Alan S. Blinder’s Article, “Team Transitory Had a Point About Inflation”

Alan S. Blinder (Princeton) had an article in The Wall Street Journal of Thursday, 7/20/2023 entitled Team Transitory Had a Point About Inflation

Prof. Blinder was concerned to relate the recent and current inflation to a) supply shocks, and b) the speed and extent of the manipulation of interest rates. Our concern is rather to explain the recent and current inflation as formally caused, and thus explained rather than merely postulated, by a) the recent flooding of the economic system – given its capacity, state of productivity, and phase of expansion – with trillions of dollars of free money, and b) the circulation of those inflation-causing trillions of free dollars throughout a) tiers of income and propensities to consume, and b) two productive operative circuits and the unproductive Redistributive Function, in which sit the stock and bond trading operations.

Preliminarily, consider three excerpts regarding the vaunted but faulty tradition of controlling the dynamic economic process by the manipulation of the interest rates and, thus, operational interest payments of Smith to Jones (or Smith-entity to Jones-entity, or Smith unit of enterprise to Jones unit of enterprise). Tragically, this tradition of adjustment by manipulation of interest rates remains a staple of academe’s flawed macroeconomic theory and practice.

.1. Traditional theory looked to shifting interest rates to provide suitable adjustment. In the main we shall be concerned with factors that are prior to changing interest rates and more effective. [CWL 15, 133)

.2. The traditional doctrine of thrift and enterprise looked to the supply of and demand for money to adjust interest rates and the adjusted rates to adjust the rate of saving to the requirements of the productive process. But it can be argued that a) this view was not sufficiently nuanced in its estimate of the requirements of the productive process, b) that it missed the magnitude of the problem, and c) that it tended to lump together quite different requirements. … [CWL 15, 140, ftnt. 197]

After carefully analyzing the effect of higher interest rates on a) point-to point production and consumption costs, b) inventory costs in the case of more or less rapid turnovers, and c) project costs in the case of long-term point-to-line projects, Lonergan concluded,

.3. ¶ … , the following conclusions seem justified. When the rate of saving is insufficient, increasing interest rates affect an adjustment. This adjustment is not a (simple and easy) adjustment of the rate of saving to the (requirements of the) productive process but (rather a difficult adjustment) of the productive process to the rate of saving; for small increments in interest rates tend to eliminate all long-term elements in the expansion; and such small increments necessarily precede the preposterously large increments needed to effect the required negative values of dw_i. Finally, the adjustment is delayed, and it does not deserve the name of adjustment. It is delayed because the influence of increasing interest rates on short-term enterprise is small. It does not deserve the name ‘adjustment’ because its effect is not to keep the rate of saving and the productive process in harmony as the expansion continues but simply to end the expansion by eliminating its long-term elements. (CWL 15, 143-44)

Though Prof. Blinder’s comments mainly concern inflation and the prospects of taming inflation by manipulation of the interest rate, our comments here mainly regard the causative effect of an overexpansion of free (“unjustified”) money due to failure to understand the nature of the organic interaction of two circuits of production and exchange. The double-circuited organism requires for continuity and equilibrium the concomitance and solidarity with one another of a) outlays with expenditures in each circuit, b) incomes in each circuit with the requirements of the phase of the expansion, and c) proportionate flows of money with flows of products as the prime preventative of inflation. Thus, the proper concomitant proportionality of the magnitudes and frequencies of the money payments with the magnitudes and frequencies of the flow of goods and services are the most effective corrective elements in the reduction of inflation.

A condition of circuit acceleration was seen in section 15 to include the keeping in step of basic outlay, basic income, and basic expenditure, and on the other hand, the keeping in step of surplus outlay, surplus income, and surplus expenditure. Any of these rates may begin to vary independently of the others, and adjustment of the others may lag. But any systematic divergence brings automatic correctives to work. The concomitance of outlay and expenditure follows from the interaction of supply and demand. The concomitance of income with outlay and expenditure is identical with the adjustment of the rate of saving to the requirements of the productive process. (CWL 15, 144)

