Today some short takes from Nobelist Joseph Stiglitz, Soros associate Robert Johnson and our favorite, James K. Galbraith, the latter on the subject of a financial transactions tax. Then we'll give you a flavor of the Demand Side forecast, since it is Forecast Friday, and in between, some more Minsky in plain English.
First, here's Joseph Stiglitz caught in an airport for a few comments.
Joseph Stiglitz. Now a promotion for The Real News Network. Robert Johnson, formerly fund manager for George Soros and recently picked by Soros to head up his INET - Institution for New Economic Thinking -- initiative. Here interviewed by TRNN's Paul Jay.
Now James K. Galbraith, here with a few thoughts on the potential for a financial transactions tax. We include the context here, where we don't always. This is from a CNBC program with Larry Kudlow and partner, plus a third debating foe on the floor.
JAMES K. GALBRAITH
So you get an idea of the hysteria in the casino when the mention of actually regulating or taxing their very destabilizing activities falls on their ear. A financial transactions tax is, indeed, a way of dampening all kinds of useless speculation and -- should it be enacted on a broad scale as Galbraith suggests at the end -- would cool down the hot money in currency markets that has played havoc with economies around the developing world over the decades.
How delighted we were to discover Hyman Minsky. We had approved of him by reputation, but had not really gotten into his thinking until the crisis eliminated vast swaths of academic economics from serious consideration.
Now we read him and he is better than us. Plus, he is writing twenty-five years ago.
Unfortunately his dense English is difficult for us. So for our own benefit and hopefully that of our listeners, we have translated another section of his monumental Stabilizing an Unstable Economy into plain English.
beginning at page 283, and Chapter 11, Inflation
our preface: Inflation was the issue of the day in the 1970s and 1980s as Minsky was writing. It had in a preposterous coup enabled the Monetarists under Milton Friedman to dethrone the bastard Keynesians -- Joan Robinson's term -- from positions of policy influence.
We at Demand Side do not believe Minsky pays enough attention to energy and particularly oil prices, but we'll fight that battle another day. With our apologies we begin.
Minsky begins with his elegant algebra which demonstrates the logical necessity of prices and price inflation being positively related to investment, profits, and the proportion of labor employed in investment goods versus consumer goods. Prices are negatively related to productivity increases.
A change in the behavior of consumer prices occurred in the mid-1960's, he writes. Inflation had been mild and episodic in the post-war period, but in 1967 it changed. It became more severe and quite clearly followed a cyclical pattern. Aggravated inflation between 1967 and Minsky's writing in the early 1980s was linked directly to the financial crises that began to occur periodically.
In his chapter 5, Minsky showed that prices are the carriers of profits and the vehicles by which a surplus is forced. The prices must validate the liability structures and costs of capital assets for a healthy growth and continued investment to occur. Sometimes they do not. Markups on labor costs are proportional to the extent of effective demand. These markups carry the cash flows that determine whether past financing was valid and whether new financing will be available.
Quoting directly, "This argument reveals that absolute prices (i.e., the observed result of market processes) and relative prices (i.e., the terms upon which alternatives are available) emerge simultaneiously; one is not more real or basic than the other."
Well, that was short and sweet, but we are out of time. This last point is worth carrying around with you. Deflating prices to their quote real unquote level may not be the clarifying technique we have long imagined.
Demand Side Forecast
Now we look at the Demand Side forecast through the window. We think it would be premature to revise our forecast before we see the results. Too many tweak the next quarter's numbers after they are in sight. Not at Demand Side. We're either too lazy, not organized enough, or have seen the numbers change and come back toward us enough not to be too concerned. Maybe a combination of all three.
Just as flavor, from a recent note to a forecaster who has real responsibility.
- Enormous household and business debt is depressing any tendrils of growth. Households increasing their savings (aka paying down debt) decreases demand and mutes action from the multiplier, i.e., stimulus has less effect. Business debt engenders Spartan payrolls and serves as silent warning not to invest.
- The financial sector is still fragile and susceptible to further crises.
- Too big banks are not lending, preferring to make money by trading or take their back door bailout from the margin between zero borrowing and the return on Treasuries.
- Many derivatives still stalk the landscape. Remember, it was the financial "innovations" of CDOs, MBSs, and so on that precipitated the last crisis. There are plenty of CDSs and CRE securities ready to go bad. The next crop may be too big for the Fed, and not just politically, to backstop.
- As my correspondent had correctly observed, federal stimulus is neutralized by state and local cutbacks. The appropriate fiscal policy is open-ended support to states and municipalities plus big new long-term recovery and development spending. The likelihood of such policy is slim to none. Consequently we can expect stagnation and decline, interrupted by crises.