Explaining The Credit Cycle

By Alasdair Macleod – Re-Blogged From GoldMoney

This article summarises why the credit cycle leads to alternate booms and slumps. It is only with this in mind that they can be properly understood as current economic conditions evolve.

The reader is taken through three monetary models: a fixed money economy, one governed by changes in bank credit, and finally the consequences of central bank intervention.

Classical economics provided the basis for an understanding of the effects of bank credit expansion. The theory, embodied in the division of labour, eluded Keynes, who was determined to justify an interventionist role in the economy for the state.

Continue reading

It’s Not Stagflation, But Inflationary Impoverishment

By Alasdair Macleod – Re-Blogged From http://www.Gold-Eagle.com

It is a matter of personal interest that it was my uncle, Iain Macleod, who invented the term stagflation shortly before he was appointed shadow chancellor in 1965. It is no longer used in its original context. From Hansard (the official record of parliamentary debates) 17 November that year:

We now have the worst of both worlds —not just inflation on the one side or stagnation on the other, but both of them together. We have a sort of “stagflation” situation and history in modern terms is indeed being made.

Continue reading

On Say’s Law

By Alasdair Macleod – Re-Blogged From http://www.Gold-Eagle.com

One of my regular readers has raised the important subject of Say’s Law, the denial of which both Keynesian and modern monetarists are emphatic. They need this fundamental axiom to be untrue to justify state stimulation of aggregate demand. Either Say’s Law is right and state intervention is economically disruptive, or if it’s wrong modern economists are right to ignore it and progress their science beyond it.

The basis of post-Keynesian economic stimulation assumes a breakdown between consumption and production can occur, and the correct response is for government to step in and revive failing demand. It is the favored explanation of the 1930s slump. Obviously, Say’s Law would have to be discarded.

This article revisits this subject, explains where Keynes went wrong, redefines the Law to include money as a good, and explains why supply-side is less destructive than demand management. Say’s Law is crucial to understanding why increasing state intervention to revive economic demand cannot work, and has led us into the current crisis.

Continue reading

The Declining Interest Rate Cap

By Alasdair Macleod – Re-Blogged From http://www.Silver-Phoenix500.com

Believe it or not, one of the topics in economics that confuses macroeconomists is the actual role of interest rates. For the most part they just assume that an interest rate is the cost of money, the price of money, or even the transfer of the fruits of production from producers to idle capitalists. This last assumption appears to have been Keynes’s motivation for his dislike of savers, or rentiers as he disparagingly labelled them. The thought that workers slave for a master who then pays interest to capitalists energises Marxism as well.

In a free market, consumption comes in two basic forms: that which is consumed today, and that which is postponed into the future. Deferred consumption is saving, and Keynes’s target was the saver, even “looking forward to the rentier’s euthanasia” as he put it in his General Theory.

Denying Say’s Law or the law of the markets allowed Keynes, in his own mind anyway, to replace the saver with the state as the principal source of funding for industrial investment. That he came to this conclusion can only be the result of moral principles unsupported by reasoned theory. But once you launch yourself down what amounts to the slipway of prejudice, there is no knowing where it will all end. In Keynes’s case, it produced a following which has become the mainspring of today’s macroeconomic mainstream. We play this down, commonly saying that the reason for discouraging saving is to encourage current consumption. This is an error, and everyone who utters this knows or should know it. All Keynes’s work, from his Tract on Monetary Reform onwards hints at his true desire, to eliminate idle savers as an economic factor.

Continue reading