It is now necessary to state the necessary and sufficient condition of constancy or variation in the exchange value of the dummy. To this end we compare two flows of the circulation: the real flow of property, goods, and services, and the dummy flow being given and taken in exchange for the real flow….Accordingly, the necessary and sufficient condition of constant value in the dummy lies in its concomitant variation with the real flow. (CWL 21, 38-39)

Money is an instrument invented by man to make possible a large and intricate exchange process. … it remains true that variations in the volume, if not to result in inflation or deflation, postulate some variations in the quantity. [CWL 21, 10

We have at one time or another, in one place or another, in one context or another, and in one manner or another addressed the issue of the (lack of) effectiveness of manipulating interest rates. This particular post should be read in conjunction with the reading of other posts:

Absorbing Several Trillion Dollars;
Where Does All the Money Go?;
Pointers Regarding Interest Rates and Inflation;
The Delusion in Manipulation of Interest Rates;
The Road Up Is The Road Down;
Facing Facts;
The Ineptitudes in Central Bank Operations;
and Lonergan’s commentary in Section 26 titled The Cycle of Basic Income in CWL 15, pp. 133-44.

Also, Prof. Blinder and other economists must read and store in their habitual mentality the conclusions of statistics and probability that, because of scattering conditions, Prediction is Impossible in the General Case.

In the particular context (not our present context of a boom caused by excessive stimulation) of an economic slowdown exhibiting unacceptably high unemployment and unacceptably low capital utilization, Lonergan addressed the theoretical inadvisability of stimulating the slowing economic process by adjustment of interest rates. The conclusion of Lonergan’s statement (“the following conclusions seem justified”) was quoted above, so, first, we’ll simply repeat portions for emphasis, then, repeat the entire statement for a second reading. Let us begin by printing particular short passages, then print the entire long excerpt from (CWL 15, 143-44), then list the selected statements justifying the conclusion.

Four pieces for emphasis:

.1. an inability to calculate is a normal condition of consumer borrowing, and rising interest rates hardly exert a great influence on people who do not calculate.

.2. Thus rising interest rates end further initiation of long-term expansion …

.3. The effect of rising interest rates on turnover magnitudes depends upon the turnover frequency of the enterprise; … The effect on turnover magnitudes, accordingly, is great when the turnover frequency is low, but negligible when the frequency is high.

.4. … , the following conclusions seem justified. When the rate of saving is insufficient, increasing interest rates effect an adjustment. This adjustment is not an adjustment of the rate of saving to the productive process but of the productive process to the rate of saving; … the adjustment is delayed, and it does not deserve the name of adjustment. It is delayed because the influence of increasing interest rates on short-term enterprise is small. It does not deserve the name ‘adjustment’ because its effect is not to keep the rate of saving and the productive process in harmony as the expansion continues but simply to end the expansion by eliminating its long-term elements. (CWL 15, 143-44)

The central adjustment in the case of economic distortions and disequilibria is the effecting of a balance of the crossovers. And another way of stating it is that the ratio of surplus income to total income must match the requirements of the phase of the pure cycle.

.1. an inability to calculate is a normal condition of consumer borrowing, and rising interest rates hardly exert a great influence on people who do not calculate.

The ineptitude of the procedure (of manipulating interest rates) arises not only from its inadequacy to affect a redistribution of income of the magnitude required but also from its effects upon the demand for money. … The effect of rising interest rates on consumer borrowing will be excellent as far as it goes; for it cannot but reduce consumer borrowing; on the other hand, one may doubt if such reduction is very significant, for an inability to calculate is a normal condition of consumer borrowing, and rising interest rates hardly exert a great influence on people who do not calculate. The effect of rising interest rates on the demand for surplus products is great: one may say that the initiation of further long-term expansion is blocked; to increase the interest rate from 5% to 6% increases by 10% the annual charge (Footnote. That is, increases in the annual charge by approximately 10%. The precise increase would be 8.557% if payments were made monthly; 8.651% if payments were made annually.) upon a piece of capital equipment paid for over 20 years. (CWL 15, 143-44)

.2. Thus rising interest rates end further initiation of long-term expansion …

Thus rising interest rates end further initiation of long-term expansion; on the other hand, expansion already initiated, especially notably advanced, will continue inasmuch an increased burden of future costs is preferred to the net loss of deserting the new or additional enterprise.

