The great debate in economics, during this crisis and over the longer term, has been between Keynesians and Austrians / austerians, (lately represented by the Chicago school, also called classical economics). Is government good? Is gold better than paper money? Do unregulated free markets lead to stability and prosperity? Do federal deficits ever have be paid back? Austrian economists tend to be fixated on gold and so-called "hard-money" policies, urging a return to pre-central bank days when the business cycle boomed and purged in a constant and damaging whipsaw. The "Neo-Keynesian", (aka neoclassical synthesis) and micro-foundations turn of the last few decades has been a triumph of the Austrian school, even if we have not quite gone the whole distance back to gold. We have deregulated, feted the CEOs, reduced taxes, and tried to box the government into impotence and disgrace. We had almost forgotten about Keynes, and the general prosperity that strong interventionist government policy fostered in the mid 20th century, after the Great Depression.
The Keynesian school is most intriguingly represented by MMT economics, which is a bit beyond the mainstream, but a growing movement to resuscitate Keynes and his more left-oriented successors, and to take fiat money seriously, particularly the vast powers it gives the government to foster stable economic conditions and universal employment. The bywords are fiat money- money that is not gold, and not "hard", but rather whose amount is continually adjusted by the government via its central bank and treasury to accommodate economic growth and other aims, and which floats against all other currencies, thereby freeing the issuing country of any "pegs" or dependence on external standards, metalic, political, or financial.
"The New Depression and the Great Depression were both caused by credit-fueled economic booms. In both instances, the boom began when the link between money and gold was broken. The earlier episode began in 1914 when World War I destroyed the Gold Standard in Europe. This time the credit boom began when the United States severed the link between dollars and gold in 1968 and then destroyed the Bretton Woods international monetary system in 1971."
Richard Duncan has rather thin credentials, working for various asset management companies, and briefly for both the World Bank and the IMF. But this is his third book, and has the kind of title, "The New Depression: the breakdown of the paper money economy", that leaps off the library's new book shelf. My expectations were of a doctrinaire gold-bug, and indeed, quotes of Ludwig von Mises, Friederich Hayek, and Irving Fisher are abundant. Even Murray Rothbard comes in for a cameo. Duncan hammers again and again, with seeming horror, at the fifity-fold growth of credit that has engulfed the US over the last fifty years, complete with countless exponentially rising graphs that make no mention of any correction for inflation. Of course, to the hard money acolyte, inflation is fundamentally illegitimate. One should be able to bury one's dollars in the back yard and come back to them a hundred years later to find their value unchanged.
But halfway through the book, something shifts. Duncan not only makes his peace with the current reality, but makes a stunning about-face.
"Capitalism was an economic system in which the private sector drove the economic process through saving, capital accumulation, and investment. The government's role was very limited. The United States has not had that kind of economic system for decades. ... This is not capitalism. Market forces no longer drive the economy. The current system is government-directed, but not planned. Government policy is determined through a process of compromise between the demands of competing power blocks: big business, the banking industry, the military, the elderly, and the general public, which, until recently, had grown to expect en ever-improving standard of living. Deficit spending and fiat money allowed the government to satisfy all those competeing demands for more than a generation. During that time, a key component of government policy has been to channel ever-greater quantities of credit to the household sector. As total credit expanded 50 times in less than 50 years, it created wealth and kept the American Dream alive. ... Capitalism became Creditism, for lack of a better word."
But then... "It is crucial to understand, however, that Rothbard and von Mises lived and wrote in a different time. Were they alive today, is it certain that they would still condemn fiat money as a great economic evil. It is not certain, however, that they would recommend the laissez-faire method as the correct solution to the current crisis in the global economy. In fact, it seems inconceivable that they would."
He goes on to lambaste the conservatives of today for their austerity policies, for he clearly sees that government spending is the only thing keeping the ship afloat in the face of private deleveraging. Indeed, their politics could not be more cynically cruel and perfidious, as of his writing back in 2012:
"All of them understand that a weak economy and high unemployment will increase the chances of a Republican candidate being elected president in November 2012. Therefore, it is very unlikely that the House will pass any government spending measures that would improve the short-term economic outlook before then."
And indeed, he seems to argue the more spending, the better, with conditions. His explicit policy proposal is a three trillion dollar stimulus package to transition the US entirely to solar energy by 2025.
"Solar energy would rank among humanity's greatest accomplishments. Low-cost energy would make possible a host of other private sector innovations, with wealth-creating possibilities beyond comprehension. This is just one example of the opportunities that our new credit-based economic system makes possible. There are many others. A large government-directed investment program to develop genetic and biotechnology would create medical miracles. Heavy government investment into nanotechnology would generate a new Industrial Revolution."
And so on. There is much more to say about this author's conversion to what is in essence Keynesian MMT economics, with a few fig leaves here and there. (His total lack of fear of China stopping its US bond purchases, his recognition that US federal deficits offset trade deficits, allowing the private sector to escape deflation, his proposal of a global minimum wage (!), his recognition of World War 2 as the ultimate stimulus package despite having zero direct investment value, etc.)
Once faced with reality, and evidently without an ideological or political need to carry water for the business elite or the 1%, (or indeed to abide by his book title), this author, starting from such unpromising beginnings, and with a good bit of expertise in the world of finance, makes a complete about-face and recognizes that our vast real productivity could be put to much more sustained and forward-thinking use if we intelligently employed the vast tools that an elastic, flexible (and floating) currency provides ... to put everyone to work. This author is only a minor example, but one senses that the classical economics paradigm is weakening significantly, after a long period in the sun.
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