Did I ruffle a few feathers? :)

Doug Henwood dhenwood at panix.com
Fri Sep 22 08:32:07 MDT 1995

At 6:06 PM 9/21/95, Chris M. Sciabarra wrote:

>        Ultimately, capital-intensive industries have the greatest demand
>for investment, and they get their money for investment through loans in
>many cases.  When interest rates are manipulated downward due to an
>inflation of the money supply, it sends out a false message to
>prospective investors that more money is available at cheaper rates for
>investment purposes.  This spurs investment for sure, but it is almost
>always investment in areas that would not be sustained in the absence of
>a genuine consumer demand for such products.  The investments are
>Mal-investments, and when the boom is over, and consumer demand does not
>materialize, the investing firms are usually forced to liquidate, causing
>a predictable downturn.  The situation is complicated further because the
>central bank never stops inflating, albeit at different rates.  And whole
>hosts of networks are created to bail-out poor investors (Lockheed,
>Chrysler, S&L's), so that the truly inefficient are never completely
>weeded out.

Chris, you really should bone up on some post-Keynesian theories of
endogenous money - which holds that private demand is the real driving
force in money creation, not the central bank, which in normal times merely
accommodates private credit demand rather than being the fons et origo of
new credit. This is quite consonant with Marx's critique of Ricardo and
other monetarists of his time - as Marx argued, economic activity is what
determined money rather than the other way around.

I might also make the point that the US had wilder booms and busts in the
days before the 1913 founding of the Federal Reserve than it has since.



Doug Henwood
[dhenwood at panix.com]
Left Business Observer
250 W 85 St
New York NY 10024-3217
+1-212-874-4020 voice
+1-212-874-3137 fax

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