Saturday, January 1, 2011

Quasi mode? Oh!

I recently used the phrase quasi-boom. You may recognize the phrase; it comes from Keynes. Anyway I Googled it (to check how others may have used it) and came across excerpts from Hunter Lewis's Where Keynes Went Wrong, a book I've seen advertised countless times on-line.

I couldn't resist. I had to go there. A search of the text for 'quasi' turned up Heading 8a and an excerpt from Keynes:

8a. Keynes: By continually lowering interest rates, we can abolish slumps and enjoy a state of perpetual quasi-boom.

It may appear extraordinary that a school of thought should exist which finds the solution for the trade cycle in checking the boom in its early stages [before problems arise] by a higher rate of interest.... The remedy for the boom is not a higher rate of interest but a lower rate of interest! For that may enable the boom to last. The right remedy for the trade cycle is not to be found in abolishing booms and thus keeping us permanently in a semi-slump; but in abolishing slumps and thus keeping us permanently in a quasi-boom.

(The page turned up by Google shows this quote with footnote-numbers. But to see the footnotes you have to buy the book I guess. I remember the phrases The right remedy for the trade cycle and semi-slump and quasi-boom from The General Theory -- most memorable phrases -- but I'm not gonna look'em'up for this post.)

I should say right off that the important bit of this part of Keynes for me was The right remedy for the trade cycle and what follows. The Hunter Lewis book emphasizes the manipulation-of-interest-rates part.

And... I did look it up. The "Remedy for the Boom" part comes from Chapter 22, Part iii, page 322 in my copy. The part that comes before that, I didn't find. So Hunter Lewis is juxtaposing two separate Keynes quotes to make his point. It's the second one that stuck in my mind.

In my copy of Keynes, the "remedy for the boom" sentence is given this footnote:

See below (p. 327) for some arguments which can be urged on the other side. For, if we are precluded from making large changes in our present methods, I should agree that to raise the rate of interest during a boom may be, in conceivable circumstances, the lesser evil.

Following that lead, the first full paragraph on page 327 opens with this sentence which I urge you to read slowly and more than once:

If we rule out major changes of policy affecting either the control of investment or the propensity to consume, and assume, broadly speaking, a continuance of the existing state of affairs, it is, I think, arguable that a more advantageous average state of expectation might result from a banking policy which always nipped in the bud an incipient boom by a rate of interest high enough to deter even the most misguided optimists.

(Remember, it's all once sentence. Maybe you should read it again. Read it until you can feel the great sense of humor expressed in his last five words there.)

What Keynes is saying on page 327 is that if we refuse to make the changes he has laid out in the previous 300+ pages -- or, say, if we spend the first 30 years after his death making some of those changes, and then the next 30 years reversing them -- that his low-interest-rate policy will not work.

As I see it, Keynes was an extremely brilliant man, brilliant enough to foresee that if his fundamental changes were not put into place, his proposed future policies would not work. And Hunter Lewis is a pretty smart guy who is cherry-picking Keynes quotes in order to make his point.

Actually, if Hunter Lewis criticized not Keynes but the Keynesians, I might agree with him entirely. As things stand, Lewis misinterprets Keynes for his own purposes, just as the Keynesians did.

Next in the Hunter Lewis book we find Heading 8b and responses to the Keynes quote:

8b. Comments:

i. As we have seen, this is a formula for creating inflations, bubbles, and crashes.

Is it possible to abolish slumps and live forever happily in a state of quasi-boom? US Federal Reserve Chairman Alan Greenspan experimented with this idea in the 1990s and 2000s and just produced bubbles.

Hunter Lewis incorrectly equates "bubbles" with "booms."

The boom ended with the recession of 1974. It ended because the Keynesians misapplied the knowledge Keynes provided, and misinterpreted the feedback they got from the economy.

After the Keynesian era faded, and after 20 years of tinkering and reinvention and financial innovation, we had the bubble in the 1990s to which Hunter Lewis refers.

And now I am cherry-picking from the 8b comments:

If printing "a bit more money" will "cure" a "massive economic slump," then only the tiniest amount of newly printed money should be needed to keep a boom going. But this has not proved to be the case. In fact, larger and larger amounts of new money are needed to keep a bubble from popping. Eventually all the debt associated with the new money becomes too great a burden for the economy and everything collapses.

Yes, Hunter Lewis, yes: Eventually all the debt associated with the new money becomes too great a burden for the economy and everything collapses.

Meanwhile, all that new money has also increased the general level of prices.

What I want to do, Hunter, is take advantage of the natural tendencies of the boom. I want to take advantage of the natural tendency that prices go up in the boom. I want to drain money out of circulation to prevent the rise of prices. But I want to do it different than we do now. I want to use the tax code, not the Fed.

I want to encourage people to use more of that money to pay down their debts. Not only does this simple plan help to stabilize prices, but it also helps reduce debt. And then, Hunter, we do not get the problem that you describe. We do not accumulate all that debt. We do not allow debt to become too great a burden. We avoid the collapse. And if we do it right, we get the permanent quasi-boom.

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