So another year ends. How did the big boys, the pro’s do in managing the money?
BTG Pactual Distressed Fund: 39.91 percent (Oct 30)
Tilden Park Offshore Investment Fund: 34.89 percent (Nov 30)
Odey Absolute Return: 33.3 percent (Nov 30)
Brookfield Global Real Estates Securities: 33.2 percent (Oct 30)
Pine River Fixed Income: 32.7 percent (Dec 7)
Sprott Offshore Fund: -37.73 percent
Paulson Gold Fund Ltd: -33.07 percent
Conquest Macro Fund Ltd: -31.29 percent (Dec 12)
RAB Special Situation: -27.52 percent (Nov 30)
Island Drive Offshore: -24.52 percent
Moving on to the year to date returns of the big and actively followed funds, CQS Fund Ltd gained 8.2 percent, the fund applies a Convertible and Volatility Arbitrage strategy. Brevan Howard’s Systematic Trading Fund, a Commodity Trading Advisor, lost 6.5 percent in the year while Caxton Hawk managed a +1.07 percent return. Paul Tudor’s Tudor Momentum, another CTA fund, lost -4.6 percent while Winton Capital Management, the fourth largest hedge fund in Europe (AUM $28.5 billion), also lost 4 percent.
Ray Dalio’s Bridgewater Fund, a global macro fund, managed to return 3.5 percent. In Long/Short Credit Arbitrage, BlackRock, Inc. (NYSE:BLK) European Credit Strategies was up 6.7 percent, while Henderson Credit Fund of Henderson Global, another large European hedge fund, gained 6.9 percent. Whereas Henderson AlphaGen Octanis Fund, a L/S Equity Fund returned 1.95 percent.
GLG Partners L/S Equity funds, GLG Emerging Equity lost 3.7 percent, while GLG European Opportunity gained 6.9 percent. Marshall Wace Tops European gained 11.47 percent.
In the Event Driven strategy, GLG Credit Opportunity has gained 14 percent, Marathon Distressed Opportunities gained 10 percent, while James Dinan’s York Fund is up 6.9 percent for the year so far.
The fees to any of these chaps, assuming of course that they would accept your money and that you met their minimum investment dollar value, would be significant.
Add to that the fact that you would likely need to agree to some form of minimum lock-up period, the 2008/2009 liquidity crisis highlighted the risks there, and you have some onerous conditions.
How about you manage your own money?
Don’t know how?
Simple, subscribe to the duCati Report and follow the long term system methodology. What were my returns for the year?
Here they are.
No lock up, you have access and control of your own money, the fees are a fraction at $10/week. You have access to me via e-mail and the blog and a weekly newsletter.
Cullen Roche has an end of year post up in regard to inflation.
Brad Delong rightly slams Austrian economist Robert Murphy this morning for a bet he made in 2009 regarding inflation. Murphy stated that headline inflation would hit 10% by January 2013. Well, here we are with 24 hours to go and the latest monthly CPI reading is 1.8%. I don’t want to just pile on Murphy with personal attacks. Instead, I think it’s constructive to understand why this prediction was wrong because it’s at the heart of an important economics and finance understanding
Headline inflation, does actually mean the headline number in the CPI, that’s the number that the average man in the street understands from the term. In which case, Murph’s call for 10% headline inflation is way off.
Here is the inflation rate from 2009 till today. The compounded rate is 3.5%, which gives +/- the 9.4% change trough to peak, which is pretty close to your 10% rate.
Am I arguing apples to apples? No not really, but the point is this: neither are the other chaps.
If we jump in the Google time machine we can see what was said back in 2009 that was so wrong. Murphy was working from the same premise that many economists work from. He saw the Fed flooding the banking system with reserves and assumed that this would cause inflation. He said
Well the Federal Reserve was and still is flooding the banking system with new reserves. It has created inflation. Lots of inflation.
“In order to keep those reserves from working their way back into the hands of the general public (where they can start pushing up prices), the Fed will have to raise the interest rate it pays to persuade the banks to keep the reserves parked at the Fed. But this simply postpones the day of reckoning, as the troublesome stockpile of excess reserves grows even faster.”
