and rediscovery and refinement of concrete, [>] ink Janus particles in electronic reading devices, [>]–[>], and penetration of paper fibers, [>] in thermal paper, [>] Institute of Making (University College London), materials library, [>] insulation, double-glazed glass, [>] International Association of Athletics Federations, [>] interstellar dust collection, [>] inventors, home-based, during 19th century, [>] invisibility shields, [>] iron alloying with carbon to create steel, [>]–[>] in cement, [>] crystals of, as microscale molecules, [>] use of by Romans, [>] Iron Age, [>], [>]–[>] iron oxide, rust in concrete, [>]–[>] inhibition by chromium, [>] ivory in billiard balls, material properties, [>]–[>] for hip joint replacements, [>] Janus particles, [>]–[>], [>] Japan, samurai steel blade, [>]–[>] jawbone, artificial, [>], [>] jelly continuity of liquids in, [>] Kistler’s explorations of, [>]–[>] as liquid trapped in solid mesh, [>] and surface tension, [>] See also gels jet jewelry, [>], [>] jewelers’ rouge (steel sharpener), [>] JFK Airport construction, concrete used in, [>] joints chondroblast scaffolds, [>] hips and knees, [>]–[>] impact of aging on, [>]–[>] inability to self-heal, [>] kaolin in English bone china, [>] in paper sizing, [>] in porcelain, [>] Kapoor, Anish (Cloud Gate sculpture), [>] Kevlar, [>], [>] King’s College London, Material Research group, [>] Kistler, Samuel creation of silica aerogel, [>] experiments using gels, [>]–[>], [>] interest in jelly, [>]–[>] invention of aerogel, [>]–[>] Nature article about aerogels and jellies, [>]–[>], [>] patenting of silica aerogel, [>] replacement of gel liquid with gas, [>] kitchen sinks, stainless steel for, [>]–[>] knee joints anterior cruciate ligament, [>] complex motion of, [>] Kodak camera, [>]–[>] Kroto, Harry, [>] Lajic, Radivoke, [>]–[>], [>] laminate in safety glass, [>] Laughlin, Zoe, [>] lava, [>]–[>] Lavoisier, Antoine, [>] lead, melting point, [>] Learned, Charles, [>] Lee, Wen Ho, [>] Lefferts, Marshall, [>], [>] lenses, and refraction by glass, [>] Lewis, David, [>]–[>] Libyan Desert, fulgurites in, [>]–[>], [>] ligaments function, [>] lack of blood supply, and inability to self-heal, [>] torn, repair using titanium screws, [>]–[>] viscoelasticity, [>] light absorption by electrons, [>] colors in, Newton’s explanation, [>]–[>] light-controlling meta-materials, [>]–[>] passage through glass, refractive index, [>] Raleigh scattering, [>]–[>] lightning bolts, glass produced by, [>] lignin, [>], [>]–[>] lignite, [>] lime, [>] limestone, [>] linen, [>] lonsdaleite, [>] Louis XV, staples made for, [>] love, romantic, association of diamonds with, [>] love letters and enduring nature of words on, [>] example, [>] as intimate communication, [>] and sensual nature of paper, [>] For the Love of God (Hirst), [>] Lumière brothers, and projection of movies, [>] Lycra, [>] macrostructures, [>], [>]–[>], [>] Maillard reaction, [>] malachite, [>] Manchester University, Physics Department, [>] Mars Pathfinder mission, silica aerogels on, [>] materials, materials science breaking materials apart, fundamentals, [>]–[>] as field of scientific research, [>] hierarchical architecture, and specialized properties, [>] historical, cultural, and personal significance, [>], [>]–[>], [>]–[>], [>]–[>] importance of atoms, atomic structures, [>]–[>] incorporation of smaller scales into larger ones, implications, [>]–[>] and interplay of scales, [>], [>] limits of chemical approach to understanding, [>] origins of author’s interest in/ obsession with, [>]–[>] psychophysical aspects, [>] understanding expansion and contraction, [>] understanding inner structures of, [>] understanding similarities, connections, [>] understanding internal structure, [>] See also specific materials Materials Library, King’s College, [>]–[>], [>] Mayan chocolatl, [>], [>] McBain, J.


pages: 116 words: 31,356

Platform Capitalism by Nick Srnicek

3D printing, additive manufacturing, Airbnb, Amazon Mechanical Turk, Amazon Web Services, Capital in the Twenty-First Century by Thomas Piketty, cloud computing, collaborative economy, collective bargaining, deindustrialization, deskilling, disintermediation, future of work, gig economy, Infrastructure as a Service, Internet of things, Jean Tirole, Jeff Bezos, knowledge economy, knowledge worker, liquidity trap, low skilled workers, Lyft, Mark Zuckerberg, means of production, mittelstand, multi-sided market, natural language processing, Network effects, new economy, Oculus Rift, offshore financial centre, pattern recognition, platform as a service, quantitative easing, RFID, ride hailing / ride sharing, Robert Gordon, self-driving car, sharing economy, Shoshana Zuboff, Silicon Valley, Silicon Valley startup, software as a service, TaskRabbit, the built environment, total factor productivity, two-sided market, Uber and Lyft, Uber for X, uber lyft, unconventional monetary instruments, unorthodox policies, Zipcar

Perez, 2009; Goldfarb, Kirsch, and Miller, 2007: 115. 13. Goldfarb, Pfarrer, and Kirsch, 2005: 2. 14. Brenner, 2009: 21. 15. Perez, 2009. 16. Federal Reserve Bank of St Louis, 2016b. 17. Comments of Verizon and Verizon Wireless, 2010: 8n12. 18. Schiller, 2014: 80. 19. Dyer-Witheford, 2015: 82–4. 20. Greenspan, 1996. 21. Brenner, 2009: 23. 22. Rachel and Smith, 2015. 23. Khan, 2016. 24. The zero lower bound, or liquidity trap, argues that nominal interest rates cannot go below zero (otherwise savers would take their money out and put it under the proverbial mattress). The result is that policymakers cannot push nominal interest rates below zero. For more, see Krugman, 1998. Recently some countries have begun imposing negative rates on reserves held at the central bank, though the effects of this action appear so far to be minimal and possibly contrary to what is intended (e.g. decreasing lending, rather than increasing lending). 25.

‘How Uber Conquered London’. The Guardian, 27 April. http://www.theguardian.com/technology/2016/apr/27/how-uber-conquered-london (accessed 22 May 2016). Kosoff, Maya. 2015. ‘Uber’s Nightmare Scenario’. Business Insider. 19 July. http://uk.businessinsider.com/what-it-would-take-for-uber-to-reclassify-all-its-drivers-2015-7 (accessed 22 May 2016). Krugman, Paul. 1998. ‘It’s Baaack: Japan’s Slump and the Return of the Liquidity Trap’. Brookings Papers on Economic Activity, 29 (2): 137–206. Kuang, Cliff. 2016. ‘How Facebook’s Big Bet on Chatbots Might Remake the UX of the Web’. Co.Desi.gn. 12 April. http://www.fastcodesign.com/3058818/how-facebooks-big-bet-on-chatbots-might-remake-the-ux-of-the-web (accessed 22 May 2016). Lardinois, Frederic. 2016. ‘Microsoft and Facebook Are Building the Fastest Trans-Atlantic Cable Yet’.


pages: 823 words: 220,581

Debunking Economics - Revised, Expanded and Integrated Edition: The Naked Emperor Dethroned? by Steve Keen

"Robert Solow", accounting loophole / creative accounting, banking crisis, banks create money, barriers to entry, Benoit Mandelbrot, Big bang: deregulation of the City of London, Black Swan, Bonfire of the Vanities, business cycle, butterfly effect, capital asset pricing model, cellular automata, central bank independence, citizen journalism, clockwork universe, collective bargaining, complexity theory, correlation coefficient, creative destruction, credit crunch, David Ricardo: comparative advantage, debt deflation, diversification, double entry bookkeeping, en.wikipedia.org, Eugene Fama: efficient market hypothesis, experimental subject, Financial Instability Hypothesis, fixed income, Fractional reserve banking, full employment, Henri Poincaré, housing crisis, Hyman Minsky, income inequality, information asymmetry, invisible hand, iterative process, John von Neumann, Kickstarter, laissez-faire capitalism, liquidity trap, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, market clearing, market microstructure, means of production, minimum wage unemployment, money market fund, open economy, Pareto efficiency, Paul Samuelson, place-making, Ponzi scheme, profit maximization, quantitative easing, RAND corporation, random walk, risk tolerance, risk/return, Robert Shiller, Robert Shiller, Ronald Coase, Schrödinger's Cat, scientific mainstream, seigniorage, six sigma, South Sea Bubble, stochastic process, The Great Moderation, The Wealth of Nations by Adam Smith, Thorstein Veblen, time value of money, total factor productivity, tulip mania, wage slave, zero-sum game

This is because there is (1) some minimum below which the rate of interest is unlikely to go, and (though Mr. Keynes does not stress this) there is (2) a maximum to the level of income which can possibly be financed with a given amount of money. If we like we can think of the curve as approaching these limits asymptotically. (Ibid.) This ‘liquidity trap’ enabled Hicks to provide an explanation for the Great Depression, and simultaneously reconcile Keynes with ‘the Classics.’ Keynes was consigned to one end of the LM curve, where the liquidity trap applied, and ‘the Classics’ to the other, where full employment was the rule (see Figure 3.1). In the ‘classical’ range of the LM curve, conventional economics reigned supreme: there was a maximal, full employment level of income, where any attempts to increase output would simply cause a rising interest rate (or inflation, in extensions of the IS-LM model).

.; and uncertainty; critique of marginal efficiency of capital; critique of Say’s Law; General Theory of Employment, Interest and Money; models of convention formation; on expectations; view of stock market Keynesian economics; American; new; overthrow of see also post-Keynesianism Keynesianism Kindleberger, Charles Kirman, Alan Koo, Richard, The Holy Grail of Macroeconomics Kornai, Janos Krugman, Paul; ‘Debt, deleveraging, and the liquidity trap’ Kumar, Dharma Kydland, Finn labor: as only source of profit; surplus labor; value of labor embodied/labor commanded labor market; theory of labor theory of value Lakatos, I. land: as factor of production; as source of value Law of Demand; applicability of; non-applicability of Leeson, Robert Leijonhufvud, Axel leisure time, and income lemmings, fluctuation of populations of Leontief input–output matrix leverage, responsible levels of Levy Institute liability structures of financial institutions liquidity; of firms liquidity preference liquidity trap Ljungqvist, L. loan-to-value ratio (LVR) logical contradiction long run average cost curve Long Term Capital Management Crisis Lorenz, E.

Pessimism rises, causing those with money to hoard it, which further reduces business activity. The falling price level also has the perverse effect that the real rate of interest rises even though nominal rates have fallen, and this drastically reduces investment. Fisher’s theory was thus an alternative explanation of the Great Depression to both Keynes’s rejection of Say’s Law and Hicks’s ‘liquidity trap’ (discussed in Chapter 9). But though the chain reaction argument is plausible, Fisher provided no formal proof for it – in contrast to his previous emphasis upon formal mathematical reasoning. Partly for this reason, his thesis was received poorly by the economics profession, and his insights were swamped by the rapid adoption of Hicks’s IS-LM analysis after the publication of Keynes’s General Theory.9 After the Great Depression, economists continued to cite his pre-Crash work on finance, while his debt-deflation theory was largely ignored.10 As a result, the antipathy he saw between the formal concept of equilibrium and the actual performance of asset markets was also ignored.


pages: 381 words: 101,559

Currency Wars: The Making of the Next Gobal Crisis by James Rickards

Asian financial crisis, bank run, Benoit Mandelbrot, Berlin Wall, Big bang: deregulation of the City of London, Black Swan, borderless world, Bretton Woods, BRICs, British Empire, business climate, buy and hold, capital controls, Carmen Reinhart, Cass Sunstein, collateralized debt obligation, complexity theory, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, Deng Xiaoping, diversification, diversified portfolio, Fall of the Berlin Wall, family office, financial innovation, floating exchange rates, full employment, game design, German hyperinflation, Gini coefficient, global rebalancing, global reserve currency, high net worth, income inequality, interest rate derivative, John Meriwether, Kenneth Rogoff, laissez-faire capitalism, liquidity trap, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, Mexican peso crisis / tequila crisis, money market fund, money: store of value / unit of account / medium of exchange, Myron Scholes, Network effects, New Journalism, Nixon shock, offshore financial centre, oil shock, one-China policy, open economy, paradox of thrift, Paul Samuelson, price mechanism, price stability, private sector deleveraging, quantitative easing, race to the bottom, RAND corporation, rent-seeking, reserve currency, Ronald Reagan, sovereign wealth fund, special drawing rights, special economic zone, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, time value of money, too big to fail, value at risk, War on Poverty, Washington Consensus, zero-sum game

Report prepared for Proceedings of Applications of Physics and Financial Analysis Conference Series, May 2, 2009. Stiglitz, Joseph E. “A Modest Proposal for the G-20.” Project Syndicate, April 1, 2011. Subbotin, Alexander. “A Multi-Horizon Scale for Volatility.” Working paper prepared for Centre d’Économie de la Sorbonne, March 3, 2008. Svensson, Lars E. O. “Escaping a Liquidity Trap and Deflation: The Foolproof Way and Others.” Working Paper No. 10195, National Bureau of Economic Research, December 2003. ———. “The Zero Bound in an Open Economy: A Foolproof Way of Escaping from a Liquidity Trap.” Working Paper No. 7957, National Bureau of Economic Research, October 2000. “Systematic Risk and the Redesign of Financial Regulation.” A Global Financial Stability Report, prepared for the International Monetary Fund, April 2010. Taylor, John B. “Discretion Versus Policy Rules in Practice.”

The Financial Crisis Inquiry Report: Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States, New York: Public Affairs, 2011, xvii. 175 In 2009, Janet Yellen, then president of the Federal Reserve Bank of San Francisco . . . “Fed Seeks Power to Issue Own Debt When Crisis Ebbs, Yellen Says,” Bloomberg, March 26, 2009. 181 Svensson’s paper is the Rosetta stone of the currency wars . . . Lars E. O. Svensson, “Escaping a Liquidity Trap and Deflation: The Foolproof Way and Others,” Working Paper No. 10195, National Bureau of Economic Research, December 2003. 182 “Even if the . . . interest rate is zero . . .” Svensson, op. cit. 182 “If the central bank could manipulate private-sector beliefs . . .” Svensson, op. cit. 185 In a famous study written just before the start of President Obama’s administration . . . Christina D.


pages: 337 words: 89,075

Understanding Asset Allocation: An Intuitive Approach to Maximizing Your Portfolio by Victor A. Canto

accounting loophole / creative accounting, airline deregulation, Andrei Shleifer, asset allocation, Bretton Woods, business cycle, buy and hold, buy low sell high, capital asset pricing model, commodity trading advisor, corporate governance, discounted cash flows, diversification, diversified portfolio, fixed income, frictionless, high net worth, index fund, inflation targeting, invisible hand, John Meriwether, law of one price, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, low cost airline, market bubble, merger arbitrage, money market fund, new economy, passive investing, Paul Samuelson, price mechanism, purchasing power parity, risk tolerance, risk-adjusted returns, risk/return, Ronald Reagan, selection bias, shareholder value, Sharpe ratio, short selling, statistical arbitrage, stocks for the long run, survivorship bias, the market place, transaction costs, Y2K, yield curve, zero-sum game

In turn, the credit worthiness of companies was reduced, forcing banks to curtail their loans. The decline in asset prices also reduced the net capital and capital adequacy of the banks, forcing them to further curtail their loan operations. These conditions created what some called a liquidity trap. As the Japan central bank printed money to stimulate the economy, the commercial banks did not lend the extra money. Instead, the money was held as excess reserves. The abundance of bank reserves reduced short-term interest rates, while stagnation lowered long-term rates. Worse, the yield curve flattened to near zero levels, hence the liquidity trap. The Japanese economy remained stagnant for several years following this turn of events. Eventually, most of the bad loans were worked out and the banks began lending again, once their capital had increased. Rising asset prices started to generate a virtuous cycle, and climbing net worth in the Japanese private sector made the sector’s credit worthy once more.

., 89 Kerry, John, 84 large-cap stocks active management tested against passive management, 166-168 annual returns, 19 elasticity, 184, 187-189 Index 311 location effect, 190-193, 202-204, 273-274 optimal mix with small-cap stocks, 23-24, 31-32, 123 performance of, 16-18, 41-43 regulatory fixed costs, 184-185 risk measurement, 20 size cycles, 54-55 active versus passive management during, 170-172, 175, 271-272 equal-weighted versus cap-weighted indexes, 175-180 and market breadth, 168-170, 237-238 in value-timing strategy, 243-250 LBOs (leveraged buyouts), 74 legislation. See tax-rate changes leverage in pure-alpha strategy, 256-257, 261 leveraged buyouts (LBOs), 74 LIBOR (London Interbank Offered Rate), 257 lifecycle allocations for benchmark portfolio, 115-116 lifecycle funds case study, 152-157 liquidity trap, 221 LJE quantitative model, probabilities in, 134-136 local companies, 190 location cycles, 57-58 location effect, 186. See also elasticity elasticity and, 187-189 large-cap stocks and, 190-193, 202-204, 273-274 regional stock indices and, 198-202 small-cap stocks and, 193-198, 202-204, 213, 273-274 location portfolios, Sharpe ratio, 61-63 location-based asset allocation cyclical asset allocation and, 34-37, 125-126 optimal mixes, 24-25 London Interbank Offered Rate (LIBOR), 257 long-run asset allocation.


pages: 248 words: 57,419

The New Depression: The Breakdown of the Paper Money Economy by Richard Duncan

asset-backed security, bank run, banking crisis, banks create money, Ben Bernanke: helicopter money, Bretton Woods, business cycle, currency manipulation / currency intervention, debt deflation, deindustrialization, diversification, diversified portfolio, fiat currency, financial innovation, Flash crash, Fractional reserve banking, income inequality, inflation targeting, Joseph Schumpeter, laissez-faire capitalism, liquidity trap, market bubble, market fundamentalism, mass immigration, Mexican peso crisis / tequila crisis, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, private sector deleveraging, quantitative easing, reserve currency, Ronald Reagan, savings glut, special drawing rights, The Great Moderation, too big to fail, trade liberalization

Without government intervention, the economy will collapse in a deflationary spiral as market forces bring supply back into equilibrium with demand at a much lower level of economic output and employment. Mismanaged intervention could have the opposite effect, however, and produce very high and destabilizing rates of inflation. Extreme inflation is like fire in that it consumes the savings of the public in a conflagration of rising prices. Extreme deflation is ice-like. It leaves the economy frozen in a liquidity trap with high unemployment and no growth. Both would end in disaster for the economy and, therefore, for society. However, the two would impact asset prices very differently. This chapter looks at how very high rates of inflation and extreme deflation would affect the various asset classes. It is not inconceivable that, as this economic calamity plays out over the next decade, the economy could be hit by both.

