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Open letter to Congressman Ron Paul,
member of the Joint Economic Committee
To the
Honorable Ron Paul
U.S. House of
Representatives
Washington, D.C.
June
10, 2003
Dear Dr. Paul:
I have been a student of monetary science for almost
fifty years and I am greatly disturbed by the explosive and malignant growth
of bond speculation which I attribute directly to the inept monetary policy
of the Federal Reserve.
One-sided bond speculation fully explains collapsing
interest rates and burgeoning depression in Japan for the past ten to twelve
years. Before 1971, when the world was on the gold exchange standard and
interest rates were relatively stable, there was no bond speculation. None
whatsoever. Moreover, the amount of long positions in bonds was limited by
the amount of issues outstanding. This was changed drastically (although
without much fanfare) in 1971 when the world embraced fiat money. (Or was it
fiat money that embraced the world?) Now interest rates can move in and out
of double digits, or even fall to zero. More ominously, the amount of long
position in bonds is no longer limited by the amount of issues outstanding
(large as it may be). Derivatives have removed that limit. Speculators can
now pyramid in pursuit of higher bond prices. At last count the size of the
derivatives market was $140 trillion. Let’s assume that the total of
interest-related derivatives is $100 trillion in ‘notional
terms’. This means that speculators have paid premiums to benefit from
a rise in the value of $100 trillion worth of bonds (never mind that the
total value of all the outstanding issues is a small fraction of that
incredible sum). Therefore speculators stand to rake in $1 trillion in
profits every time bond prices increase an average of 1 percent due to a drop
in interest rates. Nor are these profits ‘notional’: they are
payable in cold cash.
The next domino, after Japan,
is the United States.
Contrary to conventional wisdom, a falling interest rate structure is no boon
to the economy. A low and stable interest rate structure is. All thoughtful
economists would agree that lower prices with stable interest rates (as
obtain under a gold standard) are no threat. On the contrary: they are a
welcome fruit of increased efficiency. It is the combination of falling
interest rates and falling prices that is deadly: if prolonged, they could
lead to depression.
The Federal Reserve has been conducting unreformed
Keynesian monetary policy for the past decades, but it has now reached the
end of the rope as the federal funds rate was pushed down almost to zero. At
the May 21, 2003, hearing of the Joint Economic Committee, Mr. Greenspan
testified as follows.
Senator Robert F. Bennett (Chairman): Last November
when you were here we discussed the downward pressure on prices, and options
available to the Federal Reserve to combat it. Yet some still seem to believe
that low short-term interest rates limit the potency of monetary policy... Could
you explain how the Fed could address unwelcome downward pressures on prices
through the purchase of long-term Treasury securities?
Mr. Greenspan: As I and a number of my
colleagues have stated recently, we have chosen to act solely in overnight
funds, essentially addressing the reserve balances of the banks. Should it
turn out that, for reasons which we don’t expect, but we certainly are
concerned may happen, the pressures on the short-term markets drive the
federal funds rate down close to zero, that does not mean that the Federal
Reserve is out of business on the issue of further easing and expansion of
the monetary base. We can, indeed, as you point out, move out on the
yield-curve because, as you are well aware, even though short-term rates are
slightly over 1 percent, longer term rates are up significantly above that. And
we do have the capability, should that be necessary, of clearly moving out on
the yield-curve, essentially moving longer-term rates down and in the process
expanding the monetary base and the degree of monetary stimulus. And since
there is such a significant amount of potential in that longer-term maturity
structure, we see no credible possibility that we will, at any point, run out
of monetary ammunition to address problems of deflation or anything similar
to that which disrupts our economy.
