Sunday, November 24, 2013

The cartoon that inadvertently sums up Western economists’ ignorance.

The cartoon, which appears at the top of an article by Martin Wolfsays it all. It shows Bernanke offering free money to industry and banks, with the latter moving at a snail’s pace to make use of the offer.

The reason for the snail’s pace is obvious to just about everyone apart from allegedly “sophisticated” Western economists, though some economists, professional and amateur (mainly the latter) have tumbled to the reason for the snail’s pace.
The reason is that if firms are not falling over themselves to borrow and invest when interest rates are zero or near zero, then there’s a shortage of viable investments at current levels of demand. I.e. what needs boosting is demand: and the ultimate source of all demand is the consumer (i.e. Main Street not Wall Street). So those piles of money that Bernanke and other central banks have at their disposal needs channelling into consumers’ pockets (plus public spending could be boosted – depending on your political preferences.
Some of the economists who do and don’t “get it” are as follows.
Martin Wolf himself doesn’t seem to get it to judge by the article under the cartoon – which is odd because I think he is normally smart.
Lawrence Summersdoesn’t get it.
J.K.Galbraith get’s it. He said “firms borrow when they can make money and not because interest rates are low”.
Advocates of Modern Monetary Theory get it. And Simon Jenkinsgets it.

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