This is not correct and it displays a huge flaw in the model that Murphy is working with. It’s worth noting that Delong and others are working under a model that actually isn’t that different (though their “liquidity trap” theory has stated that the Murphy model is temporarily broken). Both models are wrong.
Not correct. Really. What you soon come to appreciate about Cullen Roche is that he makes large numbers of unsubstantiated statements. Very rarely does he provide any evidence. This is a case in point.
Monetary Realism starts from an understanding of modern banking. We understand that the US monetary system is essentially privatized. In other words, the money supply is controlled almost entirely by private banks whose ability to create loans creates deposits which are the primary form of money we all use. The money supply expands and contracts (mostly expands) in an elastic form based on the public’s demand for loans
Fractional reserve banking. Agreed. The money supply however is controlled by the Federal Reserve. The banks, cannot inflate without the support of a Central Bank. The Central Bank relies upon government to allow the Central Bank to break the law through breaking of contracts.
The flaw in the Murphy model is that he assumed that reserves are somehow related to a banks ability to loan money. He specifically shows the scary chart of M1 going parabolic and then states in clear terms that this money will work its way into the public.
Cullen Roche also likes to misquote people. Murphy, if you read him, is clear on the subject. Reserves are “related” to the banks and inflationary money creation via loans. When a bank creates a new loan, it reserves a fraction of that loan as a demand deposit in the Federal Reserve system. Higher loans are causative of higher reserves.
Cullen wrong again.
This is really important so I am going to cover this point again. There are two types of money in our monetary system. Banks deposits (the money we all use) are inside money because it is created inside the private sector (controlled by an oligopoly of private banks).
Controlled by the Federal Reserve.
Outside money facilitates inside money and exists in the form of cash, coins and bank reserves. This money comes from outside the private sector. It is supplied by the government to facilitate the use of inside money. Cash, for instance, is issued by the US Treasury to allows member Fed banks to stock vaults for customers who wish to draw down their bank accounts for transactional convenience. Coins serve a similar purpose.
Essentially true, but irrelevant.
Reserves are a bit different. Reserves exist solely because of the Federal Reserve System. And they serve two purposes – 1. helping banks settle interbank payments; 2. helping banks meet reserve requirements. Bank reserves are just deposits held on reserve at Fed banks. You can think of reserves as existing in their own market that is totally separate and inaccessible to the non-bank private sector. In other words, reserves are the money banks use to do business with one another
Reserves are a bit different…so something that is going to illuminate our understanding of the banking system?
Reserves: [i] facilitate interbank settlements and [ii] meet reserve requirements.
That’s it? That’s Cullen’s big insight? You have to be kidding me. Let’s look at something else that “reserves” could be used for. If you know the reserve ration mandated by the Federal Reserve, and its not a secret, you can then calculate quite accurately the outstanding loans and leverage built into the banking system. From that, you can take your GDP number, and calculate your Keynesian “multiplier”. There are lots of things bank reserves can tell you. Of course another is in a systematic default, how much deflation will occur, and from that your contraction in GDP.
Cullen is clueless.
But more importantly, banks don’t lend their reserves. Banks lend based on their solvency or capital constraint. Reserves are merely an asset of the bank. When the Fed implements monetary policy like QE they don’t change the capital position of the banks. They swap a t-bond or MBS for a bank reserve.
Of course they don’t. The reserves are caused by loans being made. Notice here, this is just Cullen rambling on. This is not Cullen examining what Murphy said. I guarantee to you Murphy never stated that the banks loaned their reserves. That however seems to be the inference made by Cullen, which is an untrue inference.
This doesn’t change the net financial asset position of the private sector.
But it can. So wrong again Cullen.
If the bank is holding an MBS that has defaulted and is worth say $0.20 on the dollar, and the Federal Reserve swaps that for a shiny new Treasury worth $1.oo on the dollar, has nothing changed?
The bank literally has the same capital position it did before this policy was enacted. So, the bank can’t create more inside money than it could have before.
