The “causes” are always real, never monetary

Keynes said “In the long run we´ll all be dead”. Unfortunately our descendants will be very much alive, maybe living miserably…

Chess Masters, Entrepreneurs and Economists weigh in. But they´re all talking about dreary prospects for the long run. But so did Thomas Malthus more than 300 years ago. And so did the Club of Rome 50 years ago. It appears that human ingenuity “solves” the long run problem. It seems much harder to “solve” the short-run cyclical one!

From the FT:

There is a fierce debate over the origins of the disappointing economic growth seen in advanced economies. On one side there is former world chess champion and political activist Garry Kasparov and internet entrepreneur Peter Thiel, while on the other, there is Kenneth Rogoff, a Harvard economist.

Mr Rogoff, who authored This Time is Different: Eight Centuries of Financial Folly(2009) with Carmen Reinhart, argues that the systemic financial crisis is the root cause of the prolonged economic slump in the western world. In their research, Mr Rogoff and Ms Reinhart found economic growth following a systemic financial crisis to be about a full percentage point below trend growth.

Mr Kasparov and Mr Thiel, on the other side, disavow Mr Rogoff’s claim that the collapse of advanced-country growth is the result of the financial crisis. In their view, the flailing western economies reflect stagnating technological development and innovation, and without radical changes in innovation policy, advanced economies are unlikely to see any prolonged pickup in productivity growth.

Robert Gordon of Northwestern University espouses an even more dire view, suggesting that the 250 years of rapid technological progress that followed the Industrial Revolution may prove to be the exception, rather than the rule.

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8 thoughts on “The “causes” are always real, never monetary

  1. Marcus, I assume the title of this post is another of your “sarcastic” (your word) statements. Tongue-in-cheek, maybe. I guess I take things too literally. The title threw me off.

    The Kasparov/Thiel view is clearly real, not monetary. So is Robert Gordon’s view. But Reinhart & Rogoff see a monetary cause of the current sluggishness. So I cannot conclude that your title is a criticism of the three views summarized in your excerpt. This leaves me confused.

    You and I are both monetary thinkers. I often refer back to Friedman quoting Mill: money “only exerts a distinct and independent influence of its own when it gets out of order.” The “out of order” thing is what drives me. It seems to drive you, too.

    One major difference between us is that, for me, the “systemic financial crisis” and our current troubles are logical conclusions of a downhill trend established by Volcker. You seem to view these problems as a fluke, an accident caused by Bernanke. I have much trouble with your view on this.

      • From the trend of interest rates after WWII, rising to 1981 and then falling, it seems clear to me that Volcker broke the spirit of the economy in 1981. (The technical term that I might mean by “spirit” I do not yet know.) Rates went up-and-down before Volcker, and up-and-down after. But the overall trend after 1981 was different, and was “established by Volcker”.

        And then, no matter how high rates were in 1981, if the trend since 1981 was all downhill, eventually rates had to reach zero. This is the “logical conclusion” to the trend.

        Perhaps (I will have to do my own graphs before I can say more than “perhaps”) a sudden fall in money growth under Bernanke did cause the sudden drop in the NGDP path that your graphs often show. But if so, I want to examine comparable sudden falls in money growth at earlier times. I expect to find that the economy was much more fragile in recent years, and that comparable falls in money growth had much less effect in times past.

        This fragility will be found to be related to the “spirit” of the economy and to the downsloping interest rates.

  2. Art, From the 50s to the early 80s the rate trend was up, following the NGDP growth trend. When NGDP growth first came down and was stabilized, long term interest rates came down, as they should given the strongly reduced inflation risk premium. By the early 00s they had stabilized (around 4%), dropping when NGDP tanked.
    That was a good trend. No “fragility” involved. It´s the recent debacle that has thrown the system off track.

    • Thank you Marcus. “as they should given the strongly reduced inflation risk premium.” Of course. (How did I miss that??)

      Have a good holiday.

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