Have Monetary Foundations Lost Their Relevance?

Since the Great Recession, perceptions as to the importance of monetary policy, have changed considerably. But how stable is this new reality? Indeed, what happens not if, but when a new consensus is pushed too far? Harold James gives voice to some of these concerns in the concluding paragraphs of a recent Project Syndicate article:

The new narrative that has emerged is ideal for populists. It holds that the financial crisis discredited traditional economics, and that "neoliberialism" was a dangerous illusion. The neoliberal insight that came in for the greatest criticism after the crisis was that fiscal restraint is a virtue and rewards adherents with lower interest rates, cheaper credit, and enhanced consumer spending. According to the critics, government spending is not only free, but also an unalloyed good.

In this brave new economy, no one seems to be able to say authoritatively how much debt is dangerous. But that doesn't mean there isn't some level of debt that could trigger a dramatic reversal. If depositors and investors become nervous, debt could become expensive again, making the existing debt stock unsustainable. Only then will the populist magic stop working.

Those who want to restore conventional politics and the old rules find themselves in an unenviable position. Although they do not wish for an end to prosperity, they sound like they do when standing next to populists. Nobody wants to vote for Cassandra when Pollyanna is on the ballot. By the time Cassandra's warnings are borne out, it is always already too late.

His article was also an apt reminder, how important are some elements of what has come to be called neoliberalism, for continued prosperity and economic stability. I've long hoped that new forms of wealth might be built alongside existing wealth without excess disruption of earlier patterns. Now, however, I occasionally find myself wondering whether extensive wealth might instead be lost, before societies learn to create wealth via new and sustainable means.

Instead of disregarding the vital connections of monetary representation with prosperity, a broader understanding is needed for how monetary processes correlate with aggregate output and real economy conditions. Without sufficient focus on these quantitative aspects, central bankers sometimes protest that monetary policy can't be expected to accomplish everything. Which only leads to a further disregard of the quantitative nature of money, and what monetary policy can accomplish. Nevertheless, fiscal policy simply can't do the heavy lifting. Only real economy adjustments and accurate nominal representation will suffice for long term growth prospects and continued prosperity. It is becoming more important by the day, to explore how monetary connections relate to ongoing changes in aggregate output and real economy circumstance.

In all likelihood, I probably come across as one the Cassandras referenced in the above article. Alas, why continually remind people about accumulating debt burdens? Or the fact future wages can't rise to the extent enjoyed in an era of tradable sector dominance, with its ever expanding output? Or that traditional housing and infrastructure is beyond reach of many near future incomes?  Who wants to be told that important and useful services could be in jeopardy for millions, once governmental budgetary burdens get out of control?

Nevertheless, I emphasize these things because I believe they can be productively addressed in the long run - even if the short run mostly holds out hope of decentralized experimentation in new community. A few years earlier, I realized it felt important to stress some of what could be done, before going more fully into the whys of what happened in the first place. Hence the real "Cassandra" portion of my story, otherwise known as book two, became sandwiched between segments of potential responses. Once I complete the first portion of the book project (for the blog sidebar), which - not surprisingly - is a little behind schedule, I anticipate a return to concentrating on the whys of this economic dilemma. With a little luck I can get there before the end of this year.