And we know that this outside money (reserves) doesn’t flood out into the private sector because it is used ONLY by the interbank system. Anyone who understood this in 2009 (as many of us did) knew that Murphy was wrong because his understanding of the system was wrong
Correct…and where, or when, did Murphy state that it did? Again, simply making inferences that are based on zero evidence. To make an inference you require evidence, not simply arbitrary statements.
So, as we’ve seen time and time again, misunderstanding modern banking and money has resulted in very bad predictions. Unfortunately, I still don’t see many people agreeing on why Murphy and others were wrong. That’s not progress
So as we’ve seen, time and time again, Cullen talks and talks, but provides no evidence to support his assertions. I suspect that nothing will change in 2013.
Predicting the future year.
This will be my annual attempt at predicting the future year. I’ll start this year by using last year’s quote:
You cannot step twice into the same river, for other waters are continually flowing in
While that is certainly true, what we do know is that while the water is new, the essential component of the river is the same, viz. flowing water.
Which is our river of money being created at an increasing rate by the Federal Reserve. Last year I stated that CPI inflation would be kept in check through the destruction of credit. That will still be a factor this year. As is the desire of individuals to hold cash, or, the demand for money. The rate of new money creation under QE Infinity is accelerating. Will it or can it exceed the rate of new money creation?
This is a central question and not an easy one to answer. The Federal Reserve has indicated that it will continue to expand the money supply until an unemployment figure of 6.5% is reached. This ensures that money creation will proceed uninhibited for quite some time.
Money destruction will also continue, but at what rate? No one really knows. The idea is that at whatever rate might eventuate, the Federal Reserve can exceed that rate and maintain an excess of about 2%, which is the targeted inflation rate.
This also assumes that the other component, the demand for money, which is currently near highs, remains, or maintains those highs.
This remains a danger; should money destruction slow for any reason, and the Fed not adjust in time, then, the inflation rate could kick higher and create an excess supply, driving individuals to demand less cash. This would, or could drive a reallocation into “things”.
This is really a follow on from inflation. Nominal earnings will rise with inflation. This will under an unrestrained Fed policy of expansion see nominal earnings higher. Real earnings on the other hand will stagnate.
Economic theory informs that businesses cannot pass forward taxes. Inflation is a tax, and as such cannot be passed forward to the consumer. Real earnings therefore will either stagnate or fall.
Revenues and margins will come under increased scrutiny. Falling revenues will impact high cost producers far more significantly than the low cost producer who can absorb the extra costs into their margins. In an economy with stagnant wages revenues have to fall or remain stagnant themselves. Commodity price increases however force the reduction in margins to producers, unless, they can pass their increased costs forward, which, as stated, cannot be done. Instead, we see reduction in package weight etc at the constant price. In other words, the price increase is hidden.
The businesses that can best situate themselves to government largesse will be the big winners in the market next year. Banks and financial services will as they did this year, do well. Banks claim a slice of government inflation far ahead of many others. Also larger capitalized companies that have the political connections to benefit will also be ones to watch.
Healthcare once again will be a strong sector. With the demographics of an aging population combined with Obamacare, price pressures will be firmly higher, expanding earnings, and possibly even creating real earnings to boot.
Of course you will have those outliers that just find their time. Josh Brown has made a call for [i] robotics [ii] 3d printing. Both of these are interesting and definitely worth keeping an eye on.
Will continue to grow. Unlike the MMR advocates who claim that deficits “don’t matter”, Cullen Roche being one of the advocates, deficits do matter. They matter for the simple reason that government cannot fund its spending from tax receipts. If this is the case, then, they must either [i] borrow, [ii] increase taxes [iii] cut expenditures [iv] print.
With the current debate with regard to the fiscal cliff…it is clear that the only option all can agree upon is…increase money creation [printing] via demand deposit expansion at the Federal Reserve. The deficits, the larger they are, the greater the risks of creating a fast increasing inflation, which, can quite quickly escape control and become self-sustaining.
Medicare spending, according to this data, is slowing. If accurate, the projected deficits will not be as catastrophic as initially projected, providing some wiggle room.
Will remain low. Bernanke via his commitment to unlimited QE has stated as much. Bonds are a dead asset class for the foreseeable future. This will place upwards pressure for investment money into commodities and common stocks.
