Did Keynes have the answer?

[oddlots]

No, not that Keynes, the Keynes almost everyone seems to think they understand, the one discussed at dinner parties... I mean the historical Keynes, the one who came up with this cunning plan to deal with trade imbalances - and, we might want to add particularly - their attendant debt and asset bubbles:

http://www.monbiot.com/archives/2008...-up-this-mess/

From Steve Keen's Debtwatch.

[Jay]

Re: Did Keynes have the answer?

No, not that Keynes, the Keynes almost everyone seems to think they understand, the one discussed at dinner parties... I mean the historical Keynes, the one who came up with this cunning plan to deal with trade imbalances - and, we might want to add particularly - their attendant debt and asset bubbles:

http://www.monbiot.com/archives/2008...-up-this-mess/

From Steve Keen's Debtwatch.

Wow, that was interesting, thanks.

[mercerbear]

Re: Did Keynes have the answer?

No, not that Keynes, the Keynes almost everyone seems to think they understand, the one discussed at dinner parties... I mean the historical Keynes, the one who came up with this cunning plan to deal with trade imbalances - and, we might want to add particularly - their attendant debt and asset bubbles:

http://www.monbiot.com/archives/2008...-up-this-mess/

From Steve Keen's Debtwatch.

Thanks for the post, oddlots. I studied economics and didn't know any of that.

[sunskyfan]

Re: Did Keynes have the answer?

Great post ....

This part struck me with respect to our current situation ...

As Joseph Stiglitz has shown, the Fund compounds existing economic crises and creates crises where none existed before. It has destabilised exchange rates, exacerbated balance of payments problems, forced countries into debt and recession, wrecked public services and destroyed the jobs and incomes of tens of millions of people(7).

Hasn't the Fed and Treasury's actions in our current crisis done just this even to the US. Don't we have a situation where an academic theory (represented by Bernanke) is being used by a desperate oligarachy (represented by Paulson) to rationalize presevation of "wealth" for a few?

This is such economic "Eugenics" that it scares the hell out of me. We are all okay with this right now why these guys are "saving" to-big-to-fail entities but wait till they decide to start "punishing" and you will see the dire path we have set for ourselves.

[c1ue]

Re: Did Keynes have the answer?

The article is an interesting tidbit, but doesn't take into account what actually happened to result in Bretton Woods.

After all, while what was said about the IMF is completely true, it was also completely unmentioned that BW II also had a feedback mechanism: surplus currency for gold reserves.

While this is not as immediate in its reining in capabilities as Keynes' proposal, on the other hand it did tie currency account deficits to repayment via a physical commodity.

Over time overly large trade deficits would equally run out of space (i.e. deficit nations would run out of gold).

As for the International Clearing Union and the bancor - this would never have happened.

For one thing, the US as the then largest surplus nation would never accept this; for a second, a requirement to forever even out currency account surpluses also forever dooms the 2nd and 3rd world nations to retain their relative position.

It takes money to build up a nation; unless you're Singapore or Switzerland, this money is both large and requires the ability to produce and sell to other nations. The ICU would have been lovely for the UK, but not so much for anyone else.

As Dr. Michael Hudson noted in his first edition of Super Imperialism, the greatest catastrophe Britain suffered in the latter half of WW II was the sudden surrender of Japan due to the use of the atomic bomb.

The crushing debt the UK incurred as a result of WW II was hoped to be worked on in the year or 3 it would take the US to bring Japan to surrender, but as we all know that didn't happen.

One consequence of this was the ending of the 'Commonwealth' privilege which had relatively helped the UK after WW I.

[oddlots]

Re: Did Keynes have the answer?

Interesting points C1ue. I'll have to re-read Hudson's take - slow study. The opposition of the US was a given as Monbiot recognises. But I'm really curious about the claim that Keynes's proposal would have held everyone in place beyond the obvious fact that such a system would have precluded the export-led model pursued by Japan for example. Keynes's solution doesn't preclude growth but enforces a balanced growth between domestic development and exports. It seems to me that 1) the alternative solution has largely doomed the 2nd and 3rd world economies to retain their positions anyway though through dollar hegemony 2) at least Keynes's plan would have given an incentive to develop a domestic, internal economy as a pre-requisite or co-requisite as it were for export growth.

I'm not really suggesting that Keynes had the answer in any earth shattering way. If he had somehow been able to pull this off it would have been a miraculous victory of principal over interests. (Putting aside your point about Britain's interests for a moment.) Politics seems to me a never-ending tragedy of sacrificing clear thought and principle to horse dealing. I actually sort of pity politicians because, if they are at all worthy, it must be torture.

What I am suggesting is that the history here is interesting because it has coughed up a moment where the exact problems that I think we are dealing with - massive global imbalances that have perverted economies on both ends of these imbalances while stunting the sort of domestic development that we suddenly see are the only means of inching back off the precipice - were foreseen. The asset bubbles that lead to the kind of Minsky moment we're living through are only possible with massive trade and current account imbalances. Keynes at least appears to have seen the danger in this and come up with a mechanism - without recourse to the arbitrary limits of a gold standard - to deal with it.

[c1ue]

Re: Did Keynes have the answer?

Oddlots,

I am in complete agreement with you that the present situation is due to the massive overindebtedness of the FIRE economy in the 1st world and the offshoring/outsourcing in the third world.

But in my view, it is far from clear that any trade imbalance is necessarily bad.

Japan and the Asian tigers (HK, Singapore, Taiwan) built their way into their prosperous status by virtue of the mercantile economy (old term for FIRE vs. outsourcing). It clearly can work.

The problem is that China is 4x the population of the US; completely different than the previous generation. Throw in India, Brazil, Vietnam, etc and the delta is more like 10x - or at least one order of magnitude difference.

However, imposing an external limit doesn't necessarily mean much either. The US, despite Bretton Woods, played lots of games with meeting its 'gold reserve' requirements in the decade prior to the 1971 default. Super Imperialism does provide a very nice recap on some of the shenanigans - including the counting of IMF gold reserves as US gold reserves. But of course even all the games don't matter if the bad behavior continues.

Much as now, the other nations of the world were just as busy sucking up US currency account deficit dollars as the US was spending them.

I guess what I'm saying is that I don't have much faith in any international agreement on limits; of much more interest to me is whether the Chinese government understands this dynamic.

After all, assuming the NWO twins aren't correct ($#* & phirang speculating that China is just one giant Ponzi scheme of fraudulent accounting), there are several ways China can still choose to go:

1) Turn inward - change some of their policies such that internal consumption is at least no longer discouraged. The most likely outlet.

2) Do what the IMF/Chicago school of economists' want: encourage internal consumption

3) Step on the export accelerator into the teeth of rising international trade protectionism

4) Reorient from being the high value aggregator of mercantile exports to taking out China's export competitors (Vietnam, Thailand, India, etc)

I'm sure there are more choices than that.