[this is from about nine months ago]
Economics is descended directly from Marx. Marx (and himself directly influenced by the British political economists) wrote that as capital accumulates, returns diminish. So does demand as capital owners substitute capital for less efficient factors from the rest of the economy.
Thus capitalism is self-contradictory. It is made of the processes that will bring about its own demise. It slows to a halt. With all the greater need for inputs, it drives labourers to rebellion. (Marx assumed that when this point was reached, the workers would at least have a full set of physical capital to make progressive use of. This was a tragic overestimate.)
Macroeconomics is the science of the fall of capitalism. Its explicit aim is to devise an array of spanners in the works, to freeze the process Marx describes.
Keynes and Friedman were both solving the problem identified by Marx.
Savers are capital owners. The interest rate is the rate of return on capital. If there is a negative interest rate, it means that capital is being destroyed/sold off. The economy as it is presently constituted cannot accommodate so much capital. If the level of capital is kept the same, then the economy will eventually be squeezed to the point of revolution. (This is a business cycle effect - it can be a negative real rate, as long as inflation is greater than the nominal rate.) The negative rate winds back the clock on Marx's mechanism.
It is enough to make the capital more cheap. What matters is the return to capital. An investment which produces low yields may become viable if it costs less.
Here is a good piece by Izzy Kaminska, of how recent financial events fit into this scheme.
Izzy Kaminska uses the (apt) analogy of Germans taking sun-loungers early in the morning. Reserved sun-loungers are then left unused for part of the day, even though people who weren't so fast could beenfit from them. If there are more sun-loungers the relative price of a sun-lounger falls. This would be capital destruction.
Repos/Reverse Repos are like when you buy clothes. You can get a refund if you bring the clothes back within a certain time. Quantitative Easing, and this new Fixed-rate-full-allotment-reverse-repo-facility, are the same for capital, except the Fed pays out the refund even if the clothes are damaged. Capital owners now get a refund if their capital gets destroyed through negative rates.
Of course, Kaminska has been arguing for a while that there will be a reduction in aggregate demand if capital holders lose confidence, and start to believe that their wealth will decline. This change to the quantitative easing mechanism has inspired her to change her mind - the crisis will finally end when we have destroyed (redistributed) enough capital.
(One of the complaints of Scott Sumner, right from the start, was that the Fed was still paying interest on reserves - like the new fixed-rate-repo facility - throughout 2008.)
Economics is descended directly from Marx. Marx (and himself directly influenced by the British political economists) wrote that as capital accumulates, returns diminish. So does demand as capital owners substitute capital for less efficient factors from the rest of the economy.
Thus capitalism is self-contradictory. It is made of the processes that will bring about its own demise. It slows to a halt. With all the greater need for inputs, it drives labourers to rebellion. (Marx assumed that when this point was reached, the workers would at least have a full set of physical capital to make progressive use of. This was a tragic overestimate.)
Macroeconomics is the science of the fall of capitalism. Its explicit aim is to devise an array of spanners in the works, to freeze the process Marx describes.
Keynes and Friedman were both solving the problem identified by Marx.
Savers are capital owners. The interest rate is the rate of return on capital. If there is a negative interest rate, it means that capital is being destroyed/sold off. The economy as it is presently constituted cannot accommodate so much capital. If the level of capital is kept the same, then the economy will eventually be squeezed to the point of revolution. (This is a business cycle effect - it can be a negative real rate, as long as inflation is greater than the nominal rate.) The negative rate winds back the clock on Marx's mechanism.
It is enough to make the capital more cheap. What matters is the return to capital. An investment which produces low yields may become viable if it costs less.
Here is a good piece by Izzy Kaminska, of how recent financial events fit into this scheme.
"The greatest trick the Fed ever played was convincing the world it did not taper."
Repos/Reverse Repos are like when you buy clothes. You can get a refund if you bring the clothes back within a certain time. Quantitative Easing, and this new Fixed-rate-full-allotment-reverse-repo-facility, are the same for capital, except the Fed pays out the refund even if the clothes are damaged. Capital owners now get a refund if their capital gets destroyed through negative rates.
Of course, Kaminska has been arguing for a while that there will be a reduction in aggregate demand if capital holders lose confidence, and start to believe that their wealth will decline. This change to the quantitative easing mechanism has inspired her to change her mind - the crisis will finally end when we have destroyed (redistributed) enough capital.
(One of the complaints of Scott Sumner, right from the start, was that the Fed was still paying interest on reserves - like the new fixed-rate-repo facility - throughout 2008.)
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