Angel Asensio

Between the cup and the lip On Post Keynesian interest rate rules and long-term interest rates management

Keywords: interest rate, rule, convention, monetary policy, financial crisis JEL classification: E12, E52 -------

The paper states that, although Post Keynesian interest rules may be feasible and sustainable in favourable circumstances, there is a shared difficulty as for the setting of long-term interest rates in a context of strong uncertainty and shifting liquidity preference. According to Keynes theory of the interest rate, the variation in the longterm interest rate that authorities are seeking for must correspond to the market convention, in order to preserve the state of the confidence and avoid disruptive shifts in the demand for money. It is argued that authorities should therefore announce a long-term interest rate target in accordance with the normative objective the opinion has debated on and agreed with. Also, such a conventional target cannot be very distant from the current rate, and the short-term rates authorities control should be adjusted gradually (but not slowly).

Moving the interest rate convention is harder to get in the context of the current crisis, because of the deleterious effects on private and public accounts, and thereby on the state of confidence, that the innumerable amounts of bad debts have carried. We put forward strong arguments in favour of reducing the amount of bad debts by means of temporary large public deficits and accommodating monetary policies (which is not to say permanent large deficits and inflationary policies), even though long-term interest rate do not respond much to the short-term impulses of central banks.

may come up against, owed to strong uncertainty and the related changing state of confidence. As we are not really concerned in this paper with the policy ultimate objectives 2 , the discussion will mainly focus on the control authorities have on the intermediary objectives, namely the short-term and long-term interest rates.

Section 3 focuses on the way confidence can be introduced within the recent Post Keynesian literature on monetary policy theory. It starts from Keynes's definition of the interest rate as a conventional variable, subject to the changing 'views about the future', and investigates how monetary authorities should manage to have a chance of moving the market convention toward the desired level. The section is also aimed at discussing issues at stake in the current and forthcoming troubled situation. The focus will be put on the difficulty of recovering the confidence of the public, given the intricate state of affairs (fragile financing system, deflation and unemployment) and forthcoming threats (huge public deficits and potential inflationary pressures).

Section 4 summarizes the main findings and concludes the paper.

2. Post Keynesian interest rate rules and their operating channels Rochon & Setterfield (2007a) have proposed an enlightening classification of the Post Keynesian proposals in terms of "activist" and "parking it" rules. While both rules are aimed at taking advantage of the potential effects of monetary policy in the long run, the former focuses on policies which are aimed at operating through the short run relation between long-term interest rates and effective demand [START_REF] Atesoglu | The neutral rate of interest and a new monetary policy rule[END_REF][START_REF] Palley | Macroeconomics and monetary policy: competing theoretical frameworks[END_REF][START_REF] Fontana | Is There an Active Role for Monetary Policy in the Endogenous Money Approach?[END_REF], 2007), while the latter focuses on policies which are aimed at operating through the relation between (short/long-term) interest rates and income distribution [START_REF] Pasinetti | Structural Change and Economic Growth[END_REF][START_REF] Lavoie | Fair Rates of Interest in Post-Keynesian Political Economy[END_REF], Rochon & Setterfield, 2007a,b, 2008[START_REF] Smithin | A real interest rate rule for monetary policy?[END_REF][START_REF] Wray | A Post Keynesian view of central bank independence, policy targets, and the rules versus discretion debate[END_REF] 3 .

Rules operating through the short run relation between the long-term interest rate and output

The rule proposed in [START_REF] Atesoglu | The neutral rate of interest and a new monetary policy rule[END_REF] is based on Keynes's definition of the 'neutral rate ' (1936: 243), the interest rate which is consistent with full employment. The rule is aimed at adjusting the central bank rate at a neutral level, that is, in such a way that the long-term interest rate is adjusted to its own neutral level as well. Although Atesoglu's proposal does not deal explicitly with the long-term effects of monetary policy, his approach does not discard these effects of course.

