Monday, January 28, 2013
By way of final installment in today's series, I'll remind readers that the earlier-mentioned Way Forward paper included a third pillar as well in its three-pillared plan for addressing the ongoing debt-deflation problem that it diagnosed and explained. That third pillar involves deep reform of global currency arrangements, which render it both (1) impossible for the U.S. not to run permanent current account deficits with the rest of the world, and (2) accordingly very difficult indeed for the Federal Reserve to modulate credit-money in the manner required to prevent recurrent debt-fueled asset price bubbles and busts such as that we've just been through. Interested readers can find more in Bretton Woods 1.0, which covers the territory in full.
I hasten to add, though, one more reminder of what I said in the post that opened today's sequence. That is that stagnant real incomes have been our principal problem since the 1970s, and that trade policy -- inclusive of currency arrangements -- is only part of what underwrites that stagnation. Indeed, in this connection, the President and wider public's renewed attention, at long last, to disturbing inequality trends in the U.S. is much to be welcomed. Such inequality, it turns out, underwrites the private debt loads I singled out earlier, which in turn render debt-fueled asset price bubbles and busts all but inevitable. An important means of ending bubbles and busts, in other words -- and hence of preventing future debt deflations and consequent hits taken by the public fisc -- is to address inequality. Significant empirical support can be found in this paper I've only just completed in draft form with a first-rate research assistant -- Income Inequality and Market Fragility: Some Empirics in the Political Economy of Finance.