August 06, 2004

Robert Skidelsky's Biography of John Maynard Keynes

Robert Skidelsky, John Maynard Keynes: Hopes Betrayed and The Economist as Saviour

J. Bradford DeLong delong@econ.berkeley.edu http://www.j-bradford-delong.net/

Robert Skidelsky (1983), John Maynard Keynes: Hopes Betrayed (London: Macmillan: 033357379x).

Robert Skidelsky (1992), John Maynard Keynes: The Economist as Saviour (London: Macmillan: 0333584996).

Sitting next to Lord Skidelsky in the Sala Maggioranza of the Italian Treasury (after they turned off the air conditioning, I took off my tie when he took off his jacket) impelled me to reread his Keynes biography. And, after rereading, I find that I cannot improve on what I wrote about them three years ago: my thoughts then were totally enthusiastic and totally adulatory. And my thoughts are the same now. (I haven't yet reread volume three). In his first two volumes, Skidelsky gives us John Maynard Keynes's life, entire. And he does so with wit, charm, control, scope, and enthusiasm. You read these books and you know Keynes--who he was, what he did, and why it was so important.

The place to start is with Skidelsky's observation that John Maynard Keynes appeared to live more lives than any of the rest of us are granted.

Keynes was an academic, but also a popular author. His books were read much more widely outside of academia than within it. Keynes was a politician--trying to advance the chances of Britain's Liberal Party between the wars--but also a bureaucrat: at times a key civil servant in the British Treasury. He was a speculator, trying to make his fortune on the stock market, but also at the core of the "Bloomsbury Group" of artists and intellectuals that did so much to shape interwar culture.

For the litterati it is Keynes of Bloomsbury--his loves, enthusiasms, acts of patronage, and wit--who is the most interesting. For economists like myself, it is Keynes the academic who is the real Keynes: he was the founder of the half-science half-witchcraft discipline of macroeconomics. For those interested in the political and economic history of the twentieth century, it is Keynes the author and politician who is primary. In either case, John Maynard Keynes is the man who has the best claim to be the architect of our modern world--whether it is how our central banks think about economic policy, what our governments believe that they must try to do, the institutions through which they work, or the habit of thought that views the economy not as Adam Smith's "system of natural liberty" but as a complicated machine that needs adjustment and governance, all of these trace large parts of their roots to the words and deeds of John Maynard Keynes.

How did this man come to be?

That is the question answered by the first volume of Skidelsky's biography: Hopes Betrayed. Hopes Betrayed is a bildungsroman, a story of growth and development. Skidelsky writes the best narrative interpretation of growing up as a smart and privileged children of academics in late Victorian Britain than I can ever conceive of being written. He writes of how Keynes was one of a relatively small number of brilliant students thrust as a leaven into the mass of Britain's upper class at Eton, and thus became part of "an intellectual elite thrust into the heart of a social elite" (HB, page 77). An entire cohort of Britain's upper class thus learned before they were twenty that Keynes could be very smart, very witty, very entertaining--and very helpful if there was a hard problem to be thought through or something to be done.

Skidelsky then writes of Keynes at Cambridge, his joining the secret society of the Apostles, and his eager grasping with both hands of the philosophy of the aesthete common among the students of the philosopher G.E. Moore. As Keynes put it in 1938, he believed that one should arrange one's life to achieve the most good, where "good" was nothing more or less than "states of mind... states of mind... not associated with action or achievement or with consequences [but]... timeless, passionate states of contemplation and communion…. a beloved person, beauty, and truth." Thus Keynes left Cambridge convinced that "one’s prime objects in life were love, the creation and enjoyment of aesthetic experience, and the pursuit of knowledge. Of these love came a long way first..." (HB, page 141).

