Liberal finance, dear Liberal finance, dear money and economic money and economic

crisiscrisis

Geoff TilyGeoff Tily

July 2009July 2009

Monetary stanceMonetary stance

CHEAPCHEAP DEARDEAR

EASYEASY

TIGHTTIGHT

1. More likely under dear 1. More likely under dear moneymoney2. Begins in corporate sector2. Begins in corporate sector

1.1. Credit creation against expected Credit creation against expected incomesincomes

2.2. Real expansionReal expansion

3.3. Outcomes relative to expectationsOutcomes relative to expectations

4.4. Shortfalls, leading to distress borrowing Shortfalls, leading to distress borrowing and debt inflationand debt inflation

5.5. Financial collapse (August 2007); debt Financial collapse (August 2007); debt deflationdeflation

6.6. Real collapse (ongoing)Real collapse (ongoing)

1. Money and Interest1. Money and Interest

Monetary StanceMonetary Stance

CHEAPCHEAP DEARDEAR

EASYEASY

TIGHTTIGHT

Funding complexFunding complex

M0

r0

LP schedul

e

M

r

Tap issueTap issue

M0 M1

r1

r0

LP schedul

e

M

r

Tap issueTap issue

M0 M1

r1

r0

LP schedul

e

M

r

M2

De-financialisationDe-financialisation

Bank rate set asideBank rate set aside Changes to debt management policy:Changes to debt management policy:

– Tap issueTap issue– Wider range of maturitiesWider range of maturities– Extension to floating debtExtension to floating debt

Treasury deposit receiptsTreasury deposit receipts

Capital control Capital control Exchange managementExchange management

The Report of the National Debt The Report of the National Debt EnquiryEnquiry

III30. We suggest the following programme of initial procedure – the date of its introduction is discussed below.

(a) Treasury Bill rate to be brought down to 1/2% and Treasury Deposit Receipts to carry 5/8%; probably a special rate of 1% (broadly the present rate) to apply to overseas money now in Treasury Bills and the like.(b) Subject to action on (a), 5 year Exchequer Bonds at 11/2% and10 year Bonds at 2% to be issued on tap, a new series to be started annually.(c) 3% Savings Bonds to be issued on tap, a new series to be issued annually, with an option to the Treasury to repay after 10 years with, preferably, no final maturity (or if necessary a fixed latest date ofrepayment after 35 years).

(b) follows upon (a); (c) could either follow (a) or precede it.

Monetary stanceMonetary stance

CHEAPCHEAP DEARDEAR

EASYEASY

TIGHTTIGHT

2. Money, Interest and 2. Money, Interest and ActivityActivity

Investment demandInvestment demand

r0

I0MEC

schedule

r

I

Animal spiritsAnimal spirits

r0

I0

I1

MEC schedul

e

r

I

I2

Dear and easy moneyDear and easy money

r0

I0

I1

correct MEC schedule

r

I

MEC 1

3. Financial 3. Financial considerationsconsiderations

Dear and easy moneyDear and easy money

r0

I0

I1

correct MEC schedule

r

I

MEC 1

4. Prevention4. Prevention

Cheap and tight moneyCheap and tight money

r1 r0

I0

I1

Correct MEC schedule

r

I

5. The evidence of 5. The evidence of experienceexperience

-10

-5

0

5

10

15

20

25

1920 1926 1932 1938 1944 1950 1956 1962 1968 1974 1980 1986 1992 1998 2004

Real interest rates on United States Real interest rates on United States corporate bonds (Moody’s BAA)corporate bonds (Moody’s BAA)

Monetary stanceMonetary stance

CHEAPCHEAP DEARDEAR

EASYEASY 70s 70s

02-0702-0720s – US 20s – US

80-0180-01

02-0702-07

TIGHTTIGHT 31-4531-45

45-7045-7020s – UK 20s – UK

08-0908-09

US GDP: contributionsUS GDP: contributions

Y C I X M G30s 1.3 67 -24 -4 7 5440s 6.0 41 11 4 -2 4750s 4.1 57 20 3 -7 2860s 4.4 62 19 7 -7 1970s 3.3 67 25 15 -11 380s 3.1 69 14 15 -19 2190s 3.1 70 30 23 -31 800s 2.3 84 3 22 -27 18

50-60s 59 20 5 -7 2380-00s 75 15 20 -26 16

The debt inflationThe debt inflation

0

200

400

600

800

1000

1200

1400

1600

1945 1949 1953 1957 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005

““The build-up of debt levels over time, both domestically and internationally, can eventually also lead to economic problems with attendant and often substantial costs. … Any or all of these numbers might well

revert to the mean, with associated implications for global economic growth. Such an unwinding might be gradual, and possibly benign, but it could also be rapid

and disruptive. In large part, what happens will be determined by real–

financial interactionsthat we should not pretend to fully

understand.””

The BIS in their The BIS in their 75th Annual 75th Annual ReportReport, 2005, 2005

6. Beyond the 6. Beyond the corporate sectorcorporate sector

Conventional opinionConventional opinion

Chiefly: Greenspan did not create low, long-term interest rates. The low, long-term rates were caused primarily by a global savings glut, Wolf said. (See: China's savings rate.) (April, 2008)(April, 2008)

Ben Bernanke, the US Federal Reserve Chairman, has argued that this creates a global savings glut and can also help to explain also why long-term interest rates are so low across the developed world. (Sentence, March 2007)

““new macrofinancial new macrofinancial stability framework”:stability framework”:

To be more specific, monetary policy To be more specific, monetary policy might be tightened even with projected might be tightened even with projected inflation under control, given a inflation under control, given a sufficiently worrisome combination of sufficiently worrisome combination of rapid credit growth, rising asset prices rapid credit growth, rising asset prices and distorted spending or production and distorted spending or production patterns. In focusing on a combination of patterns. In focusing on a combination of systemic indicators, this proposal is quite systemic indicators, this proposal is quite different from simply targeting asset different from simply targeting asset prices. (BIS, 2007, p. 148)prices. (BIS, 2007, p. 148)

7. Keynes and Marx7. Keynes and Marx

Investment demandInvestment demand

r FE, T

IFE, T

Correct MEC

schedule

r

I

r FE, T+1

IFE, T+1

Keynes’s obituary Keynes’s obituary in the in the Economic JournalEconomic Journal

Austin Robinson, March 1947 Austin Robinson, March 1947

Indeed it is difficult not to be impressed by the consistency of his main strategic objectives: the full employment of resources; the achievement of balance of payments for all countries by methods that would not be inconsistent with full employment; as a means to this, a system of exchange rates that would combine the short-term virtues of fixity and predictability with the long-term virtues of flexibility; and, as a means to full employment, low interest rates. (Robinson 1947, p. 45)