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Spencer's avatar

David Beckworth again: “He, Krugman, definitely has a traditional New Keynesian perspective on getting the real interest rate down to its equilibrium or natural rate level, by raising inflation expectations, and thus, doing it appropriately long enough, you’ll get the output gap clear, and you’ll be back to a healthy recovery.”

Complete tripe. R * is a hoax. Investment hurdle rates are idiosyncratic. Business expenditures depend largely on profit-expectations, and favorable profit-expectations depend primarily on cost/price relationship of the recent past and of the present. Cost/price relationships are crucial, and they are particular; they cannot be adequately treated in terms of broad-aggregates or statistical weighted “averages”.

According to Alfred Marshall’s “cash balances” approach, that prescription will backfire. To wit: Alfred Marshall’s cash balances (“Money, Debt and Economic Activity” (2nd ed.; New York: Prentice-Hall 1953), p. 197

“If the public considers its real balances excessive or deficient, forces will be set in motion which will alter the value of the cash holdings of the public, but not necessarily in the fashion desired by the public.

For example, if the public on balance considers the real worth of its cash balances deficient, this will bring about an increase in the demand for money and a decrease in its supply.

The velocity of money will decline, and if prices tend to be sticky, sales, production, implement and payroll will fall off. This will lead to reduced bank lending, a decline in the volume of money, and this will not be compensated by an appropriate decline in prices.

Under these circumstances’ equilibrium is never reached, and the public in seeking to increase its real balances so reduces its effective purchasing power as to create a condition of chronic stagnation.”

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Market monetarism is sheer ipsedixism.

10-Year Treasury Inflation-Indexed Security, Constant Maturity (DFII10) | FRED | St. Louis Fed

Adding infinite, artificial, and misdirected money products (LSAPs on sovereigns) while remunerating IBDDs (inducing nonbank disintermediation), generates negative real rates of interest; has a negative economic multiplier; stokes asset bubbles (results in an excess of savings over real investment outlets); exacerbates income inequality, produces social unrest, and depreciates the exchange value of the U.S. $.

(“It is the real interest rate that affects spending”, pg. 19 Marcus Nunes and Benjamin Cole’s “With Market Monetarism – a Roadmap to Economic Prosperity”).

How do you explain real yields continuing to fall at the same time the economy is “slowing”? Link “Fed Leaves Interest Rates Near Zero as Economic Recovery Slows” – NYT

Interest is the price of credit. The price of money is the reciprocal of the price level. An artificial exogenous increase in money products reduces the real rate of interest. An endogenous increase in the utilization / activation of savings products increases the real rate of interest.

Real output is following the distributed lag effect of money flows, volume times transactions’ velocity.

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