My original draft:
In 1829 the then-young economist John Stuart Mill put his finger on how it could be that there could be excess supply of everything in the economy--of pretty much all currently produced goods and services and pretty much all kinds of workers. Previous economists had asserted a "metaphysical necessity" that excess supply of one commodity be matched by excess demand for another: that if there were unemployed cobblers then there were desperate consumers frantically looking for more seamstresses, and thus that the economy's problems were never those of a general shortage of demand but of structural adjustment instead. These previous economists, John Stuart Mill was the first to point out, had forgotten about the financial sector. If there was an excess demand for some set of financial assets, then there could be an excess supply of everything else--what they used to call a "general glut," and what we now call a depression.
But what is the financial excess demand, exactly? Friedmanite monetarist dogma says that the key financial excess demand is always and everywhere for money--and you can always cure depression by bringing the money supply up so that there would no longer be excess demand for money. Hicksian doctrine says the key financial excess demand is almost invariably a demand for bonds--for vehicles to transport purchasing power in the form of savings from the present into the future--and you can almost invariably cure the depression by (i) raising business confidence so that they would issue more bonds and build capacity or (ii) getting the government to borrow and spend and so boost the supply of bonds.
The Minskyites have a different take. The Minskyites say that the monetarists and the Hicksians (usually called Keynesians, much to the distress of many who actually knew Keynes) are sometimes right but definitely wrong when the chips are down and a big depression is the result of a financial crisis. Then the key financial excess demand is for high-quality assets: safe financial places in which you could park your wealth and still be confident it would be there when you returned.
After a panic, Hyman Minsky and his (few) allies argued, boosting the money stock would fail. Cash is a high-quality asset, true, but even big proportional boosts to the economy's cash supply are small potatoes in the total stock of assets and would not do much to satisfy the key financial excess demand. Trying to boost investment would not work either, for there was no excess demand for the risky claims to future wealth that are private bonds. The right cure, Minsky and his allies argued, was the government as "lender of last resort": increase the supply of safe high-quality assets that the private sector can hold by every means possible: printing cash, creating reserve deposits, printing up safe high-quality government bonds and using the proceeds to buy goods and services, printing up safe high-quality government bonds and then swapping them out into the private market in return for risky assets.
When the government prints up cash and swaps it out for government bonds, we call that expansionary monetary policy. When the government prints up bonds and uses them to buy goods and services, we call that expansionary fiscal policy. When it prints up cash and bonds and swaps them for risky private financial assets or guarantees private assets we call that banking policy. All of these, the Minskyites say, have their place and should be pursued now--not as Friedmanite monetarism or Hicksian fiscalism, but instead as ways to boost the supply of high-quality financial assets that are in such extraordinary demand now.
But what happens should a government's printing press print more bonds than investors think it will dare to raise future taxes to pay off? What happens when a government's debts are no longer regarded as safe? Then policies of monetary or fiscal expansion or of banking sector asset swaps and guarantees do not boost but reduce the supply of safe high-quality assets: they move government paper out of the "safe" and into the "risky" category. We saw this in Austria in 1931 and in East Asia in 1997-8 and in Greece right now. Then not expansion but rather austerity to restore confidence in the safety and quality of government liabilities is the best a government can do to attempt to relieve depression--that and cry for help from outside.
Here we have the crux: Right now Greece and Ireland and Spain and Portugal and Italy need to be austere. But Germany and Britain and America and Japan do not. With their debts valued by the market at heights I had never thought to see in my lifetime, the best thing that they can do to relieve the global depression is to engage in coordinated global expansion: expansionary fiscal policy, expansionary monetary policy, and expansionary banking policy are all called for on a titanic scale.
But, the members of the Pain Caucus say, how will we know when we have reached the limits of expansion? How will we know when we need to stop because the next hundred billion tranche of debt will permanently and irreversibly crack market confidence in dollar or sterling or deutschmark or yen assets? Will shrink rather than increase the supply of high-quality financial assets the world market today so desperately wants? And send us spiraling down?
Trust me, we will know when the time comes to stop expansion.
Financial markets will tell us.
And not by whispering in a still, small voice.
Trust me, we will know, and right now we are still very, very far from that point indeed.
940 words: July 15, 2010