The media keeps describing Fed actions as "Keynesian", yet I'm not sure that's accurate.

From everything I’ve read, Keynes first off believed most in Government “direct” intervention on unemployment, suggested implementation of any public work project to put people to work even if the project in the end did not generate income. Keynes appeared to promote “reflation” or price controls as a secondary option and only for a temporary period of time. As you still see below, Fisher described the reason for this quite well, but also supplied a warning. In this book, Fisher also describes in great detail what causes depressions and the cycle from beginning to end. But given that we are in the cycle already, and it has been “stalled” by the Fed, I felt it was more interesting to see what Fisher had to say what would come “after” the reflation.

 

I’ve just read Irving Fisher’s “"The Debt-Deflation Theory of Great Depressions", and I’ve come away with something rather interesting. Fisher believed, of which I agree, that depressions are caused by both over-indebtedness followed by distressed selling or selling at distressed prices. This all leads to a depression as the system cascades upon itself. What I found interesting was revealed in in what he called his “creed”, which consisted of 49 articles. In the 38^th article he says this, “On the other hand, if the foregoing analysis is correct, it is always economically possible to stop or prevent such a depression simply by reflating the price level up to the average level at which outstanding debts were contracted by existing debtors and assumed by existing creditors, and then maintain that level unchanged.” In other words, Fisher believe to avoid a depression, price levels should be “controlled”. Well, that’s precisely what The Fed has done. That have effectively stopped the over-indebtedness/distress selling cycle in its tracks. How marvelous. With that said, Fisher’s 42^nd and 43^rd articles of his creed went on to say this. 42^nd “If the debt-deflation theory of great depressions is essentially correct, the question of controlling the price3 level assumes a new importance; and those in the drivers’ seats – the Federal Reserve Board and the Secretary of the Treasury, or, let us hope, a special stabilization commission – will in the future be held to a new accountability.” No doubt they “should” be held to a new accountability, and very interesting about the “hope” of a commission – which of course was Simpson/Bowles and yet no one listened, oh well. Now here is where it gets most interesting. 43^rd “Price level control, or dollar control, would not be a panacea.  Even with an ideally stable dollar, we would still be exposed to the debt disease, to the technological-unemployment disease, to over-production, price-dislocation, over-confidence, and many other minor diseases. To find the proper therapy for these diseases will keep economists busy long after we have exterminated the dollar disease.”

 

So, in essence, Fisher believed that the Fed/Treasury should step in and control prices, to prevent deflation and thus a depression. But he knew the actual “diseases” that caused the problem would not be fixed by this measure. In this particular book he does not go on to say whether he thought the “diseases” curable by intervention, but I’ll be reading a book he wrote two years later that may answer that question, “100% Money and the Public Debt”.

 

Randy Woodward
Managing Director, Fixed Income Capital Markets

One Burton Hills Blvd, Ste 225, Nashville, TN 37205

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Randy.Woodward@RaymondJames.com

 

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