July 12, 2008

Dear Mr. Munchau.

Just read your Financial Times commentary of a few days ago.

Below are my own comments along similar lines of June 30 2008 on an Icelandic internet board (Icelandic part translated).

Gunnar Tómasson

(IMF economist 1966-1989)


The current problem in the international monetary system has been predictable for more than a quarter century.

But the world’s central banks and their institutions (the International Monetary Fund/IMF and the Bank of International Settlements) did not heed the warning which the undersigned presented within and outside the IMF on the basis of classical monetary thought (Adam Smith, Jeremy Bentham, Jean Baptiste Say, John Stuart Mill, John Maynard Keynes prior to 1936) which disappeared from the sight of academic economists after World War II.

Or, as on of the highest-ranking IMF officials, then and now, commented years ago:

“Mr. Tomasson thinks he is right and the world is wrong.”


Here are my comments on this aspect of the issue which I posted to this thread last February:

Patrick Minford is an English economics professor and economic advisor to the Conservative Party. In his work he is partial to using econometric models in which the trend of economic variables in some past period is extrapolated to “predict” changes in economic variables in a future period.

This modus operandi is predicated on the foundational thesis of modern “mainstream” economics to the effect that the world’s market economies are “in ‘stable’ equilibrium or motion” (Paul A. Samuelson, ‘Foundations of Economic Analysis’, Atheneum, New York , 1979, p. 5).

This thesis is both good and bad - it creates employment for “mainstream” economists in the making of econometric models but precludes their being able to foresee future problems in the economic systems of nations and the the world as a whole which are due to systemic flaws.

A little more than eleven years ago (January 18, 1997) I had occasion to send Minford a brief letter along these lines:

"In the field of monetary and fiscal policy, the short-term usefulness of econometric models for forecasting and policy analysis must be weighed against their complete irrelevance to any analysis of medium-and long-term policy issues as evidenced in the debate which preceded the IMF's SDR scheme in the late 1960s.

"With the Bretton Woods system nearing collapse, the principal concern of the IMF's Research Department, Management, Executive Directors, and Governors, shared by outside economic scholars, was a perceived incipient shortage of world liquidity. Of course, events would soon prove all this to be imaginary nonsense.

"Instead, the world banking and financial system proceeded to generate liquidity in amounts vastly exceeding the comparatively small change which informed policy makers considered appropriate in the course of the detailed analysis which preceded the institution of the SDR scheme itself.

"The resulting house of cards is certain to come crashing down."

Minford did not respond to my letter, but the point of my letter was simply to document

(a) that the current systemic problem in the world’s monetary and economic system has been predictable for many years;

(b) that the "mainstream" economics underlying the so-called Washington Consensus is nonsense; and

(c) that comments by "mainstream" economists on the systemic problem in the world’s monetary and economic affairs is empty gibberish.

It was also predictable that the world’s foremost central bank, the U.S. Federal Reserve (Fed), would admit to no responsibility after having been asleep at the controls of the world’s monetary system on its path to the brink of disaster ever since the demise of the Bretton Woods system in the early 1970s.

Therefore, on December 7, 1996 I sent the following letter to Fed governor, econometrician and forecaster Laurence Meyer:

"Now, after quarter-century of sustained growth of monetary and other financial instruments, the ratio of paper wealth to output of goods and services has long since become dangerously high as manifested, inter alia, in Third World debt, the S&L morass, rising public debt and commercial bank portfolio problems.

"In this respect, Deputy Treasury Secretary Lawrence Summers advised The Washington Post last week that he judged the U.S. economic outlook to be now better than at any time since the 1970s. Other signs, such as the recent rapid economic slow-down in Asia , suggest that this may be the lull before the storm.

"It is fair surmise that
macro-economic forecasting models predicated on mainstream monetary thought, which have detected no signs of "a global crisis" during the rapid rise in the ratio of paper wealth to real output during the past quarter century, are once again setting policy-makers up for a nasty "surprise"."

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