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Money, Finance and the Real Economy

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Money, Finance and the Real Economy

What Went Wrong?

CEPS,

15 min read
10 take-aways
Audio & text

What's inside?

Corporate investment is still down despite low interest rates, so where will international surplus savings go?

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Editorial Rating

8

Qualities

  • Comprehensive
  • Analytical
  • Innovative

Recommendation

Economic reports can be dry, pedantic affairs, but this text from economists Anton Brender, Florence Pisani and Emile Gagna reads more like a mainstream book – a whodunit that unravels the reasons behind the stagnant aftermath of the 2008 crisis. The authors cleanly and concisely discuss some big economic policy issues, particularly the important role of financial systems in developed economies. Their description of how risks circulate and spread is especially noteworthy, as is their explanation of how risk-averse savers helped create a risk-hungry – and by 2008, fragile – shadow banking sector. However, their main conclusion – that the world has failed to organize the investments required to absorb surplus global savings – elegantly ties together the seeming paradox of expanding asset bubbles and stifled economic growth. While the general reader may find this a challenging read, getAbstract believes that those with some understanding of economics can gain a great deal of new perspective from it.

Summary

Monetarism

Ardent monetarists have long presumed that they can analyze the economy in a “dichotomous” manner – that is, by separating real economic activity from an economy’s price levels. This point of view sees inflation mainly as a function of the quantity of money in circulation. It considers money as a “veil” covering activity in which “products are exchanged for products” in the real economy. Proponents of monetarism believe that central bankers and regulators should monitor and fine-tune the growth of the money supply to achieve inflation targets and full employment, while allowing market forces free rein to manage economic activity.

Assuming that money’s value is tangential to real economic activity also means assuming that an economy’s prices and interest rates easily, smoothly and continually adjust their levels in response to changes in the amount of money in circulation. However, experience and history show that actors within economies don’t engage in this continual renegotiation process. Instead, prices and rates are sticky, particularly on the downward side. For example, after the 2008 crisis, few employers or employees considered negotiating an immediate...

About the Authors

Anton Brender, Florence Pisani and Emile Gagna are economists with Candriam Investors Group, a New York Life Company.

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