Decrease in Construction Reduction in Output Reduction in Trade Unemployment More Pessimism IX. Hoarding X. Runs on Banks Banks Curtailing Loans for Self-Protection Banks Selling Investments Bank Failures Distrust Grows More Hoarding More Liquidation He then went on to explain how, in such circumstance, the economy can become frozen in a liquidity trap: If the over-indebtedness with which we started was great enough, the liquidation of debts cannot keep up with the fall of prices which it causes. In that case, the liquidation defeats itself. While it diminishes the number of dollars owed, it may not do so as fast as it increased the value of each dollar owed. Then, the very effort of individuals to lessen their burden of debts increases it, because of the mass effect of the stampede to liquidate in swelling each dollar owed.


pages: 275 words: 77,955

Capitalism and Freedom by Milton Friedman

affirmative action, Berlin Wall, central bank independence, Corn Laws, Deng Xiaoping, floating exchange rates, Fractional reserve banking, full employment, invisible hand, Joseph Schumpeter, liquidity trap, market friction, minimum wage unemployment, price discrimination, rent control, road to serfdom, Ronald Reagan, secular stagnation, Simon Kuznets, the market place, The Wealth of Nations by Adam Smith, union organizing

First, suppose people are utterly indifferent to whether they hold bonds or money, so that bonds to get the $100 can be sold without having to offer a higher return to the buyer than such bonds were yielding before. (Of course, $100 is so small an amount that it would in practice have a negligible effect on the required rate of return, but the issue is one of principle whose practical effect can be seen by letting the $100 stand for $100 million or $100 ten-million.) In Keynesian jargon, there is a “liquidity trap” so people buy the bonds with “idle money.” If this is not the case, and clearly it cannot be indefinitely, then the government can sell the bonds only by offering a higher rate of return on it. A higher rate will then have to be paid also by other borrowers. This higher rate will in general discourage private spending on the part of would-be borrowers. Here comes the second extreme circumstance under which the simple Keynesian analysis will hold: if potential borrowers are so stubborn about spending that no rise in interest rates however steep will cut down their expenditures, or, in Keynesian jargon, if the marginal efficiency schedule of investment is perfectly inelastic with respect to the interest rate.

., 125 liberalism, 5, 10, 22–23, 32, 115, 137, 195; on dispersal of power, 2, 3, 6, 15, 39; on freedom of the individual, 12–13, 25–26, 33, 39, 195; On government, 23, 24–27, 34, 147, 195 (see also government, proper functions of); on governmental paternalism, 1–2, 33–34, 178–79, 188; on inappropriate governmental roles, 34–36; and international monetary policy, 56–57, 67–69; perversion of the term, 5–6; on role of voluntary co-operation, 22; on social security, 182–4; on taxation, 176 licensure, 9, 35–36, 137–60; and anticommunist agenda, 141; as governmental intervention, 126–27, 130–31, 191; granting arrangements for, 140–41; of medical profession, 138, 147–48, 149–59; paternalistic arguments justifying, 148, 149; as restriction on economic freedom, 111, 137–38, 146, 147; as special interest monopoly, 143–44, 148–49 limited government. See government, proper functions of liquidity crisis, 46–50 liquidity trap, 82 majority rule, 24–25, 52, 113–14, 187, 194 market. See free market Marx, Karl, 197 Marxism, 167–68 McCarthyism, 20–21 medical care, governmental, 177 medical profession, licensure of, 138, 147–48, 149–59 (see also American Medical Association); alternative to, 158–59; and experimentation, 157, 158, 160; and low standards of practice, 156–58; and restricted medical school admission, 151–53, 155, 156, 158; social costs of, 155–58 Meiselman, David, 84 n.


pages: 183 words: 17,571

Broken Markets: A User's Guide to the Post-Finance Economy by Kevin Mellyn

banking crisis, banks create money, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, Bonfire of the Vanities, bonus culture, Bretton Woods, BRICs, British Empire, business cycle, buy and hold, call centre, Carmen Reinhart, central bank independence, centre right, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate raider, creative destruction, credit crunch, crony capitalism, currency manipulation / currency intervention, disintermediation, eurozone crisis, fiat currency, financial innovation, financial repression, floating exchange rates, Fractional reserve banking, global reserve currency, global supply chain, Home mortgage interest deduction, index fund, information asymmetry, joint-stock company, Joseph Schumpeter, labor-force participation, light touch regulation, liquidity trap, London Interbank Offered Rate, market bubble, market clearing, Martin Wolf, means of production, mobile money, money market fund, moral hazard, mortgage debt, mortgage tax deduction, negative equity, Ponzi scheme, profit motive, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, rising living standards, Ronald Coase, seigniorage, shareholder value, Silicon Valley, statistical model, Steve Jobs, The Great Moderation, the payments system, Tobin tax, too big to fail, transaction costs, underbanked, Works Progress Administration, yield curve, Yogi Berra, zero-sum game

Damping down inflation, which everywhere is a matter of creating too much money relative to the output of goods, is a central bank responsibility of the highest order. After the collapse of a financial bubble, as occurred in the United States in the 1930s and Japan in the 1990s, the more immediate threat is the opposite 71 72 Chapter 3 | The Economic Consequences of Financial Regulation of inflation. It is deflation, the relentless drop in the price of assets as society responds by trying to pay down debt and save. It was this “liquidity trap” Keynes was trying to cure with his advice to offset private thrift with government spending. However, vast increases in government spending and debt have proven ineffective in halting Japanese deflation. And while the United States has avoided actual deflation, the effects of massive increases in government spending, debt, and the money supply have been remarkably feeble. At such a juncture, the retirement income and savings of households face a double threat: either the government will deliberately stoke inflation to reduce the real value of the money it must pay back its creditors, or it will try to keep interest rates as low as possible as long as possible so that the interest service on the debt is manageable.

eBook <www.wowebook.com> 170 Index Global whirlwinds (continued) economic primacy, 113 European banking crisis ECB, 102–103 federal funds market, 102 Federal Reserve, 103 global money market, 102 interbank market, 101 interbank-lending market, 102 interest rate and currency risks, 101 investment-banking industry, 101 recession, 103 short-and medium-term credit, 101 short-term funding and liquidity, 101 sovereign risk, 102 steroids, 103 globalization, 113 global money pump, 103–105 global trade, zero-sum game ants and grasshoppers, 96 cheap TV deal, 94–95 Chinese Central Bank, 94 currency manipulation, 95–96 multilateral trade, 94 political demagoguery, 94 hegemon, 113–116 sustainable development, 112 technology vs. friction, 105–106 US global economic leadership, 112 US losing clout, 111–112 war, settlement risk, 108–109 Western decline acceleration, 113 Government-sponsored enterprises (GSEs), 17 Graham-Leach-Bliley Act, 36 Great Depression, 5, 44, 61 Great Moderation, 16–18, 21, 61 “Green” economy, 85 Growth-killing austerity, 111 H Home equity lines of credit (HELOCs), 16 I Industrial Revolution, 77 Infinite customization, 68 J Joint-stock banking, 63, 76 L Laissez-faire economy, 84–86 Liberal arts, 132 Life after finance, 75 credit-driven economy, 76–77 death knell, consumer credit American optimism, 90 big data, 90 entrepreneurs starvation, 91–92 loan factories, 90 per-account/per-transaction, 90 securitization, 90 unbanking, 91 financial repression Bretton Woods system, 79 capital exports and foreignexchange transactions, 79 captive domestic audience, 79 debt restructuring, 78 GDP, 79 government banks ownership, 79 industrial policy, 86 monopolies, 86 negative real interest rates, 78, 79 prudential regulation, 79 rules, 80 subsidized green energy, 86 tax raising and lowering, 81–82 World War II, 79 Government expenditure, 75–76 low interest rates, 77–78 political direction, credit and investment formal taxation, 82 government-run utility, 83 Japanese banks, 83 laissez-faire economy myth, 84–86 Index market-driven banking system, 83 winners and losers, 83–84 risky business amalgamation, 88 coincidence, 88 competition, 89–90 joint-stock banks, 87 often-contradictory rules and requirements, 88 private partnerships, 87 separation of functions, 87 shareholder-owned banks, 87 small-town banks, 87 Life-line banking, 70 R Liquidity trap, 72 Ring fencing, 88 London Interbank Offered Rate (LIBOR), 102 Rules-based regulation, 59, 61 M S “Market-centric” financial system, 110 Real Time Gross Settlement (RTGS), 108 Regulation process “Anglo-Saxon” world, 36 balance sheets and trading desks, 35 definition, 36 finance deregulation, 35–36 Graham-Leach-Bliley Act, 36 Triple A–rated bonds, 37 “ultra-safe” money market mutual fund, 37 Regulatory arbitrage, 61 Resolution Trust Corporation (RTC), 31 Savings-and-loan (S&L) industry, 28, 30 Mass-market retail banking, 66 Securities and Exchange Commission (SEC) rules, 33 McKinsey Global Institute (MGI), 110 S&L industry.See Savings-and-loan industry Micro-regulation, 92 Ministry of International Trade and Industry (MITI), 83 Society for Worldwide Interbank Financial Telecommunications (SWIFT), 107 Moral hazard, 18 Straight-through procession, 107 N National Bank Act, 49 National Bureau of Economic Research (NBER), 78 O Outsourcing, 13 P Personal Consumption Expenditure (PCE), 90 Price discovery, 104 Principles-based regulation, 59 Printing money, 78 Professional/proprietary trading, 12 Subprime mortgage market, 66 T The Dodd-Frank Act, 49 Trillion-pound banking groups, 60 Troubled Asset Relief Program (TARP), 39 U US Federal Reserve, 6 V Volcker rule, 88 W Working capital, 11 171 Broken Markets A User’s Guide to the Post-Finance Economy Kevin Mellyn Broken Markets: A User’s Guide to the Post-Finance Economy Copyright © 2012 by Kevin Mellyn All rights reserved.


pages: 225 words: 11,355

Financial Market Meltdown: Everything You Need to Know to Understand and Survive the Global Credit Crisis by Kevin Mellyn

asset-backed security, bank run, banking crisis, Bernie Madoff, bonus culture, Bretton Woods, business cycle, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, cuban missile crisis, disintermediation, diversification, fiat currency, financial deregulation, financial innovation, financial intermediation, fixed income, Francis Fukuyama: the end of history, George Santayana, global reserve currency, Home mortgage interest deduction, Isaac Newton, joint-stock company, Kickstarter, liquidity trap, London Interbank Offered Rate, long peace, margin call, market clearing, mass immigration, money market fund, moral hazard, mortgage tax deduction, Northern Rock, offshore financial centre, paradox of thrift, pattern recognition, pension reform, pets.com, plutocrats, Plutocrats, Ponzi scheme, profit maximization, pushing on a string, reserve currency, risk tolerance, risk-adjusted returns, road to serfdom, Ronald Reagan, shareholder value, Silicon Valley, South Sea Bubble, statistical model, The Great Moderation, the new new thing, the payments system, too big to fail, value at risk, very high income, War on Poverty, Y2K, yield curve

This explains the sudden revival of the ideas and reputation of John Maynard Keynes. THE GHOST OF LORD KEYNES Keynes was never what the press or politicians would call a Keynesian. He was pragmatic for an intellectual and made a small fortune speculating in stocks. His famous book, which nobody reads, The General Theory, was largely concerned with solving the problem posed by deflation. This is called the ‘‘paradox of thrift’’ or the ‘‘liquidity trap.’’ If you stop spending money because your job is uncertain and things are getting cheaper all the time, you are doing the right thing for you. But if everyone does this, spending and work dry up and you have a deflationary spiral leading to a prolonged depression like that of the 1930s. Keynes’ solution to deflation was based on the idea that the economy was driven by total demand for goods and services.

(LBJ), 140; and the Great Inflation, 154 Joint Stock Companies, history and role, 81–82, 89, 138; East India Company, 81–82 Keynes, John Maynard, 113–115, 129, 153, 155, 163, 165 Kindleberger, Charles, Manias, Panics and Crashes, 136 ‘‘legal tender,’’ xv, xvii, 10, 105, 148 Lender of Last Resort, 150 lending, xix, 15–18, 27, 34, 36–39, 56, 60–63, 66, 68, 70, 72, 83–84, 90, 92, 98, 102–103, 107, 109–110, 126, 131–132, 142, 148, 150–152, 156–158, 164, 166–167, 170, 185–189. See also Balance sheet lending Leverage, 4–5, 27–28, 66, 152, 160 liberalism, 125, 180, 182 Liberty and markets, 125, 179–182 LIBOR (London Interbank Offered Rate), 146, 150 ‘‘Lifeboat’’ method of bank rescue, 121 Liquidity, 30, 110, 113 Liquidity Trap, 113 Lombard Rate, 34 Lombard Street, book by Walter Bagehot, 102 Lombard Street, London, 34, 135 ‘‘long tail’’ risks, 69. See also ‘‘black swans’’ Long Term Credit Bank (LTCB), Japan, 170 195 196 Index Mackay, Charles, Great Popular Delusions and the Madness of Crowds, 136 Madoff, Bernard, 23, 175 Main Street, 1, 91, 104, 144, 176, 187 Manias, xviii–xx, 27, 109, 136–138 Manufacturers Hanover Trust Company, 148, 158 margin lending, 110 market capitalization, 47, 51, 70, 126, 159, 183 markets 19–22, 24–28, 40–41, 60, 72, 107, 111, 117–119, 124, 126–127, 150, 165–169, 175–176; 179–189; defined, xi–xx; functions, 18–28; history of, 75, 79–89, 135–145; how to play, 50–56; irrational, 52–53, 156–57; real estate market downturn and ‘‘Billy Bob’’ banking crisis, 131–32; secondary, 44 MBS (Mortgage Backed Securities), 57 Medici, 79 Meyer, Martin, Bankers, The, 143 MMA (Money Market Account), 130 models, uses in finance, 21, 25, 27, 63–65, 69–70, 99–100, 138, 152, 166, 171, 177, 182; faith in, 4, 58, 66, 68, 71–72, 74 MOF (Ministry of Finance, Japan), 167 money, creation of, 13; defined, x, xi, 117; history of, xv–xvi, 33–34, 77–80; function of, xii–xv; money supply, types of xv, xvii–xviii, 4, 8–9, 83, 92, 148, 155; value of, 4.


pages: 318 words: 77,223

The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse by Mohamed A. El-Erian

activist fund / activist shareholder / activist investor, Airbnb, balance sheet recession, bank run, barriers to entry, break the buck, Bretton Woods, British Empire, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, collapse of Lehman Brothers, corporate governance, currency peg, disruptive innovation, Erik Brynjolfsson, eurozone crisis, financial innovation, Financial Instability Hypothesis, financial intermediation, financial repression, fixed income, Flash crash, forward guidance, friendly fire, full employment, future of work, Hyman Minsky, If something cannot go on forever, it will stop - Herbert Stein's Law, income inequality, inflation targeting, Jeff Bezos, Kenneth Rogoff, Khan Academy, liquidity trap, Martin Wolf, megacity, Mexican peso crisis / tequila crisis, moral hazard, mortgage debt, Norman Mailer, oil shale / tar sands, price stability, principal–agent problem, quantitative easing, risk tolerance, risk-adjusted returns, risk/return, Second Machine Age, secular stagnation, sharing economy, sovereign wealth fund, The Great Moderation, The Wisdom of Crowds, too big to fail, University of East Anglia, yield curve, zero-sum game

Six months earlier, Christine Lagarde, the head of the International Monetary Fund and former French finance minister, decided to use a more down-to-earth label. During presentations to the annual meetings of the IMF and World Bank in Washington, D.C., she referred to the new-normal phenomenon as the “new mediocre.”10 However one labels it, various explanations have been put forward for this unusual and worrisome phenomenon—from the difficulties of escaping a liquidity trap and the challenging aspects of balance sheet recessions to a change in productivity trends, lack of infrastructure investment, the effects of debt overhangs, demography, and “the race against the machines.” These are all factors that, first, hold actual growth below the potential of the economy, and second, act to pull down future potential growth. There have also been attempts to formalize some of these drivers via comprehensive analytical models of secular stagnation, including by Gauti Eggertsson and Neil Mehrota, who have proposed an insightful New Keynesian overlapping-generations model.11 Drawing on the insights of Alvin Hansen, the distinguished American economist, these two economists illustrate why conventional self-correcting mechanisms can fail in driving a proper recovery.12 It essentially has to do with an oversupply of savings that results from a permanent deleveraging shock, slower population, and an increase in inequality.

The more people expect prices to fall in the future, the greater the possibility that they will delay their spending, thus also undermining companies’ appetite for expanding productive capacity and investing in new ones. Economists are also trying to figure out where “neutral” interest rates (that is, the steady-state policy rates consistent with stable inflation) are likely to settle once advanced economies finally overcome the liquidity trap and migrate up to a higher-equilibrium growth rate. There is general agreement that the new-equilibrium interest rate structure is likely to be below historical averages. But there is still quite a bit of disagreement on how far below. This frantic catch-up process is not limited to economists. Central banks are also scrambling—and not only in Europe and Japan, where detrimental disinflation is either a reality or a high risk.


pages: 333 words: 76,990

The Long Good Buy: Analysing Cycles in Markets by Peter Oppenheimer

"Robert Solow", asset allocation, banking crisis, banks create money, barriers to entry, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, business cycle, buy and hold, Cass Sunstein, central bank independence, collective bargaining, computer age, credit crunch, debt deflation, decarbonisation, diversification, dividend-yielding stocks, equity premium, Fall of the Berlin Wall, financial innovation, fixed income, Flash crash, forward guidance, Francis Fukuyama: the end of history, George Akerlof, housing crisis, index fund, invention of the printing press, Isaac Newton, James Watt: steam engine, joint-stock company, Joseph Schumpeter, Kickstarter, liberal capitalism, light touch regulation, liquidity trap, Live Aid, market bubble, Mikhail Gorbachev, mortgage debt, negative equity, Network effects, new economy, Nikolai Kondratiev, Nixon shock, oil shock, open economy, price stability, private sector deleveraging, Productivity paradox, quantitative easing, railway mania, random walk, Richard Thaler, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, secular stagnation, Simon Kuznets, South Sea Bubble, special economic zone, stocks for the long run, technology bubble, The Great Moderation, too big to fail, total factor productivity, trade route, tulip mania, yield curve

Lessons from when the bubble burst. The Japan Times [online]. Available at https://www.japantimes.co.jp/news/2009/01/06/reference/lessons-from-when-the-bubble-burst/ 9 Okina, K., Shirakawa, M., and Shiratsuka, S. (2001). The asset price bubble and monetary policy: Experience of Japan's economy in the late 1980s and its lessons. Monetary and Economic Studies, 19(S1), 395–450. 10 Turner, G. (2003). Solutions to a liquidity trap. London, UK: GFC Economics. 11 Norris, F. (2000). The year in the markets; 1999: Extraordinary winners and more losers. New York Times [online]. Available at https://www.nytimes.com/2000/01/03/business/the-year-in-the-markets-1999-extraordinary-winners-and-more-losers.html 12 See Sorescu, A., Sorescu, S. M., Armstrong, W. J., and Devoldere, B. (2018). Two centuries of innovations and stock market bubbles.

