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Clash of the titans

By Owen Paine on Thursday January 29, 2009 06:22 PM

The debate these days among the econ-con pundicrats might be personified as a proxy-by-posse duel betwixt two demigods of the 1920's and 30's, Irving Fisher --

vs J.M. Keynes --

-- a duel in the sun between the patron saint of direct and borrowed gubmint expenditures, and the wizard of Flatlandian monetary magic.

We all know about Keynes and his liquidity trap, right?

Well, be prepared now to meet and greet doctor Irving Fisher, eugenicist, preacher's boy, and diet nut, father of a self-reported "both new and important" deflation debt dive bomb theory of depressions.

Two sides of the same coin? Are they both about the flaw at the core of a private credit based economy?

Not exactly -- there's enough difference between 'em to muster loudly opposing factions for today's great policy moment: Uncle as direct buyer of first resort for lots of real neat green stuff, vs. Uncle as buyer of last resort for all things figmentary and toxic.

Put that way, it sounds obvious who's the heel and who's the babyface. But not so fast, comrades.

Both men's models were designed in, by, and for the great depression. But by the time the war to end depression had subsided into a cold peace, Keynes and his "theory" were king of the planet, whereas Fisher, though home-grown and, in the roaring 20's, every bit as much of a superstar as Keynes (and a pro-business, anti-labor superstar to boot) found his rival paradigm largely unattended-to, not only in academia, but in leading American policy circles as well.

Up and down the line, it was Keynes' century, and so it remained, all through the Harry, Ike and Jack years. In fact, the triumph of Keynes and his postwar Hicksite followers was so complete by the time of LBJ and RMN -- in other words by amok time -- that even the Chamber of Commerce had its version -- though de-balled -- of Keynes.

"We're all Keynesians now," dear old Dick once glowered to the press.

By the high 60's, fiscal deficits had become the universal Rx for the system's mild macro slumps. Credit policy was left to the pinch-nosed, green-eyeshade guys, while the likes of Paul Samuelson and Jim Tobin carefully calibrated the nation's optimal federal deficits.

But Fisherian deflation theory, with its starring role played by the monetary authority, arrived or re-arrived back on the scene -- albeit as a late entrant after the kook-krieg of flame fanners and zoo-doers -- and Irv was a major beneficiary of the highly successful anti-Keynesian, anti-fiscalist campaign touched off by the deadly bottom-line events of the late 70's. Stagflation! The Waterloo for Keynes and his borrow-to-spend formula. And particularly during the Reagan salad days, a new macro mindset triumphed -- despite the evidence at hand, i.e. the economy roaring out of the 82-83 contraction, prolly more from a Keynesian huge deficit run and military buildup than through Kodiak Volcker's final removal of the figure-four credit lock he'd applied back in '79. But that's another story.

In retrospect, it would seem that the immiserating events of the failed Carter crusade had told an eternal truth: larger fiscal deficits as attempts to tune up job markets ultimately lead to uncontrollable wage-price cyclones. Cyclones like the ones that blew apart the late 70's also blew apart the city of light that Johnny K's acolytes were attempting to build in postwar America. The day of the money-base loons had arrived, and with them came the retreat of the Keynesians into post-Keynesians. Like monks in Ireland, they kept the candles of truth burning -- ahh, maybe with a bit of twist to 'em, I must admit.

The new respectable macro science found Fisher.

So what was Fisher's angle? His starchy Yankee values were repelled by handouts and confiscatory transfers, and building public pyramids in the wilderness, so he looks on first view like a nice antidote to the flippant gay British free-lunch advocate.

In the dark days of the depression, doctor Fisher, looking out his Yale office window at a misery visible, like any good scientist, tried to find a way to reconcile his deepest disciplinary prejudices with what he observed around him. The unorthodox virulence of the great contraction had shattered his boundless high spirits. After some false starts and fad fancies, our man, in a moment of clarity, built a simple model of explanation that -- worked.

He kept his model of the "real economy", the market-based production system, intact, but he constructed a new addition to his overlying credit system.

Short course:

Left to the whims and vaguaries of the unfettered market systems, both credit and production, any rapid accumulation of excess unsustainable private debt will lead inevitably to a period of "realization" and subsequent panic and crisis. And that leads on to massive asset liquidation, and from there we go into a protracted grinding deflation, a downward spiral where our already burdensome debt loads become ever heavier as prices and incomes and outputs fall, and consquently defaults grow ever bigger and spread ever wider.

Okay. So that's kinda kool. On rediscovery, who do you think became the number-one fans of this Fisher deflation model?

Ten years ago, that would be hard to pick. You got folks all the way from Krugman on the white-hat side, to Taylor on the black to pick from. But now, after all the swanning-about of the hi-fi credit system these last dozen years or so, paleo-Keynesians have sallied from the Ivy towers to do battle with the monetary macro-uber-alles crowd -- often, as in Krug's case, the paleos are reborn post-Keynesians. And all this, of course, gets muddled by the multitude of shallow syncretists attempting to blend the two sharply opposed equestrian schools into a common camel jaunt.

At one pole you got yer Fisherian policy camp calling for maximum balance sheet actions, versus those dauntless paleo-Keynesians calling for maximum infrastructure-building, benefit-extending, state-budget-boosting by means of federal budget busting, etc.

The credit economy vs. the production economy? Bankers vs hard hats?

Ah, if it were such a simple choice: Scrooge or the union kulaks -- who would not know which side to be on? But my friends, both sides dance inside the circle of doom.

Stay tuned.

Comments (5)


OP - what do you think of Foster and Magdoff's assessment: http://monthlyreview.org/081201foster-magdoff.php



i'll post up a response to f and m

btw to be fair
october when they posted this
was a long time ago
at crisis rates


fishers key "discovery"
if the pay down on debt
causes market prices of products and assets to drop faster then the paydown
of the aggregate private debt itself
the real debt burden only rise
and the debt crisis sharpen

macro wise
the system is into
a cat after its own tail act

only a virtual suspension of
debt principal pay down
and a return to normal expenditure paths
will hault the down spiral ...obviously

but to get a de centralized system of independent profit driven creditors to act in unison agin their individual interests...

btw this type of horror from wall street hell hits emerging economies frequently
and they
like the state of mississippi
lack a dollar mine to work

makes it hard when your debts are in dollars
or the hard ass like


fisher by 32 had blasted away
the andy mellon liquidation argument

when debt loads are too heavy
you can't liquidate yourself...
as a system
of private independent firms
"capitalists" and wage laborers
into anything but massive
fast spreading
wall to wall default and bankrupcy


"His starchy Yankee values were repelled by handouts and confiscatory transfers, and building public pyramids in the wilderness, so he looks on first view like a nice antidote to the flippant gay British free-lunch advocate. "

OP, I forgive you all your antic vers libre rhapsodies for that one sharp sentence!

In plainer words, someone (maybe Barry Ritholz) noted today that all the bailouts and stimulus plans so far are only aiming to re-inflate the credit bubble, keep those ugly suburban shopping malls open, and concentrate wealth even further in the hands of the lenders.

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