This embrace of aestheticism was and remained the key to the "Bloomsbury" avatar of John Maynard Keynes, for whom the lodestars were to "be in love with one’s friends, with beauty, with knowledge" and who was and remained an enthusiastic member of the Bloomsbury group, sharing "its intellectual values and its artistic enthusiasms," and participating "in its wild fancy dress parties" (HB, page 234). Keynes was a man who could celebrate this appointment to the British Treasury with "...a party for seventeen… at the Café Royale.... Afterwards they went back to 46 Gordon Square for Clive [Bell]’s and Vanessa [Bell, the sister of Virgina Woolf]’s party. There they listened to a Mozart trio... and went upstairs for the last scene of a Racine play performed by three puppets made by Duncan [Grant], with words spoken by the weird-voiced Stracheys. ‘The evening ended with Gerald Shove enthroned in the center of the room, crowned with roses...’" (HB, page 300).

But at the same time Keynes's pursuit of knowledge was shading over into politics and policy as well. For Keynes it was never enough to pursue knowledge in order to achieve a good state of mind, one had also to be sure to cause the knowledge to be applied to make the world a better place. And how one could act in politics and policy was greatly constrained by the limits of our knowledge. One argument from Edmund Burke, especially resonated with Keynes. As he wrote: "Burke ever held, and held rightly, that it can seldom be right... to sacrifice a present benefit for a doubtful advantage in the future.... It is not wise to look too far ahead; our powers of prediction are slight, our command over results infinitesimal. It is therefore the happiness of our own contemporaries that is our main concern; we should be very chary of sacrificing large numbers of people for the sake of a contingent end, however advantageous that may appear... We can never know enough to make the chance worth taking..." (ES, page 62).

Keynes's industry and intelligence thus made him a trusted and effective member of Britain's intellectual and administrative elite well before the eve of World War I. Sir Edwin Montagu, especially, pushed him forward both before and during the war. Before the war Keynes decided that he wanted the life of an academic rather than of an administrator: Cambridge rather than the India Office or the Treasury. Yet he kept a strong presence in both worlds, writing his practical and policy-oriented book Indian Currency and Finance in spare moments as he worked on the deeper and philosophical project that was his Treatise on Probability.

Thus it was no surprise that Keynes found an important and powerful job at the Treasury during the national emergency that was World War I. How do you mobilize the financial resources of Britain to support the war effort? How large a war effort could the British economy stand? How could an international trade system geared to consumer satisfaction be harnessed as an instrument of national power? These are all deep and complicated questions. These are what Keynes worked on. But as the death toll from World War I mounted up toward ten million, Keynes became angrier and angrier at this monstrous botch of human lives and social energy that was World War I--and angrier and angrier at the politicians who could see no way forward other than mixing more blood with mud at Paaschendale.

Keynes's friend David Garnett wrote him a letter condemning his work for the government, calling Keynes "an intelligence they need in their extremity.... A genie taken incautiously out... by savages to serve them faithfully for their savage ends, and then--back you go into the bottle.... Oh... our savages are better than other savages.... But don’t believe in the profane abomination." The interesting thing was that Keynes "agreed that there was a great deal of truth in what I had said..." (HB, page 321). And then the whole project of post-World War I reconstruction went wrong at Versailles--when the new German government was treated as a foe rather than a democratic ally, when the object seemed to be to extract as much in plunder and reparations from Germany as possible ("until the pips squeak").

Skidelsky quotes South African politician Jan Christian Smuts on the atmosphere at Versailles: "Poor Keynes often sits with me at night after a good dinner and we rail against the world and the coming flood. And I tell him that this is the time for Grigua’s prayer (the Lord to come himself and not to send his Son, as this is not a time for children). And then we laugh, and behind the laughter is [Herbert] Hoover’s horrible picture of thirty million people who must die unless there is some great intervention. But then again we think that things are never really as bad as that; and something will turn up, and the worst will never be. And somehow all these phases of feeling are true and right in some sense..." (HB, page 373).

Under this unbearable pressure, Keynes exploded. Keynes exploded with a book called The Economic Consequences of the Peace. It condemned the political maneuvering of Versailles and the treaty that resulted in the strongest possible terms. He excoriated short-sighted politicians who were interested in victory rather than peace. He outlined his alternative proposals for peace: "German damages limited to £2000m; cancellation of inter-Ally debts; creation of a European free trade area… an international loan to stabilize the exchanges...."

