By Philip Pilkington, a writer and journalist based in Dublin, Ireland
Question: what on earth has Bill Gross been reading? Gross has long been an acolyte of Hyman Minsky, or so he says. But his recent piece in the Financial Times entitled ‘Zero-Based Money Risks Trapping Recovery’ has a lot of people scratching their noodles.
Look, Gross is trying tell the world that ZIRP policies might be stalling recovery and there is certainly a case to be made that the ZIRP policies are, at best, a two-edged sword – indeed, there’s the even more important case to be made that ZIRP policies may be leading inflation hedgers to pour into the commodities markets, causing both an unsustainable bubble and rising price inflation for households. So, you have to sympathise with Gross for swimming against the tide in this regard.
But really, what is all this strange talk about Minsky and Keynes he throws into his piece? Poor Hyman is mentioned nine times in Gross’ thirteen paragraph article and yet, to say that Minsky has been misrepresented would be an enormous understatement.
As he kicks off his argument Gross writes:
Likewise, the deceased economic maestro of the 21st century – Hyman Minsky – probably couldn’t have conceived how his monetary theories could be altered by zero-based money. Minsky… probably couldn’t imagine the liquidity trap qualities of zero-based money.
Say what? Did Bill Gross just claim that Minsky could never have imagined a so-called liquidity trap environment in which interest rates were running as low as possible and the economy continued to stagnate? Has Bill Gross actually read Minsky?
In fact Minsky discusses the liquidity trap at multiple points in his work. Here is a brief passage from his analysis of the ISLM framework in his 1975 book John Maynard Keynes (p.36):
The view that the liquidity-preference function is a demand-for-money relation permits the introduction of the idea that in appropriate circumstances the demand for money may be infinitely elastic with respect to variations in the interest rate… The liquidity trap presumably dominates in the immediate aftermath of a great depression or financial crisis.
Yeah… sounds like Minsky was pretty well aware of the potential for a so-called liquidity trap. (Whether such a concept really had much to say about his more mature analysis, which included an endogenous approach to money and credit creation, will be left up in the air for now). But then Gross’ article gets even weirder.
Who could have conceived 30 or 40 years ago that interest rates could ever approach zero for an extended period of time? Probably no one.
Hang on a minute… what? Did Gross even Google the term ‘liquidity trap’? While the term seems to have originated with Hicks, the concept was introduced by Keynes in his famous book The General Theory of Employment, Money and Interest – written in 1936. From the chapter entitled ‘The Psychological and Business Incentives to Liquidity’ (hmm… precisely the topic Gross discusses in his article…):
There is the possibility, for the reasons discussed above, that, after the rate of interest has fallen to a certain level, liquidity-preference may become virtually absolute in the sense that almost everyone prefers cash to holding a debt which yields so low a rate of interest. In this event the monetary authority would have lost effective control over the rate of interest.
Keynes admits that he has never come upon such a phenomenon. But it is clear that he certainly ‘conceived’ of it. Indeed, in the same paragraph he even alluded to what might be done under such circumstances:
If such a situation were to arise, it would mean that the public authority itself could borrow through the banking system on an unlimited scale at a nominal rate of interest.
In other words, the government could spend its way out of the depression. But then wasn’t that the point of the whole book?
While it’s nice to have someone of Gross’ stature and talent boosting the theories of Keynes and Minsky, I think we’d all appreciate it if he did a little reading to ensure… that he is actually boosting the theories of Keynes and Minsky.