The testimony of Mr. Greenspan reveals that the
Federal Reserve has no creditable plan to combat deflation. The plan it has
is a colossal mistake that could very well plunge America headlong into deep
depression. The bubble of speculative long positions in bonds is so huge that
it can no longer be safely deflated. Now the Federal Reserve is gearing up to
climb the yield-curve in order to expand the monetary base and stimulate
demand. But this is to pour oil on raging fire. The Federal Reserve can
create as much new money as it wants, but will have no control over it once
it has entered circulation. It is up to the speculators. This is how they
read the message: "Hey, here is another godsend. The old boy has pulled
out all the stops, there is no more risk in pyramiding bond derivatives! You
had better believe it! Just watch the price-indicators. Every time one falls,
or demand weakens, Greenspan & Co. is going to buy bonds. Forestall them,
how we will! We buy first. Profits guaranteed, courtesy of the Fed. Thank you
kindly, Mr. Greenspan!"
There was always political pressure on the Federal
Reserve Board to reduce interest rates. But as shown by the volumes of the
Federal Reserve Bulletin for the years 1950-1970, the Board was always very
clear on the point that the reduction of interest rates (other than the
federal funds rate) is not within the Board’s power. If Mr.
Greenspan now promises to work the miracle that his predecessors were frank
enough to call impossible, it is because he, like the Sorcerer’s
Apprentice, relies on others to do the job for him, namely, on the
speculators. The explosive growth in bond speculation is explained by the
greatly reduced risks involved. Now, given Mr. Greenspan’s testimony,
the remaining risk is being taken out as well. But he won’t be able to
control speculators once he has allowed them free rein. Mr. Greenspan will,
like the Sorcerer’s Apprentice, be swept away by the tide he has
fomented.
The consequences are terrifying. The pact Mr.
Greenspan has made with the devil is a most dangerous kind. Further drop in
interest rates would, albeit with a time lag, cause a fall in prices, and
falling prices would cause interest rates to fall further, spelling
deflationary spiral for the country.
I respectfully submit that the Joint Economic
Committee, in search for an answer to Senator Bennett’s query, may wish
to hear the testimony of independent witnesses as well. Mr.
Greenspan’s testimony is self serving, and it shrouds the extreme
danger implicit in his counter-productive plan. There are opposing views that
may be worthy of the attention of your Committee. I take the liberty of
enclosing a brief representing those views.
I remain,
Your most obedient servant,
Antal E. Fekete
Professor Emeritus
Enclosure
DEFLATION UNDER FIAT MONEY
According to Mr. Greenspan almost no economists
believed that you could create deflation with fiat currencies because, by
definition, the ultimate supply of those currencies comes from the
government. This brief represents the view of those very few economists he
refers to, never before carefully spelled out in detail.
Genesis of the long wave
inflation-deflation cycle
In the Keynesian view, the gold standard is
"contractionist" or "deflation-prone". The truth is the
exact opposite. The gold standard is the flywheel regulator of the economy:
it makes for stability. It was precisely the sabotaging of the gold standard
by the banks and the government that started the inflation-deflation
long-wave cycle. With the connivance of the government, banks expanded credit
beyond the limits set by their gold reserves. When they could no longer pay
their sight liabilities, the government came to their rescue by declaring a
"bank holiday". Worse still, a double standard was introduced in
the application of contract law. While every other firm was liable to be
liquidated by its creditors in case it failed to deliver on its contracts,
banks were given a privilege. They were exempted. Nay, they were rewarded
for breaking their contract with their creditors. Their dishonored promissory
notes were elevated to the status of money, at first temporarily, then
permanently. This perverted system of incentives did not fail to have
consequences.
The immediate effect was inflation. This was a
sellers’ market and the new cash caused prices to rise. Higher prices
caused interest rates to rise as well. Lenders demanded compensation for
their expected losses in the form of an "inflation premium" to be
added to the going rate of interest. As interest is a major cost for the
producers, higher interest rates in turn caused further price rises.
The Spiral
In this way an inflationary spiral was set into
motion: higher prices causing higher interest rates causing higher prices,
and so on. Sooner or later the spiral would run its course and come to an
end. When growing stockpiles remained unsold, there was panic. Retrenchment, alias
deflation, started in earnest. Prices fell. Lenders were forced to drop the
inflation premium. Interest rates fell. This was now a buyers’ market.