The innovative proposal for a 'flexible opportunistic approach' developed by Fontana andPalacio-Vera (2003, 2007) seeks explicitly to encourage the growth rate of output and employment, besides stabilizing output in the short run and achieving price stability in the long run (see also [START_REF] Sawyer | Seeking to reformulate macroeconomic policies, 3rd bi-annual conference of the CEMF: Post Keynesian Principles of Economic Policy[END_REF]. The standard opportunistic approach [START_REF] Orphanides | The Opportunistic Approach to Disinflation[END_REF] states that, in order to be able to take advantage of a possible exogenous adjustment of the inflation rate towards the long-run target, the central bank should not adjust interest rates as long as the actual inflation rate remains within some predetermined upper and lower limits around the target. By contrast, the flexible opportunistic approach puts forward that the possible long-run effects of monetary policy on potential output argue in favour of a policy loosening when the actual rate of inflation is below the target but above the predetermined lower bound. In a similar way, if the actual rate of inflation is above the target but below the predetermined upper bound, the flexible opportunistic approach states that monetary policy should moderately decrease the interest rate so as to take advantage of a possible increase in potential output, which would subsequently offset possible inflationary pressure. [START_REF] Palley | Macroeconomics and monetary policy: competing theoretical frameworks[END_REF] considers further real effects of monetary policy, besides the effects on potential output and growth, and argues that inflation targeting 'biases decisions toward low inflation by obscuring the fact that policy also affects unemployment, real wages, and growth' (Palley 2007: 61). Taking these real effects into account, Palley calls for setting the rate of interest so as to balance the possible advantages that may follow from accepting an increased inflation rate with the advantage of low inflation. In his model, when unemployment is sufficiently high, the only cost to monetary stimulus is increased inflation. The authorities in that case may reduce the rate of interest so that unemployment decreases towards Palley's MURI (minimum unemployment rate of inflation, beyond which further inflation increases would have a counterproductive effect on employment 4 ). However, a trade-off between higher wages and lower unemployment, versus higher inflation and lower growth, may arise as unemployment falls. This is because the economy, under certain conditions5 , becomes profit-led (as the profit rate is negatively affected by unemployment). This interesting feature of Palley's model suggests that the rate of interest should not be adjusted according to a rigid predetermined rule, for the economy may become wage-led or profit-led depending on the level of unemployment, which affects the terms of the trade-off facing monetary policy.

Rules operating through the relation between interest rates and income distribution

Rules that aim at operating through the relation between interest rates and income distribution do not deny that the interest rate policy impacts the economy trajectory in the short run, although they focus on the sharing of the product of economic growth in a long run perspective. They respond to the doubt that, owing to the many uncertainties in the transmission mechanism [START_REF] Wray | A Post Keynesian view of central bank independence, policy targets, and the rules versus discretion debate[END_REF][START_REF] Bateman | The End of Keynes and Philosophy?[END_REF], monetary policy could get much success in the 'activist' way of setting interest rates. It is therefore recommended that the interest rate is set so that undesirable distributive effects are avoided. The resulting 'Parking it' rules divide into short-term nominal rate and long-term real rate rules.

Let us first discuss the 'fair rate' rule, understood in the spirit of Pasinetti 1981 (see also [START_REF] Lavoie | Fair Rates of Interest in Post-Keynesian Political Economy[END_REF], and the 'low real rate' proposed in Smithin 2007 (also [START_REF] Atesoglu | Inflation targeting in a simple macroeconomic model[END_REF][START_REF] Hein | Macroeconomic policy mix, employment and inflation in a Post-Keynesian alternative to the New Consensus Model[END_REF]. Both are real rate based rules and share the normative purpose of providing economic policy with an 'explicit distributional objective'. The 'fair rate' rule consists in equalizing the real interest rate with the productivity growth rate, so that the rentiers' share in the national income is constant. Smithin's rule, on the other hand, holds to setting the real interest rate at a low level (a cheap money policy). The distribution effect here differs essentially because 'it does not […] guarantee a share for existing wealth holders (as opposed to entrepreneurs or workers) in current productivity increases, as would the notion of the "fair" interest rate […]. This omission might be justified on the grounds that it is the latter, rather than the former, who are actually responsible for the productivity increases' (Smithin 2007: 116).

As Wray (2007: 120) also rejects "discretionary policy and doubt[s] the veracity of conventional views of central bank ability to achieve traditional goals such as robust growth, low inflation, or high employment", the 'Kansas city' rule recommends a constant zero short-term nominal rate 6 which aims at returning 'to Keynes's call for low interest rates and euthanasia of the rentier' 7 .

Table 1 below summarizes some central features of the 'activist' and 'parking it' rules.

6 Camara [START_REF] Neto | Fiscal policy and the Washington consensus: a Post Keynesian perspective[END_REF] also advocate a low interest rate policy so as to make it easier for the government to implement a sound countercyclical fiscal policy. 7 According to Keynes, 'The social philosophy towards which the General Theory might lead' (Keynes 1936: 374-377) focuses on our ability to manage the rate of interest so as to raise the inducement to invest to the level where, given the aggregate propensity to consume (including the State), there is full employment. Insofar as the accumulation of capital decreases the marginal efficiency of capital, a decrease in the interest rate will be necessary in the long run. That is the essence of Keynes's prediction of the euthanasia of the rentier. According to his argument, the ideal policy is not to maintain the interest rate at a low fixed level unconditionally; it is to adjust the interest rate to the level that ensures full employment, given the marginal efficiency of capital and the aggregate propensity to consume. As these variables may change in response to changes in the rate (and the state) of capital accumulation, in productivity growth or in the government's propensity to consume, among other factors, it would be imprudent to adopt a rule that could not take account of such developments. The success of interest rate rules rests on the condition that the transmission mechanisms do work, which is often implicitly assumed in this literature. Let us examine the point.

