Markets always overreact to changing expectations: this time was no different

I have been away working on my research and publishing and nursing a very nasty summer cold these past few weeks . A lot has happened that needs to be noted. First let me pay tribute to the long and productive career of Bob Rae in Canadian politics. Bob is someone I have known off and on since our students days in Britain. I haven’t always agreed with him on fiscal policy questions but I always respected his high intelligence,his gracious diplomacy, his political passion for justice and equity and his many valuable contributions to Canadian and global politics.As a federal M.P. in the 1980s, a leader of the Ontario NDP, Ontario Premier, again member of Parliament and interim leader of the Liberal party Bob made an outstanding contribution . I wish him the very best in his post parliamentary politics career.

Second it is impossible to ignore the controversy and scandal around the question of privacy and civil liberties raised by recent events. A long overdue honest debate needs to take place about the inevitable need for security and safety and its clash with the sacred democratic rights of civil liberties and privacy. Otherwise there will be an inevitable turning away from the rich promise of the internet and new communications technology as a global forum for free discussion and the pursuit of knowledge.

Third  we have just witnessed the defeat of Julia Gillard by the former Australian  PM Kevin Rudd in the run up to the Australian election expected this fall. Rudd who had himself been defeated by Gillard after being elected Prime Minister in 2010 defeated Gillard by 57 votes to 45 as the Australian parliamentary Labour party facing defeat in the upcoming elections sought to improve its chances by choosing Rudd who is more popular than the opposition leader Tony Abbott of the Liberal party. We shall see if this gambit works for Labour in the upcoming Australian election. Abbott is a big advocate unfortunately of austerity, the last thing that Australia needs at this point.

Finally, the latest economic data and the markets. Keynes long ago in 1936 pointed out “that in a world ruled by uncertainty, with an uncertain future linked to an actual present, a final position of equilibrium, such as one deals with in static economics, does not properly exist.” At this point in writing to Hubert Henderson he was talking about interest rates and his belief that the rate of interest was dependent upon the supply and demand for money and that other things being equal during a boom interest rates would rise and during a slump they were more likely to fall subject to changes in the degree of liquidity preference and to central bank adjustments in the supply of money. ”If the supply of money is suitably adjusted, then here is no necessary reason why interest rates need rise during a boom or fall during a depression.” It is these calculations under conditions of expectations and uncertainty that bedevil the current stock market and its traders. A mere hint improperly conveyed by the Fed that it may in the future be curbing quantitative easing which has helped keep interest rates low is converted into unjustified panic on the markets by computerized trading programs and hedge funds who are staffed by a generation of young people who know very little of economic history and pre Friedman economic thought. The markets have since recovered on somewhat better , although uneven economic data. So we should expect a bouncy sometimes up sometimes sharply down market for the forseeable future. But despite sequestration and obsession with deficits affecting policy negatively and slowing growth the upward momentum in the U.S. should continue.

A last thought and observation. A headline in The Guardian reads Ireland falls back into recession despite multibillion euro austerity drive: Official data means Ireland has endured three successive quarters of recession.   The headline shows how far the conventional wisdom about macro-economics has been perverted by the prevailing anti Keynesian orthodoxy. Austerity leads in all circumstances to slower growth. If its is implemented after a crash and a sharp rise in unemployment worsening the recession is inevitable.


About haroldchorneyeconomist

I am Professor of political economy at Concordia university in Montréal, Québec, Canada. I received my B.A.Hons (econ.&poli sci) from the University of Manitoba. I also completed my M.A. degree in economics there. Went on to spend two years at the London School of Economics as a Ph.D. student in economics and then completed my Ph.D. in political economy at the University of Toronto. Was named a John W.Dafoe fellow, a CMHC fellow and a Canada Council fellow. I also was named a Woodrow Wilson fellow in 1968 after completing my first class honours undergraduate degree. Worked as an economist in the area of education, labour economics and as the senior economist with the Manitoba Housing and Renewal Corporation for the Government of Manitoba from 1972 to 1978. I also have worked as an economic consultant for MDT socio-economic consultants and have been consulted on urban planning, health policy, linguistic duality and public sector finance questions by the governments of Manitoba, Saskatchewan,the cities of Regina and Saskatoon, Ontario and the Federal government of Canada. I have also been consulted by senior leaders of the British Labour party, MPs from the Progressive Conservative party, the Liberal party and the New Democrats on economic policy questions. Members of the Government of France under the Presidency of Francois Mitterand discussed my work on public sector deficits. I have also run for elected office at the municipal level. I first began to write about quantitative easing as a useful policy option during the early 1980s.
This entry was posted in austerity, business cycles, classical economics, deficit hysteria, European debt crisis, J.M.Keynes, quantitative easing, unemployment and tagged , , , . Bookmark the permalink.

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