Saturday, 14 December 2013

Setting up the next Keynesian bubble and bust?

By G. R. Steele          

Keynesian demand management endures with the regular adjustment of short-term interest rates and the lowering of long-term interest rates, once short-term interest rates have been driven to their ‘lower bound’. That a call for negative real interest rates should be supported by an economist who finds salvation in bubbles can be no surprise. A proposal from Larry Summers and supported by Paul Krugman is the antithesis of economics. Interest rates serve as all other prices: they allocate scarce resources.

The manipulation of interest rates to steer economic growth has microeconomic consequences, some of which are more widely acknowledged than others: the redistribution of income from savers to borrowers and the increased capitalised value of pension fund liabilities are widely acknowledged. More subtle and less-well documented is the impact of inter-temporal price changes upon business decisions.

Continue reading...