Producers were squeezed by competition, and they had to cut prices further. Thus
a deflationary spiral was set into motion: lower prices causing lower
interest rates causing lower prices, and so on.
Oscillating money flows
The inflation-deflation cycle can be visualized as a
money-flow oscillating back-and-forth between the bond market and the
commodity market. In the inflationary phase money flows from the former to
the latter. Prices are bid up. Bondholders sell their bonds. The tide in the
commodity market is coupled with an ebb in the bond market. After the panic
the flow is turned around. It now flows from the commodity market to the bond
market. Bondholders buy their bonds back. Commodities are sold at fire-sale
prices. Consumers hold back their purchases awaiting still lower prices.
Note that organized speculation has hardly any role
in all this as long as the gold standard remains intact. Bond speculation is
ruled out: interest rates are relatively stable under a gold standard and, as
a result, there is not enough variation in the bond price to make speculation
profitable. Commodity speculation exists only insofar as it addresses risks
created by nature, to the exclusion of risks created by man. As a
consequence, the inflation-deflation cycle is relatively moderate.
Destabilizing speculation
Everything changes drastically with the advent of
fiat currency. In addition to stabilizing speculation (addressing risks
created by nature) we now have to face destabilizing speculation (addressing
risks created by man). This is what Keynesians have "forgotten" to
take into account. None of the risks in the foreign exchange and bond markets
is created by nature. These risks have all been created by man, in particular
by the government, through the instrumentality of overthrowing the gold
standard and imposing fiat currency. In the battle of wits more often than
not it is the nimble speculator who outsmarts the clumsy central banker and
other hired hands of the government.
The consequences of destabilizing speculation are
enormous. Limits on the amplitude of price moves have been removed. Worse
still, the natural limit on the total commitments in the bond market has also
been removed: speculators can now amass long (or short) positions in bonds in
any amount, regardless of the combined value of all outstanding issues. It is
this fact that is at the heart of the problem of the explosive and malignant
growth of bond speculation which has by now brought the total commitments of
speculators to $ 140 trillion in the derivatives markets, a figure that
boggles the mind. The total value of bonds outstanding falls far short of the
notional value of derivatives on bonds. This is as though speculators are
allowed to hold futures contracts calling for delivery of wheat before the
next crop in the amount several times greater than wheat in all the barns, freight
cars, and elevators of the world combined!
Where the risks are man-made, speculation is not
a zero-sum game. The total gains of successful speculators are not
equal to the total losses of unsuccessful ones. Speculators in bonds and
derivatives make money not by resisting the formation of price-trends
(as they would in the commodity market under a gold standard). They make
money by inducing and riding price trends. They congregate on the same
side of the market, whether long or short, and create exorbitant price swings
before they move in for the kill. The profits of bond speculators are at the
expense of society at large. They come out of the hides of innocent people.
The Ratchet
The deflationary spiral changed its character under
the regime of fiat currency. While it had its benign aspects before the gold
standard was overthrown such as correcting the excesses of credit expansion,
it has become totally malignant after. Speculation and bonds constitute an
explosive mix which will, sooner or later, cause economic disaster. Oscillating
money-flows get out of control. The process replicates the operation of a
runaway vibrator, except the wave length is measured in years or decades,
rather than seconds.
Ratchet is the name for the phenomenon that rising
prices pull up interest rates and rising interest rates pull up prices
(creating inflationary spiral). This is ratchet-up. But you can ratchet-down
as well: falling prices pull down interest rates and falling interest rates
pull down prices (creating deflationary spiral). Under the regime of fiat
currency these ratchets are irresistible as they are powered and amplified by
speculation.
