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Tuesday, October 14, 2008

Warnings from the Ignored Father of Macroeconomics

Some people, including economists are bemoaning the fact that the warnings about our 'excessive' economy were not heeded. They point to recent predictions made by Roubini and others years ago. But these warnings extend not just from 6 months prior, or 2 years ago - they go all the way back to an all-but-pushed-aside economist (nowadays at least): John Maynard Keynes, from Chapter 12 of his "General Theory":

"Of the maxims of orthodox finance none, surely, is more anti-social than the fetish of liquidity, the doctrine that it is a positive virtue on the part of investment institutions to concentrate their resources upon the holding of “liquid” securities. It forgets that there is no such thing as liquidity of investment for the community as a whole. The social object of skilled investment should be to defeat the dark forces of time and ignorance which envelop our future. The actual, private object of the most skilled investment to-day is “to beat the gun”, as the Americans so well express it, to outwit the crowd, and to pass the bad, or depreciating, half-crown to the other fellow.... As the organisation of investment markets improves, the risk of the predominance of speculation does, however, increase.... Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.... These tendencies are a scarcely avoidable outcome of our having successfully organised “liquid” investment markets."

Here's to hoping his warnings are never forgotten (or ignored) again.

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