Tuesday, July 5, 2011

Getting Perspective on the Little Depression

Brad DeLong had a debate with Jim Grant on a Wall Street Journal. You can see the video here.

DeLong has some comments on the debate which he has posted to his blog Grasping Reality with Both Hands. Here are the key points:
I must say I found spending six minutes with Jim Grant rather depressing...

I found it depressing because the major unfairness Grant focused on is that, because of the Federal Reserve, investors in money market funds can get only one basis point of interest. The 9% unemployed: they are not the victims. Those who cannot sell their houses because of the foreclosure overhang: they are not the victims. Those whose businesses crash because of slack aggregate demand call they are not the victims. The real victims are the rentiers who have a right to a nice solid well above inflation safe return, and from whom the Federal Reserve is stealing that right.


And I found what I could gauge of Jim Grant's worldview depressing as well. He seemed to be selling rentier-populist ressentiment. Grant's world is full of "takers"--and the Federal Reserve is helping them. And the biggest takers in Jim Grant's mind are the hedge fund operators of Greenwich, Connecticut. Why are they the biggest takers? Because they can borrow cheap, at low interest rates, and put the money they borrow to work making fortunes. If only the Federal Reserve would shrink the money stock and raise interest rates! Then the hedge funds would have to pay healthy interest rates for their cash! Then the profits would flow to the truly worthy: the rentier coupon-clippers now suffering with their one basis point yields.

Never mind what a policy of monetary restraint to "normalize" interest rates would do to the unemployed--and the employed--to the underwater homeowners--and the above-water homeowners--and to the bankrupt businessmen--and to the businessmen not yet bankrupt.

Other things I had prepared, but did not say:

A depressed economy with a slack labor market, low wages, and very low interest rates can be consistent with high asset values and ample corporate profits. But policies that produce such an outcome aren't policies for economic recovery. They are policies for class war. They are not in the public interest...

A too-strong dollar is not in the public interest: a too-strong dollar greatly increases the future chances of a major, major dollar crash that will produce a depression that makes today look like a day on the beach at Malibu. When the dollar is at a level where U.S. net foreign debt is growing unsustainably fast it is time to think about lowering it, not keeping it where it is or raising it...
Funny, the thinkers I pay attention to understand the on-going tragedy of the lack of response to the Little Depression. But they are shouted down by those who argue for the status quo, or worse, for an even harder turn to the political right with more tax cuts for the rich and more taxes on the bottom 90% along with the removal of pensions and government services, of entitlements and any effective measures to boost the economy. It is a great tragedy.

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