And he prophesied doom--if the treaty were carried out and Germany kept poor for a generation. "If we aim deliberately at the impoverishment of Central Europe, vengeance, I dare predict, will not limp. Nothing can then delay for long that final civil war between the forces of reaction and the despairing convulsions of revolution, before which the horrors of the late German war will fade into nothing, and which will destroy... the civilization and progress of our generation..." (HB, page 391).

The Economic Consequences of the Peace made Keynes famous. His horror at the terms of the peace treaty won him friends like Felix Frankfurter, a powerful molder of opinion in the United States. In his book, propelled by "passion and despair," Keynes "spoke like an angel with the knowledge of an expert" and showed an extraordinary mastery not just of economics but also of the words that were needed to make economics persuasive. Before The Economic Consequences of the Peace Keynes was primarily an academic (with some government experience) with a lot of influential literary friends. Afterwards he was a celebrity. He was not only the private Keynes: "the Cambridge don selling economics by the hour, the lover of clever, attractive, unworldly young men, the intimate of Bloomsbury." He was also--because of what he had done with his pen after Versailles--"the monetary reformer, the adviser of governments, the City magnate, the feared journalist whose pronouncements caused bankers and currencies to tremble... conferences jostled with holidays, intimacy merged into patronage. In 1925 the world-famous economist would marry a world-famous ballerina in a blaze of publicity..." (HB, page 400).

So after World War I Keynes used what power he had to--don't laugh--try to restore civilization. In Skidelsky's--powerful and I believe correct--interpretation, Keynes before 1914 "believed (against much evidence, to be sure) that a new age of reason had dawned. The brutality of the closure applied in 1914 helps explain Keynes’s reading of the interwar years, and the nature of his mature efforts... to restore the expectation of stability and progress in a world cut adrift from its nineteenth-century moorings..." (ES, page xv).

Skidelsky's narrative of the mature Keynes--Keynes in the 1920s--is far from being a one-note recounting of the brave but losing struggle against the approaching Great Depression, against political insanity, and against the Nazi Party's attempted revenge for the German defeat in World War I. Bloomsbury takes up a good chunk of the narrative. Skidelsky's book includes love letters from Keynes to his future wife Lydia Lopokova: "In my bath today I considered your virtues—how great they are. As usual I wondered how you could be so wise. You must have spent much time eating apples and talking to the serpent! But I also thought that you combined all ages—a very old woman, matron, a debutante, a girl, a child, an infant; so that you are universal. What defence can you make against such praises?" (page 181).

But when he tries to paint a picture of what it was like to be a member of the Bloomsbury culture group in the 1920s, even Skidelsky cannot quite reach the full range. So he resorts to the imaginings of one of the characters of novelist Anthony Powell, who thinks that Bloomsbury must have been "...every house stuffed with Moderns from cellar to garret. High-pitched voices adumbrating absolute values, rational statse of mind, intellectual integrity, civilized personal relationships, significant form…. The Fitzroy Street Barbera is uncorked. 'Le Sacre du Printemps' turned on, a hand slides up a leg.... All are at one now, values and lovers" (page 11).

Virginia Woolf had a different, less happy and romantic view. She wrote of her "vivid sight of Maynard by lamplight--like a gorged seal, double chin, ledge of red lip, little eyes, sensual, brutal, unimaginate. One of those visions that come from a chance attitude, lost as soon as he turned his head. I suppose though it illustrates something I feel about him. He’s read neither of my books..." (page 15). There is a clear lesson: if your circle includes Nobel Prize-winnning caliber novelists with wicked pens, read their books and praise them as often as possible.

