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The answer to the question why Congress is restricting the money supply is that it is a power play. The Congress is keen to show the American people who is in charge. In the earliest days, the deprivation of human rights was actually incorporated in the Constitution, despite the disclaimer that “all men are created equal.” At that point in time, the law sort of stood alone as the deprivator of rights of slaves, natives, women, children, and money could be used to buy freedom. That’s how we ended up with a significant population of freedmen, primarily in the northern states where they weren’t liable to be snapped by any officious lawman. It is also how we ended up with women owners of large estates as a consequence of fathers writing up wills that specifically precluded the (mostly roaming) husbands of these women from getting any share of their inheritance.
Anyway, now that the law is set to promote equality, it falls to the money to enforce the distinctions that are necessary to a social hierarchy. Some people have to be deprived just so some other people can claim to be top dogs.
The impulse towards segregation is really hard to resist, if only because some people are convinced that without the promise of a reward, nobody will do anything at all.
But, I have some questions that are not entirely germain. To what extent does restricting the availability of money — i.e. rationing the supply — promote hoarding? Is the response to the availability of money the same as to the availability of a commodity like flour or fuel or other necessities of life? Does scarcity, whether natural or artificially created, propell the propensity to save into excess accumulation and hoarding? Is it something that only endemically insecure people engage in or is it a universal response?
Interviewed in a Swedish Television documen-tary on the the economic crisis (aired yesterday on SvT), Nobel laureate Robert Lucas answered a question (wind to 19:40 in the programme here http://www.svtplay.se/video/591940/19-11-del-2-av-3 ) if the level of debt was a problem, by telling us that the high level of debt is not an interesting problem, since, for a country as a whole, debt and credit always “cancel out.” Unbelievable stupidity even to come from a Chicago economist. Fortunately Dirk Bezemer and Steve Keen were also interviewed and could sort things out and give a more sensible view on the increasing indebtedness of modern economies.
Debt-deflation and austerity-Professor Lars Pålsson Syll-Malmö University
20 November, 2012 at 21:24 http://larspsyll.wordpress.com/2012/11/20/debt-deflation-and-austerity/
Some of my readers have asked me if there really is any difference between solving the liquidity trap by lowering real wages via inflation or by lowering nominal wages. Are they not equivalent measures?
No, they are not!
As John Maynard Keynes wrote in General Theory (1936):
The method of increasing the quantity of money in terms of wage-units by decreasing the wage-unit increases proportionately the burden of debt; whereas the method of producing the same result by increasing the quantity of money whilst leaving the wage-unit unchanged has the opposite effect. Having regard to the excessive burden of many types of debt, it can only be an inexperienced person who would prefer the former … If a sagging rate of interest has to be brought about by a sagging wage-level … there is … a double reason for putting off investment and thus postponing recovery.
Or as Irving Fisher – the originator of the debt-deflation theory – wrote in Debt-Deflation Theory of Great Depressions (Econometrica, 1933):
In summary, we find that: (1) economic changes include steady trends and unsteady occasional disturbances which act as starters for cyclical oscillations of innumerable kinds; (2) among the many occasional disturbances, are new opportunities to invest, especially because of new inventions; (3) these, with other causes, sometimes conspire to lead to a great volume of over-indebtedness; (4) this in turn, leads to attempts to liquidate; (5) these, in turn, lead (unless counteracted by reflation) to falling prices or a swelling dollar; (6) the dollar may swell faster than the number of dollars owed shrinks; (7) in that case, liquidation does not really liquidate but actually aggravates the debts, and the depression grows worse instead of better, as indicated by all nine factors; (8) the ways out are either laissez faire (bankruptcy) or scientific medication (reflation), and reflation might just as well have been applied in the first place.
Austerity policies will only bring our economies deep into the kind of debt-deflationary depressions that Fisher and Keynes warned us of in the 1930s.
I was reading through the final section of your 7DIF, and I was glad to see you had included a recommendation for a public-option healthcare system. It seemed odd that you had no suggestion there regarding our higher education system, however. Given the absurd costs of going to college these days, do you have any recommendations on this front? The problems there seem to be similar with our healthcare system – a completely distorted market structure that results in a race to the top for prices. Would be interested to hear your take on the topic, or perhaps you’ve addressed it elsewhere?