In an update to his popular post, which is causing some interesting commentary on Twitter, my co-blogger Karl Smith has this to say:
My argument is no, this isn’t just another bad experience. Its a failure of our most basic institutions and is leading to pure loss.
Indeed, I think that the wrong way to think about the problem of recessions is that there is a fundamental problem with market economies, or that recessions (no matter how deep) represent a market failure. To me, this recession (both the depth and length) is fairly clearly a monetary failure…and if you catch me on a bad day (or a good day, depending on your disposition I suppose), I’d even go as far as to claim that the type of money system we use makes our economies prone to the types of failures we have recently experienced. In fact, financial crises are not rare. The World Bank has identified 96 banking crises (large enough to cause economy-wie problems) and 176 monetary failures since the dismantling of the Bretton Woods in 1971.[1]
Even before the termination of gold convertibility, massive crashes were remarkably common the world over. From the Holland tulip mania to the Great Crash of 1929, these crashes have happened with frightening regularity. Being as these types of economic issues span countries, time periods, regulatory regimes, and degrees of economic development; I think that it is safe to say we should begin turning a inquiring eye toward the one system that permeates all of these societies throughout time and location.
That, of course, is the type of money we use, the characteristics of which have been replicated by nearly every society since the relinquishment of barter, and the dawn of what we would consider “modern money”. This recession is, of course, no different. An increase in the demand to hold safe assets (of which the medium of exchange is generally the safest, at least in developed economies) causes a disconnect between workers and factories. People and machines sit idle. Productive capacity dwindles, along with hours worked. Price and wage stickiness facilitates a real downward adjustment to market clearing rates to cause grinding deflation (or disinflation, which under a regime of positive trend inflation is similarly problematic).
Is there a bug inherent in the money system that is used the world over that causes these disconnects? I think that analyzing the dynamics of the flow of biomass through natural ecosystems can provide useful insights into how the money we use causes the economy (or sectors of the economy) to become brittle (too brittle to sustain?) and prone to failure.
[1]Caprio and Klingebiel, 1996
9 comments
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Tuesday ~ September 7th, 2010 at 5:36 pm
Rebecca Burlingame
I just left a long post on Karl’s blog, so just a few quick points here. Yes, it’s definitely about the most basic elements of money this time. One reason it may be more difficult than crashes in the last couple of hundred years is the fact that people of all walks of life are now more dependent upon the use of money for everything they do. “analyzing the dynamics of the flow”…absolutely.
Tuesday ~ September 7th, 2010 at 7:01 pm
M. Gordon
Okay, I’ll bite…what are the alternatives to barter and money (in the form we currently have it)? I’m not an economist or a social scientist, so break it down for me. I vaguely recall Robert Anton Wilson theorizing in the Schroedinger’s Cat trilogy about a self-depreciating currency system that discouraged hoarding, and I remember reading more recently about some proposals about actually implementing such a system in Japan where electronic transactions make up the majority of all commerce. Is this the sort of thing you have in mind?
Tuesday ~ September 7th, 2010 at 7:59 pm
Rebecca Burlingame
The reason barter is not particularly effective now is that it does mostly what money excels at: trading physical goods. And barter is not well suited for knowledge-based services because the attempt to value them externally prevents people from sharing with others based on the actual time that they have. One hurdle is to convince people that they have more than adequate skills to evaluate and accredit others on an individual basis. Once people are convinced that they can take the chance to give one another the green light, it is possible to use education of all kinds in direct ways for services. Capitalism then can concentrate on what it does best, valuation of physical commodities and physical resources of all kinds, that people use in conjunction with knowledge-based services.
Tuesday ~ September 7th, 2010 at 8:06 pm
Nick Rowe
Yep. All failures of Say’s Law are essentially monetary in nature.
Tuesday ~ September 7th, 2010 at 8:15 pm
Rebecca Burlingame
One more thought. Once we take individual responsibility for knowledge-based services instead of government trying to do it for us, that makes us competitive with every country for the jobs that left our shores.
Tuesday ~ September 7th, 2010 at 10:23 pm
Lord
The bug is allowing bankers to be in charge in times like these.
Wednesday ~ September 8th, 2010 at 1:04 am
Apex
Why isn’t this simply a failure of the combination of human greed and easy credit.
The boom and bust cycle is easily explained using these two elements. As an economy starts to recover confidence begins to rise. People begin to get more comfortable with risk and begin to take on credit.
Generally this is positive but the system never finds equilibrium. As growth continues the greed kicks in and people begin taking on more and more credit. This continues to fuel growth beyond equilibrium. More factories are built than needed, more goods are built than needed (see fiber optic capacity circa 2000), more houses are built than needed (2006). As this growth goes hyperbolic confidence soars far beyond what is reasonable and this leads everyone to feel comfortable that the increasing risk is manageable. This leads to easier and easier credit, which leads to more and more risk. Eventually the system is so overheated that it cannot stand on its own and it crashes. Sometimes mildly, sometimes spectacularly.
Then credit is tightened, confidence is shattered, demand is crushed, and capacity utilization drops far below equilibrium. But make no mistake, at the peak it was far above equilibrium. Comparing to the peak and suggesting that the proper monetary coarse of action is to prevent falling from the peak or to get us to quickly return to the peak is wrong.
The real analysis that would be valuable in my view is to determine how to manage the combination of human greed and credit in a way that keeps the system’s natural oscillation in a small range rather than the huge peak and valley swings it now takes. If we could do that, the pain of recession would be very minimal and very manageable.
Sustainable moderate growth, controlled access to credit and reducing artifical demand. I am not sure if its possible to create a system that could do that but if you could I believe you eliminate the kind of reset we are experiencing now.
Wednesday ~ September 8th, 2010 at 8:10 pm
Evan
Computer-mediated super-barter is technically within reach, but there’s a lot of work to be done there on instrumenting and validating people’s registered preferences and needs. Other open questions are who you could trust to run it, what to do about long-term investment, and how to allocate land.
Still, money strikes me as lossy and short-term as an information transferral mechanism, which suggests that there are likely alternatives.
Perhaps making the medium of exchange and the unit of account different, tradeable currencies? Salaries, savings, stocks, bonds, rents, & land purchases in UoA, prices for goods and services in MoE. This is halfbaked, but I think the psychology of money nominal vs. real money is important in this.
Thursday ~ September 9th, 2010 at 5:57 pm
Nicholas Mycroft
both market and monetary failure. neither the financial system or Greenspan could have done it alone.
you guys need to read some Minsky, or perhaps his Australian godchild Steve Keen:
http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/