The bulk of this second volume--The Economist as Saviour--is, however, devoted to Keynes's political and intellectual struggle for stable money and full employment, and against deflation, overvalued exchange rates, and the sacrifice of the happiness of today's populations in the hopes of regaining the imagined benefits of the classical gold standard at some time in the distant future. Keynes spent more than a decade arguing against central bankers who "think it more important to raise the dollar exchange a few points than to encourage flagging trade." He tried to prevent Britain's return to the gold standard in 1925 at an overvalued exchange rate, for by overvaluing the exchange rate Britain's Treasury Minister, Winston Churchill, was willing "... the deliberate intensification of unemployment. The object of credit restriction, in such a case, is to withdraw from employers the financial means to employ labor at the existing level of prices and wages. This policy can only attain its end by intensifying unemployment without limit, until the workers are ready to accept the necessary reduction in money wages under the pressure of hard facts.... Deflation does not reduce wages 'automatically.' It reduces them by causing unemployment. The proper object of dear money is to check an incipient boom. Woe to those whose faith leads them to use it to aggravate a Depression!" (page 203).

But in the end Keynes failed in the 1920s. He was unable to persuade British governments that economic policy should be decided upon by rational thought rather than by obedience to old poorly-understood verities. He failed to achieve any material easing of the terms of the Versailles treaty. He failed to prevent deflation and high unemployment in Britain. He failed to convince people that the Great Depression was a man-made catastrophe that could be cured relatively easily. His pen--though strong--was not strong enough. His allies were too few. And among central bankers and cabinet ministers, understanding of the situation in which they were embedded was rare.

So the 1930s saw a change of emphasis. Fewer short polemical articles were written. Instead, Keynes concentrated his attention on writing a book, a book which he thought "...will largely revolutionize--not, I suppose, at once but in the course of the next ten years--the way the world thinks about economic problems. When my new theory has been duly assimilated and mixed with politics and feelings and passions, I can’t predict what the upshot will be in its effects on actions and affairs. But there will be a great change..." (pages 520-521). And he was right.

His General Theory of Employment, Interest, and Money did change the world. It ends with a bold claim for the importance of ideas rather than interests that, in context, has to be read not as a considered judgment but as his desperate hope: "Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas.... But, soon or late, it is ideas, not vested interests, which are dangerous for good or evil..." (page 570). 

The extraordinary thing is that Keynes was right.

The other extraordinary thing is that Skidelsky has told the story so well.

Skidelsky is superb at getting at the heart of what the key contribution of Keynes's General Theory. As Skidelsky puts it, Keynes's key contribution was to find not a middle way but a genuine Third Way between "laissez-faire and central planning... conservatism and socialism." His proposals did not split the difference, but instead promised to achieve the benefit each of the traditional poles of politics had claimed but had never been able to deliver. Socialists promised full employment without economic freedom. (And Communists promised full employment without either economic or political freedom.) Conservatives promised economics (and sometimes political) freedom without full employment. Keynes, by contrast, promised both. His doctrines were thus politically irresistible: they would have been extraordinarily attractive to politicians and bureaucrats even if the doctrines and theories had not been true. Fortunately for all of us, they were true--or at least true enough to be very useful indeed in their historical context.

Skidelsky is also very good at focusing on the underlying liberal--classical liberal, that is--nature of Keynes's thought. Brought up in the laissez-faire classical liberal tradition, Keynes came to see it as a con: based on false claims about the world. But, Keynes believed, a good and smart government could make the claims of laissez-faire true enough.

Keynes saw the market economy as having two great flaws. The first was that demand for investment was extraordinarily and pointlessly volatile, as business leaders and investors attempted the hopeless task of trying to pierce the veil of time and ignorance. The second was that the fluctuations in the wage level that classical economic theory relied on to bring the economy back into balance after such an investment fluctuation either did not work at all or worked too slowly to be relevant for economic policy. (No, I am not going to be drawn into a debate about "unemployment disequilibrium.") But Keynes believed that if these problems could be fixed, then the standard market-oriented toolkit of economists would once again be worthwhile and relevant. And he showed a way to fix them or at least come close enough to fixing them, a way that we still use today--as you can see if you watch what Alan Greenspan's Federal Open Market Committee does next week.

So buy these books. Read these books. These are great books. Time spent with them is time well-spent. Robert Skidelsky deserves great honors for having devoted so much of his life to writing down the story of John Maynard Keynes, and writing it down so well.