New York, NY: Penguin. Thompson, E. (2007). The tulipmania: Fact or artifact? Public Choice, 130(1–2), 99–114. Tooze, A. (2018). Crashed: How a decade of financial crises changed the world. London, UK: Allen Lane. Turner, A. (2017). The path to a low-carbon economy. Climate 2020 [online]. Available at https://www.climate2020.org.uk/path-low-carbon-economy Turner, G. (2003). Solutions to a liquidity trap. London, UK: GFC Economics. US Department of Justice. (2015). U.S. v. Microsoft: Proposed findings of fact. Available at https://www.justice.gov/atr/us-v-microsoft-proposed-findings-fact-0 Vogel, E. (2001). Japan as number one lessons for America. Lincoln, NE: iUniverse.com. Why weather forecasts are so often wrong. (2016). The Economist explains. Suggested Reading Ahir, H., and Prakash, L. (2014).


pages: 76 words: 20,238

The Great Stagnation by Tyler Cowen

Asian financial crisis, Bernie Madoff, en.wikipedia.org, endogenous growth, financial innovation, Flynn Effect, income inequality, indoor plumbing, life extension, liquidity trap, Long Term Capital Management, Mark Zuckerberg, meta analysis, meta-analysis, Peter Thiel, RAND corporation, school choice, Tyler Cowen: Great Stagnation, urban renewal

The most important economist on these issues is Michael Mandel, who runs a for-profit news and education company, Visible Economy LLC. As a former BusinessWeek columnist, he did the most of anyone to raise questions about the quality of our recent innovations and to ask whether our measured productivity improvements are real. Paul Krugman, Nouriel Roubini, and Jeffrey Sachs are all more famous, prizewinning commentators on the questions of macroeconomics and development, and from them you will hear a lot of talk about liquidity traps, currency crises, and the future of Africa. But this group misses many of the critical angles of science and technology and the broader historical picture of how a technological plateau is possible. Peter Thiel, a cofounder of PayPal and an early investor in Facebook (he shows up as a character in the movie Social Network, albeit poorly portrayed), also deserves credit for promoting the idea of an innovation and productivity slowdown.


pages: 322 words: 84,580

The Economics of Belonging: A Radical Plan to Win Back the Left Behind and Achieve Prosperity for All by Martin Sandbu

"Robert Solow", Airbnb, autonomous vehicles, balance sheet recession, bank run, banking crisis, basic income, Berlin Wall, Bernie Sanders, Boris Johnson, Branko Milanovic, Bretton Woods, business cycle, call centre, capital controls, carbon footprint, Carmen Reinhart, centre right, collective bargaining, debt deflation, deindustrialization, deskilling, Diane Coyle, Donald Trump, Edward Glaeser, eurozone crisis, Fall of the Berlin Wall, financial intermediation, full employment, future of work, gig economy, Gini coefficient, hiring and firing, income inequality, income per capita, industrial robot, intangible asset, job automation, John Maynard Keynes: technological unemployment, Kenneth Rogoff, knowledge economy, knowledge worker, labour market flexibility, liquidity trap, longitudinal study, low skilled workers, manufacturing employment, Martin Wolf, meta analysis, meta-analysis, mini-job, mortgage debt, new economy, offshore financial centre, oil shock, open economy, pattern recognition, pink-collar, precariat, quantitative easing, race to the bottom, Richard Florida, Robert Shiller, Robert Shiller, Ronald Reagan, secular stagnation, social intelligence, TaskRabbit, total factor productivity, universal basic income, very high income, winner-take-all economy, working poor

The theoretical argument for thinking this could not be done was plausible enough. Since physical money effectively pays a zero interest rate (cash keeps the same nominal value forever), taking rates negative might simply make savers convert all their deposits into cash. That would mean further monetary stimulus would have no effect, as all new central bank money would be immediately swapped for cash and rates would stay at zero. This theoretical situation is called a “liquidity trap.” But it turned out that central banks were not “trapped” at zero at all. This became clear when the Riksbank—Sweden’s central bank—was the first to introduce a negative interest rate in 2009. Switzerland, Japan, and eventually the European Central Bank itself followed suit. No matter the theory, it turns out that cutting interest rates below zero in practice looks very similar to cutting them when they are positive.

See employment job training programmes, 108–9, 204, 205 Johnson, Boris, 238 Kentucky, 126, 205 Kerr, Sari Pekkala, 250n20 Kerr, William, 250n20 Kessler, Martin, 79–80 Keynes, John Maynard, 131, 133, 140, 142, 147 knowledge economy, 27–29, 70, 207 Korea, 79 Kuper, Simon, 194 laissez-faire economics, 236 Lakner, Christoph, 19 Law and Justice party (Poland), 45 League party (Italy), 192 left behind, the: carbon tax and, 184–86, 187; dependence of, 9, 111–12, 116; economic grievances of, 8, 18, 35–36, 48; education of, 27–29; employment solutions for, 105–6; gender roles as issue for, 33–34; in Germany, 60; harms inflicted on, by financial sector instability, 151; harms inflicted on, by poor policy decisions, 56, 61–62, 68, 70, 134–35, 137–38, 141, 143; health of, 36, 48–49, 112; loss of economic and psychological security felt by, 9, 35–36, 44, 48, 61–62, 111–12, 116; macroeconomic policy choices harmful to, 134–35, 137–38; macroeconomic policy’s effect on, 131–47; in the Nordic countries, 105–6; overlooking of situation of, 232; place-based identification of, 31–33, 45–47, 49; place of residence of, 29–33; populism’s attraction for, 36, 72; recessions’ effects on, 135, 137–38, 141; regional instances of, 192–208; socioeconomic conditions resulting in, 9–10, 17–36; tax policy for benefit of, 168–87; Trump support from, 45; unemployment of, 135, 136; vulnerability of, 58, 111–13, 135 Le Pen, Marine, 15, 72 Le Pen family, 41, 192 Lewis, Sinclair, It Can’t Happen Here, 11 liberalism and liberal democracy: cultural values associated with, 14–15; divergent interests in, 232–33; economic health as essential bulwark of, 7–8, 10, 12–16; failures of centrist politicians in, 229–33; globalisation associated with, 211–12; globalisation criticised from standpoint of, 9, 13; principles of, 5; rejection of, 7, 10, 15–16, 18; restoration of, 229. See also elites; illiberalism libertarianism, 236 Linke party (Germany), 192 liquidity trap, 163–64 living standards, 19–20, 67 Louis, Edouard, 35; Who Killed My Father? 36 macroeconomic policy, 131–47; economics of belonging dependent on, 132–33, 141–42, 147; failures to use, 56, 90–92, 141, 144, 146–47, 161, 165, 181; financial policy in support of, 163–65; fiscal austerity as, 144–46; harms inflicted on the vulnerable by, 56, 61–62, 68, 70, 134–35, 137–38, 141, 143; high-pressure, 106, 132–33, 138–44, 146–47, 151, 216–17; for job creation, 132; overall economic productivity affected by, 138–40; social contract undermined by mistakes in, 133; symmetric vs. asymmetric, 142 Macron, Emmanuel, 61, 193, 238 macroprudential regulations, 161–62, 260n21, 270n7 “Make America Great Again,” 8, 33 “make work pay” schemes, 43, 47, 61 manufacturing.


pages: 369 words: 94,588

The Enigma of Capital: And the Crises of Capitalism by David Harvey

accounting loophole / creative accounting, anti-communist, Asian financial crisis, bank run, banking crisis, Bernie Madoff, Big bang: deregulation of the City of London, Bretton Woods, British Empire, business climate, call centre, capital controls, creative destruction, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, deskilling, equal pay for equal work, European colonialism, failed state, financial innovation, Frank Gehry, full employment, global reserve currency, Google Earth, Guggenheim Bilbao, Gunnar Myrdal, illegal immigration, indoor plumbing, interest rate swap, invention of the steam engine, Jane Jacobs, joint-stock company, Joseph Schumpeter, Just-in-time delivery, land reform, liquidity trap, Long Term Capital Management, market bubble, means of production, megacity, microcredit, moral hazard, mortgage debt, Myron Scholes, new economy, New Urbanism, Northern Rock, oil shale / tar sands, peak oil, Pearl River Delta, place-making, Ponzi scheme, precariat, reserve currency, Ronald Reagan, sharing economy, Silicon Valley, special drawing rights, special economic zone, statistical arbitrage, structural adjustment programs, the built environment, the market place, The Wealth of Nations by Adam Smith, Thomas L Friedman, Thomas Malthus, Thorstein Veblen, too big to fail, trickle-down economics, urban renewal, urban sprawl, white flight, women in the workforce

Under conditions of uncertainty, hanging on to the universal form of wealth, money, rather than commodities makes sense, except under conditions of rapid inflation when it may prove more advantageous to hold on to cans of tuna and barrels of cooking oil rather than money. The more general case is one in which a loss of faith and of confidence in the economy leads people to hoard money and not to spend it. This can occur when profit prospects dim. But this in turn leads into what Keynes called the ‘liquidity trap’ – the more people or institutions (including banks and corporations) hoard money rather than spend it, the more likely that effective demand will collapse and the less profitable reinvestment in production will become. The result is a downward spiral (of the sort that occurred in the 1930s and which we are currently witnessing) that is difficult to reverse. Keynes sought to bypass this barrier by resort to state-led strategies of fiscal and monetary management.