The effect of rising interest rates on turnover magnitudes depends upon the turnover frequency of the enterprise. If the frequency is once every two years, 1% increase in the rate of interest is a 2% increase in costs; if the frequency is once every month, 1% increase in the rate of interest is 1/12 of 1% increase in costs. Effects of the latter order are negligible when prices are rising. Indeed, then even a 2% increase might be disregarded; but the combination of the 2% increase in costs with the uncertainty of what prices will be in two years’ time is a rather powerful deterrent. The effect on turnover magnitudes, accordingly, is great when the turnover frequency is low, but negligible when the frequency is high.(End of footnote) … (CWL 15, 143-44)

.4. … , the following conclusions seem justified.

However, the following conclusions seem justified. When the rate of saving is insufficient, increasing interest rates effect an adjustment. This adjustment is not an adjustment of the rate of saving to the productive process but of the productive process to the rate of saving; for small increments in interest rates tend to eliminate all long-term elements in the expansion; and such small increments necessarily precede the preposterously large increments needed to effect the required negative values of dw_i. Finally, the adjustment is delayed, and it does not deserve the name of adjustment. It is delayed because the influence of increasing interest rates on short-term enterprise is small. It does not deserve the name ‘adjustment’ because its effect is not to keep the rate of saving and the productive process in harmony as the expansion continues but simply to end the expansion by eliminating its long-term elements. (CWL 15, 143-44)

Similarly a lowering of interest rates may encourage the expansion of basic industry; but it also will encourage the expansion of well-intentioned but not well-thought-out innovations, the number of bankruptcies, etc. What is needed is the egalitarian shift in incomes, that will compensate for the previous and shorter anti-egalitarian shift, and will produce the things that people really need and can learn to purchase without the help of self-seeking advertisers. [CWL 15, 141 ftnt 198]

Economists in academe and government must understand that the economic process has an exigence to expand in the form of a pure cycle characterized by phases distinguished by the comparison of the accelerations dQ”/Q” vs. dQ’/Q’ – a proportionate phase dQ”/Q” = dQ’/Q’; a surplus phase dQ”/Q” > dQ’/Q’; and a basic phase dQ”/Q” = <dQ’/Q’. The successive phases of the pure cycle postulate concomitant variations of the ratios of basic and surplus incomes to total incomes, which meet the requirements of the phase of the cycle.. (CWL 15, 131).

The general condition of equilibrium throughout all the phases of the pure cycle of the macroeconomic process may be grasped in the The Diagram of Rates of Flow below.

G = c”O” – i’O’ = 0 (CWL 15, 48-54)

(Insert comments about the money supply, and specifically about the perfidious nature of M1 and M2)

Money is a dummy invented by humans to enable divided exchange. Money is a promise of trust between people. But, simple as money’s functional purpose may seem, the determinations of how much money to create through the credit function is not well understood. There are natural limits to the supply of money, though the menace of inflation from Modern Monetary Quackery’s (mistakenly called “theory”) unconstrained printing of money ignorantly overlooks it.

Money is an instrument invented by man to make possible a large and intricate exchange process. … it remains true that variations in the volume, if not to result in inflation or deflation, postulate some variations in the quantity. Now in the long run these variations in quantity can be had only by the introduction of a money of account, [CWL 21, 104]

This central adjustment to continued achievement of equilibrium and continued avoidance of the swindles of inflation and deflation is effected by concomitant variation in the rate of saving. This rate of saving

may be defined, conveniently for present purposes, as the ratio of surplus income to total income. Assuming that the rate of saving will not differ appreciably because income is derived from basic or surplus outlay, we may denote this rate by the symbol w, so that

w = I”/I’ + I” (CWL 15, 131-32)

Also, Prof. Blinder and other economists must acknowledge that divergence from the norms of the proper correlation of flows of money with the flows of products would require a systematic adjustment of the inevitable distorted pricing through the proper, balanced correlation of money flows with goods-and-services flows until the ratios of basic and surplus incomes to total incomes is in line with the requirements of the phase of the process of expansion.

