Kevin Warsh appeared on Bloomberg Surveillance this morning. He tends to be in agreement with much of what Lonergan has said; and Kevin could modify, refine, and buttress his arguments by studying Lonergan’s Macroeconomic Dynamics: An Essay in Circulation Analysis. Kevin properly speaks of the “real economy”; Lonergan uses the phrase “operative circuits,” and he illustrates these in his Diagram of Rates of Flow. Both persons understand the risk of excess new money causing inflation in either the real economy or in secondary financial-asset values, depending on how the new money circulates.
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]
The (explanatory) channels of circulation replace the overall dominance claimed for general equilibrium theory, … More positively, the channels account for booms and slumps, for inflation and deflation, for changed rates of profit, for the attraction found in a favorable balance of trade, the relief given by deficit spending, … [CWL15, 17]
… 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]