Morgan 142, 173, 219 ‘just-in-time’ principle 68 K Kay, Kenneth 53 Kerala, India, and remittances 38 Keynes, John Maynard 32, 53, 55, 87, 111, 160, 226, 237, 238 General Theory 114 Keynesian, Keynesians 168, 238, 255, 261 Kohl, Helmut 64 ‘Kondratieff cycles’ 96 Krieger, Andy 24–5 Krugman, Paul 235–6 kulaks 250 L labour and capital 56, 88, 169–70 casual 242 competition 61 costs 15, 16, 88 disempowered 16 divisions of 196, 213 exploitation of 94 feminisation of the global labour force 258 ‘floating’ army of laid-off workers 60 geographical mobility of 59–60, 213 guild 160 import of 14 integration of peasant populations into 58 laws 59, 103 living standards 88–9 massive reserves 64 and new technologies 60 organisations 61 and politics of populist outrage 55–6 power of 12, 14, 15, 40–41, 103, 172 quality requirements 93 regulation of conditions of 59 rights 251 scarcity of 12, 59, 60 social divisions of 67 supply 47, 121 supply and demand for 60 surplus 5, 15, 215 ultimate power of the workforce 63, 101–2 unionised 108 unrest 66 labour markets geographically segmented 59 local 63 regulating dynamics of 60 labour power demand of 115 released as a commodity into the market place 58 and standard of living 62–3 supply of 63, 65, 115 value of 64 labour process 105 collective 104 resistance or inefficiencies in 47 labour unions 256 laissez faire 128 land capital embedded in the 191 enclosures 48 fertility 82 Israeli dispossession of Palestinian land 247 land use degradation 77 reform 249 rights 88 speculation 187–8 values 181, 182, 183, 234 landlords 40 laptops 131 Las Vegas, foreclosure crisis in 2 Latin America anti-neoliberal struggles 226 bilateral trade with China 173 and the Catholic Church 254 land bought up in 220 population growth 146 Latin American Southern Cone group (MERCOSUR) 200 Latvian government 37 Lazard’s 11 lead-based paints 74 ‘learned societies’ 91 Lebanon economic stimulus 140 rebuilding of 202 Leeson, Nicholas 37, 100, 190 Lefebvre, Henri 128 legitimation crises 217 Lehman Brothers 2, 5, 12, 21, 37, 132, 211 Leipzig, Germany 142 Lenin, Vladimir 46, 136, 227 Leningrad 243 Leninism 134 lesbians, and colonisation of urban neighbourhoods 247 leveraged buy-outs 50 leveraging 30, 31 Leverhulme foundation 44 life expectancy 137, 152, 250 limited companies 49 liquidity crisis in 206 liquidity injections vii, 261 liquidity trap 111 surplus 5, 28, 30 living standards 10, 46, 62–3, 72, 88–9, 96, 120 Locke, John 90, 233 London, territorial organisation of 196 London School of Economics vii, 235 Long Term Capital Management crash and bail-out (1998) 8, 100, 261 ‘long waves’ 96 Luddite movement 60, 96 Luxemburg, Rosa 108, 116–17 luxury goods 70, 110 M McCarthyism 169 machinery 66, 113, 114, 127 Mackinder, Sir Halford 209–10 macroeconomics 237 McVeigh, Timothy 248 Maddison, Angus 26 Mahan, A.T.: The Influence of Sea Power upon History 209 maintenance failures 86 Malaysia: resorts to capital controls 198 Malthus, Thomas 72, 94 Manchester 27 Mao Zedong 59 Cultural Revolution 137 dialectical sense of how contradictions worked 136 Great Leap Forward 137, 138, 250 health care 137 recognised that a revolution had to be permanent or nothing at all 136–7 Maoism 133 Maoists 253 Marcos, Imelda 43 Marcuse, Herbert 169 market laws 198 market share 43 markets credit 2, 5, 37 export 141, 218 free 10, 90, 100, 128, 131 internal 109 market connections 162–3 niches 131, 175 see also derivatives markets; futures markets; labour markets; options markets Marshall, Arthur 162 ‘Marshallian’ industrial production districts 162 Marx, Karl 46–7, 98, 110, 160, 232–3 and Bakunin 225 on barriers 84, 88 the capitalist creed 103 capitalist development 117 changing the world 119–20 on the cotton industry 67 and falling profitability 94 goal of 238 on an ‘industrial reserve army’58 and Keynes 111 and limitless money 47 and Luddite movement 96 on Malthus and Ricardo 72 on the power of the labourer 101–2 on ‘primitive accumulation’58, 249 and rent 81 and reproduction schemas 70 on the rise of capitalism 135, 250 systematic critique of capitalism and its crisis tendencies 237 understanding and transparency 99, 100 on the world of high finance 54–5 Capital 53–4, 70, 89, 119, 126, 237 Grundrisse der Kritik des Politischen Ökonomie 47, 155 Marx, Karl and Engels, Friedrich: The Communist Manifesto 89, 115, 127, 157, 237, 259 Marxian theory 56, 183 Marxists 253 Meadows, Donella h.: Limits to Growth 72 meat-based diets 73, 74 Medicare 28–9, 224 Mellon, Andrew 11, 98 mercantilism 206 merchant capitalists 40 mergers 49, 50 forced 261 Merrill Lynch 12 Merton, Robert 100 methane gas 73 Mexico debt crisis (1982) 10, 19 northern Miexico’s proximity to the US market 36 peso rescue 261 privatisation of telecommunications 29 and remittances 38 standard of living 10 Mexico City 243 microcredit schemes 145–6 microeconomics 237 microenterprises 145–6 microfinance schemes 145–6 Middle East, and oil issue 77, 170, 210 militarisation 170 ‘military-industrial complex’ 91 minorities: colonisation of urban neighbourhoods 247, 248 Mitterrand, François 198 modelling of markets 262 modernism 171 monarchy 249 monetarism 237 monetisation 244 money centralised money power 49–50, 52 a form of social power 43, 44 limitlessness of 43, 47 loss of confidence in the symbols/quality of money 114 universality of 106 monoculture 186 Monopolies Commission 52 monopolisation 43, 68, 95, 113, 116, 221 Monsanto 186 Montreal Protocol (1989) 76, 187 Morgan Stanley 19 Morishima, Michio 70 Morris, William 160 mortgages annual rate of change in US mortgage debt 7 mortgage finance for housing 170 mortgage-backed bonds futures 262 mortgage-backed securities 4, 262 secondary mortgage market 173, 174 securitisation of local 42 securitisation of mortgage debt 85 subprime 49, 174 Moses, Robert 169, 171, 177 MST (Brazil) 257 multiculturalism 131, 176, 231, 238, 258 Mumbai, India anti-Muslim riots (early 1990s) 247 redevelopment 178–9 municipal budgets 5 Museum of Modern Art, New York 21 Myrdal, Gunnar 196 N Nandigram, West Bengal 180 Napoleon III, Emperor 167, 168 national debt 48 National Economic Council (US) 11, 236 national-origin quotas 14 nationalisation 2, 4, 8, 224 nationalism 55–6, 143, 194, 204 NATO 203 natural gas 188 ‘natural limits’ 47 natural resources 30, 71 natural scarcity 72, 73, 78, 80, 83, 84, 121 nature and capital 88 ‘first nature’ 184 relation to 121, 122 ‘the revenge of nature’ 185 ‘second nature’ 184, 185, 187 as a social product 188 neocolonialism 208, 212 neoliberal counter-revolution 113 neoliberalism 10, 11, 19, 66, 131, 132, 141, 172, 175, 197, 208, 218, 224, 225, 233, 237, 243, 255 Nepal: communist rule in 226 Nevada, foreclosure wave in 1 New Deal 71 ‘new economy’ (1990s) 97 New Labour 45, 255 ‘new urbanism’ movement 175 New York City 11 September 2001 attacks 41 fiscal crisis (1975) 10, 172, 261 investment banks 19, 28 New York metropolitan region 169, 196 Nicaragua 189 Niger delta 251 non-governmental organisations (NGOs) 35, 253–4 non-interventionism 10 North Africa, French import of labour from 14 North America, settlement in 145 North American Free Trade Association (NAFTA) 200 Northern Ireland emergency 247 Northern Rock 2 Norway: Nordic cris (1992) 8 nuclear power 188 O Obama, Barack 11, 27, 34, 210 Obama administration 78, 121 O’Connor, Jim 77, 78 offshoring 131 Ogoni people 251 oil cheap 76–7 differential rent on oil wells 83 futures 83, 84 a non-renewable resource 82 ‘peak oil’ 38, 73, 78, 79, 80 prices 77–8, 80, 82–3, 261 and raw materials prices 6 rents 83 United States and 76–7, 79, 121, 170, 210, 261 OPEC (Organisation of Oil-Producing Countries) 83, 84 options markets currency 262 equity values 262 unregulated 99, 100 Orange County, California bankruptcy 100, 261 Organisation for Economic Cooperation and Development (OECD) 51 organisational change 98, 101 organisational forms 47, 101, 121, 127, 134, 238 Ottoman Empire 194 ‘over the counter’ trading 24, 25 overaccumulation crises 45 ozone hole 74 ozone layer 187 P Pakistan: US involvement 210 Palley, Thomas 236 Paris ‘the city of light’ 168 epicentre of 1968 confrontations 177, 243 Haussmann’s rebuilding of 49, 167–8, 169, 171, 176 municipal budget crashes (1868) 54 Paris Commune (1871) 168, 171, 176, 225, 243, 244 Partnoy, Frank: Ubfectious Greed 25 patents 221 patent laws 95 patriarchy 104 pensions pension funds 4, 5, 245 reneging on obligations 49 Péreire brothers 49, 54, 98, 174 pesticides 185, 186, 187 petty bourgeois 56 pharmaceutical sector 129, 245 philanthropy 44 Philippines: excessive urban development 8 Phillips, Kevin 206 Pinochet, General Augusto 15, 64 plant 58 Poland, lending to 19 political parties, radical 255–6 politics capitalist 76 class 62 co-revolutionary 241 commodified 219 depoliticised 219 energy 77 identity 131 labour organizing 255 left 255 transformative 207 pollution air 77 oceanic 74 rights 21 ‘Ponts et Chaussées’ organisation 92 Ponzi schemes 21, 114, 245, 246 pop music 245–6 Pope, Alexander 156 population growth 59, 72, 74, 121, 167 and capital accumulation 144–7 populism 55–6 portfolio insurance 262 poverty and capitalism 72 criminalisation and incarceration of the poor 15 feminisation of 15, 258 ‘Great Society’ anti-poverty programmes 32 Prague 243 prices commodity 37, 73 energy 78 food grain 79–80 land 8, 9, 182–3 oil 8, 28, 37–8, 77–8, 80, 82–3, 261 property 4, 182–3 raw material 37 reserve price 81–2 rising 73 share 7 primitive accumulation 58, 63–4, 108, 249 private consortia 50 private equity groups 50 private property and radical egalitarianism 233, 234 see also property markets; property rights; property values privatisation 10, 28, 29, 49, 251, 256, 257 pro-natal policies 59 production expansion of 112, 113 inadequate means of 47 investment in 114 liberating the concept 87 low-profit 29 offshore 16 production of urbanisation 87 reorganisation and relocation of 33 revolutionising of 89 surplus 45 technologies 101 productivity agreements 14, 60, 96 agricultural 119 cotton industry 67 gains 88, 89 Japan and West Germany 33 rising 96, 186 products development 95 innovation 95 new lines 94, 95 niches 94 profit squeeze 65, 66, 116 profitability constrains 30 falling 94, 131 of the financial sector 51 and wages 60 profits easy 15 excess 81, 90 falling 29, 72, 94, 116, 117 privatising 10 rates 70, 94, 101 realisation of 108 proletarianisation 60, 62 property markets crash in US and UK (1973–75) 8, 171–2, 261 overextension in 85 property market-led Nordic and Japanese bank crises 261 property-led crises (2007–10) 10, 261 real estate bubble 261 recession in UK (after 1987) 261 property rights 69, 81–2, 90, 122, 179, 198, 233, 244, 245 Property Share Price Index (UK) 7 property values 171, 181, 197, 248 prostitution 15 protectionism 31, 33, 43, 211 punctuated equilibrium theory of natural evolution 130 Putin, Vladimir 29, 80 Q Q’ing dynasty 194 quotas 16 R R&D (research and development) 92, 95–6 race issues 104 racism 61, 258 radical egalitarianism 230–34 railroads 42, 49, 191 Railwan, rise of (1970s) 35 rare earth metals 188 raw materials 6, 16, 37, 58, 77, 101, 113, 140, 144, 234 RBS 20 Reagan, Ronald 15, 64, 131, 141 Reagan-Thatcher counter revolution (early 1980s) 71 Reagan administration 1, 19 Reagan recession (1980–82) 60, 261 Real Estate Investment Trusts (US) 7 recession 1970s 171–2 language of 27 Reagan (1980–82) 60, 261 Red Brigade 254 reforestation 184 refrigeration 74 reinvestment 43, 45, 66–7, 110–12, 116 religious fundamentalism 203 religious issues 104 remittances 38, 140, 147 rentiers 40 rents differential rent 81, 82, 83 on intellectual property rights 221 land 182 monetisation of 48, 109 monopoly 51, 81–2, 83 oil 83 on patents 221 rising 181 reproduction schemas 70 Republican Party (US) 11, 141 reserve price 81 resource values 234 Ricardo, David 72, 94 risks, socialising 10 robbery 44 Robinson, Joan 238 robotisation 14, 136 Rockefeller, John D. 98 Rockefeller brothers 131 Rockefeller foundation 44, 186 Roman Empire 194 Roosevelt, Franklin D. 71 Rothschild family 98, 163 Royal Society 91, 156 royalties 40 Rubin, Robert 98 ‘rule of experts’ 99, 100–101 Russia bankruptcy (1998) 246, 261 capital flight crisis 261 defaults on its debt (1998) 6 oil and natural gas flow to Ukraine 68 oil production 6 oligarchs 29 see also Soviet Union S Saddam Hussein 210 Saint-Simon, Claude Henri de Rouvroy, Comte de 49 Saint-Simonians 87, 168 Salomon Brothers 24 Samuelson, Robert 235, 239 Sandino, Augusto 189 Sanford, Charles 98 satellites 156 savings 140 Scholes, Myron 100 Schumer, Charles 11 Schumpeter, Joseph 46 Seattle battle of (1999) 38, 227 general strike (1918) 243 software development in 195 Second World War 32, 168–70, 214 sectarianism 252 securitisation 17, 36, 42 Sejong, South Korea 124–6 service industries 41 sexism 61 sexual preferences issues 104, 131, 176 Shanghai Commune (1967) 243 shark hunting 73, 76 Shell Oil 79, 251 Shenzhen, China 36 shop floor organisers (shop stewards) 103 Silicon Valley 162, 195, 216 Singapore follows Japanese model 92 industrialisation 68 rise of (1970s) 35 slavery 144 domestic 15 slums 16, 151–2, 176, 178–9 small operators, dispossession of 50 Smith, Adam 90, 164 The Wealth of Nations 35 social democracy 255 ‘social democratic’ consensus (1960s) 64 social inequality 224 social relations 101, 102, 104, 105, 119, 121, 122, 123, 126, 127, 135–9, 152, 240 loss of 246 social security 224 social services 256 social struggles 193 social welfarism 255 socialism 136, 223, 228, 242, 249 compared with communism 224 solidarity economy 151, 254 Soros, George 44, 98, 221 Soros foundation 44 South Korea Asian Currency Crisis 261 excessive urban development 8 falling exports 6 follows Japanese model 92 rise of (1970s) 35 south-east Asia: crash of 1997–8 6, 8, 49, 246 Soviet Union in alliance with US against fascism 169 break-up of 208, 217, 227 collapse of communism 16 collectivisation of agriculture 250 ‘space race’ (1960s and 1970s) 156 see also Russia space domination of 156–8, 207 fixed spaces 190 ‘space race’ (1960s and 1970s) 156 Spain property-led crisis (2007–10) 5–6, 261 unemployment 6 spatial monopoly 164–5 special drawing rights 32, 34 special economic zones 36 special investment vehicles 36, 262 special purpose entities 262 speculation 52–3 speculative binges 52 speed-up 41, 42 stagflation 113 stagnation 116 Stalin, Joseph 136, 250 Standard Oil 98 state formation 196, 197, 202 state-corporate nexus 204 ‘space race’ (1960s and 1970s) 156 state-finance nexus 204, 205, 237, 256 blind belief in its corrective powers 55 ‘central nervous system’ for capital accumulation 54 characteristics of a feudal institution 55 and the current crisis 118 defined 48 failure of 56–7 forms of 55 fusion of state and financial powers 115 innovation in 85 international version of 51 overwhelmed by centralised credit power 52 pressure on 54 radical reconstruction of 131 role of 51 and state-corporate research nexus 97 suburbanisation 171 tilts to favour particular interests 56 statistical arbitrage strategies 262 steam engine, invention of 78, 89 Stiglitz, Joseph 45 stimulus packages 261 stock markets crash (1929) 211, 217 crashes (2001–02) 261 massive liquidity injections (1987) 236, 261 Stockton, California 2 ’structural adjustment’ programmes vii, 19, 261 subcontracting 131 subprime loans 1 subprime mortgage crisis 2 substance abuse 151 suburbanisation 73, 74, 76–7, 106–7, 169, 170, 171, 181 Summers, Larry 11, 44–5, 236 supermarket chains 50 supply-side theory 237 surveillance 92, 204 swaps credit 21 Credit Default 24, 262 currency 262 equity index 262 interest rate 24, 262 Sweden banking system crash (1992) 8, 45 Nordic crisis 8 Yugoslav immigrants 14 Sweezey, Paul 52, 113 ‘switching crises’ 93 systematic ‘moral hazard’ 10 systemic risks vii T Taipei: computer chips and household technologies in 195 Taiwan falling exports 6 follows Japanese model 92 takeovers 49 Taliban 226 tariffs 16 taxation 244 favouring the rich 45 inheritance 44 progressive 44 and the state 48, 145 strong tax base 149 tax rebates 107 tax revenues 40 weak tax base 150 ‘Teamsters for Turtles’ logo 55 technological dynamism 134 technologies change/innovation/new 33, 34, 63, 67, 70, 96–7, 98, 101, 103, 121, 127, 134, 188, 193, 221, 249 electronic 131–2 ‘green’ 188, 221 inappropriate 47 labour fights new technologies 60 labour-saving 14–15, 60, 116 ‘rule of experts’ 99, 100–101 technological comparative edge 95 transport 62 tectonic movements 75 territorial associations 193–4, 195, 196 territorial logic 204–5 Thailand Asian Currency Crisis 261 excessive urban development 8 Thatcher, Margaret, Baroness 15, 38, 64, 131, 197, 255 Thatcherites 224 ‘Third Italy’, Bologna 162, 195 time-space compression 158 time-space configurations 190 Toys ‘R’ Us 17 trade barriers to 16 collapses in foreign trade (2007–10) 261 fall in global international trade 6 increase in volume of trading 262 trade wars 211 trade unions 63 productivity agreements 60 and US auto industry 56 trafficking human 44 illegal 43 training 59 transport costs 164 innovations 42, 93 systems 16, 67 technology 62 Treasury Bill futures 262 Treasury bond futures 262 Treasury instruments 262 TRIPS agreement 245 Tronti, Mario 102 Trotskyists 253, 255 Tucuman uprising (1969) 243 Turin: communal ‘houses of the people’ 243 Turin Workers Councils 243 U UBS 20 Ukraine, Russian oil and natural gas flow to 68 ultraviolet radiation 187 UN Declaration of Human Rights 234 UN development report (1996) 110 Un-American Activities Committee hearings 169 underconsumptionist traditions 116 unemployment 131, 150 benefits 60 creation of 15 in the European Union 140 job losses 93 lay-offs 60 mass 6, 66, 261 rising 15, 37, 113 and technological change 14, 60, 93 in US 5, 6, 60, 168, 215, 261 unionisation 103, 107 United Fruit Company 189 United Kingdom economy in serious difficulty 5 forced to nationalise Northern Rock 2 property market crash 261 real average earnings 13 train network 28 United Nations 31, 208 United States agricultural subsidies 79 in alliance with Soviet Union against fascism 169 anti-trust legislation 52 auto industry 56 blockbusting neighbourhoods 248 booming but debt-filled consumer markets 141 and capital surplus absorption 31–2 competition in labour markets 61 constraints to excessive concentration of money power 44–5 consumerism 109 conumer debt service ratio 18 cross-border leasing with Germany 142–3 debt 158, 206 debt bubble 18 fiscal crises of federal, state and local governments 261 health care 28–9 heavy losses in derivatives 261 home ownership 3 housing foreclosure crises 1–2, 4, 38, 166 industries dependent on trade seriously hit 141 interventionism in Iraq and Afghanistan 210 investment bankers rescued 261 investment failures in real estate 261 lack of belief in theory of evolution 129 land speculation scheme 187–8 oil issue 76–7, 79, 80, 121, 170, 210, 261 population growth 146 proletarianisation 60 property-led crisis (2007–10) 261 pursuit of science and technology 129 radical anti-authoritarianism 199 Reagan Recession 261 rescue of financial institutions 261 research universities 95 the reversing origins of US corporate profits (1950–2004) 22 the right to the city movement 257 ‘right to work’ states 65 savings and loan crisis (1984–92) 8 secondary mortgage market 173 ‘space race’ (1960s and 1970s) 156 suburbs 106–7, 149–50, 170 train network 28 unemployment 5, 6, 60, 168, 215, 261 unrestricted capitalist development 113 value of US stocks and homes, as a percentage of GDP 22 and Vietnam War 171 wages 13, 62 welfare provision 141 ‘urban crisis’ (1960s) 170 urban ‘heat islands’ 77 urban imagineering 193 urban social movements 180 urbanisation 74, 85, 87, 119, 131, 137, 166, 167, 172–3, 174, 240, 243 US Congress 5, 169, 187–8 US Declaration of Independence 199 US National Intelligence Council 34–5 US Senate 79 US Supreme Court 179 US Treasury and Goldman Sachs 11 rescue of Continental Illinois Bank 261 V Vanderbilt family 98 Vatican 44 Veblen, Thorstein 181–2 Venezuela 256 oil production 6 Vietnam War 32, 171 Volcker, Paul 2, 236 Volcker interest rate shock 261 W wage goods 70, 107, 112, 162 wages and living standards 89 a living wage 63 national minimum wage 63 rates 13, 14, 59–64, 66, 109 real 107 repression 12, 16, 21, 107, 110, 118, 131, 172 stagnation 15 wage bargaining 63 Wal-Mart 17, 29, 64, 89 Wall Street, New York 35, 162, 200, 219, 220 banking institutions 11 bonuses 2 ‘Party of Wall Street’ 11, 20, 200 ‘War on Terror’ 34, 92 warfare 202, 204 Wasserstein, Bruce 98 waste disposal 143 Watt, James 89 wealth accumulation by capitalist class interests 12 centralisation of 10 declining 131 flow of 35 wealth transfer 109–10 weather systems 153–4 Weather Underground 254 Weill, Sandy 98 Welch, Jack 98 Westphalia, Treaty of (1648) 91 Whitehead, Alfred North 75 Wilson, Harold 56 wind turbines 188 women domestic slavery 15 mobilisation of 59, 60 prostitution 15 rights 176, 251, 258 wages 62 workers’ collectives 234 working hours 59 World Bank 36, 51, 69, 192, 200, 251 ‘Fifty Years is Enough’ campaign 55 predicts negative growth in the global economy 6 World Bank Development Report (2009) 26 World Trade Organisation (WTO) 200, 227 agreements 69 street protests against (Seattle, 1999) 55 TRIPS agreement 245 and US agricultural subsidies 79 WorldCom 8, 100, 261 worldwide web 42 Wriston, Walter 19 X X-rays 99 Y Yugoslavia dissolution of 208 ethnic cleansings 247 Z Zapatista revolutionary movement 207, 226, 252 Zola, Émile 53 The Belly of Paris 168 The Ladies’ Paradise 168


pages: 298 words: 95,668

Milton Friedman: A Biography by Lanny Ebenstein

"Robert Solow", affirmative action, banking crisis, Berlin Wall, Bretton Woods, business cycle, Deng Xiaoping, Fall of the Berlin Wall, fiat currency, floating exchange rates, Francis Fukuyama: the end of history, full employment, Hernando de Soto, hiring and firing, inflation targeting, invisible hand, Joseph Schumpeter, Kenneth Arrow, Lao Tzu, liquidity trap, means of production, Mont Pelerin Society, Myron Scholes, Pareto efficiency, Paul Samuelson, Ponzi scheme, price stability, rent control, road to serfdom, Robert Bork, Ronald Coase, Ronald Reagan, Sam Peltzman, school choice, school vouchers, secular stagnation, Simon Kuznets, stem cell, The Chicago School, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, Thorstein Veblen, zero-sum game

I was just trying to set down what I thought was a reformulation of the quantity theory of money. Remember Keynes was a quantity theorist. Look at his Monetary Reform.... [It is] straight quantity theory.... So if you ask in what way was Keynes’s liquidity preference theory [changes in monetary velocity] different from the quantity theory . . . , it was different only in the idea of having a liquidity trap [a decline in monetary velocity]. This was the only essential different idea. In my reformulation I don’t have a liquidity trap.9 Friedman was a hardworking student and took copious notes in class and of works that he read. He took, for example, eighty-seven pages of notes on Keynes’s Treatise on Money. The member of the faculty at Chicago with whom Friedman had the most contact as a student, but of whom he had a very low opinion at the time, was Henry Schultz.


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Rise of the Robots: Technology and the Threat of a Jobless Future by Martin Ford

"Robert Solow", 3D printing, additive manufacturing, Affordable Care Act / Obamacare, AI winter, algorithmic trading, Amazon Mechanical Turk, artificial general intelligence, assortative mating, autonomous vehicles, banking crisis, basic income, Baxter: Rethink Robotics, Bernie Madoff, Bill Joy: nanobots, business cycle, call centre, Capital in the Twenty-First Century by Thomas Piketty, Chris Urmson, Clayton Christensen, clean water, cloud computing, collateralized debt obligation, commoditize, computer age, creative destruction, debt deflation, deskilling, disruptive innovation, diversified portfolio, Erik Brynjolfsson, factory automation, financial innovation, Flash crash, Fractional reserve banking, Freestyle chess, full employment, Goldman Sachs: Vampire Squid, Gunnar Myrdal, High speed trading, income inequality, indoor plumbing, industrial robot, informal economy, iterative process, Jaron Lanier, job automation, John Markoff, John Maynard Keynes: technological unemployment, John von Neumann, Kenneth Arrow, Khan Academy, knowledge worker, labor-force participation, liquidity trap, low skilled workers, low-wage service sector, Lyft, manufacturing employment, Marc Andreessen, McJob, moral hazard, Narrative Science, Network effects, new economy, Nicholas Carr, Norbert Wiener, obamacare, optical character recognition, passive income, Paul Samuelson, performance metric, Peter Thiel, plutocrats, Plutocrats, post scarcity, precision agriculture, price mechanism, Ray Kurzweil, rent control, rent-seeking, reshoring, RFID, Richard Feynman, Rodney Brooks, Sam Peltzman, secular stagnation, self-driving car, Silicon Valley, Silicon Valley startup, single-payer health, software is eating the world, sovereign wealth fund, speech recognition, Spread Networks laid a new fibre optics cable between New York and Chicago, stealth mode startup, stem cell, Stephen Hawking, Steve Jobs, Steven Levy, Steven Pinker, strong AI, Stuxnet, technological singularity, telepresence, telepresence robot, The Bell Curve by Richard Herrnstein and Charles Murray, The Coming Technological Singularity, The Future of Employment, Thomas L Friedman, too big to fail, Tyler Cowen: Great Stagnation, uber lyft, union organizing, Vernor Vinge, very high income, Watson beat the top human players on Jeopardy!, women in the workforce

However, if automation technology eventually makes it possible for businesses to expand or meet new demand without significant hiring, or if demand is so weak that businesses aren’t interested in borrowing, then little of the newly created money will find its way to consumers, and so it won’t get spent and it won’t multiply in the intended fashion. It will just slosh around in the banking system. This is more or less what occurred during the 2008 financial crisis—not because of job automation, but because the banks could not find creditworthy borrowers, and/or no one wanted to borrow anyway. Everyone just wanted to hold onto their cash. Economists call this situation a “liquidity trap.” * In Elysium, the rabble eventually infiltrates the elite orbital fortress by hacking into its systems. That’s at least one hopeful note regarding this scenario: the elite would have to be very careful about whom they trusted to design and manage their technology. Hacking and cyber attack would likely be the greatest dangers to their continued rule. * For example, waiting tables in a full-service restaurant would require a very advanced robot—something that we’re unlikely to see anytime soon.