A condition of circuit acceleration was seen … to include the keeping in step of basic outlay, basic income, and basic expenditure, and on the other hand, the keeping in step of surplus outlay, surplus income, and surplus expenditure. Any of these rates may begin to vary independently of the others, and adjustment of the others may lag. But any systematic divergence brings automatic correctives to work. The concomitance of outlay and expenditure follows from the interaction of supply and demand. The concomitance of income with outlay and expenditure is identical with the adjustment of the rate of saving to the requirements of the productive process. [CWL 15, 144]

Prof. Blinder is right to point out that developments in Ukraine plus covid-induced traffic jams in the supply chains bollixed things up; but, while we acknowledge the lack of time and space for authors of WSJ articles, we wish that Prof. Blinder had at least made mention of several other critical factors, especially that the massive addition of “free” “unjustified” money to the economic process was, by itself and apart from the level of interest rates, intrinsically inflationary and would require wrenching adjustments in the tiers of basic income, especially for many in the lower tiers of income.

The interest rate is the rental price of the temporary use of money.

… the divided exchange postulates a dummy that will bridge the intervals, short or long, between contribution to the process and sharing in its products. Further, if this dummy is to work satisfactorily, if it is to bridge the intervals fairly and adequately, then it must fulfill certain conditions. The first of these is divisibility … The second condition is homogeneity … The third condition is that the dummy must be constant in exchange value … The fourth condition is that the dummy be universally acceptable within a given area, so that anyone willing to exchange will be willing to surrender property, goods, or services for the dummy. Whether this fourth condition is distinct from the other three has been a matter of dispute.… [CWL 21, 37-39]

The growth rate and the interest rate are intrinsic rates. They are not themselves flows; they are calculations of the relations of dynamic flows to one another. Products and money flow in intelligible circulations; interest rates do not flow; they change as the relations among flows change, but they do not flow. They are not hydrodynamical.

The general charged interest rate – with suitable additions for lenders costs of operation – equals the general growth rate. That growth represents the bounty which can be shared among equity investors and secured lenders according to estimated degrees of risk and reward; and a particular rate will be the rate for a particular combination of duration, risk, and estimated reward, From whatever may be the point of view and the assessment of risk and reward, the interest rate is the rental price of money. And, from a strictly theoretical point of view, the Fed’s manipulation of the interest rate is manipulation of the rental price of the ubiquitous dummy, money. Smith the borrower will pay more or less than before to the lender Jones. But, strictly theoretically, the manipulation of the price of money is no more or less sacred or effective than the manipulation of the price of ubiquitous steel, food, transport, or energy. One particular intervention might be easier to effect and administrate, but any artificial change is an artificial change of one variable which has its particular concomitance and solidarity with all the others in the dynamic, organic process. This dynamic process features interdependencies throughout. Again,

A condition of circuit acceleration was seen … to include the keeping in step of basic outlay, basic income, and basic expenditure, and on the other hand, the keeping in step of surplus outlay, surplus income, and surplus expenditure. Any of these rates may begin to vary independently of the others, and adjustment of the others may lag. But any systematic divergence[1] brings automatic correctives to work. The concomitance of outlay and expenditure follows from the interaction of supply and demand. The concomitance of income with outlay and expenditure is identical with the adjustment of the rate of saving to the requirements of the productive process. [CWL 15, 144]

Economists in Academia and in the staffs of government, journalism, the U.S. Treasury, the Bureau of Economic Research, the Federal Reserve Bank, the Congressional Budget Office, and the Council of Economic Advisors suffer from a misconception and misunderstanding about the intelligibility of interest rates and about the effectiveness of the manipulation of interest rates. All fail to understand that economic problems are most often caused by the failure to achieve dynamic equilibrium among the product and monetary flows of the ignorant private sector and fiscal sector; and that the problems are to be corrected by the effecting of dynamic equilibrium by an enlightened private sector and fiscal sector, not by the Fed with its tools of stress, strain, and counterproductivity. The private and government sectors, guided by an admonitory Fed and Treasury – who must, if necessary, with integrity make themselves unpopular with politicians – must administrate the pace and balance of the dynamic process of which their activities are constituent. They must understand the norms of the dynamic process, and cooperate and coordinate so as to effect the normative relativities and balances of monetary and productive flows. And, we must affirm, it is also possible for the Fed and Treasury to bollix things up by relying upon a misconception of the intelligibility of the interest rate and by the ineffectiveness, if not the actual counterproductivity, of artificial manipulations. And, we must also admit, the only reason the Fed is mandated to control inflation and unemployment is that the private and fiscal sectors, who are primarily responsible, fail to control inflation and unemployment in the first place themselves.