I have played around with “stock picking” last year and found that the best results are to be found in the index ETF’s. It is far easier to have an already diversified list that already carries good volume, and let the ETF managers rebalance via the common stocks. ETF’s are a good way to play the market. Of course you will never get the VHC/AAPL etc type of returns. If you can pick these sorts of stock, then, hell son, pick “em.
Will remain high, and possibly even start moving higher again. The inflation of Bernanke will not ultimately allow the repricing of wages without creating new unemployment.
Inflation [amongst other things] is designed to lower wages. Wages are already stagnant. As prices rise, so more and more will be forced to look for higher wages or take action to get wage increases. This will force the high cost producers to bankruptcy, which puts everyone on the unemployment line. We saw hints of this with Hostess late last year as their costs were already crippling the firm.
A cost push inflation as it is called hasn’t really been seen in the US since the 1970’s. Whether we shall see one starting next year is an interesting question…I think no, not with unemployment as high as it is. However, if a point comes where you simply can’t meet the escalating costs of bills, electricity, petrol, food, etc, people become a little desperate.
Here in NZ the price rises in food etc is ridiculous. Petrol is at all time highs with petrol taxes slated to go higher. NZ remains [relative to other countries] low in the inflation being imposed, but we are starting to see significant unemployment as businesses go to the wall. Increasingly the recession/depression is biting here.
Europe in jumping on the QE bandwagon has condemned itself to high unemployment for a significant period of time. High unemployment leads to an increasing disintegration of society and increased violence.
The French, now being taxed to the limit, are no strangers to industrial action and along with the Spanish, who have nothing to lose, will drive a lot of European social unrest.
Gold will remain volatile, always looking to shake traders out of the trade, nothing new there, but, it will rise. Gold however it is priced or valued is priced or valued against fiat money. Fiat money in the age of constant QE is and must lose value or purchasing power. Thus gold priced against a depreciating asset must gain value. The same argument goes for silver. To trade gold you need some methodology to keep you in the trade for the required time period.
The trade will end, more or less, with the end of the QE experiments around the world and rising interest rates. As that is unlikely to occur this year, you should have at least a year to hold and gain some capital appreciation through that holding period.
With the discovery, or pending production of shale gas etc, energy is less of a sure thing [stock trading wise] this year. The increased production could lead to new revenue streams for the respective corporations, but commodity prices might fall hurting higher cost producers.
The end of cheap energy might be yet delayed. Industrial production has depended upon cheap energy since the industrial revolution. Predictions of falling and slowing growth have been predicated on ever higher prices in the commodity markets for at least a couple of years now. Now, I’m not so sure. Of course China, India and eventually Africa will and are demanding higher quantities of energy, but with coal reserves, natural gas and new oil finds, it seems, for the moment that new supply will trump new demand.
War has always been a political tool to subjugate a home population. A population focused upon an external enemy, focus less upon the real enemy, viz. their own politicians and bureaucracy. This will be a common theme as, wherever you look currently there is economic stagnation and social unrest.
Civil wars are particularly destructive as essentially both sides in any given country lose. How close is America, or a major European country to a civil war? Probably not that close, but that you even have to think about it rather underlines the severity of the situation at present.
The problem is [or part of it anyway] that with constraints on government spending, without a credible threat, spending on the overseas military is likely to be cut. Iraq was never a popular war. Neither is Afghanistan. The US public and the rest of the world, just don’t get it.
The market will have a positive year. While eventually the inflationary policies of the Federal Reserve and Treasury will catch up with them, creating another bust, that may even exceed the 666 lows in the S&P500 of 2009, they likely won’t occur in 2013. Rather, we will see the continued nominal gains continue, certainly through the first half of the year as inflation creates real losses in the economy. Stocks therefore are an inflation hedge, protecting purchasing power rather than increasing it.
Bonds are a deathtrap simply waiting to spring. Shorter maturities are in real terms yield negative, the longer maturities, if not negative are pretty damn close to it. At some point, although not next year, interest rates will rise. When they start to rise, the rise in % terms will be brutal, destroying huge wealth as they rise.