., 29–30, 250 kiosks, intelligent, 17–19 Kiva Systems, 16 K’NEX, 5–6 knowledge-based jobs automation of, 85–86 big data and, 93–96 collaboration with machines and, 121–128 See also white-collar jobs Koller, Daphne, 133 Koza, John, 110 Kroger Company, 17 Krueger, Alan, 119 Krugman, Paul, 60, 203–204, 204n, 205 Kuka AG, 10 Kura sushi restaurant chain, 14–15 Kurzweil, Ray, 78, 233, 234–235, 237 labor organized, 57–58 role in economy, 279 share of national income, 38–39, 41, 56, 58 See also workers/workforce Lanier, Jaron, 77 Law, Legislation and Liberty (Hayek), 257–258 law school bubble, 173n LeCun, Yann, 231 legal discovery, trends in, 124–125 Lehman, Betsy, 149 leisure time, basic income guarantee and, 263 Leno, Jay, 177 Levy, Steven, 85 liability autonomous cars and, 183–184, 186, 190 health care, 150, 150n Lickel, Charles, 96 The Lights in the Tunnel (Ford), xiii, 60, 264 Lipson, Hod, 108, 109, 110, 180 liquidity trap, 218n London Symphony Orchestra, 111 London taxi drivers, 209n long-tail distribution, in Internet sector, 76–78 long-term unemployment, ix, xvi, 45–46, 211, 280 Los Angeles Angels, 83 low-wage jobs, automation and, 26–27 Luddites, 31, 33, 256 machine essay grading, 129–131 machine intelligence, 72, 75, 80. See also artificial intelligence machine learning, 89–92, 100–101, 107–115, 129–131.


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Never Let a Serious Crisis Go to Waste: How Neoliberalism Survived the Financial Meltdown by Philip Mirowski

"Robert Solow", Alvin Roth, Andrei Shleifer, asset-backed security, bank run, barriers to entry, Basel III, Berlin Wall, Bernie Madoff, Bernie Sanders, Black Swan, blue-collar work, Bretton Woods, Brownian motion, business cycle, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, complexity theory, constrained optimization, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, dark matter, David Brooks, David Graeber, debt deflation, deindustrialization, do-ocracy, Edward Glaeser, Eugene Fama: efficient market hypothesis, experimental economics, facts on the ground, Fall of the Berlin Wall, financial deregulation, financial innovation, Flash crash, full employment, George Akerlof, Goldman Sachs: Vampire Squid, Hernando de Soto, housing crisis, Hyman Minsky, illegal immigration, income inequality, incomplete markets, information asymmetry, invisible hand, Jean Tirole, joint-stock company, Kenneth Arrow, Kenneth Rogoff, Kickstarter, knowledge economy, l'esprit de l'escalier, labor-force participation, liberal capitalism, liquidity trap, loose coupling, manufacturing employment, market clearing, market design, market fundamentalism, Martin Wolf, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, Naomi Klein, Nash equilibrium, night-watchman state, Northern Rock, Occupy movement, offshore financial centre, oil shock, Pareto efficiency, Paul Samuelson, payday loans, Philip Mirowski, Ponzi scheme, precariat, prediction markets, price mechanism, profit motive, quantitative easing, race to the bottom, random walk, rent-seeking, Richard Thaler, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, savings glut, school choice, sealed-bid auction, Silicon Valley, South Sea Bubble, Steven Levy, technoutopianism, The Chicago School, The Great Moderation, the map is not the territory, The Myth of the Rational Market, the scientific method, The Wisdom of Crowds, theory of mind, Thomas Kuhn: the structure of scientific revolutions, Thorstein Veblen, Tobin tax, too big to fail, transaction costs, Vilfredo Pareto, War on Poverty, Washington Consensus, We are the 99%, working poor

Perhaps Krugman realized something similar, because in the subsequent year he teamed up with Gauti Eggertsson to author what he advertised as a “Fisher-Minsky-Koo” model. The problem Krugman hoped to address was to convince the reader that in the throes of a deleveraging crisis, when financial failures induced everyone to try to shed debt, there was room for the government to improve the situation by taking on substantial volumes of new debt. In his books, this supposed “Keynesian” solution had to map into the old-fashioned IS-LM model of a “liquidity trap,” something he had long trumpeted as the paradigm for “depression economics,” which he interpreted to mean that the supply and demand for loanable funds could be equilibrated only at a negative interest rate. Eggertsson and he sought to render these ideas more acceptable to the orthodoxy through resort to a standard New Keynesian model with the wrinkle that there were posited two different agents, and the “impatient agent borrows from the patient agent, but is subject to a debt limit.

“Osborne’s Supporters Turn on Him,” New Statesman, August 15, 2012. Economist. “Influential Economists,” The Economist, February 10, 2011. Economist. “What Went Wrong with Economics?” The Economist, July 18, 2009. Eecke, Wilfred ver. “Ethics in Economics: From Classical Economics to Neoliberalism,” Philosophy and Social Criticism 9 (1982): 145–68. Eggertsson, Gauti, and Paul Krugman. “Debt, Deleveraging, and the Liquidity Trap: A Fisher-Minsky-Koo Approach” (2010), at www.frbsf.org/economics/conferences/1102/eggertsson.pdf. Ehrenreich, Barbara. Bait and Switch (New York: Henry Holt, 2005). Ehrenreich, Barbara. “Turning Poverty into an American Crime,” The Nation, August 9, 2011. Eichengreen, Barry. “The Crisis in Financial Innovation,” address to International Schumpeter Society, 2010, available at http://emlab.berkeley.edu/~eichengr/crisis_finan_innov.pdf.

He rather touchingly concedes there: “As you probably know, I am not exactly an evolutionary economist.” I owe a debt to Steve Keen (“Like a Dog Walking on Its Hind Legs”) for this, and some other ideas covered in this section. 112 See Krugman, “The Return of Depression Economics.” This talk has disappeared from its original site, and was never published; it can be found at www.youtube.com/watch?v=5N35mq4_gIw. 113 Eggertsson and Krugman, “Debt, Deleveraging, and the Liquidity Trap,” p. 3. 114 Nocera, “The Big Lie.” 115 Paul Krugman blog, December 24, 2011, at http://krugman.blogs.nytimes.com/2011/12/24/joe-nocera-gets-mad/#postComment. 116 For the original claim, see Mooney, The Republican War on Science. The misguided tendency of blaming “Republicans” for the transformation of academic science in the United States is covered in Mirowski, ScienceMart, pp. 35 et seq.) 117 Interview with Josh Rosner, PBS NewsHour, August 1, 2011; “Fannie was shrewd enough to understand that in order to push their agenda on Capitol Hill they needed to be supported by economists as well and so they started a series of papers where they would hire notable Conservative economists like Glenn Hubbard or progressive economists like Joe Stiglitz and Peter Orszag to justify various aspects of Fannie and Freddie’s mission, or dispel concerns about their safety and soundness, and really used those as lobbying points on Capitol Hill,” said Rosner.


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Utopia or Bust: A Guide to the Present Crisis by Benjamin Kunkel

anti-communist, Bretton Woods, business cycle, capital controls, Carmen Reinhart, creative destruction, David Graeber, declining real wages, full employment, Hyman Minsky, income inequality, late capitalism, liberal capitalism, liquidity trap, means of production, money: store of value / unit of account / medium of exchange, mortgage debt, Occupy movement, peak oil, price stability, profit motive, savings glut, Slavoj Žižek, The Wealth of Nations by Adam Smith, transatlantic slave trade, War on Poverty, We are the 99%, women in the workforce, Works Progress Administration, zero-sum game

On this subject the last word still belongs to Kalecki: “If capitalism can adjust itself to full employment, a fundamental reform will have been incorporated in it. If not, it will show itself an outmoded system which must be scrapped.” February 2010 * Doug Henwood’s calculation, applying a statistical measure developed by the economist Robert Shimer. * The Polish economist Michal Kalecki (1899–1970) developed a “Keynesian” theory of business cycles, liquidity traps, and countercyclical spending independently of Keynes. In economics departments outside the US, he is usually given credit for this. But Kalecki’s politics were Marxist. * Keynes: “The whole management of the domestic economy depends upon being free to have the appropriate rate of interest without reference to the rates prevailing elsewhere in the world. Capital control is a corollary of this


pages: 448 words: 142,946

Sacred Economics: Money, Gift, and Society in the Age of Transition by Charles Eisenstein

Albert Einstein, back-to-the-land, bank run, Bernie Madoff, big-box store, Bretton Woods, capital controls, clean water, collateralized debt obligation, commoditize, corporate raider, credit crunch, David Ricardo: comparative advantage, debt deflation, deindustrialization, delayed gratification, disintermediation, diversification, fiat currency, financial independence, financial intermediation, fixed income, floating exchange rates, Fractional reserve banking, full employment, global supply chain, God and Mammon, happiness index / gross national happiness, hydraulic fracturing, informal economy, invisible hand, Jane Jacobs, land tenure, land value tax, Lao Tzu, liquidity trap, McMansion, means of production, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, new economy, off grid, oil shale / tar sands, Own Your Own Home, Paul Samuelson, peak oil, phenotype, Ponzi scheme, profit motive, quantitative easing, race to the bottom, Scramble for Africa, special drawing rights, spinning jenny, technoutopianism, the built environment, Thomas Malthus, too big to fail

One way to look at it is as a tax on holdings of money, ensuring that the only way to maintain wealth is to invest it at risk or, shall we say, to make wise decisions on how to direct the magical flow of human creativity. Certainly, this is an ability that deserves reward, and herein lies an essential missing piece of Marxist theories of value that ignore the entrepreneurial dimension to the allocation of capital. While the bold yet still mainstream economists I’ve mentioned see negative interest as a temporary measure to promote lending and escape a deflationary liquidity trap, its true significance runs much deeper. A liquidity trap is not a temporary aberration caused by a bubble collapse; it is an ever-present default state originating in the declining marginal efficiency of capital,30 itself a result of technological improvement and competition. As Keynes pointed out, As the stock of the assets, which begin by having a marginal efficiency at least equal to the rate of interest, is increased, their marginal efficiency (for reasons, sufficiently obvious, already given) tends to fall.


pages: 545 words: 137,789

How Markets Fail: The Logic of Economic Calamities by John Cassidy

"Robert Solow", Albert Einstein, Andrei Shleifer, anti-communist, asset allocation, asset-backed security, availability heuristic, bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Black-Scholes formula, Blythe Masters, Bretton Woods, British Empire, business cycle, capital asset pricing model, centralized clearinghouse, collateralized debt obligation, Columbine, conceptual framework, Corn Laws, corporate raider, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Daniel Kahneman / Amos Tversky, debt deflation, different worldview, diversification, Elliott wave, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, full employment, George Akerlof, global supply chain, Gunnar Myrdal, Haight Ashbury, hiring and firing, Hyman Minsky, income per capita, incomplete markets, index fund, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invisible hand, John Nash: game theory, John von Neumann, Joseph Schumpeter, Kenneth Arrow, Kickstarter, laissez-faire capitalism, Landlord’s Game, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, margin call, market bubble, market clearing, mental accounting, Mikhail Gorbachev, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, Myron Scholes, Naomi Klein, negative equity, Network effects, Nick Leeson, Northern Rock, paradox of thrift, Pareto efficiency, Paul Samuelson, Ponzi scheme, price discrimination, price stability, principal–agent problem, profit maximization, quantitative trading / quantitative finance, race to the bottom, Ralph Nader, RAND corporation, random walk, Renaissance Technologies, rent control, Richard Thaler, risk tolerance, risk-adjusted returns, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, shareholder value, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical model, technology bubble, The Chicago School, The Great Moderation, The Market for Lemons, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, unorthodox policies, value at risk, Vanguard fund, Vilfredo Pareto, wealth creators, zero-sum game

This rise in the “propensity to hoard” short-circuits the free market recovery mechanism, which involves a fall in interest rates and a rise in business and residential investment. Even if the central bank prints more money, the typical response to a downturn, people and businesses will simply hold on to the extra cash rather than spending it. The economy will get stuck in a “liquidity trap,” with further increases in the money supply having little or no impact on interest rates or spending. Keynes conceded that liquidity traps were rare, but he claimed that one had occurred in the United States during the financial crisis of 1932, when a large number of banks failed and “scarcely anyone could be induced to part with holdings of money on any reasonable terms.” Whenever the economy is humming, as it was in the United States for much of the period from 1982 to 2007, conservative economists dismiss Keynes’s argument for countercyclical spending programs as confused and outmoded.


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After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead by Alan S. Blinder

"Robert Solow", Affordable Care Act / Obamacare, asset-backed security, bank run, banking crisis, banks create money, break the buck, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, conceptual framework, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, Detroit bankruptcy, diversification, double entry bookkeeping, eurozone crisis, facts on the ground, financial innovation, fixed income, friendly fire, full employment, hiring and firing, housing crisis, Hyman Minsky, illegal immigration, inflation targeting, interest rate swap, Isaac Newton, Kenneth Rogoff, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, market bubble, market clearing, market fundamentalism, McMansion, money market fund, moral hazard, naked short selling, new economy, Nick Leeson, Northern Rock, Occupy movement, offshore financial centre, price mechanism, quantitative easing, Ralph Waldo Emerson, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, short selling, South Sea Bubble, statistical model, the payments system, time value of money, too big to fail, working-age population, yield curve, Yogi Berra

how does that destroy jobs?: Blinder, “The GOP Myth of ‘Job-Killing’ Spending,” Wall Street Journal. $49 billion dribbling out over fiscal years 2013–2019: Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2012 to 2022. Chapter 9: The Attack on the Spreads Rogoff (and Krugman again) for the United States: Krugman, “It’s Baaack: Japan’s Slump and the Return of the Liquidity Trap,” Brookings Papers on Economic Activity; Rogoff, “The Bullets Yet to Be Fired to Stop the Crisis,” Financial Times. “almost treasonous”: Daly, “Rick Perry Jabs Bernanke, Says ‘Printing More Money . . . Is Almost Treasonous,’” CBS News Political Hotsheet. “magically fix economic problems”: Palin’s letter to the editor appeared on November 18. Blinder, “In Defense of Ben Bernanke,” Wall Street Journal; Palin, Letter to the Editor, Wall Street Journal.

Krishnamurthy, Arvind, and Annette Vissing-Jorgensen. “The Effects of Quantitative Easing on Interest Rates: Channels and Implications for Policy.” Brookings Papers on Economic Activity 42/2 (Fall 2011): 215–87. Krugman, Paul R. “Cash for Trash.” New York Times, September 21, 2008. ———. “Gordon Does Good.” New York Times, October 12, 2008. ———. “It’s Baaack: Japan’s Slump and the Return of the Liquidity Trap.” Brookings Papers on Economic Activity 29/2 (Fall 1998): 137–205. Lagarde, Christine. “Global Risks Are Rising, but There Is a Path to Recovery,” in Achieving Maximum Long-Run Growth: A Symposium Sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyo., August 25–27, 2011: 421–26. Lake Research Partners. “Wall Street Reform: One Year Anniversary.” Presentation at Americans for Financial Reform, Washington, D.C., July 18, 2011. www.lakeresearch.com/news/AFR/Presentation.WallStreetReform.f.071811.pdf.


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Endless Money: The Moral Hazards of Socialism by William Baker, Addison Wiggin

Andy Kessler, asset allocation, backtesting, bank run, banking crisis, Berlin Wall, Bernie Madoff, Black Swan, Branko Milanovic, break the buck, Bretton Woods, BRICs, business climate, business cycle, capital asset pricing model, commoditize, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, crony capitalism, cuban missile crisis, currency manipulation / currency intervention, debt deflation, Elliott wave, en.wikipedia.org, Fall of the Berlin Wall, feminist movement, fiat currency, fixed income, floating exchange rates, Fractional reserve banking, full employment, German hyperinflation, housing crisis, income inequality, index fund, inflation targeting, Joseph Schumpeter, Kickstarter, laissez-faire capitalism, land reform, liquidity trap, Long Term Capital Management, McMansion, mega-rich, money market fund, moral hazard, mortgage tax deduction, naked short selling, negative equity, offshore financial centre, Ponzi scheme, price stability, pushing on a string, quantitative easing, RAND corporation, rent control, reserve currency, riskless arbitrage, Ronald Reagan, school vouchers, seigniorage, short selling, Silicon Valley, six sigma, statistical arbitrage, statistical model, Steve Jobs, stocks for the long run, The Great Moderation, the scientific method, time value of money, too big to fail, upwardly mobile, War on Poverty, Yogi Berra, young professional

His style is far more thorough and granular, but essentially his mission has been to substantiate these early findings and build upon them with a wider focus. The Great Depression is highly relevant to the credit implosion that began in 2008, although a majority of observers today pointedly deny the applicability of the parallel. Of even greater importance is that the academic blueprint Bernanke might follow to escape the clutches of a liquidity trap may be fatally flawed, and in fact much of our present difficulties can be traced to Depression era institutions and practices. By carefully probing the flaws of this body of economic research, a deeper understanding of our present dilemma is inescapable. Bernanke and his academic peers, who together have ossified around an academic consensus, lay the blame for the depth and duration of the Depression upon the gold standard.Yet via the convenient machination of assumption they neglect to discover the primary cause of that sharp downturn, which not only instigated the collapse, but doomed it to be deeper and longer than prior recessions.

The obstinance of those who did not feel the tremors of the tectonic shift away from gold is merely par for the course at such an important inflection point in the world’s cultural and monetary history, for there is a human tendency to think linearly and extrapolate. But Fisher then became a leading indicator of the intellectual mood of the 1930s. He quickly grasped reflation as a way out of the liquidity trap and, out of self-interest, his personal dilemma. Fisher helped construct a new orthodoxy that likewise has calcified academia around support for floating exchange rates, elastic currency, and the uselessness of commodity-backed currency. If the world, as Einstein proved, is circular and contains an unseen dimension, then why might not also the riddles of finance be? As we shall see in the following chapter, “Spitting into the Wind,” the Federal Reserve governors have clung to the prevailing attitudes of the Fisherian and Friedmanist school of thought.


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Money: 5,000 Years of Debt and Power by Michel Aglietta

bank run, banking crisis, Basel III, Berlin Wall, bitcoin, blockchain, Bretton Woods, British Empire, business cycle, capital asset pricing model, capital controls, cashless society, central bank independence, collapse of Lehman Brothers, collective bargaining, corporate governance, David Graeber, debt deflation, dematerialisation, Deng Xiaoping, double entry bookkeeping, energy transition, eurozone crisis, Fall of the Berlin Wall, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, floating exchange rates, forward guidance, Francis Fukuyama: the end of history, full employment, German hyperinflation, income inequality, inflation targeting, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invention of writing, invisible hand, joint-stock company, Kenneth Arrow, Kickstarter, liquidity trap, margin call, means of production, money market fund, moral hazard, Nash equilibrium, Network effects, Northern Rock, oil shock, planetary scale, plutocrats, Plutocrats, price stability, purchasing power parity, quantitative easing, race to the bottom, reserve currency, secular stagnation, seigniorage, shareholder value, special drawing rights, special economic zone, stochastic process, the payments system, the scientific method, too big to fail, trade route, transaction costs, transcontinental railway, Washington Consensus

Figure 6.7 The future short rate as an option on the expected natural rate ‘Non-Conventional’ Policies for Circumventing the Zero-Rate Barrier When the option’s intrinsic value is positive, the observed nominal rate is too high in relation to the natural rate that the central bank should fix in order to bring the economy back towards optimal production (an output gap of zero). The economy is stuck in a liquidity trap. The result is that the curve of the short-term interest rate heads to close to zero, on account of the attractive power of the zero floor. The central bank thus finds its action constrained, if it is indeed committed to influencing the economy on the basis of the short-term rate. It loses its ability to transmit its impulses to the economy. It must, therefore, invent other means of action, which involve attempting directly to influence long-term rates.