In equity (the basic expansion following the surplus expansion) should be directed to raising the standard of living of the whole society. It does not. And the reason why it does not is not the reason on which simple-minded moralists insist. They blame greed. But the prime cause is ignorance. The dynamics of surplus and basic expansion, surplus and basic incomes are not understood, not formulated, not taught….. [CWL 15, 82]

(See Tiers of Income; Migrations and Adjustments to the Phase of the Pure Cycle)

First, an artificially induced accumulating inflation – failing to be sooner or later completely offset by deflation – has a cumulative effect on individuals’ purchasing power. If a 10% inflation lasts for two years, then falls to zero inflation where prices remain at the most recent highest level, the price of a basket of consumer-goods of $100.00 would go to $110.00 during the first year, then to $121.00 during the second year. That is, $100.00 at the start would retain only 82.64% of its purchasing power, and this would constitute a swindle of sorts on relatively vulnerable workers. Thus It would be a disingenuous half-truth if the inflation perpetrators were to boast triumphantly at the end of a 21% rise in prices and an 18.4 reduction in purchasing power that the inflation which they imposed by mismanagement, had been heroically slain by them. On the contrary, the inflation had thrived and had done considerable damage to vulnerable people. Nor should incompetent managers of the monetary process boast of a soft landing when damaging inflation has been lower but gone on longer to the same final level of severity. (The frog in the frying pan; the long gradual exit ramp)

Economists in each Team Transitory in the bureaus of government, must be honest with themselves. They must ask, Do we really understand how the dynamic economic process works? Do we understand the principles and laws of a unitary, quasi-hydrodynamic system of interdependent circuits with an exigence for continuity and dynamic equilibrium? Do we understand the required concomitant adjustments among incomes, and do we grasp the principles of implicit definitions, concomitance, solidarity and organic function in the dynamic process?

… real analysis (is) identifying money with what money buys. … If you want to treat money that doesn’t make a difference, you can have a beautiful liberal monetary theory. But it doesn’t say the way the thing works. [CWL 21, Editors’ Introduction, xxviii quoting Lonergan]

(there is to be discerned a threefold process in which a basic stage is maintained and accelerated by a series of surplus stages, while the needed additions to or subtractions from the stock of money in these processes is derived from the redistributive area) … The maintaining of a standard of living is attributed to a basic process (distinct process 1), an ongoing sequence of instances of so much every so often. The maintenance and acceleration (distinct process 2) of this basic process is brought about by a sequence of surplus stages, in which each lower stage is maintained and accelerated by the next higher. Finally, transactions that do no more than transfer titles to ownership are concentrated in a redistributive function, whence may be derived changes in the stock of money (distinct process 3) dictated by the acceleration (positive or negative) in the basic and surplus stages of the process. … So there is to be discerned a threefold process in which a basic stage is maintained and accelerated by a series of surplus stages, while the needed additions to or subtractions from the stock of money in these processes is derived from the redistributive area. … it will be possible to distinguish stable and unstable combinations and sequences of rates in the three main areas and so gain some insight into the long-standing recurrence of crises in the modern expanding economy. [CWL 15, 53-54]

Second, any artificial inflation effected by the maladaptation constituted by maldistribution of incomes would have winners and losers on both sides of the average. Inflation and deflation are swindles. Some people are relatively less vulnerable to inflation while others are relatively more vulnerable. In particular, people in the lower income tiers, who might lack the power to negotiate escalator clauses for higher salaries and wages in line with the pace of inflation, would be losers; also, lifelong savers of cash might have much of the purchasing power of their older savings severely diluted; but relatively less vulnerable others might be winners when the redistributions within the tiers of incomes (I’ = (I’ +I”) CWL 15, pp. xxx) of all the “unjustified” free money in the operative basic and surplus circuits and in the stock and bond markets of the Redistribution Function are finally finished.

