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Money, Financial Instability and Stabilization Policy

Edited by L. Randall Wray

Money, Financial Instability and Stabilization Policy consists of original articles by leading Post Keynesians, Kaleckians and other heterodox economists from the developed and developing world. Post Keynesian literature has long been associated with the study of money, financial markets and financial instability. Indeed, this is perhaps the area to which Post Keynesians have made the greatest contributions. The authors to this volume present an overview of the latest research on monetary theory and policy, financial markets, and financial instability coming out of the Post Keynesian school of thought. They provide an indication of the wide-ranging interests and of the truly international scope of Post Keynesian research. The first half of the volume is theoretical, while the second half includes papers that are either empirical or more focused on specific concerns.
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Chapter 6: Saving, Asset-Price Inflation, and Debt-Induced Deflation

Michael Hudson


6. Saving, asset-price inflation and debtinduced deflation Michael Hudson The National Income and Product Accounts (NIPA) measure the circular flow between production, consumption and new investment. Employers earn profits which they invest in capital goods, and they pay their employees who spend their income to buy the goods they produce (Figure 6.1). Production and consumption represent only part of the economy. Governments levy taxes and user fees, which they spend and sometimes run budget surpluses (the government’s way of saving) that drain income from the econ omy’s flow of spending. But, more often, governments inject spending power by running deficits (financed by running into debt). The NIPA measure these fiscal removals or injections of revenue by taxing and spending (Figure 6.2). A half-century ago, economists anticipated that rising incomes and living standards would lead to higher savings. The most influential view of the economic future was that of John Maynard Keynes. Addressing the problems of Wages and salaries Producer/ employer Employee/ consumer Purchases of goods and services Figure 6.1 Economy no. 1 – production/consumption (the ‘real economy’ without FIRE and government) Wray and Forstater – Fig 6.1 104 Saving, asset-price inflation and debt-induced deflation 105 Taxes Wages and salaries Producer/ employer Employee/ consumer Government Purchases of goods and services Public spending Economy no. 1 – production/consumption Government spending and taxes Figure 6.2 Economy no. 1 with government (the ‘real economy’ with government and without FIRE) Wray and Forstater – Fig 6.2 the Great Depression in 1936, his General Theory of Employment, Interest and Money...

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