Financial vulnerabilities result from the accumulation of foreign debts, bubbles in the price of assets financed on credit, and financial techniques that produce intersections of commitments among international financial counterparties that bear a hidden systemic risk. Balance of payments surpluses are disequilibria, if they create externalities stemming from asymmetrical adjustments. They reduce demand and economic activity in other countries when, for various reasons, adjustment via interest and exchange rates does not work for different reasons: liquidity traps, inflexible currency exchange, or deflationary pressures. What, then, are the principles of international organisation revealed to us by history? Which principles allow us, if not to prevent financial disorder, then at least to contain it for a certain number of years – allowing us to take advantage of the improvements in monetary regulation at the national level that we studied in Chapter 6?


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The People's Republic of Walmart: How the World's Biggest Corporations Are Laying the Foundation for Socialism by Leigh Phillips, Michal Rozworski

Berlin Wall, Bernie Sanders, call centre, carbon footprint, central bank independence, Colonization of Mars, combinatorial explosion, complexity theory, computer age, corporate raider, decarbonisation, discovery of penicillin, Elon Musk, G4S, Georg Cantor, germ theory of disease, Gordon Gekko, greed is good, hiring and firing, index fund, Intergovernmental Panel on Climate Change (IPCC), Internet of things, inventory management, invisible hand, Jeff Bezos, Joseph Schumpeter, linear programming, liquidity trap, mass immigration, Mont Pelerin Society, new economy, Norbert Wiener, oil shock, passive investing, Paul Samuelson, post scarcity, profit maximization, profit motive, purchasing power parity, recommendation engine, Ronald Coase, Ronald Reagan, sharing economy, Silicon Valley, Skype, sovereign wealth fund, strikebreaker, supply-chain management, technoutopianism, The Nature of the Firm, The Wealth of Nations by Adam Smith, theory of mind, transaction costs, Turing machine, union organizing

Having completed his tour of American business and witnessed its inner workings, upon his return to Britain, he compiled his thoughts in a 1932 lecture to University of Dundee students little younger than himself, although it would be another five years before he published his results. The resulting text, “The Nature of the Firm”, features a quote from economist Dennis Robertson—a close collaborator of famed British macroeconomist John Maynard Keynes, and the originator of the concept of the “liquidity trap”—in which Robertson talks of the curiosity of the very existence of companies, unflatteringly describing them as “islands of conscious power in this ocean of unconscious cooperation, like lumps of butter coagulating in a pail of buttermilk.” But where Robertson had merely remarked upon the mystery, Coase explained it: “Those who object to economic planning on the grounds that the problem is solved by price movements can be answered by pointing out that there is planning within our economic system [that] is akin to what is normally called economic planning.”


Manias, Panics and Crashes: A History of Financial Crises, Sixth Edition by Kindleberger, Charles P., Robert Z., Aliber

active measures, Asian financial crisis, asset-backed security, bank run, banking crisis, Basel III, Bernie Madoff, Black Swan, Bonfire of the Vanities, break the buck, Bretton Woods, British Empire, business cycle, buy and hold, Carmen Reinhart, central bank independence, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, Corn Laws, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, currency peg, death of newspapers, debt deflation, Deng Xiaoping, disintermediation, diversification, diversified portfolio, edge city, financial deregulation, financial innovation, Financial Instability Hypothesis, financial repression, fixed income, floating exchange rates, George Akerlof, German hyperinflation, Honoré de Balzac, Hyman Minsky, index fund, inflation targeting, information asymmetry, invisible hand, Isaac Newton, joint-stock company, large denomination, law of one price, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, new economy, Nick Leeson, Northern Rock, offshore financial centre, Ponzi scheme, price stability, railway mania, Richard Thaler, riskless arbitrage, Robert Shiller, Robert Shiller, short selling, Silicon Valley, South Sea Bubble, special drawing rights, telemarketer, The Chicago School, the market place, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, tulip mania, very high income, Washington Consensus, Y2K, Yogi Berra, Yom Kippur War

A number of economists objected to these measures because they would lead to an increase in unemployment, especially among the poor, while the financial problems had been set in motion by comfortable officials and well-to-do bankers. Some support for orthodoxy, however, came from the Japanese experience in the 1990s when the combination of an expansive monetary policy and the depreciation of the yen produced a ‘liquidity trap’. Both Japanese interest rates and bank loans decreased after the declines in stock prices and real estate prices, and the inference was that there was a ‘credit crunch’. Banks were reluctant to lend because their loan losses had eroded their capital and firms were reluctant to borrow because of the sluggish growth in the demand for their products. The decline in short-term interest rates in Tokyo to 1 percent and below led to a surge in the ‘carry-trade’; US hedge funds borrowed yen, which they sold to buy US dollars which were used to buy US dollar securities that yielded 3 or 4 percent.

The decline in short-term interest rates in Tokyo to 1 percent and below led to a surge in the ‘carry-trade’; US hedge funds borrowed yen, which they sold to buy US dollars which were used to buy US dollar securities that yielded 3 or 4 percent. The ‘carry-trade’ transactions led to an increase in the flow of funds from Tokyo to New York and to a decline in the value for the yen that in turn led to an increase in the Japanese trade surplus and increases in Japanese output and employment. The increase in the Japanese trade surplus was a useful response to the liquidity trap and an effective supplement to expansive Japanese fiscal and monetary policies. The carry-trade transactions would remain profitable for the US hedge funds as long as any appreciation of the yen was smaller than the excess of the interest rates on US dollar securities over the interest rates they were paying on their yen loans. Moral suasion and other exhortatory devices The dominant argument against the a priori view that panics can be cured by being left alone is that they almost never are left alone.


pages: 322 words: 77,341

I.O.U.: Why Everyone Owes Everyone and No One Can Pay by John Lanchester

asset-backed security, bank run, banking crisis, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black-Scholes formula, Blythe Masters, Celtic Tiger, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, diversified portfolio, double entry bookkeeping, Exxon Valdez, Fall of the Berlin Wall, financial deregulation, financial innovation, fixed income, George Akerlof, greed is good, hedonic treadmill, hindsight bias, housing crisis, Hyman Minsky, intangible asset, interest rate swap, invisible hand, Jane Jacobs, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, Kickstarter, laissez-faire capitalism, light touch regulation, liquidity trap, Long Term Capital Management, loss aversion, Martin Wolf, money market fund, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, negative equity, new economy, Nick Leeson, Norman Mailer, Northern Rock, Own Your Own Home, Ponzi scheme, quantitative easing, reserve currency, Right to Buy, risk-adjusted returns, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, South Sea Bubble, statistical model, The Great Moderation, the payments system, too big to fail, tulip mania, value at risk

In a depressed housing market, the problem with your house could easily be not so much its value as the fact that you can’t sell it because nobody is buying property at the moment. Or rather, you can sell it, but you have to do so for an artificially depressed, crazy-cheap price: a “fire sale” price. When the market returns to normal, you will be able to sell your house for its true value, so you aren’t really insolvent, you’re just caught in a “liquidity trap.” In practice, all you would do in the above example—as long as you weren’t really You Inc., in which case you might well be under a legal obligation to go into receivership—would be to simply ignore the question and keep going. You’d hope to be able to pay your bills as they fell due and hang on for grim life until your house price recovered. As we speak, hundreds of thousands of people across the United Kingdom—around the world—are doing precisely that.


pages: 268 words: 74,724

Who Needs the Fed?: What Taylor Swift, Uber, and Robots Tell Us About Money, Credit, and Why We Should Abolish America's Central Bank by John Tamny

Airbnb, bank run, Bernie Madoff, bitcoin, Bretton Woods, buy and hold, Carmen Reinhart, corporate raider, correlation does not imply causation, creative destruction, Credit Default Swap, crony capitalism, crowdsourcing, Donald Trump, Downton Abbey, fiat currency, financial innovation, Fractional reserve banking, full employment, George Gilder, Home mortgage interest deduction, Jeff Bezos, job automation, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, liquidity trap, Mark Zuckerberg, market bubble, money market fund, moral hazard, mortgage tax deduction, NetJets, offshore financial centre, oil shock, peak oil, Peter Thiel, price stability, profit motive, quantitative easing, race to the bottom, Ronald Reagan, self-driving car, sharing economy, Silicon Valley, Silicon Valley startup, Steve Jobs, The Wealth of Nations by Adam Smith, too big to fail, Travis Kalanick, Uber for X, War on Poverty, yield curve

The problem was that an economy consuming so much of its credit rather than investing it was eventually going to implode, and the decline took some banks with it. It is too bad the failed banks weren’t allowed to go bankrupt. Economists who suggest that an interest rate set by the Fed led to the housing boom are ignoring history. In the 1970s, the Fed was eagerly jacking up rates, but housing soared. For those same economists to suggest that a low fed funds rate rendered credit “easy” is to first promote Keynesian mythology about “liquidity traps.” They ask us to believe that absent the Fed, credit created in the real economy would have sat idle. The latter is not a serious presumption, nor is it serious to believe the Fed can decree credit easy. What they describe as “artificially low rates” is, at best, an admission of credit tightness, not ease. For those promoting this narrative to suggest otherwise is to believe the Fed is the only governmental body in the history of mankind that can institute artificial price controls that actually lead to abundance over scarcity.


pages: 701 words: 199,010

The Crisis of Crowding: Quant Copycats, Ugly Models, and the New Crash Normal by Ludwig B. Chincarini

affirmative action, asset-backed security, automated trading system, bank run, banking crisis, Basel III, Bernie Madoff, Black-Scholes formula, business cycle, buttonwood tree, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, collective bargaining, corporate governance, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, delta neutral, discounted cash flows, diversification, diversified portfolio, family office, financial innovation, financial intermediation, fixed income, Flash crash, full employment, Gini coefficient, high net worth, hindsight bias, housing crisis, implied volatility, income inequality, interest rate derivative, interest rate swap, John Meriwether, Kickstarter, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, low skilled workers, margin call, market design, market fundamentalism, merger arbitrage, Mexican peso crisis / tequila crisis, Mitch Kapor, money market fund, moral hazard, mortgage debt, Myron Scholes, negative equity, Northern Rock, Occupy movement, oil shock, price stability, quantitative easing, quantitative hedge fund, quantitative trading / quantitative finance, Ralph Waldo Emerson, regulatory arbitrage, Renaissance Technologies, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, Ronald Reagan, Sam Peltzman, Sharpe ratio, short selling, sovereign wealth fund, speech recognition, statistical arbitrage, statistical model, survivorship bias, systematic trading, The Great Moderation, too big to fail, transaction costs, value at risk, yield curve, zero-coupon bond

TABLE N.1 Effects of Quantitative Easing on Interest Rates in the United States Thus, there are some limitations to the Fed’s normal way of influencing the economy. First, if longer-term interest rates do not respond to changes in the Fed Funds rate, then the Fed has very little effect on the economy. Second, if the Fed Funds rate is zero or close to zero, than there is no room for further Fed tightening. This is known by economists as the liquidity trap. In this situation, the Fed cannot really stimulate the economy anymore. In 2008, this is what happened. Banks also did not want to lend, since they were fearful of their own survival and wanted to shore up capital. With the financial system still in turmoil, the Fed had to find innovative ways to help the financial system. Unconventional Policies The first innovation of the Federal Reserve had to do with supplying huge amounts of liquidity to banks so as to restore confidence in the banks and insure counterparties that these banks and institutions had enough funding to keep their business going.

Level II: Observable market-based inputs or unobservable inputs that are corroborated by market data. Level III: Unobservable inputs that are not corroborated by market data. liquid trade A trade that can be executed easily with little impact on market prices and where market prices before trading are quite reliable. liquidity premium Refers to the extra return an investor receives when taking investments that aren't as easily converted into cash. liquidity trap A situation where monetary policy is unable to stimulate an economy by lowering interest rates or increasing the money supply. For example, if short-term interest rates are already at zero percent, the Fed must resort to other policies since they cannot reduce the interest rate any further. May also occur in other situations, such as when investment does not respond to interest rates. long the spread A long spread trade is positioned to profit if the spread widens.


pages: 693 words: 204,042

New York 2140 by Kim Stanley Robinson

availability heuristic, back-to-the-land, Black-Scholes formula, Burning Man, central bank independence, creative destruction, credit crunch, crowdsourcing, decarbonisation, East Village, full employment, happiness index / gross national happiness, hive mind, income inequality, invisible hand, Jane Jacobs, liquidity trap, Mason jar, mass immigration, megastructure, microbiome, music of the spheres, New Urbanism, offshore financial centre, plutocrats, Plutocrats, Ponzi scheme, precariat, quantitative easing, rent-seeking, the built environment, too big to fail

Classification: LCC PS3568.O2893 N49 2017 | DDC 813/.54—dc23 LC record available at https://lccn.loc.gov/2016039922 ISBNs: 978-0-316-26234-7 (hardcover), 978-0-316-26233-0 (ebook), 978-0-316-51009-7 (Barnes & Noble signed edition) E3-20170124-JV-PC CONTENTS Cover Title Page Copyright Part One. The Tyranny of Sunk Costs a) Mutt and Jeff b) Inspector Gen c) Franklin d) Vlade e) a citizen f) Amelia g) Charlotte h) Stefan and Roberto Part Two. Expert Overconfidence a) Franklin b) Mutt and Jeff c) that citizen d) Inspector Gen e) Vlade f) Amelia g) Stefan and Roberto h) Franklin Part Three. Liquidity Trap a) the citizen b) Mutt and Jeff c) Charlotte d) Amelia e) Inspector Gen f) Mutt and Jeff g) Stefan and Roberto h) Vlade i) that citizen Part Four. Expensive or Priceless? a) Franklin b) Charlotte c) Vlade d) Amelia e) a citizen f) Inspector Gen g) Franklin h) Mutt and Jeff Part Five. Escalation of Commitment a) Stefan and Roberto b) Vlade c) that citizen d) Inspector Gen e) Charlotte f) Franklin g) Amelia h) Inspector Gen Part Six.

“All right,” I said. “I’ll come back down when I’m done, see if you’re still here.” “I’ll be up in a bit,” Charlotte said. “I want to see how things look up there.” So the evening was screwed. And in fact it had been going badly most of the night, judging by Jojo’s face, and that was worrying me quite badly. Adjustments were going to have to be made, but which ones? And why? PART THREE LIQUIDITY TRAP Drowned, hosed, visiting Davy Jones, six fathoms under, wet, all wet, moldy, mildewed, tidal, marshy, splashing, surfing, body-surfing, diving, drinking, in the drink, drunk, damp, scubaed, plunged, high diving, sloshed, drunk, dowsed, watered, waterfalled, snorkeled, running the rapids, backstroking, waterboarded, gagged, holding your breath, in the tube, bathyscaping, taking a bath, showered, swimming, swimming with the fishes, visiting the sharks, conversing with the clams, lounging with the lobsters, jawing with Jonah, in the belly of the whale, pilot fishing, leviathanating, getting finny, shnockered, dipped, clammed, clamming, salting, brined, belly-flopping, trawling, bottom-feeding, breathing water, eating water, down the toilet, washing-machined, submarining, going down, going down on Mother Ocean, sucking it, sucking water, breathing water, H2O-ing, liquidated, liquefied, aplastadoed, drenched, poured, squirted, pissed on, peed out, golden showered, plutosucking, estuaried, immersed, emulsified, shelled, oystered, squeegeed, melted, melting, infinityedged, depthcharged, torpedoed, inundated, laved, deluged, fluvialized, fluviated, flooded, Noahed, Noah’s-neighbored, U-boating, universally solventized, ad aqua infinitum a) the citizen The First Pulse was not ignored by an entire generation of ounce brains, that is a myth.


pages: 309 words: 85,584

Nine Crises: Fifty Years of Covering the British Economy From Devaluation to Brexit by William Keegan

banking crisis, Berlin Wall, Big bang: deregulation of the City of London, Boris Johnson, Bretton Woods, British Empire, capital controls, congestion charging, deindustrialization, Donald Trump, Etonian, eurozone crisis, Fall of the Berlin Wall, financial innovation, financial thriller, floating exchange rates, full employment, gig economy, inflation targeting, Just-in-time delivery, light touch regulation, liquidity trap, Martin Wolf, moral hazard, negative equity, Neil Kinnock, non-tariff barriers, North Sea oil, Northern Rock, oil shock, Parkinson's law, Paul Samuelson, pre–internet, price mechanism, quantitative easing, Ronald Reagan, school vouchers, short selling, South Sea Bubble, The Chicago School, transaction costs, tulip mania, Winter of Discontent, Yom Kippur War

The Keynesian approach was developed in reaction to the Great Depression which began in 1929, under which unemployment rose to 15 per cent in Britain. Essentially the Keynesian approach was, to quote a phrase much beloved of Denis Healey, ‘When you are in a hole, stop digging.’ Originally the emphasis was on boosting public spending when the private sector was depressed and monetary policy was caught in what was known as a liquidity trap, so that lower interest rates were ineffectual in boosting demand. In the post-war years, rescue operations evolved into what became known as ‘demand management’, involving tax cuts as well as increases in public spending. During the relatively successful economic policies of the immediate post-war decades, Keynesian policymakers probably became overconfident. The idea was to apply policies of economic expansion where appropriate, but to rein back if there were problems with the balance of payments or inflation.


pages: 261 words: 86,905

How to Speak Money: What the Money People Say--And What It Really Means by John Lanchester

asset allocation, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, blood diamonds, Bretton Woods, BRICs, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collective bargaining, commoditize, creative destruction, credit crunch, Credit Default Swap, crony capitalism, Dava Sobel, David Graeber, disintermediation, double entry bookkeeping, en.wikipedia.org, estate planning, financial innovation, Flash crash, forward guidance, Gini coefficient, global reserve currency, high net worth, High speed trading, hindsight bias, income inequality, inflation targeting, interest rate swap, Isaac Newton, Jaron Lanier, joint-stock company, joint-stock limited liability company, Kodak vs Instagram, liquidity trap, London Interbank Offered Rate, London Whale, loss aversion, margin call, McJob, means of production, microcredit, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, negative equity, neoliberal agenda, New Urbanism, Nick Leeson, Nikolai Kondratiev, Nixon shock, Northern Rock, offshore financial centre, oil shock, open economy, paradox of thrift, plutocrats, Plutocrats, Ponzi scheme, purchasing power parity, pushing on a string, quantitative easing, random walk, rent-seeking, reserve currency, Richard Feynman, Right to Buy, road to serfdom, Ronald Reagan, Satoshi Nakamoto, security theater, shareholder value, Silicon Valley, six sigma, Social Responsibility of Business Is to Increase Its Profits, South Sea Bubble, sovereign wealth fund, Steve Jobs, survivorship bias, The Chicago School, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, trickle-down economics, Washington Consensus, wealth creators, working poor, yield curve