Again, Inflation and deflation are swindles. One of the properties of money, qualifying it to be publicly acceptable, is that the money ideally be constant in value or purchasing power. Ideally,

… the dummy must be constant in exchange value, so that equal quantities continue to exchange, in the general case, for equal quantities of goods and services. The alternative to constant value in the dummy is the alternative of inflation and deflation. Of these famous twins, inflation swindles those with cash to enrich those with property or debts, while deflation swindles those with property or debts to enrich those with cash; in addition to the swindle each of these twins has his own way of torturing the dynamic flows; deflation gives producers a steady stream of losses; inflation yields a steady stream of gains to give production a drug-like stimulus. [CWL 21, 37-38]

DP’ and DP” simply indicate what might be described metaphorically as the inertia of the quantity process of goods and services in its response to acceleration initiated in the circulatory process of payments. Rapid increases or decreases in the circulatory (monetary) process have not a proportionate effect in the (production) quantity process but are in part absorbed by positive or negative price increments. Thus booms are notoriously inflationary and slumps deflationary. Hence DP’ and DP” are best taken as indices of divergence between circulatory and quantity phases. (CWL 21, 134)

Third, in the normal management of the money supply, the amount of new money injected into the economic process should not be injected willy-nilly; rather a carefully calculated, approximately proper amount should be injected into the system through the channels from the Redistributive Function to the Supply Function (S’-s’O’) and (S”-s”O”). Skillful measurement and analysis by the Fed, the BEA, the CBO, and the Treasury are necessary. They should be constantly measuring. analyzing, and communicating to lenders and borrowers the “state of the equilibrium or disequilibrium of the system.”

Now, if in each unit of enterprise the magnitude and frequency of payments depend upon the magnitude and frequency of turnovers, it follows that with respect to the aggregate of basic units and again with respect to the aggregate of surplus units we have quantities and circuit velocities of money determined by turnover magnitudes and frequencies. (CWL 15, 59)

Now every unit of enterprise involves a turnover magnitude and a turnover frequency. The statement would be merely a truism if it meant no more than that the rates of payment received and made by the unit of enterprise involved quantities and velocities of money. But the statement is not a truism, for it involves a correlation between the quantities and velocities of rates of payment and the quantities and velocities of goods and services. (CWL 15, 57)

the quantity alternative in the rates of payment is conjoined with the quantity alternative in the rate of production, and the frequency alternative in the rate of payment is conjoined with the frequency alternative in the rate of production (and sale). The two cases of quantity-velocity are not only parallel but also correlated. CWL 15, 57

Fourth, commentators in the print and electronic media must be responsible and state precisely to their audience whether they are speaking about real GDP or nominal GDP.

Fifth, commentators must not be so cavalier as to call faulty analysis and failed prediction, or a careless mistake a mere “inartful choice of words” or “bad choice of adjective.” They should explain and emphasize the true nature of their errors forthrightly, having sought to discover the reason(s) for their theoretical or data-measurement errors. (See Prediction is Impossible in the General Case.)

Sixth, inflation and deflation do not happen on their own.

Money is a dummy invented by humans to enable divided exchange. Money is a promise of trust between people. But, simple as money’s functional purposes may seem, the determinations of how much money to create through the credit function is not well understood by academe, much elected politicians. There are natural limits to the supply of money, though the menace of Modern Monetary Quackery’s (mistakenly called “theory”) unconstrained printing of money would not have it so.

Finally, economists in each Team Transitory in the economic bureaus of government, must be honest with themselves. They must ask, Do we really understand how the economic process works and how distortions create a systematic necessity for correction?

real analysis (is) identifying money with what money buys. … And that is the source of the problem in real analysis. If you want to treat money that doesn’t make a difference, you can have a beautiful liberal monetary theory. But it doesn’t say the way the thing works. [CWL 21, Editors’ Introduction, xxviii quoting Lonergan]

Again, at length:

The ineptitude of the procedure arises not only from its inadequacy to effect a redistribution of income of the magnitude required but also from its effects upon the demand for money. … The effect of rising interest rates on consumer borrowing will be excellent as far as it goes; for it cannot but reduce consumer borrowing; on the other hand, one may doubt if such reduction is very significant, for an inability to calculate is a normal condition of consumer borrowing, and rising interest rates hardly exert a great influence on people who do not calculate. The effect of rising interest rates on the demand for surplus products is great: one may say that the initiation of further long-term expansion is blocked; to increase the interest rate from 5% to 6% increases by 10% the annual charge (FTNT. That is, increases in the annual charge by approximately 10%. The precise increase would be 8.557% if payments were made monthly; 8.651% if payments were made annually.) upon a piece of capital equipment paid for over 20 years. Thus rising interest rates end further initiation of long-term expansion; on the other hand, expansion already initiated, especially notably advanced, will continue inasmuch an increased burden of future costs is preferred to the net loss of deserting the new or additional enterprise. The effect of rising interest rates on turnover magnitudes depends upon the turnover frequency of the enterprise. If the frequency is once every two years, 1% increase in the rate of interest is a 2% increase in costs; if the frequency is once every month, 1% increase in the rate of interest is 1/12 of 1% increase in costs. Effects of the latter order are negligible when prices are rising. Indeed, then even a 2% increase might be disregarded; but the combination of the 2% increase in costs with the uncertainty of what prices will be in two years’ time is a rather powerful deterrent. The effect on turnover magnitudes, accordingly, is great when the turnover frequency is low, but negligible when the frequency is high. … ¶ However, the following conclusions seem justified. When the rate of saving is insufficient, increasing interest rates effect an adjustment. This adjustment is not an adjustment of the rate of saving to the productive process but of the productive process to the rate of saving; for small inctrements in interest rates tend to eliminate all long-term elements in the expansion; and such small increments necessarily precede the preposterously large increments needed to effect the required negative values of dw_i. Finally, the adjustment is delayed, and it does not deserve the name of adjustment. It is delayed because the influence of increasing interest rates on short-term enterprise is small. It does not deserve the name ‘adjustment’ because its effect is not to keep the rate of saving and the productive process in harmony as the expansion continues but simply to end the expansion by eliminating its long-term elements. (CWL 15, 143-44)

Other:

Inflation (of the second kind) may result from a disruption between accelerations in the monetary circuit vs. real production, especially in the basic final market. There may occur (i.e. be effected) an inflation resulting from an increasingly excessive amount of monetary income moving to the basic final market; and there would follow a rise in prices stemming from redistribution of incomes (as reductions of purchasing power) quite different in kind from the normal rise resulting from increasing scarcity. This maladjustment of the pricing (as an inflationary reduction of purchasing power by disruption of normative functional relationships by stresses and strains among earners and sellers) is really the system’s spontaneous formal attempt to adjust what should already have been adjusted. The system is struggling to reduce, by means of inflation, purchasing power in the basic circuit so as to keep the ratio of the accelerations of basic and surplus incomes and expenditures (dQ’/Q’, dQ”/Q”, dI’/I’, dI”/I”) at the level appropriate to the relative accelerations of basic and surplus production in the pure cycle.

There would be, for instance, a radical maladjustment between circuit and productive acceleration if, when surplus rates of production were increasing more rapidly than basic, basic rates of income were increasing more rapidly than surplus. Then interval after interval, an increasingly excessive amount of monetary income would be moving to the basic final market, and there would follow a rise in prices quite different in kind from the normal rise resulting from increasing scarcity. Such a rise would not be an ordinary scarcity but at once a consequence and, as will appear, a corrective of disproportion between monetary and real consumer income. ¶ Not only is it true that this second type of price variation is different from the first, but also one must give it a different kind of attention. When prices rise because of real scarcity, one may speak of a requirement for variation in E’ and E” over and above the variation postulated by dQ’/Q’ and dQ”/Q”. But when prices rise or fall because the distribution of income has not anticipated these requirements correctly, then price variation is not a postulate for variation in E’ and E” but rather a spontaneous effort at adjusting what should already have been adjusted. Accordingly, such adjustment variations in prices will be ignored for the moment to be considered more in detail in the next section (entitled The Cycle of Basic Income). Present concern will be for the type of adjustment that the successive phases of the pure cycle postulate. ¶ The central adjustment is variation in the rate of saving.

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Alan S. Blinder’s Article, “Team Transitory Had a Point About Inflation”

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