Ratchet-up is uncontroversial and is accepted by
most economist. It is ratchet-down the validity of which has been called into
question. Critics say that falling interest rates need not cause falling
prices, and they cite our current experience: falling interest rates have not
produced a major fall in the price level. In fact, people in every walk of
life complain about unwarranted price hikes. However, the jury is still out
on this. Prices did drop in the 1980's when sugar fell from 70 cents a pound,
silver from $45 an ounce, and crude oil from $40 a barrel. During the 1990's
prices of computers and communication equipment have come down dramatically. Ford
has recently reported that the company has lost its pricing-power, something
it could formerly take for granted. Senator Bennett and Chairman Greenspan
would not polemicize about downward pressure on prices and potential deflation
if they were a mere figment of the imagination.
The reluctance of the mind to admit that the
principle of ratchet-down is a valid one is due to the sway Quantity Theory
of Money holds over economics. Under the regime of fiat currency ratchet-down
appears as an oxymoron. People think that prices can only go up because the
quantity of money in circulation is never reduced but always increased. However,
the Quantity Theory is a very crude device. It presents a linear model that
is valid only as a first approximation. New money can flow not only to the
commodity market, but also to the stock, bond, and real-estate market. For a
clue as to which one it will, we must study the behavior of speculators. In
today’s complex world we need a non-linear model such as the theory of
oscillating money-flows. Without it we remain blind to the fact that Mr.
Greenspan’s anti-deflationary plan is counter-productive.
Falling interest rates squeeze
profits
To understand the mechanism of ratchet-down consider
the fact that falling interest rates squeeze profits. Conventional wisdom
would suggest otherwise: lower interest rates are salubrious to business. However,
we must distinguish between a low interest-rate structure and a falling
one. Only the former is salubrious, the latter can be lethal. Falling
interest rates reveal that past investments in physical capital have been
made at too high a rate in view of lower rates now available. The
difference of the two hits the profit margin, and hits it badly. There is no
way to get around this if you want to keep your books straight. Falling
interest rates make the cost of servicing debt on past investments soar. The
present value of debt rises. As it does, the cost of liquidating liability
rises as well. If you want to retire a loan of $1,000 taken out at 6% after
the rate has fallen to 3%, then you have to come up with $2,000. As a
consequence the value of capital falls. Firms with zero debt are not exempt
either. Their capital is also decimated since its replacement can now be
financed at lower rates. This should be reflected by writing down capital.
Relaxed accounting standards do, however, allow firms to get away without
reporting capital losses in the balance sheet. But a loss is a loss, admitted
or not. Ignoring it won’t eliminate it but will expose the firm to the
danger of "sudden death". Like any other loss (such as physical
destruction of plant and equipment during war, for example), capital loss
should be charged against future earnings. If it isn’t, the firm is
reporting phantom profits. Creditors will not let themselves be hoodwinked. Long
before capital is reduced to zero they will cut off debtors, forcing them
into liquidation.
Some of my critics argue that companies refinance
their debts to their advantage. Well, some debts may be refinanced, some may
not. As things are, more and more lenders are reluctant to comply with
requests to refinance. At any rate, debt that has been paid off cannot be
refinanced. Yet paid-up capital should be written down in the same manner as
capital financed by debt, since it was also subject to losses if it had been
put in place when interest rates were higher. Most of the losses plaguing
companies are of this variety. For example, several airlines (regardless
whether well or badly managed) got blown out of the sky as falling interest
rates wiped out their capital.
If you bought a house yesterday only to find out
today that comparable houses have been reduced in price by half, then you
have suffered a capital loss. No amount of sophistry can make the loss
disappear. Nor does it make a difference whether you financed your purchase,
or whether you paid cash. The situation is the same with plant and equipment
owned by corporations.
Other critics say that falling interest rates drive
real estate prices higher, especially that of homes, because buyers
don’t care how high the price is as long as the monthly payments fall
within their budgets. Thus falling interest rates do not squeeze profits in
the housing industry. However, this is a rather short-sighted view of
deflation, leaving growing unemployment and escalating consumer debt out of
the picture. And what about the scenario that the housing bubble may burst,
too, as it probably will?