Economists and people who speak money argue all the time about things like inflation, not just in terms of what to do about it and its practical consequences but actually in terms of the very essence of what it is and how it works and how best to define it. Here is the range of views, as summarized by Wikipedia: Some economists maintain that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply, while others take the view that under the conditions of a liquidity trap, large injections are “pushing on a string” and cannot cause significantly higher inflation. Views on which factors determine low to moderate rates of inflation are more varied. Low or moderate inflation may be attributed to fluctuations in real demand for goods and services, or to changes in available supplies such as during scarcities, as well as to changes in the velocity of money supply measures—in particular the MZM (money zero maturity) supply velocity.


pages: 346 words: 89,180

Capitalism Without Capital: The Rise of the Intangible Economy by Jonathan Haskel, Stian Westlake

"Robert Solow", 23andMe, activist fund / activist shareholder / activist investor, Airbnb, Albert Einstein, Andrei Shleifer, bank run, banking crisis, Bernie Sanders, business climate, business process, buy and hold, Capital in the Twenty-First Century by Thomas Piketty, cloud computing, cognitive bias, computer age, corporate governance, corporate raider, correlation does not imply causation, creative destruction, dark matter, Diane Coyle, Donald Trump, Douglas Engelbart, Douglas Engelbart, Edward Glaeser, Elon Musk, endogenous growth, Erik Brynjolfsson, everywhere but in the productivity statistics, Fellow of the Royal Society, financial innovation, full employment, fundamental attribution error, future of work, Gini coefficient, Hernando de Soto, hiring and firing, income inequality, index card, indoor plumbing, intangible asset, Internet of things, Jane Jacobs, Jaron Lanier, job automation, Kenneth Arrow, Kickstarter, knowledge economy, knowledge worker, laissez-faire capitalism, liquidity trap, low skilled workers, Marc Andreessen, Mother of all demos, Network effects, new economy, open economy, patent troll, paypal mafia, Peter Thiel, pets.com, place-making, post-industrial society, Productivity paradox, quantitative hedge fund, rent-seeking, revision control, Richard Florida, ride hailing / ride sharing, Robert Gordon, Ronald Coase, Sand Hill Road, Second Machine Age, secular stagnation, self-driving car, shareholder value, sharing economy, Silicon Valley, six sigma, Skype, software patent, sovereign wealth fund, spinning jenny, Steve Jobs, survivorship bias, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, Tim Cook: Apple, total factor productivity, Tyler Cowen: Great Stagnation, urban planning, Vanguard fund, walkable city, X Prize, zero-sum game

Article I, Section 8, Clause 8 of the United States Constitution empowers the United States Congress: “To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.” Chapter 5: Intangibles, Investment, Productivity, and Secular Stagnation 1. Published as Summers 2015. Summers developed his views further in a Keynote Address at the National Association for Business Economics Policy Conference, February 24, 2014, published as Summers 2014. Paul Krugman has also popularized the term “liquidity trap,” which refers to a position whereby interest rates can be lowered no further and so monetary policy, which works by adjusting interest rates and so changing investment and consumption, loses its power to affect activity. 2. There are a number of different measures of profits. One such measure is published by statistical agencies. They measure economy-wide company profits (often with sectors removed, e.g., banks or oil industries) that they divide by economy-wide commercial capital to produce a return on capital employed.


pages: 327 words: 90,542

The Age of Stagnation: Why Perpetual Growth Is Unattainable and the Global Economy Is in Peril by Satyajit Das

"Robert Solow", 9 dash line, accounting loophole / creative accounting, additive manufacturing, Airbnb, Albert Einstein, Alfred Russel Wallace, Anton Chekhov, Asian financial crisis, banking crisis, Berlin Wall, bitcoin, Bretton Woods, BRICs, British Empire, business cycle, business process, business process outsourcing, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Clayton Christensen, cloud computing, collaborative economy, colonial exploitation, computer age, creative destruction, cryptocurrency, currency manipulation / currency intervention, David Ricardo: comparative advantage, declining real wages, Deng Xiaoping, deskilling, disintermediation, disruptive innovation, Downton Abbey, Emanuel Derman, energy security, energy transition, eurozone crisis, financial innovation, financial repression, forward guidance, Francis Fukuyama: the end of history, full employment, gig economy, Gini coefficient, global reserve currency, global supply chain, Goldman Sachs: Vampire Squid, happiness index / gross national happiness, Honoré de Balzac, hydraulic fracturing, Hyman Minsky, illegal immigration, income inequality, income per capita, indoor plumbing, informal economy, Innovator's Dilemma, intangible asset, Intergovernmental Panel on Climate Change (IPCC), Jane Jacobs, John Maynard Keynes: technological unemployment, Kenneth Rogoff, knowledge economy, knowledge worker, light touch regulation, liquidity trap, Long Term Capital Management, low skilled workers, Lyft, Mahatma Gandhi, margin call, market design, Marshall McLuhan, Martin Wolf, Mikhail Gorbachev, mortgage debt, mortgage tax deduction, new economy, New Urbanism, offshore financial centre, oil shale / tar sands, oil shock, old age dependency ratio, open economy, passive income, peak oil, peer-to-peer lending, pension reform, plutocrats, Plutocrats, Ponzi scheme, Potemkin village, precariat, price stability, profit maximization, pushing on a string, quantitative easing, race to the bottom, Ralph Nader, Rana Plaza, rent control, rent-seeking, reserve currency, ride hailing / ride sharing, rising living standards, risk/return, Robert Gordon, Ronald Reagan, Satyajit Das, savings glut, secular stagnation, seigniorage, sharing economy, Silicon Valley, Simon Kuznets, Slavoj Žižek, South China Sea, sovereign wealth fund, TaskRabbit, The Chicago School, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, the market place, the payments system, The Spirit Level, Thorstein Veblen, Tim Cook: Apple, too big to fail, total factor productivity, trade route, transaction costs, uber lyft, unpaid internship, Unsafe at Any Speed, Upton Sinclair, Washington Consensus, We are the 99%, WikiLeaks, Y2K, Yom Kippur War, zero-coupon bond, zero-sum game

Fearful of losing market share, businesses everywhere lacked pricing power, contributing to low inflation. In November 2012, IMF chief economist Olivier Blanchard admitted that the impact of the unconventional monetary measures was both limited and uncertain. He acknowledged the minimal effect of the policies on business and consumer confidence, consumption, employment, and growth in incomes or credit.12 It was Keynes's liquidity trap, where policy is largely ineffective, analogous to pushing on a string. But central banks continued with the failed policies. In January 2015, the European Central Bank announced its own version of QE after over two years of prevarication. No one was convinced that it would create growth or inflation. Board members felt that they had to do something. Launching their umpteenth round of ineffective monetary stimuli, Japanese central bankers resorted to marketing, rebranding QE as QQE (qualitative and quantitative expansion).


pages: 363 words: 104,113

Clan Corporate by Stross, Charles

glass ceiling, indoor plumbing, liquidity trap, RFID

Global climate change? What is the world’s population here, anyway? Suddenly she had a strange vision, a billion coal-fired cooking stoves staining the sky with as bad a smog as a billion SUVs. Convergence . . . “So times are bad and the Constabulary are getting heavy-handed. The Evil Empire is rattling its sabers and threatening to invade, just to add to the fun. And the economy is stuck in a liquidity trap that’s been getting worse for months, with deflation setting in … ?” She shook her head again. “And I thought things were bad back home.” “So where have you been?” Erasmus asked, cocking his head to one side. There was something birdlike about his movements, but now Miriam could see that it was a side effect of the disease eating him from the inside out, leaving him gaunt and huge-eyed. “I thought you’d abandoned me.”


pages: 354 words: 105,322

The Road to Ruin: The Global Elites' Secret Plan for the Next Financial Crisis by James Rickards

"Robert Solow", Affordable Care Act / Obamacare, Albert Einstein, asset allocation, asset-backed security, bank run, banking crisis, barriers to entry, Bayesian statistics, Ben Bernanke: helicopter money, Benoit Mandelbrot, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, bitcoin, Black Swan, blockchain, Bonfire of the Vanities, Bretton Woods, British Empire, business cycle, butterfly effect, buy and hold, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, cellular automata, cognitive bias, cognitive dissonance, complexity theory, Corn Laws, corporate governance, creative destruction, Credit Default Swap, cuban missile crisis, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, debt deflation, Deng Xiaoping, disintermediation, distributed ledger, diversification, diversified portfolio, Edward Lorenz: Chaos theory, Eugene Fama: efficient market hypothesis, failed state, Fall of the Berlin Wall, fiat currency, financial repression, fixed income, Flash crash, floating exchange rates, forward guidance, Fractional reserve banking, G4S, George Akerlof, global reserve currency, high net worth, Hyman Minsky, income inequality, information asymmetry, interest rate swap, Isaac Newton, jitney, John Meriwether, John von Neumann, Joseph Schumpeter, Kenneth Rogoff, labor-force participation, large denomination, liquidity trap, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, Mexican peso crisis / tequila crisis, money market fund, mutually assured destruction, Myron Scholes, Naomi Klein, nuclear winter, obamacare, offshore financial centre, Paul Samuelson, Peace of Westphalia, Pierre-Simon Laplace, plutocrats, Plutocrats, prediction markets, price anchoring, price stability, quantitative easing, RAND corporation, random walk, reserve currency, RFID, risk-adjusted returns, Ronald Reagan, Silicon Valley, sovereign wealth fund, special drawing rights, stocks for the long run, The Bell Curve by Richard Herrnstein and Charles Murray, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, Thomas Bayes, Thomas Kuhn: the structure of scientific revolutions, too big to fail, transfer pricing, value at risk, Washington Consensus, Westphalian system

The Historical school’s inductive method and use of history have today been brushed aside by neo-Keynesian equations and an Austrian insistence on money agency. Yet Schumpeter’s insights into capital formation through entrepreneurship, and its disruptive impact on prevalent business models—creative destruction—seem in sync with the age of Amazon and Netflix. This revival comes at a time when Austrian money theories are stymied by velocity’s volatility, and neo-Keynesian models prove unprepared for a new liquidity trap. It is past time to take Schumpeter off the shelf and give historical method its due. Consideration of Schumpeter today comes mostly from those interested in microeconomics—the theory of the firm, and the individual. A Schumpeterian renascence needs to consider his macroeconomic perspective, including his illumination of global growth dynamics. Schumpeter’s long-wave historical perspective seems the right antidote to Karl Popper’s slow, steady piecemeal social engineering.


pages: 401 words: 109,892

The Great Reversal: How America Gave Up on Free Markets by Thomas Philippon

airline deregulation, Amazon Mechanical Turk, Amazon Web Services, Andrei Shleifer, barriers to entry, bitcoin, blockchain, business cycle, business process, buy and hold, Carmen Reinhart, carried interest, central bank independence, commoditize, crack epidemic, cross-subsidies, disruptive innovation, Donald Trump, Erik Brynjolfsson, eurozone crisis, financial deregulation, financial innovation, financial intermediation, gig economy, income inequality, income per capita, index fund, intangible asset, inventory management, Jean Tirole, Jeff Bezos, Kenneth Rogoff, labor-force participation, law of one price, liquidity trap, low cost airline, manufacturing employment, Mark Zuckerberg, market bubble, minimum wage unemployment, money market fund, moral hazard, natural language processing, Network effects, new economy, offshore financial centre, Pareto efficiency, patent troll, Paul Samuelson, price discrimination, profit maximization, purchasing power parity, QWERTY keyboard, rent-seeking, ride hailing / ride sharing, risk-adjusted returns, Robert Bork, Robert Gordon, Ronald Reagan, Second Machine Age, self-driving car, Silicon Valley, Snapchat, spinning jenny, statistical model, Steve Jobs, supply-chain management, Telecommunications Act of 1996, The Chicago School, the payments system, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, too big to fail, total factor productivity, transaction costs, Travis Kalanick, Vilfredo Pareto, zero-sum game

Where have all the workers gone? An inquiry into the decline of the U.S. labor force participation rate. Brookings Papers on Economic Activity (Spring). Krueger, A. B., and O. Ashenfelter (2018). Theory and evidence on employer collusion in the franchise sector. NBER Working Paper No. 24831, National Bureau of Economic Research, Cambridge, MA, July. Krugman, P. (1998). It’s baaack: Japan’s slump and the return of the liquidity trap. Brookings Papers on Economic Activity 2, 137–187. Kumar, S. (2016). Relaunching innovation: Lessons from Silicon Valley. Banking Perspectives 4(1), 19–23. Kwoka, J. (2015). Mergers, Merger Control, and Remedies. Cambridge, MA: MIT Press. Kwoka, J. (2017a). A response to the FTC critique. Working paper, April 6. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2947814. Kwoka, J. E. (2017b).


pages: 338 words: 104,684

The Deficit Myth: Modern Monetary Theory and the Birth of the People's Economy by Stephanie Kelton

2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, Affordable Care Act / Obamacare, American Society of Civil Engineers: Report Card, Asian financial crisis, bank run, Bernie Madoff, Bernie Sanders, blockchain, Bretton Woods, business cycle, capital controls, central bank independence, collective bargaining, COVID-19, Covid-19, currency manipulation / currency intervention, currency peg, David Graeber, David Ricardo: comparative advantage, decarbonisation, deindustrialization, discrete time, Donald Trump, eurozone crisis, fiat currency, floating exchange rates, Food sovereignty, full employment, Gini coefficient, global reserve currency, global supply chain, Hyman Minsky, income inequality, inflation targeting, Intergovernmental Panel on Climate Change (IPCC), investor state dispute settlement, Isaac Newton, Jeff Bezos, liquidity trap, Mahatma Gandhi, manufacturing employment, market bubble, Mason jar, mortgage debt, Naomi Klein, new economy, New Urbanism, Nixon shock, obamacare, open economy, Paul Samuelson, Ponzi scheme, price anchoring, price stability, pushing on a string, quantitative easing, race to the bottom, reserve currency, Richard Florida, Ronald Reagan, shareholder value, Silicon Valley, trade liberalization, urban planning, working-age population, Works Progress Administration, yield curve, zero-sum game

Committee hearings are often carried live on C-SPAN 3. See Jason Furman, “Options to Close the Long-Run Fiscal Gap,” testimony before the US Senate Committee on Budget, January 31, 2007, www.brookings.edu/wp-content/uploads/2016/06/furman20070131S-1.pdf. 5. Keynesian economists will often argue that there is a special circumstance under which crowding out doesn’t happen. It’s a situation—often described as a liquidity trap—where rising deficits don’t push interest rates higher because rates are stuck at zero. In that situation, the government can safely add to the deficit without worrying that rising interest rates will crowd out private investment (since rates are stuck at zero). That gives the government a window of opportunity to boost spending without any kind of trade-off. Once interest rates become unstuck, crowding out is immediately back in play.


pages: 457 words: 125,329

Value of Everything: An Antidote to Chaos The by Mariana Mazzucato

"Robert Solow", activist fund / activist shareholder / activist investor, Affordable Care Act / Obamacare, Airbnb, bank run, banks create money, Basel III, Berlin Wall, Big bang: deregulation of the City of London, bonus culture, Bretton Woods, business cycle, butterfly effect, buy and hold, Buy land – they’re not making it any more, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, cleantech, Corn Laws, corporate governance, corporate social responsibility, creative destruction, Credit Default Swap, David Ricardo: comparative advantage, debt deflation, European colonialism, fear of failure, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, financial repression, full employment, G4S, George Akerlof, Google Hangouts, Growth in a Time of Debt, high net worth, Hyman Minsky, income inequality, index fund, informal economy, interest rate derivative, Internet of things, invisible hand, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, knowledge economy, labour market flexibility, laissez-faire capitalism, light touch regulation, liquidity trap, London Interbank Offered Rate, margin call, Mark Zuckerberg, market bubble, means of production, money market fund, negative equity, Network effects, new economy, Northern Rock, obamacare, offshore financial centre, Pareto efficiency, patent troll, Paul Samuelson, peer-to-peer lending, Peter Thiel, profit maximization, quantitative easing, quantitative trading / quantitative finance, QWERTY keyboard, rent control, rent-seeking, Sand Hill Road, shareholder value, sharing economy, short selling, Silicon Valley, Simon Kuznets, smart meter, Social Responsibility of Business Is to Increase Its Profits, software patent, stem cell, Steve Jobs, The Great Moderation, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, Tobin tax, too big to fail, trade route, transaction costs, two-sided market, very high income, Vilfredo Pareto, wealth creators, Works Progress Administration, zero-sum game

With great ingenuity, the American Paul Samuelson (1915-2009) - one of the most influential economists of the second half of the twentieth century, a professor at the Massachusetts Institute of Technology and the first American to win the Nobel Prize in Economics - attempted to prove that neoclassical theory could explain how the economy behaved in normal times, except when recessionary periods made monetary policy have little effect: i.e. when increasing the money supply does not lower interest rates and only adds to idle balances rather than spurring growth (what is known as the ‘liquidity trap'). In essence, Samuelson argued that in normal economic times there was little need for governments to try to manage the economy along Keynesian lines and that government intervention (e.g. aimed at increasing employment) in these cases would only lead to higher inflation. In the 1970s, inflation began to increase, opening the way for the monetarists, led by Milton Friedman. A libertarian, Friedman rejected the idea that government spending is beneficial, arguing that it most likely leads to inflation, ignoring that this assumes that the economy is already operating at full capacity so that any extra demand (stimulated by government) would result in higher prices.


pages: 452 words: 134,502

Hacking Politics: How Geeks, Progressives, the Tea Party, Gamers, Anarchists and Suits Teamed Up to Defeat SOPA and Save the Internet by David Moon, Patrick Ruffini, David Segal, Aaron Swartz, Lawrence Lessig, Cory Doctorow, Zoe Lofgren, Jamie Laurie, Ron Paul, Mike Masnick, Kim Dotcom, Tiffiniy Cheng, Alexis Ohanian, Nicole Powers, Josh Levy

4chan, Affordable Care Act / Obamacare, Airbnb, Bernie Sanders, Burning Man, call centre, Cass Sunstein, Chelsea Manning, collective bargaining, creative destruction, crony capitalism, crowdsourcing, don't be evil, facts on the ground, Firefox, hive mind, immigration reform, informal economy, jimmy wales, Julian Assange, Kickstarter, liquidity trap, Mark Zuckerberg, obamacare, Occupy movement, offshore financial centre, peer-to-peer, plutocrats, Plutocrats, prisoner's dilemma, rent-seeking, Silicon Valley, Skype, technoutopianism, WikiLeaks, Y Combinator

In the Prisoner’s Dilemma the rational decision, yielding the best-expected outcome for each criminal, has the pair ratting one another out, and taking the middling sentences. It’s a tragic (for the criminals) function of the inability to engage in collective action, as in a world in which the duo could communicate with and trust one another they’d both keep their lips sealed and neither would go to prison at all. Lack of confidence that investments in a struggling economy will pay off is a partial explanation for ongoing hoarding and liquidity traps. Nobody wants to stick their neck out on their own, without an understanding that other lenders are likely to start lending, and that consumers are likely to consume. Just as the prisoners would optimize their respective outcomes were they able to confer and act in a binding unison by which they agreed to stay mum, so too would our economy be best off if all of the economic actors agreed that they’d spend together, and kick-start a real recovery.