Posted by DeLong at August 6, 2004 08:01 PM | TrackBack | | Other weblogs commenting on this post
Comments

Thanks for the reviews - I think I'm going to check my local library system for both books. It's funny that Keynes, a true visionary, is now, at least in the popular mind, the accursed one of "liberal" economics. I, for one, am tired of seeing incense burned at the altars of Hayek and Friedman.

The pity is that we now have a huge deficit which could have been avoided. If the grown-ups manage to wrest control of government away from the three-year-olds, we won't have the financial flexibility to engage in a proper stimulus package. And the masses will blame the messengers, not the mess-makers.

Alas.

Posted by: Larry B on August 6, 2004 09:16 PM

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"I, for one, am tired of seeing incense burned at the altars of Hayek and Friedman."

Heh. Didn't Firedman say/write that "We're all Keynesians now"?

Posted by: Steven Rogers on August 6, 2004 09:40 PM

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Indespensible work.

Posted by: Stirling Newberry on August 6, 2004 10:08 PM

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I'm also off to the library, but "Lord Skidelsky"? We fought a couple of wars to get rid of that kind of shite.

Milt "Hong Kong rules!" Friedman needs to be tossed into some sort of historical garbage can.

Mark

Posted by: Mark on August 6, 2004 10:30 PM

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Damn pinger clicked twice. By the way, those links take you to Amazon.uk, but the US Amazon also has them.

Posted by: Linkmeister on August 7, 2004 12:23 AM

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Brad: For those wishing to get an abridged flavor of Professor Skidelsky's writing, there is his "single-volume life of John Maynard Keynes (published after his) three-volume life". The reference is "John Maynard Keynes 1883-1946: Economist, Philosopher, Statesman" (London: 2003) Macmillan (0 333 90312 9).

FJC

Posted by: FJC on August 7, 2004 03:01 AM

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Here is an OT question I have been pondering. Suppose we are in an alternate-world 1978. Stagflation is rampant and Carter gets and implements the best economic advice we can think of in our hindsight. What would it have been? And what effect would it have had?

Posted by: Dick Thompson on August 7, 2004 06:36 AM

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You should read the first 20 pages or so of Saul Bellow's Ravelstein. In which Saul Bellow's alter-ego discusses writng an article about Keynes at Versailles with a thiny veiled Alan Bloom.

Posted by: banco on August 7, 2004 07:21 AM

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"I, for one, am tired of seeing incense burned at the altars of Hayek and Friedman."

There is no escape...

"LORD ROBERT SKIDELSKY: ... I think the three great economists of this century were Keynes, Hayek, and Friedman.

"I'm not sure exactly how I'd rank them, except I think I would have to say Keynes and Hayek were the top ones in their profundity...."

http://www.pbs.org/wgbh/commandingheights/shared/minitextlo/int_robertskidelsky.html


Posted by: Jim Glass on August 7, 2004 09:14 AM

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In passing. Comparing George W. Bush to Herbert Hoover seems grossly unfair--to Hoover. Hoover lived before the intellectual framework that Keynes created whereas Bush has no excuse of this sort. Plus Hoover managed to save millions of people from starvation.

I read the first two of these books about 5 years ago before the 3rd volume came out, and I think they're wondeful.

I can only say that I love all the aspects of Keynes: economist, speculator, investor, man of affairs, Bloomsbury aesthete and squire of Tilton. The multiplicity is what makes him fascinating.