Another frequent criticism maintains, while
confirming that losses occur in the liability column as a result of falling
interest rates, that these are offset by gains in the asset column. Not only
do falling interest rates increase the present value of debt, causing losses,
they increase the present value of future earnings, too, leading to capital
gains. Capital losses are compensated by capital gains - something, my
critics say, I have overlooked. The trouble with this argument is that it
ignores the accounting rule that prohibits putting values on assets higher
than historic costs, regardless of any anticipated increase in future
earnings. As the proverb says: "there is many a slip between cup and
lip". Unforeseen liquidation of the enterprise would reduce all future
earnings to zero. Why did Swissair fall out of the sky if it could capitalize
its higher future earnings due to lower interest rates? Because it
couldn’t: by the time it would collect them it was no longer flying. The
(upright) accountant has no choice. He must charge the increased cost of
liquidation to the liability column - without making any allowance for
increased future earnings in the asset column. Net worth must be written
down.
As profits are squeezed, firms are forced to
retrench. They reduce inventory, causing prices to fall. Falling prices
squeeze profits further. Some firms may be able to reduce labor costs through
wage-cuts. Most will lay off workers. Either way, payrolls shrink, making
demand weaken. This will reinforce the fall in prices. Many firms see their
capital melt away and have to fold, in spite of low interest rates. You have
to have capital in order to borrow. This is the mechanism whereby falling
interest rates cause prices to fall.
To recapitulate: falling interest rates cause a
blanket decrease in the net worth of the entire productive sector while the
wide-spread capital losses go unreported. Instead, phantom profits are paid
out, undermining capital further. Such is the true explanation of the
wholesale failure of firms. In a depression collapsing demand is secondary;
the primary effect is collapsing production due to fatal weakening of the
capital structure, caused by falling interest rates.
The Linkage
Linkage is the name for the phenomenon that the
price level and the rate of interest, apart from leads and lags, move in the
same direction. Just as when a man is walking his dog on a leash: while it is
possible for either one to get ahead of the other by a few steps from time to
time, it is not possible for them to move in opposite directions for any
great length of time. Linkage (also known as economic resonance) was
recognized by several distinguished economists such as Knuth Wicksell,
Wilhelm Roepke, Gottfried Haberler, Irving Fisher, and others. Apparently, Keynes
himself recognized it under the name "Gibson’s paradox". Economists
who studied the phenomenon also agree that there is a causal relation between
rising (falling) prices and rising (falling) interest rates.
But as far as the relation between rising (falling)
interest rates and rising (falling) prices are concerned, they found linkage
"puzzling". Fisher went as far as saying that "it seems
impossible to interpret this as representing a relationship with any rational
basis". He attributed the phenomenon to freak coincidence. In 1947
Gilbert E. Jackson in a little-known paper The Rate of Interest
pointed out that causality works in both directions. He plotted the price
level and the rate of interest in the same coordinate system with the
horizontal axis representing time. The inflationary spiral appeared as a
rising, and the deflationary as a falling trend of the curves. Inflationary
and deflationary spirals alternated. Sometimes the price level led and the
rate of interest lagged, at other times the rate of interest led and the
price level lagged.
Jackson was writing at
a time the country was still on the gold exchange standard, before the advent
of the fiat dollar. We can augment his reasoning as follows. Speculation
amplifies the oscillation of money-flows greatly. In 1971 the advent of the
fiat dollar gave impetus to prices to rise. Speculators, ready to move in for
the kill, kept buying commodities and hedged themselves by shorting the bond
market. Commodity prices rose while bond prices fell. But this is the same to
say that the rise in the price level caused interest rates to rise as well. The
converse is also true. Rising interest rates, that is, falling bond prices,
cause prices to rise as well. Speculators keep selling bonds and hedge
themselves by establishing long positions in the commodity market. The
inflationary spiral is on and assumes formidable dimensions.