pages: 488 words: 144,145

Inflated: How Money and Debt Built the American Dream by R. Christopher Whalen

Albert Einstein, bank run, banking crisis, Black Swan, Bretton Woods, British Empire, business cycle, buy and hold, California gold rush, Carmen Reinhart, central bank independence, commoditize, conceptual framework, corporate governance, corporate raider, creative destruction, cuban missile crisis, currency peg, debt deflation, falling living standards, fiat currency, financial deregulation, financial innovation, financial intermediation, floating exchange rates, Fractional reserve banking, full employment, global reserve currency, housing crisis, interchangeable parts, invention of radio, Kenneth Rogoff, laissez-faire capitalism, liquidity trap, means of production, money: store of value / unit of account / medium of exchange, moral hazard, mutually assured destruction, non-tariff barriers, oil shock, Paul Samuelson, payday loans, plutocrats, Plutocrats, price stability, pushing on a string, quantitative easing, rent-seeking, reserve currency, Ronald Reagan, special drawing rights, The Chicago School, The Great Moderation, too big to fail, trade liberalization, transcontinental railway, Upton Sinclair, women in the workforce

Far less attention has been given to Lincoln as the activist executive who set a new standard for mobilizing public finance in a crisis, pursuant to express Congressional authority under the Legal Tender Acts, presidential authority at its zenith . . . Lincoln is remembered for overcoming enormous political and military challenges. Often overlooked, however, is the economic and financial chaos he confronted upon taking office. In the weeks prior to Lincoln’s inauguration, the nation was swept by fear, the hoarding of gold, and a panic perhaps more dangerous than other classic Keynesian liquidity traps in March 1933 and September 2008, since there was no central bank in 1861 with the authority to issue currency and inject liquidity into the financial system to try to break a downward spiral by restraining the psychology of hoarding.3 Americans chose to keep hard money in the form of gold and silver coins and shunned paper money issued by the state-chartered banks around the country. Even in the mid-1800s much of American economic life was still conducted via barter and exchange.


pages: 524 words: 143,993

The Shifts and the Shocks: What We've Learned--And Have Still to Learn--From the Financial Crisis by Martin Wolf

air freight, anti-communist, Asian financial crisis, asset allocation, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Basel III, Ben Bernanke: helicopter money, Berlin Wall, Black Swan, bonus culture, break the buck, Bretton Woods, business cycle, call centre, capital asset pricing model, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collateralized debt obligation, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, debt deflation, deglobalization, Deng Xiaoping, diversification, double entry bookkeeping, en.wikipedia.org, Erik Brynjolfsson, Eugene Fama: efficient market hypothesis, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial deregulation, financial innovation, financial repression, floating exchange rates, forward guidance, Fractional reserve banking, full employment, global rebalancing, global reserve currency, Growth in a Time of Debt, Hyman Minsky, income inequality, inflation targeting, information asymmetry, invisible hand, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, light touch regulation, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, mandatory minimum, margin call, market bubble, market clearing, market fragmentation, Martin Wolf, Mexican peso crisis / tequila crisis, money market fund, moral hazard, mortgage debt, negative equity, new economy, North Sea oil, Northern Rock, open economy, paradox of thrift, Paul Samuelson, price stability, private sector deleveraging, purchasing power parity, pushing on a string, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, Richard Feynman, risk-adjusted returns, risk/return, road to serfdom, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, Second Machine Age, secular stagnation, shareholder value, short selling, sovereign wealth fund, special drawing rights, The Chicago School, The Great Moderation, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, The Wealth of Nations by Adam Smith, too big to fail, Tyler Cowen: Great Stagnation, very high income, winner-take-all economy, zero-sum game

Reliance on the fiscal buffer (the ability to let the fiscal deficit rise in response to a private-sector led recession) was essential this time, because even a strongly expansionary monetary policy was insufficient to prevent the shifts of the household and corporate sectors into surplus. We know it was insufficient because the monetary authorities initiated such a policy. This is a situation in which Keynesian fiscal policy becomes relevant. This is no more than to say that the economy was in a ‘liquidity trap’: at the lowest interest rate the central bank could create, the private and foreign sectors would have had a large excess of income over desired spending at full employment (the spending that would have occurred had the economy been at full employment, which, of course, it was not). This could be dealt with in only one of two ways: either by a collapse in income greater than the associated collapse in spending – that is, an outright depression – or by a large fiscal deficit.


pages: 497 words: 150,205

European Spring: Why Our Economies and Politics Are in a Mess - and How to Put Them Right by Philippe Legrain

3D printing, Airbnb, Asian financial crisis, bank run, banking crisis, barriers to entry, Basel III, battle of ideas, Berlin Wall, Big bang: deregulation of the City of London, Boris Johnson, Bretton Woods, BRICs, British Empire, business cycle, business process, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, cleantech, collaborative consumption, collapse of Lehman Brothers, collective bargaining, corporate governance, creative destruction, credit crunch, Credit Default Swap, crony capitalism, currency manipulation / currency intervention, currency peg, debt deflation, Diane Coyle, disruptive innovation, Downton Abbey, Edward Glaeser, Elon Musk, en.wikipedia.org, energy transition, eurozone crisis, fear of failure, financial deregulation, first-past-the-post, forward guidance, full employment, Gini coefficient, global supply chain, Growth in a Time of Debt, hiring and firing, hydraulic fracturing, Hyman Minsky, Hyperloop, immigration reform, income inequality, interest rate derivative, Intergovernmental Panel on Climate Change (IPCC), Irish property bubble, James Dyson, Jane Jacobs, job satisfaction, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, labour market flexibility, labour mobility, liquidity trap, margin call, Martin Wolf, mittelstand, moral hazard, mortgage debt, mortgage tax deduction, North Sea oil, Northern Rock, offshore financial centre, oil shale / tar sands, oil shock, open economy, peer-to-peer rental, price stability, private sector deleveraging, pushing on a string, quantitative easing, Richard Florida, rising living standards, risk-adjusted returns, Robert Gordon, savings glut, school vouchers, self-driving car, sharing economy, Silicon Valley, Silicon Valley startup, Skype, smart grid, smart meter, software patent, sovereign wealth fund, Steve Jobs, The Death and Life of Great American Cities, The Wealth of Nations by Adam Smith, too big to fail, total factor productivity, Tyler Cowen: Great Stagnation, working-age population, Zipcar

As early as March 2009, the Bank of England cut the interest rate at which it lends to banks to a record low of 0.5 per cent. By 2011 inflation averaged 4.5 per cent, so real interest rates were minus 4 per cent. One might have expected such exceptionally generous borrowing terms to have sparked a recovery. But they didn’t, because when banks, households and companies all want to hoard money not part with it, monetary policy becomes largely ineffective. In a liquidity trap, it is like pushing on a string. Normally, when the Bank of England cuts its bank lending rate, the rate at which banks can borrow more generally also falls.428 Banks then tend to lend to people and companies more cheaply, which generally encourages both to borrow more and in time to spend or invest more. Lower interest rates also tend to push up the prices of shares, bonds, property and other assets, making investors feel wealthier and therefore more likely to spend.


pages: 497 words: 153,755

The Power of Gold: The History of an Obsession by Peter L. Bernstein

Albert Einstein, Atahualpa, Bretton Woods, British Empire, business cycle, California gold rush, central bank independence, double entry bookkeeping, Edward Glaeser, Everybody Ought to Be Rich, falling living standards, financial innovation, floating exchange rates, Francisco Pizarro, German hyperinflation, Hernando de Soto, Isaac Newton, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, large denomination, liquidity trap, long peace, money: store of value / unit of account / medium of exchange, old-boy network, Paul Samuelson, price stability, profit motive, random walk, rising living standards, Ronald Reagan, seigniorage, the market place, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, trade route

The bank deposits received by those who exported gold to the United States sat idle or were invested at interest rates of less than 1 percent per annum. It was no time for taking risks. The banks whose reserves were swelled by the golden imports felt the same way: nothing in those days was as beautiful to behold as a nice, fat pile of cash. In short, money continued to heap up in America far beyond its proper level just to sit quietly until the storms had blown over. The process came to be known as a "liquidity trap." The accumulations of cash would be put to use only later when the pressures of wartime spending demanded it. And so the great Victorian gold standard died an ugly, painful, and protracted death, a process that reached all the way back to the prohibitions on convertibility that were put in place after the outbreak of World War I. The old structure was never completely revived after 1918.


pages: 524 words: 155,947

More: The 10,000-Year Rise of the World Economy by Philip Coggan

"Robert Solow", accounting loophole / creative accounting, Ada Lovelace, agricultural Revolution, Airbnb, airline deregulation, Andrei Shleifer, anti-communist, assortative mating, autonomous vehicles, bank run, banking crisis, banks create money, basic income, Berlin Wall, Bob Noyce, Branko Milanovic, Bretton Woods, British Empire, business cycle, call centre, capital controls, carbon footprint, Carmen Reinhart, Celtic Tiger, central bank independence, Charles Lindbergh, clean water, collective bargaining, Columbian Exchange, Columbine, Corn Laws, credit crunch, Credit Default Swap, crony capitalism, currency peg, debt deflation, Deng Xiaoping, discovery of the americas, Donald Trump, Erik Brynjolfsson, European colonialism, eurozone crisis, falling living standards, financial innovation, financial intermediation, floating exchange rates, Fractional reserve banking, Frederick Winslow Taylor, full employment, germ theory of disease, German hyperinflation, gig economy, Gini coefficient, global supply chain, global value chain, Gordon Gekko, greed is good, Haber-Bosch Process, Hans Rosling, Hernando de Soto, hydraulic fracturing, Ignaz Semmelweis: hand washing, income inequality, income per capita, indoor plumbing, industrial robot, inflation targeting, Isaac Newton, James Watt: steam engine, job automation, John Snow's cholera map, joint-stock company, joint-stock limited liability company, Kenneth Arrow, Kula ring, labour market flexibility, land reform, land tenure, Lao Tzu, large denomination, liquidity trap, Long Term Capital Management, Louis Blériot, low cost airline, low skilled workers, lump of labour, M-Pesa, Malcom McLean invented shipping containers, manufacturing employment, Marc Andreessen, Mark Zuckerberg, Martin Wolf, McJob, means of production, Mikhail Gorbachev, mittelstand, moral hazard, Murano, Venice glass, Myron Scholes, Nelson Mandela, Network effects, Northern Rock, oil shale / tar sands, oil shock, Paul Samuelson, popular capitalism, popular electronics, price stability, principal–agent problem, profit maximization, purchasing power parity, quantitative easing, railway mania, Ralph Nader, regulatory arbitrage, road to serfdom, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, savings glut, Scramble for Africa, Second Machine Age, secular stagnation, Silicon Valley, Simon Kuznets, South China Sea, South Sea Bubble, special drawing rights, spice trade, spinning jenny, Steven Pinker, TaskRabbit, Thales and the olive presses, Thales of Miletus, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Malthus, Thorstein Veblen, trade route, transaction costs, transatlantic slave trade, transcontinental railway, Triangle Shirtwaist Factory, universal basic income, Unsafe at Any Speed, Upton Sinclair, V2 rocket, Veblen good, War on Poverty, Washington Consensus, Watson beat the top human players on Jeopardy!, women in the workforce, Yom Kippur War, zero-sum game

So why didn’t new businesses spring up and hire all those unemployed workers? The problem was uncertainty about the future prospects for the economy, and thus the profitability of investment. This uncertainty is all the greater when the economy is struggling. Businesses will be reluctant to invest, whatever the level of interest rates. They may prefer to pay down debts, or hold cash. Keynes described this as a “liquidity trap”. Instead, Keynes said that the government should step in and boost demand. In the short run, governments face no practical limits on their borrowing capabilities since investors tend to regard government bonds as a safe asset. The government could then employ people in, say, construction projects. These workers will then spend their wages elsewhere, boosting demand for private sector goods.


pages: 700 words: 201,953

The Social Life of Money by Nigel Dodd

accounting loophole / creative accounting, bank run, banking crisis, banks create money, Bernie Madoff, bitcoin, blockchain, borderless world, Bretton Woods, BRICs, business cycle, capital controls, cashless society, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, commoditize, computer age, conceptual framework, credit crunch, cross-subsidies, David Graeber, debt deflation, dematerialisation, disintermediation, eurozone crisis, fiat currency, financial exclusion, financial innovation, Financial Instability Hypothesis, financial repression, floating exchange rates, Fractional reserve banking, German hyperinflation, Goldman Sachs: Vampire Squid, Hyman Minsky, illegal immigration, informal economy, interest rate swap, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Joseph Schumpeter, Kickstarter, Kula ring, laissez-faire capitalism, land reform, late capitalism, liberal capitalism, liquidity trap, litecoin, London Interbank Offered Rate, M-Pesa, Marshall McLuhan, means of production, mental accounting, microcredit, mobile money, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, negative equity, new economy, Nixon shock, Occupy movement, offshore financial centre, paradox of thrift, payday loans, Peace of Westphalia, peer-to-peer, peer-to-peer lending, Ponzi scheme, post scarcity, postnationalism / post nation state, predatory finance, price mechanism, price stability, quantitative easing, quantitative trading / quantitative finance, remote working, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Satoshi Nakamoto, Scientific racism, seigniorage, Skype, Slavoj Žižek, South Sea Bubble, sovereign wealth fund, special drawing rights, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transaction costs, Veblen good, Wave and Pay, Westphalian system, WikiLeaks, Wolfgang Streeck, yield curve, zero-coupon bond

Why Marx Was Right, New Haven, CT/London, Yale University Press. Earley, J. S. (1994). “Joseph Schumpeter: A Frustrated ‘Creditist.’ ” New Perspectives in Monetary Macroeconomics, G. Dymski and R. Pollin Eds. Ann Arbor, University of Michigan Press: 337–51. Economou, M., M. Madianos, et al. (2011). “Increased Suicidality amid Economic Crisis in Greece.” Lancet 378: 1459. Eggertsson, G. B. and P. Krugman (2012). “Debt, Deleveraging and the Liquidity Trap: A Fisher-Minsky-Koo Approach.” The Quarterly Journal of Economics 127 (3): 1469–513. Eichengreen, B. (2007). “The Breakup of the Euro Area.” NBER Working Paper No. 13393, Cambridge, MA, National Bureau of Economic Research, http://www.nber.org/papers/w13393. Eichengreen, B. (2008). Globalizing Capital: A History of the International Monetary System, Princeton, NJ, Princeton University Press.


pages: 823 words: 206,070

The Making of Global Capitalism by Leo Panitch, Sam Gindin

accounting loophole / creative accounting, active measures, airline deregulation, anti-communist, Asian financial crisis, asset-backed security, bank run, banking crisis, barriers to entry, Basel III, Big bang: deregulation of the City of London, bilateral investment treaty, Branko Milanovic, Bretton Woods, BRICs, British Empire, business cycle, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collective bargaining, continuous integration, corporate governance, creative destruction, Credit Default Swap, crony capitalism, currency manipulation / currency intervention, currency peg, dark matter, Deng Xiaoping, disintermediation, ending welfare as we know it, eurozone crisis, facts on the ground, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, floating exchange rates, full employment, Gini coefficient, global value chain, guest worker program, Hyman Minsky, imperial preference, income inequality, inflation targeting, interchangeable parts, interest rate swap, Kenneth Rogoff, Kickstarter, land reform, late capitalism, liberal capitalism, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, manufacturing employment, market bubble, market fundamentalism, Martin Wolf, means of production, money market fund, money: store of value / unit of account / medium of exchange, Monroe Doctrine, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, new economy, non-tariff barriers, Northern Rock, oil shock, precariat, price stability, quantitative easing, Ralph Nader, RAND corporation, regulatory arbitrage, reserve currency, risk tolerance, Ronald Reagan, seigniorage, shareholder value, short selling, Silicon Valley, sovereign wealth fund, special drawing rights, special economic zone, structural adjustment programs, The Chicago School, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transcontinental railway, trickle-down economics, union organizing, very high income, Washington Consensus, Works Progress Administration, zero-coupon bond, zero-sum game

By manipulating the spread between its “interest on reserves” (IOR) rate in relation to market rates, the Fed now had greater capacity to influence the aggregate quantity of reserves, and to direct liquidity to specific sections of the banking system, with the goal in particular of reducing systemic risk in the interbank market. The centerpiece of this new system was what came to be known as the practice of “quantitative easing.”88 At a time when interest rates were already near zero, this essentially involved flooding the financial markets with so many dollars as to prevent what economists called a “liquidity trap.” The US had not objected when this had been undertaken by Japan at the beginning of the decade, and this was no doubt a factor in ensuring it did not produce a run on the yen; its application in the US was seriously explored as a matter of Treasury policy as early as 2005.89 Previously, anyone suggesting such direct and massive pump-priming would have been judged economically illiterate. A sell-off of Treasuries by other purchasers would have been predicted, amid a massive run on the dollar.


EuroTragedy: A Drama in Nine Acts by Ashoka Mody

"Robert Solow", Andrei Shleifer, asset-backed security, availability heuristic, bank run, banking crisis, Basel III, Berlin Wall, book scanning, Bretton Woods, call centre, capital controls, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, credit crunch, Daniel Kahneman / Amos Tversky, debt deflation, Donald Trump, eurozone crisis, Fall of the Berlin Wall, financial intermediation, floating exchange rates, forward guidance, George Akerlof, German hyperinflation, global supply chain, global value chain, hiring and firing, Home mortgage interest deduction, income inequality, inflation targeting, Irish property bubble, Isaac Newton, job automation, Johann Wolfgang von Goethe, Johannes Kepler, Kenneth Rogoff, Kickstarter, liberal capitalism, light touch regulation, liquidity trap, loadsamoney, London Interbank Offered Rate, Long Term Capital Management, low-wage service sector, Mikhail Gorbachev, mittelstand, money market fund, moral hazard, mortgage tax deduction, neoliberal agenda, offshore financial centre, oil shock, open borders, pension reform, premature optimization, price stability, purchasing power parity, quantitative easing, rent-seeking, Republic of Letters, Robert Gordon, Robert Shiller, Robert Shiller, short selling, Silicon Valley, The Great Moderation, The Rise and Fall of American Growth, too big to fail, total factor productivity, trade liberalization, transaction costs, urban renewal, working-age population, Yogi Berra

Journal of Political Economy 115, no. 3: 403–​446. Kowsmann, Patricia. 2011. “Political Turmoil Grows in Portugal.” Wall Street Journal Online, March 15. Krugman, Paul. 1995. “Dutch Tulips and Emerging Markets.” Foreign Affairs 74, no. 4: 28-​44. Krugman, Paul. 1988. “Financing vs Forgiving a Debt Overhang.” Journal of Development Economics 29: 253–​268. Krugman, Paul. 1998. “It’s Baaack: Japan’s Slump and the Return of the Liquidity Trap.” Brookings Papers on Economic Activity 2: 137–​205. 582   r e f e r e n c e s Krugman, Paul. 2011. “An Impeccable Disaster.” New York Times, September 11. Krugman, Paul. 2012. End This Depression Now! New York: W. W. Norton. Krugman, Paul. 2014a. “Timid Analysis.” Conscience of a Liberal, New York Times Blogs, March 21. http://​krugman.blogs.nytimes.com/​2014/​03/​21/​timid-​ analysis-​wonkish/​?