John Maynard Keynes

[Hugo]

For all intents, "modern money" has been privatized.

Rubbish! Government fiat money is very real. Governments decide what is legal tender and what is not, and how much new currency to mint (or the fractional reserves it allows to banks, which is the same thing). There is no private money anymore. The fact that "private financial instruments" are involved in dealings is irrelevant until those instruments are also in the business of issuing currency.

For instance, you have claimed that the Federal Reserve is private and nongovernmental, which is a lie. Consider that the Fed made very profound shifts in monetary policy in the years of 1953, 1961, 1969, 1974, and 1977, and in all of those years, the presidency changed. Coincidence? I think not. Policies of "packing" the Fed director positions with friendly people go back to the founding of the Fed itself. FDR used this policy to great effect. Robert Weintraub observed that "a Chairman of the Federal Reserve Board who ignores the wishes of the President does so at his peril."

Consider too that Arthur Burns was Chairman of the Fed during the terms of office for Nixon, Ford and Carter. In Nixon's time, he followed a loose monetary policy, apeing Nixon's policies, and then when Ford came to office he dutifully followed his "Whip Inflation Now" line and contracted the money supply. Then when Carter was elected, he followed Carter's desire to raise the supply rate again. Doesn't sound too independent.

Friedman rightly said that sustained inflation is at all times a monetary phenomenon.

Chicago capitalism is an inferior doctrine to Austrian. I would summarise Milton Friedman in much the same way that you summarised Keynes: some occasionally useful thoughts, but for the most part misguided and wrongheaded. Monetarism is wrong as a theory, as the Japanese stagnation has illustrated. Although it appears to offer a valid explanation, the prescriptions that follow don't solve the problem at all, therefore, one must conclude that the diagnosis has missed something vital. A miss is as good as mile, in this case.

[The Terrible Sweal]

As I understand it, when growth is too rapid it can create a destabilizing level of inflation. Central banks act on a continous basis to maintain a balance.

Explain how, or at least provide an example.

Growth is an outward/upward shift in the aggregate demand/supply equilibrium. If the equilibrium is shifting too rapidly, predictability suffers. To avoid this problem central banks constrain the supply of money, thereby slowing or halting the shift of the equilibrium.

No, that's deficit spending.

No, it is not. Deficit spending is when you borrow money and spend it. A government could spend from a deficit without inflating, for instance, by selling bonds. In this case, the expenditure is from a budget deficit but is from real capital.

There doesn't seem to be a distinction. Government spending is either based on taxes or borrowing. Taxes take money directly from the economy and so there is no net inflationary pressure, so it must be borrowed money that you are worried about.

Inflation is creating new money from nothing and then spending it. That's an entirely different beast.

I don't understand what you mean. Who creates this 'money from nothing'?

No. Workers demand more value. They know inflation affects their money like everyone else.

My point exactly.

Then you agree with me?

Well, I guess that concludes our discussion for today ... we're using much different definitions.

Why did you not tell me how you define inflation?

I thought I did. I said inflation is a decrease in the unit purchasing power of currency.

[Hugo]

Growth is an outward/upward shift in the aggregate demand/supply equilibrium. If the equilibrium is shifting too rapidly, predictability suffers. To avoid this problem central banks constrain the supply of money, thereby slowing or halting the shift of the equilibrium.

Alright, that makes sense. But I don't agree with the premise that a rapidly shifting equilibrium has negative consequences. If demand increases rapidly and supply also increases rapidly (as in the period 1700-1913), this should not cause a problem. Predictability might be a factor in that it might cause malinvestment in a rapidly-growing sector, as might have been a cause of the dot-com bubble, but as in that example, sooner or later those malinvestments will correct themselves without necessitating the intervention of a central bank. More to the point, artificially altering the money supply creates further malinvestment and causes disruption of the consumption/investment relationship, which causes far greater problems.

There doesn't seem to be a distinction. Government spending is either based on taxes or borrowing.

No, there is a third: inflationary spending. Government can tax (take money), borrow (ask for money) or inflate (make money).

I don't understand what you mean. Who creates this 'money from nothing'?

In the past, it was central banks. Now the government has also given permission for private banks to do this in the form of fractional reserve banking. Usually, however, private banks do this in making loans to government. This has the same effect as if the government were to print more money.

Then you agree with me?

Workers will prefer an increase in value, and this is a constant regardless of inflation. In the conventional free market the natural tendency of prices to fall will provide this increase in value, even if wages remain constant or even fall (as long as they fall slower than prices do). Inflation, however, causes prices to rise, and therefore the worker preference for increased value will be redirected towards a rising wage. So he will demand more money, even though he would not necessarily do so in a non-inflationary environment.

I think we are in agreement, yes. Perhaps I should have said that workers will demand more currency, but the same or greater amount of money.

I thought I did. I said inflation is a decrease in the unit purchasing power of currency.

Ah, OK. This is the usually accepted definition of inflation these days, so one could certainly not claim that you are uninformed, but I contend that this is an effect of inflation and not inflation itself. Inflation is the artificial creation of money, and rising prices (or, as you have put it, "a decrease in the unit purchasing power of currency" which amounts to the same thing) are unavoidable consequences of this inflation.

[Grantler]

As a slight resurrection of this topic...

Is one willing to argue that the steps Reagan and Thatcher took in the 80s were not necessary in creating a more stable and robust economy (ie. moving from Keynes to Hayek---it seems to have helped Solidarity in Poland).

[WageSlave]

Anyone intersted in a modern look at keynesian economics should take a look at the "post autistic economics review". It does a great job of linking feminism and other real issues to modern day economics.