Wednesday, April 18, 2012

It was the one thing that Keynes was fundamentally wrong about (Malthus too, for that matter)

And Scott Sumner, Matt Yglesias, and Karl Smith (at the end of the post) are promoting the idea again today.

Is it possible? Of course its possible that we could enter a period of weaker growth that implies the prospect of liquidity trap recessions in the future. Depending on how we deal with aging populations, it might even be plausible as a medium term forecast.

But I'm not personally willing to be so pessimistic just yet. Reaching frontiers matters, but frontiers can be pushed out too.


  1. Daniel

    Yesterday, Williams posted a link to a Kocherlakota speech, which included theses sentences:

    My story for the past four years centers on two key changes in the economy. The first is that from 2006 to 2012, households have lost trillions of dollars in wealth and net worth, as housing and other assets have fallen in value. The second is that households and firms now feel that they must stay prepared for the kind of financial market shock they experienced in 2008.

    1) Exactly where or how was Keynes wrong, as to these two points?

    As to the second, isn't the reason for the second attitude directly related to our failure to have had the massive "helicoptor drop" actually required in light of our aging populations, etc. IOW, we don't have the time for a "slow recovery."

  2. "It was the one thing that Keynes was fundamentally wrong about"

    What is? Your post doesn't make it clear.

  3. Sorry - not clear to at least two people.

    The idea that long term demographic (and demand generally) trends meant an extended future period of stagnant growth. The idea that the investment opportunities of the nineteenth century were spent.

    I do agree with Keynes on the more basic point that there is no guarantee of a full-employment level of investment demand. And I do agree with the anonymous commenter above that balance sheet issues are going to have a predictable impact on demand.

    I think the post-war experience has demonstrated that prognosticating too much about being doomed to a permanent slump is dangerous. Of course this sort of thing is always a risk - and maybe demographic trends suggest that it will be extra-risky in the future. But I'm not sure pessimism about recurrent liquidity traps and weak demand is necessary.

  4. I mostly agree with you, especially about long-run near 0% interest rates.

    In the UK since 2009 it has been possible to buy term-deposits/bonds with interest rates of 2.5-3.5%. Most of those are even covered by deposit insurance, so they are as safe as investments denominated in money get. This fact has been very useful to me personally since my home mortgage rate is tied to the Bank-of-England base rate. So for the past few years it has paid me to save my money elsewhere rather than pay off more of my mortgage. There's no way this can be a long run situation.

    In some type of short-run the interest rate bank accounts and bonds can fall to very low levels and deviate significantly from returns on other investments. But, unless the demand for liquidity acts in a very strange way the two become substitutable in the long run. For example, I don't expect the rent on a house to fall to zero in the future or to fall to the cost of maintaining the house, and neither does anyone else. They should not expect interest rates to remain around zero indefinitely either because why should someone keep a zero interest bond when they can buy a property that yields rent. The answer "what if it's a zero interest bank balance and the holder wants the liquidity of holding a money-substitute not returns" doesn't cut it in the long run. For it to prevent substitution kicking in the demand for liquidity must be constantly rising. Besides, even in this case a FR bank can buy the property, use it as backing for bank balances and pay the rent as profits to it's shareholders.

    1. I expect Daniel and many of the readers here know what I mentioned above.

      I argued a little more about these long-run ideas in an article I wrote ages ago on the book "The Forever War"...

  5. Actually, Malthus was wrong about some other things as well.


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