Corporate bonds have enjoyed an easy market. Corporations have sold record amounts into the end of 2012. Some are paying out special dividends, some are buying back common stock. They have found that the cost of capital is far, far lower, than raising equity capital.
Should interest rates rise, and they realistically can do nothing else, investors will be sitting on losses that accelerate. Corporations that sold the debt, could have the option, although I doubt they’d bother, of buying back the debt for a profit. It is however far better to wait. Bond market trends are big, decade consuming trends.
Stay well away.
The cost to business in complying with the endless red tape of legislation spewed out by Congress will as it always has increase. More totally useless regulation will choke off competition and innovation, which are necessary components o9f economic growth. Capital is reduced through the costs of compliance.
As last year, I don’t anticipate [who ever does] a major stock market disaster, viz. collapse. There will be the usual fluctuations as there always are, but without those, who would win and who would lose money in the market?
The issue, will again as it was this year, be that traders/managers/etc simply cannot believe that the market will rise against a backdrop of increasingly poor economic data. That earnings cannot continue to rise/stay high etc. As such there will be numerous scares panics with acute and severe price declines that will shake traders out of positions. Short term traders, as they have this year, will bitch incessantly about rigged and difficult markets that do not trade to their chart patterns and technical triggers.
The problem of course is that major players know all about technicals, charts, quantitative methods, and, when new edges are discovered, you have non-trading researchers giving them all away in academic papers.
Will have a huge year to make up for his dismal year. In the early going, he will refrain from too many public calls, preferring instead to make some big gains early on from some real hindsight trades that just happened to come good. Of course, then he’ll start believing his own press, again, and make some big public calls, that, as this year demonstrated, will have very variable results.
In a word…be long. It will be easier to be long the market, than individual stocks. Individual stocks can obviously outperform the market, but also under-perform the market.
Until next year…
This is an essay written by Samuelson with regard to Keynes’ General Theory. I’ll address it it sections.
The Impact Of The General Theory.
Econometrica, July 1946.
by Paul A. Samuelson
I have always considered it a priceless advantage to have been born as an economist prior to1936 and to have received a thorough grounding in classical economics. It is quite impossible for modern students to realize the full effect of what has been advisably called “The Keynesian Revolution” upon those of us brought up in the orthodox tradition. What beginners today often regard as trite and obvious was to us puzzling, novel, and heretical. To have been born as an economist before 1936 was a boon—yes. But not to have been born too long before!
Bliss was it in that dawn to be alive, But to be young was very heaven!
The General Theory caught most economists under the age of 35 with the unexpected virulence of a disease first attacking and decimating an isolated tribe of south sea islanders.
Economists beyond 50 turned out to be quite immune to the ailment. With time, most economists in between began to run the fever, often without knowing or admitting their condition.
I must confess that my own first reaction to the General Theory was not at all like that of Keats on first looking into Chapman’s Homer. No silent watcher, I, upon a peak in Darien. My rebellion against its pretensions would have been complete. Except for an uneasy realization that I did not at all understand what it was about. And I think I am giving away no secrets when I solemnly aver— upon the basis of vivid personal recollection—that no one else in Cambridge, Massachusetts, really knew what it was about for some twelve to eighteen months after its publication. Indeed. until the appearance of the mathematical models of Meade, Lange. Hicks, and Harrod, there is reason to believe that Keynes himself did not truly understand his own analysis.
Fashion always plays an important role in economic science: new concepts become the ‘mode and then are passe. A cynic might even be tempted to speculate as to whether academic discussion is itself equilibrating: whether assertion, reply, and rejoinder do not represent an oscillating divergent series, in which—to quote Frank Knight’s characterization of sociology—”bad talk drives out good.”
In this case, gradually and against heavy resistance, the realization grew that the new analysis of effective demand associated with the General Theory was not to prove such a passing fad, that here indeed was part of “the wave of the future.” This impression was confirmed by the rapidity with which English economists, other than those at Cambridge, took up the new Gospel: e.g., Harrod, Meade, and others, at Oxford: and, still more surprisingly, the young blades at the London School, like Kaldor. Lerner. and Hicks, who threw off their Hayekian garments and joined in the swim.