When panic occurred in 1980, speculators switched
allegiance. They closed out their short positions in the bond market and
their long positions in the commodity market. They kept on buying bonds and
hedged themselves with short positions in the commodity market. The
speculative money-flow reversed. The deflationary spiral is definitely on,
and we still don’t know where it will end.
Monetary policy: contra-cyclical or
counter-productive?
The so-called contra-cyclical monetary policy
invented by Keynes has been the guiding star of the Fed. Following the
Keynesian prescription the Greenspan Fed is trying to contain weakening
demand and falling prices through open market purchases of bonds, if need be,
by climbing the yield curve. Contra-cyclical monetary policy backfires in the
case of the deflationary spiral. To forestall the Fed speculators go long in
bonds and hedge their exposure by going short in commodities. The Fed is
helpless: it cannot stem the rising tide of money flowing to the bond market.
As far as bond prices are concerned the sky is the limit. Interest rates in
the United States will
plunge to zero, as they have in Japan. Mr. Greenspan, like the
Sorcerer’s Apprentice, can make speculators charge, but has no idea how
to stop them when enough is enough.
Incidentally, contra-cyclical monetary policy
backfires in the case of the inflationary spiral as well. There the
Fed’s concern is rising interest rates getting out of hand. To rein
them in and turn them back it resorts to open market purchases of bonds. Speculators
correctly perceive that the new money so created will flow to the commodity
market, reducing the risks of speculating. They go long and hedge their
exposure by going short in the bond market. Once again, the Fed is helpless:
it cannot stem the rising tide of money flowing to the commodity market.
To recapitulate, in a deflationary spiral the Fed
combats weakening prices, causing the rate of interest to fall - which leads
to still more weakness in prices. In an inflationary spiral it combats the
high rate of interest, causing prices to rise - which leads to still higher
interest rates. In either case, the contra-cyclical policy is
counter-productive. For example, during the 1947-1980 inflationary spiral the
rate of interest rose five-fold and the price level rose ten-fold in the
United States, in spite (because?) of constant and vigorous contra-cyclical
intervention of the Fed. In the present deflationary cycle that started in
1980 long term interest rates as measured by the yield on the 30-year
Treasury bond have fallen by three-quarter (from 16 to 4 percent). So far
apart from the initial fall in 1980 prices haven’t fallen much, and
some may have risen. But remember, Mr. Greenspan has just given the green
light to speculators. Nobody knows how low prices will go by the time Mr.
Greenspan and his speculators are through.
To recapitulate, the long-wave economic cycle is
caused by huge money-flows oscillating back-and-forth between the bond and
commodity markets, amplified by speculation and reinforced by the mindless
and inept contra-cyclical monetary policy of the Fed.
Compulsive currency devaluations
Keynes was so obsessed with the idea of gold
hoarding that he missed the key point that hoarding other goods, inevitable
under the regime of fiat currency, is infinitely more menacing. Keynes is the
prophet of anti-gold agitation. He preached that if the gold coin were taken
away from "man’s greedy palms", then there would be no
economic contraction, no deflation. This was a monumental mistake, the kind
only a doctrinaire can make. The Fed, blindly following the prophet, has
brought the country to the brink of depression, fiat money notwithstanding. Gold
is the philosopher’s stone: in its presence hoarding is directed into
its proper channels but, without it, the world becomes a plaything in the
hands of speculators.
The deflationary spiral that started in 1980 has not
run its course yet. Some liquidation of inventories has taken place, some
producers have been eliminated. The worst may still lie ahead. Politicians
and central bankers around the world congratulate each other upon their
success of "squeezing inflationary expectations out of the system".
They are unaware that, right now, they are fostering deflationary
expectations. Otherwise they would not be tempting speculators so recklessly
with reduced risks.
