Friday, May 8, 2009

Political Aspects of Full Employment I, 2.

by Michal Kalecki

It may be asked where the public will get the money to lend to the government if they do not curtail their investment and consumption. To understand this process it is best, I think, to imagine for a moment that the government pays its suppliers in government securities. The suppliers will, in general, not retain these securities but put them into circulation while buying other goods and services, and so on, until finally these securities will reach persons or firms which retain them as interest-yielding assets. In any period of time the total increase in government securities in the possession (transitory or final) of persons and firms will be equal to the goods and services sold to the government. Thus what the economy lends to the government are goods and services whose production is 'financed' by government securities. In reality the government pays for the services, not in securities, but in cash, but it simultaneously issues securities and so drains the cash off; and this is equivalent to the imaginary process described above.

What happens, however, if the public is unwilling to absorb all the increase in government securities? It will offer them finally to banks to get cash (notes or deposits) in exchange. If the banks accept these offers, the rate of interest will be maintained. If not, the prices of securities will fall, which means a rise in the rate of interest, and this will encourage the public to hold more securities in relation to deposits. It follows that the rate of interest depends on banking policy, in particular on that of the central bank. If this policy aims at maintaining the rate of interest at a certain level, that may be easily achieved, however large the amount of government borrowing. Such was and is the position in the present war. In spite of astronomical budget deficits, the rate of interest has shown no rise since the beginning of 1940.


1 comment:

TheTrucker said...

How very refreshing to observe someone that seems to have a clue about fiat money. Whether the Fed sets interest rates or not the government can keep right on spending and not taxing until the money is simply worthless. Interest bearing financial instruments are simply fiat money in interest bearing form. The only way to protect the value of fiat money is by recovering a large portion of the excess using a tax. Increasing interest rates simply rewards the people who have gotten all the tax breaks in the past and, hence, have lots of money to lend.

The proper solution to the inflation of the 70's was a large tax increase as opposed to a large increase in interest rates. Reaganomics and Volkerism were simply a gravy train for the rich. And all the "economic gains" were a refection of government spending. It is entirely possible to tax in such a way as to not harm the real economy. It is not possible to "rescue the dollar" with something as blunt as interest rates.

See: Soft Currency Economics