In this country it was pretty much the same story. Obviously, exactly the same words cannot be used to describe the analysis of income determination of, say, Lange, Hart, Harris, Ellis, Hansen, Bissell, Haberler, Slichter, J.M. Clark, or myself. And yet the Keynesian taint is unmistakably there upon every one of us.
Instead of burning out like a fad the General Theory is still gaining adherents and appears to be in business to stay. Many economists who are most vehement in criticism of the specific Keynesian policies—which must always be carefully distinguished from the scientific analysis associated with his name—will never again be the same after passing through his hands. It has been wisely said that only in terms of a modern theory of effective demand can one understand and defend the so called “classical” theory of unemployment. It is perhaps not without additional significance. in appraising the long-run prospects of the Keynesian theories, that no individual, having once embraced the modern analysis, has—as far as I am aware—later returned to the older theories. And in universities where graduate students are exposed to the old and new income analyses. I am told that it is often only too clear which way the wind blows.
Finally, and perhaps most important from the long-run standpoint, the Keynesian analysis has begun to filter down into the elementary textbooks; and, as everybody knows, once an idea gets into these, however bad it may be, it becomes practically immortal.
Thus far, I have been discussing the new doctrines without regard to their content or merits, as if they were a religion and nothing else. True, we find a Gospel, a Scriptures, a Prophet, Disciples, Apostles. Epigoni, and even a Duality: and if there is no Apostolic Succession, there is at least an Apostolic Benediction. But by now the joke has worn thin, and it is in any case irrelevant.
The modern saving-investment theory of income determination did not directly displace the old latent belief in Say’s Law of Markets (according to which only “frictions” could give rise to unemployment and over-production). Events of the years following 1929 destroyed the previous economic synthesis. The economists’ belief in the orthodox synthesis was not overthrown, but had simply atrophied: it was not as though one’s soul had faced a showdown as to the existence of the Deity and that faith was unthroned, or even that one had awakened in the morning to find that belief had flown away in the night: rather it was realized with a sense of belated recognition that one no longer had faith, that one had been living without faith for a long time, and that what, after all, was the difference? The nature of the world did not suddenly change on a black October day in 1929 so that a new theory became mandatory. Even in their day, the older theories were incomplete and inadequate: in 1815, in 1844, 1893, and 1920. I venture to believe that the eighteenth and nineteenth centuries take on a new aspect when looked back upon from the modern perspective, that a new dimension has been added to the rereading of the Mercantilists, Thornton, Malthus, Ricardo, Tooke, David Wels, Marshall, and Wicksell.
Of course, the great depression of the thirties was not the first to reveal the untenability of the classical synthesis. The classical philosophy always had its ups and downs along with the great swings of business activity. Each time it had come back. But now for the first time, it was confronted by a competing system—a well-reasoned body of thought containing among other things as many equations as unknowns; in short, like itself, a synthesis: and one which could swallow the classical system as a special case.
A new system, that is what requires emphasis. Classical economics could withstand isolated criticism. Theorists can always resist facts: for facts are hard to establish and are always changing anyway, and ceteris paribus can be made to absorb a good deal of punishment. Inevitably, at the earliest opportunity, the mind slips back into the old grooves of thought, since analysis Is utterly impossible without a frame of reference, a way of thinking about things, or, in short, a theory.
Herein lies the secret of the General Theory. It is a badly written book, poorly organized; any layman who, beguiled by the author’s previous reputation. bought the book was cheated of his five shillings. It is not well suited for classroom use. It is arrogant, bad-tempered. polemical, and not overly generous in its acknowledgments. It abounds in mares’ nests or confusions. In it the Keynesian system stands out indistinctly, as if the author were hardly aware of its existence or cognizant of its properties; and certainly he is at his worst when expounding its relations to its predecessors. Flashes of insight and intuition intersperse tedious algebra. An awkward definition suddenly gives way to an unforgettable cadenza. When finally mastered, its analysis is found to be obvious and at the same time new. In short, it is a work of genius.
