Policy Research in Macroeconomics

PRIME on the overstated panic in Washington

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AlJaz

AlJaz

Ann Pettifor, Director of PRIME, argues that the US debt crisis is greatly exaggerated and that central banks have the power to create the finance to solve this “crisis”.  Click here to watch Al Jazeera´s “Counting the cost”.

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One Response

  1. I don’t think central banks do have the power to create the finance to solve the problem, because the problem is not a lack of liquidity, i.e. money, but a lack of capital. We have a situation very similar to that described by Marx and Engels in relation to the 1840’s. There has been a period of very rapid, and powerful profit growth since the late 1980’s. It led to a lot of productive investment in Asia, Latin America etc. But, just as happened in the 1840’s, the flow of profits was such that it could not be absorbed even by this huge amount of capital formation. It pressed down on money markets and reduced interest rates, encouraging speculation.
    Then it was the Railway Mania, today it has been the blowing up of the equity, bond and property markets for more than 30 years. Then, the speculative frenzy led to huge capital gains that even caused firms to bleed their actual business in order to buy Railway shares. We have seen something similar today, including firms using their cash and borrowing to buy back their own shares to goose the share price.

    After the bubble bursts, their is fear, and firms hold back investment, in an atmosphere of limited growth in demand. Further money printing does not go to productive investment, but only further blows up asset prices. Consumer prices have been kept low despite all the destruction of the value of money only because a huge rise in productivity, and massive expansion in the production of commodities, from China etc, has reduced the value of commodities even more than the reduction in value of money.

    Printing more money will not resolve the problem, because what is required is more capital formation, that creates more real demand, not more liquidity. In fact, if the causes of a reduction in the value of commodities, have now reversed, and I think they have, i.e. productivity falling, then any further money printing that reduces the value of money, will lead not to growth, but to inflation. The potential for inflation will cause longer dated yields to rise.

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