Posted by: Abby on August 7, 2004 10:32 AM

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"Hoover managed to save millions of people from starvation."
~~~~~~~~~

"He is certainly a wonder and I wish we could make him President. There couldn't be a better one."
-- FDR on Herbert Hoover, 1920

"I had supposed the President was more literate, economically speaking."
-- Keynes on FDR, 1934

"Mr Hoover was the only man who emerged from the ordeal of Paris with an enhanced reputation. This complex personality with his habitual air of a weary Titan, his eyes starely fixed on the true and essential facts of the European situation, imported into the councils of Paris, when he took part in them, precisely that atmosphere of reality, knowledge, magnanimity and disinterestedness which, if they had been found in other quarters also, would have given us the good peace....

"Europe ... should never forget the extraordinary assistance afforded her during the first six months of 1919 through the agency of Mr Hoover and the American commission of relief. Never was a nobler work of disinterested goodwill carried through with more tenacity and sincerity and skill, and with less thanks either asked or given.

"The ungrateful governments of Europe owe much more to the statesmanship and insight of Mr Hoover and his band of American workers than they have yet appreciated or will ever acknowledge.

"The American relief commission, and they only, saw the European position during those months in its true perspective and felt towards it as men should. It was their efforts, their energy, and the American resources placed by the President at their disposal, often acting in the teeth of European obstruction, which not only saved an immense amount of human suffering, but averted a widespread breakdown of the European system."

-- Keynes on Hoover, 1919


Posted by: Jim Glass on August 7, 2004 11:49 AM

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"WHY AREN’T WE ALL KEYNESIANS YET?"

Posted by: El Gringo on August 7, 2004 05:04 PM

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Yep, simply the best biography I have ever read - not only the man in full, but his ideas in full too.

As for 'Lord' Skidelsky, IIRC he is only a life peer - ie created a lord by government appointment (technically by the queen, but she does as she's told by the prime minister) and no-one inherits his title. In other words it's an ex officio title (like 'Justice Scalia') rather than a marker of inherited aristocracy. You can't sit in the upper house of parliament unless you're a lord or a bishop, so the government had to make him one to fill the job.

Posted by: derrida derider on August 7, 2004 08:15 PM

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@Steven
"Heh. Didn't Firedman say/write that "We're all Keynesians now"? "

I assume you meant Friedman but still: I heard this said about Reagan. Googling on that I found that doubt is raised on that too, but there these contributions discussed the point if ot was Reagan himself or one of his cabinet-members.

Posted by: Frans Groenendijk on August 8, 2004 12:15 PM

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Thanks for the review, Brad.

Posted by: hippocopter on August 8, 2004 01:19 PM

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If I recall, it was President Nixon who said that "we're all keynesians now". This was after the introduction of wage & price controls in August 1971; I think that Dr. George Shultz who was OMB Director at the time was put in charge of admnistering the controls. This famous remark happened after Professor Friedman met the President at the White House and called these controls a "monstruosity" and added "I don´t blame George (Shultz) for it, I blame you, Mr. President!" I hope that I am not getting all these things wrong.

Yes, Brad! Good book reviews should be a complement to the reading of the book. They should "add" to the book's message and be forever a part of it. Your review is a very good review. Thanks.

Posted by: FJC on August 8, 2004 02:54 PM

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Nixon said, "We're all Keynesians now."

Posted by: piraisoli on August 8, 2004 03:39 PM

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"Why aren't we all Keynesians yet?"
By Paul Krugman, FORTUNE
Aug. 17, 1998 issue

Posted by: El Gringo on August 8, 2004 05:18 PM

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I'm curious--why do you discuss only Skidelsky's first two volumes? The third is also worth reading.

Posted by: Mark on August 8, 2004 10:28 PM

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Members of the literati shouldn't write "litterati" - leave such back-formations to the semi-educated glitterati.

Posted by: JamesW on August 9, 2004 12:06 AM

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Went back to some old press cuttings to confirm the authorship of the 'keynesian' quotation and found that a couple of months after the introduction of wage & price controls Dr. Schultz was promoted to Treasury Secretary, substituting Mr. Connaly. It is most curious to know who replaced him to the newly created Cost of Living Council, the agency charged with administering first the price freeze and then the controls. So, folks, that's your first question. The second question is: who is the author of the not-less-famous quotation "we're all monetarists now!".

FJC

Posted by: FJC on August 9, 2004 04:48 AM

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Thanks FJC for correcting my stupid mistake (mixing up Nixon and Reagan (of course I DID google on Nixon and the quote....)

