On Economic Anthropology of our time
The torrent of media comments on the Fed and its role in supplying support for the American and world economies has resulted in a number of disputes over the effectiveness of the bond buying activities. The production of liquidity in the market is claimed to have sustained the economy in much the same way that a variety of political and economic voices argue that saving the banks and entities like AIG prevented a depression. While that assumes we are out of danger of that end, there is the implication that we could still "fall back in."
The current situation reminds me of the discussions in the 19th century over the effects of gold from California and Australia on the world economy. Those supporting the quantity theory of money argued that inflation would result, those like Tooke and Newmarch believed that an increase in money would be absorbed in new production, investment and consumption and resulting in only temporary inflation. Jevons demonstrated that there was a dramatic increase in inflation in 1853, but Newmarch argued that the period of influx was rather stable from 1848-1857, though also it covered a period of significant revolt and depression of production in European in 1948. Newmarch seems to have been correct that the increased gold went into the general economy producing dispersed economic behavior.
Today we have experienced 5 years of government intervention in the production of credit, supporting banks and the stock market. This intervention has thus been limited to a small fraction of economic actors. Only a minor amount of deflation appears to have been the result and this seems to be dissipating. The credit of the governments has largely been absorbed in trading and exchanging financial products like bonds and equities. At the same time unemployment has appeared to drop while the participation rate has been steady. Many new jobs are at lower rates of pay or are part time so the earning power of the mass of the people has declined reducing demand. Productivity has also risen, but not such much as to result in inflation. Profits have been maintained by cutting labor costs or reducing other production and marketing costs (reducing quality or quantity). This is why the Fed's actions have not resulted in any significant change in the economy, without demand there can be no growth, but also no inflation. If the Fed ends the credit creation process there can only be a significant drop in confidence and deflation will result with catastrophic results. A stable Chinese economy can be helpful, but without growth in America we will continue in a long period of stasis unless there can be massive creative destruction on the scale of WWII. That is unlikely politically in America.
Dear Hak:
Thanks, I will look at the references, especially your paper on Keynes.