Mr. Greenspan has done nothing to neutralize the
causes of world-wide deflation. The international monetary system is still
the same rudderless ship it was in 1971, and it is still exposed to the same
monetary storms, except for the direction of the gale that has changed course
from inflationary to deflationary. This will lead to competitive devaluation
of the fiat currencies of the world. The dollar has just been devalued, if
not de jure then de facto. Other countries cannot afford to be
priced out of the American market, and they will have to debase their
currencies as well. Compulsive currency debasement is the hallmark of world
depression. We know how ruinous that course is from the earlier episode in
the 1930's. Yet the prospect of it is staring us in the face right now.
What is to be done?
The only road to stabilization and the removal of
the threat of depression is through putting speculation into its proper place
and confining speculators to fields where they can do no harm while they may
do some good. Gold money eliminates foreign exchange and bond speculation not
through the barrel of the gun but through the persuasion of reason. It
confines speculation to the commodity market where supply is controlled by
nature, not by governments or central banks.
The significance of the gold standard is not to be
seen in its ability to stabilize prices, which is neither possible nor
desirable. It is, rather, to be seen in its ability to stabilize interest
rates at the lowest level that is still consonant with the state of the
economy. The stabilization of interest and foreign exchange rates will then
impart as much stability to the price level (and to all other important
economic indicators) as is compatible with progress.
The solution is: open the U.S. Mint to the free and
unlimited coinage of gold. Double standard in contract law should be
abolished, together with bank privileges. Banks that cannot pay their sight
obligations in gold coin should be allowed to fail. Nobody will miss them.
Letting the saver withdraw gold coins (that is, bank reserves) whenever the
rate of interest falls to a level that he considers unacceptable represents
no danger, indeed, it would nip malevolent speculation in the bud. Benign
bond/gold arbitrage would replace malignant bond/commodity speculation. Since
the former is self-limiting and the latter is self-aggravating, economic
stability would be restored. Time has come to conclude, for once and all,
that the wild experiment with fiat currencies has failed, and failed
completely. It should be terminated forthwith before it causes further damage
to the economy.
The alternative is to continue the experiment. Naturally,
Mr. Greenspan is in favor of that course. The consequences are too horrible
to contemplate: unemployment more devastating than that of the 1930's,
wholesale bankruptcies of productive enterprise, competitive currency
debasement, collapse of the international monetary system, construction of
unscalable protective tariff walls, world war in which governments are hoping
to find the escape route from economic chaos.
NOTE ON RUNAWAY VIBRATION
The phenomenon of vibration
is studied in physics. The most common varieties are even vibration
(oscillation) and damped vibration, according as the amplitude remains
constant or it is decreasing exponentially. But there is also a third
variety, not as well known, called runaway vibration, where the amplitude is
increasing exponentially. The collapse of the Tacoma
suspension bridge in the State of Washington
in 1940 was an example. Gusting winds caused the bridge to vibrate at one of
its harmonic frequencies. The increasing amplitude of the runaway vibration
ultimately caused the suspension cables to snap, and the whole structure was
plunged into the river. The event has been preserved on film - it must be
seen to be believed.
In general, the small parcels of energy represented by each thrust would get
dissipated harmlessly through damping. In the case of resonance, however, not
only are they not dissipated, they are allowed to be built up to a formidable
force capable of causing huge destruction.
Resonance in economics, no less than in bridge
design, is a problem to reckon with. I have discussed linkage in my talk
Kondratieff Revisited. The price level and the rate of interest move together
up or down, as they resonate with huge oscillating speculative money flows to
and fro between the bond and commodity markets. Bond speculators try to
maximize their profits. For them the problem is correct timing: they want to
be the first to switch positions when the expected turn of the flow of money
materializes. This is just the point where the runaway vibrator starts
spinning out of control. As soon as speculators find that point, the
oscillating speculative money-flows will become too big and too destructive
for anybody to control, and they will drown the economy.
June 10, 2003
Dr.
Antal E. Fekete
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