The background of my remark is not any different because of the mistake however.

On my own site referring to this post of professor de Long I confront the greatness of Keynes with the miserable stature of the Dutch minister of finance who in his own weblog (!) wrote something along this line:
"this Keynesian stuff was something from the past”
suggesting some surprise that anybody still believed in the soundness of Keynes ideas.
This same mister Zalm (Dutch for salmon btw) is the hero or Don Quichotte trying (and to some extend succeeding) to have the European commission act to force Germany and France to stick to the so called Stability and Growth Pact.
He is kind of a “deficit hawk” but will never ever address the US-policy even after this:
“Mr Chirac's questioning of the stability pact won support from America's treasury secretary, John Snow, who said he thought it “helpful” that the French president was raising the issue, since it was a mistake for countries to “put themselves in straitjackets”. (The Economist, last year: http://www.economist.com/agenda/displayStory.cfm?story_id=1921623)
(see also: “EU Governments Have Last Say on Deficits, Court Rules (Update6)” at Bloomberg: http://quote.bloomberg.com/apps/news?pid=10000085&sid=acU742pnEMmo&refer=europe)

To me it looks like this of importance for the US too because of this (http://afr.com/articles/2004/06/10/1086749836166.htm) “dollar dilemma” Niall Ferguson described in the Australian financial review
“The dramatic shift in the finances of the federal government from surplus to deficit since 2000 - a deterioration unprecedented in peacetime, according to the IMF - has been substantially funded from abroad. Had that not been the case, the combination of tax cuts, increased spending and reduced revenue that has characterized George Bush's fiscal policy would have led to much more severe increases in long-term US interest rates. Veterans of the Nixon and Reagan years can only shake their heads enviously at the way the present Republican administration has escaped punishment for its profligacy. To run deficits on this scale while enjoying long-term bond yields of under 5 per cent looks like the biggest free lunch in modern economic history. The cost of servicing the federal debt has actually fallen under Bush, even as the total debt itself has risen."

The buyers of the dollars are Asian central banks in the first place. The banks don't want a weaker dollar while this would hurt their exports to the huge American market. But

"... reliance on exports to the US may not be a long-term option for Asia. In a recent lecture in Washington, Larry Summers, the former US treasury secretary, argued that the US has no alternative but to increase its savings rates if it is to extricate itself from "the most serious problem of low national saving, resulting in dependence on foreign capital, and fiscal unsustainability, that we have faced in the last 50 years". His conclusion is that the world can no longer count on the US to be the consumer of first resort, which means in turn that "the growth plans of others that rely on export- led growth will need to be adjusted in the years ahead"."
....
The Asian dollar dilemma is the euro's opportunity, both economically and politically. First, if the US does cease to be the only functioning engine of global demand, it is imperative that the euro zone step up to the plate, and soon. For too long the European Central Bank has made price stability the "magnetic north" of its policy compass. It has not spent enough time thinking about growth in Europe and the world. For too long ECB interest rates have been about a percentage point above the Fed's, despite the fact that deflation is a bigger threat to the core German economy than it ever has been to the US....

During the last couple of weeks I have started to fear that maybe Cheney and Snow are right about the tax cuts and deficit in some short term and US-unilateral way.
Simply because Europe and the Asian countries can not afford to act as irresponsible as the Bush administration and can and will go on (at least for some years) indirectly funding the US policy to prevent a lose-lose-lose situation.
But the longer they go on the bigger the clash will be, I fear.

Posted by: Frans Groenendijk on August 9, 2004 12:46 PM

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Keynes always gets major props for his "ideas, not vested interests, which are dangerous for good or evil" quote. But is it really that different from Shelley's quote (hope) circa 1820: "Poets are the unacknowledged legislators of the world"?

Posted by: eric on August 10, 2004 02:10 PM

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not only is skidelsky a great writer, he is also great company

Posted by: gbloco on August 11, 2004 07:48 AM

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I wish to buy the book, all three volumes of it. Where from? Amazon.com does not have it. Waterstones does not have it.

Posted by: rana on August 19, 2004 11:45 AM

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I wish to buy the book, all three volumes of it. Where from? Amazon.com does not have it. Waterstones does not have it.

Posted by: rana on August 19, 2004 11:47 AM

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I wish to buy the book, all three volumes of it. Where from? Amazon.com does not have it. Waterstones does not have it.

Posted by: rana on August 19, 2004 11:49 AM

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