[OPE-L:7360] [OPE-L:890] Re: Re: r & i

Allin Cottrell (cottrell@ricardo.ecn.wfu.edu)
Tue, 13 Apr 1999 23:10:44 -0400 (EDT)

On Tue, 13 Apr 1999, Gerald Levy wrote:

> The Central Bank can raise or lower the [discount] rate as
> they wish. Their decisions, though, are either validated or
> invalidated by market forces. For example, if they raise the
> discount rate too much, then private banks can obtain
> reserves through other ways (e.g. selling securities)...

The private sector can obtain reserves only from the central
bank (i.e. only by selling securities to the central bank --
which sets the terms of such transactions). Little room for
manoever is obtained by the private banks' selling securities to
non-bank private agents. This does not increase reserves, but
eases the banks' balance sheets a little by reducing their
deposit liabilities. And of course large-scale security sales
will lower security prices and raise interest rates. It's part
of the mechanism whereby higher interest rates are diffused
throughout the system.

> I think, rather, that we should be clear about the way in
> which the rate of accumulation (and with it, shifts in
> aggregate demand) can influence the rate(s) of interest
> *before* we consider the role of the state in modifying the
> rate(s) of interest through monetary policy.

Paul's argument is that this has it backwards: modern money
(maybe even money tout court) is inherently a "state"
phenonenon. For a sustained argument to this effect see Randall
Wray's "Modern Money" (Elgar).

> Hold on ... There is something missing in [Paul's] your
> argument. If the loss of jobs in one sector leads to a
> depression of wages in that sector, then doesn't the
> increase in investment in the other sector (and with it, the
> increase in the bargaining power of workers in that sector)
> lead to increasing wages there, c.p.?

The trigger was a rise in interest, so the overall effect will
be to depress real investment, employment, and wages.
Investment will be _limited_ to only those sectors with the
highest rate of profit at the margin.

Allin Cottrell.