It is not unlikely that future historians of economic thought will conclude that the very obscurity and polemical character of the General Theory ultimately served to maximize its long-run influence. Possibly such an analyst will place it in the first rank of theoretical classics, along with the work of Smith. Cournot, and Walras. Certainly. these four books together encompass most of what is vital in the field of economic theory: and only the first is by any standards easy reading or even accessible to the intelligent layman.
In any case, it bears repeating that the General Theory is an obscure book, so that would be anti-Keynesians must assume their position largely on credit unless they are willing to put in a great deal of work and run the risk of seduction in the process. The General Theory seems the random notes over a period of years of a gifted man who in his youth gained the whip hand over his publishers by virtue of the acclaim and fortune resulting from the success of his Economic Consequences of the Peace.
Like Joyce’s Finnegan’s Wake, the General Theory is much in need of a companion volume providing a “skeleton key” and guide to its contents: warning the young and innocent away from Book I (especially the difficult Chapter 3) and on to Books II, IV and VI. Certainly in its present state, the book does; not get itself read from one year to another even by the sympathetic teacher and scholar.
Too much regret should not be attached to the fact that all hope must now be abandoned of an improved second edition, since it is the first edition which would in any case have assumed the stature of a classic. We may still paste into our copies of the General Theory certain subsequent Keynesian additions, most particularly the famous chapter in How to Pay for the War which first outlined the modern theory of the inflationary process.
This last item helps to dispose of the fallacious belief that Keynesian economics is good “depression economics” and only that. Actually, the Keynesian system is indispensable to an understanding of conditions of over-effective demand and secular exhilaration; so much so that one anti-Keynesian has argued in print that only in times of a great war boom do such concepts as the marginal propensity to consume have validity. Perhaps, therefore, it would be more nearly correct to aver the reverse: that certain economists are Keynesian fellow-travelers only in boom times, falling off the band wagon in depression. If time permitted. it would be instructive to contrast the analysis of inflation during the Napoleonic and first World War periods with that of the recent War and correlate this with Keynes’ influence. Thus, the “inflationary gap” concept, recently so popular. seems to have been first used around the Spring of 1941 in a speech by the British Chancellor of the Exchequer, a speech thought to have been the product of Keynes himself.
No author can complete a survey of Keynesian economics without indulging in that favorite in-door guessing game: wherein lies the essential contribution of the General Theory and its distinguishing characteristic from the classical writings? Some consider its novelty to lie in the treatment of the demand for money, in its liquidity preference emphasis. Others single out the treatment of expectations.
I cannot agree. According to recent trends of thought. the interest rate is less important than Keynes himself believed…As for expectations, the General Theory is brilliant in calling attention to their importance and in suggesting many of the central features of uncertainty and speculation. It paves the way for a theory of expectations, but it hardly provides one. I myself believe the broad significance of the General Theory to be in the fact that it provides a relatively realistic, complete system for analyzing the level of effective demand and its fluctuations. More narrowly. I conceive the heart of its contribution to be in that subset of its equations which relate to the propensity to consume and to saving in relation to offsets-to-saving. In addition to linking saving explicitly to income, there is an equally important denial of the implicit “classical” axiom that motivated investment is indefinitely expansible or contractible, so that whatever people try to save will always be fully invested. It is not important whether we deny this by reason of expectations, interest rate rigidity, investment inelasticity with respect to overall price changes and the interest rate, capital or investment satiation, secular factors of a technological and political nature of what have you. But it is vital for business-cycle analysis that we do assume definite amounts of investment which are highly variable over time in response to a myriad of exogenous and endogenous factors, and which are not automatically equilibrated to full. Discussion employment saving levels by any internal efficacious economic process.
With respect to the level of total purchasing power and employment, Keynes denies that there is an invisible hand channeling the self-centered action of each individual to the social optimum. This is the sum and substance of his heresy. Again and again through his writings there is to be found the figure of speech that what is needed are certain “rules of the road” and governmental actions, which will benefit everybody, but which nobody by himself is motivated to establish or follow. Left to themselves during depression, people will try to save and only end up lowering society’s level of capital formation and saving; during an inflation, apparent self-interest leads everyone to action which only aggravates the malignant upward spiral