Do central banks control long-term interest rates?

First of all, it is important to notice that the central bank does not control directly the long-term interest rates, which are decided by banks (as far as bank loans are considered) and by the markets conditions as far as private loans are considered. Of course, the central bank's refinancing policy influences both: when the central bank refinancing rate is increased, banks tend to pass the difference more or less on the various credit rates they offer, and as credits become more expansive, borrowers tend to get finance in the non bank sector, which transmits the long-term rate increase to that sector as well.

The central bank influence on the long-term rates however is not the only force which determines the level of interest rates, as stated in Keynes's liquidity preference theory. The point is that the shifting nature of the state of confidence has serious implications for the ability of monetary policy to control the long-term interest rate, especially in the case of interest rate reductions. In order to make this clear within the Post Keynesian approach to endogenous money, let us suppose that the monetary base is increased as a result of lower short-term interest rates, and that consequently, lower long-term bank rates boost the demand for credit. If, at the same time, liquidity preference increases, banks may be able to sell more credit without needing to reduce their interest rates, for non-bank loan (bond) rates tend in this case to rise in order to compensate for the increasing liquidity preference. Even if 'the monetary authority were prepared to deal both ways on specified terms in debts of all maturities, and even more so if it were prepared to deal in debts of varying degree of risk', there would be 'limitations on the ability of the monetary authority to establish any given complex of rates of interest for debts of different terms and risk…' (Keynes 1936: 205, 207). 9 Some of these limitations (see Keynes 1936: 207-208 for a detailed discussion) can be considered purely theoretical, insofar as they would only arise in extreme circumstances (virtually absolute liquidity preference when rates are considered too low; breakdown of stability in the rate of interest -owing to a flight from the currency or other financial crisis); but others apply in normal circumstances (the intermediate cost of bringing the borrower and the lender together, the allowance for risk required by the lender, including liquidity risk). Changes in liquidity preference may be triggered by the central bank policy itself. For example, let us suppose that the cut in the short-term rate starts to have some effect on the long-term rate. According to Keynes's theory of interest, if the market belief is that the 'conventional' long-term rate is higher than the actual, it will expect a future increase, and agents will increase their liquidity-preference (this point is discussed further in section 3), thereby limiting or possibly preventing the reduction in the long-term rate.

Hence, the Post Keynesian endogenous money approach is right when it states that banks do deliver the amount of credit money that is demanded at the current interest rate structure. It is also correct to say that the rate of interest is exogenous in the sense that it does not result from a market clearing process. But this is not to say that the central bank has enough control as to set the rates at the level it decides, as suggested in Smithin (1994: 172-173), [START_REF] Lavoie | Horizontalism, Structuralism, Liquidity Preference and the Principle of Increasing Risk[END_REF]Lavoie ( : 277, 1999: 2, 7) : 2, 7) or recently in Rochon & Setterfield (2008: 6) 10 .

The point has obvious implications in the debate on interest rate rules. Whether longterm interest rates have to be adjusted with respect to the output-gap or according to some distributional objective do not close the debate; it remains to deal with the delicate question of how to get the desired interest rate adjustment. The problem is even more difficult when the policy rule involves real rates, for it is assumed in this case that, provided the central bank is able to adjust the long-term nominal rate, it can easily adjust the nominal rate to take account of the expected inflation rate. But this requires that the expected rate of inflation is independent of the nominal rate of interest, which is not self-evidently true. Even if authorities intend to anchor expectations by committing themselves to an inflation target, the official target would not anchor expectations if agents thought the nominal interest rate was inconsistent with the target. Thus, either the central bank anchors the expected inflation but cannot set the nominal rate independently, or the central bank sets the interest rate but cannot anchor the expected inflation rate independently. In either case, the central bank can hardly be said to control the real interest rate.

9 On monetary policy and debt management, see also [START_REF] Tily | Keynes's theory of liquidity preference and his debt management and monetary policies[END_REF]. 10 According to Lavoie (1999: 2), 'monetary authorities have the ultimate say on the convention', but the author also pointed out that the spreads between the long-term rates and the overnight rate vary according to the liquidity preference of the commercial banks and the participants in the financial markets: 'As Smithin (1996: 93) puts it, a role for Keynesian liquidity preference can be retained in this scenario, in that liquidity preference considerations may well periodically insert a wedge between those rates of interest which are more or less directly under the central bank control and rates elsewhere' (Lavoie 1999: 2).

Conflicting objectives and short-term interest rate rule sustainability

If the rule is specified in terms of the policy instrument, or in terms of a rate strongly related to the policy instrument, as in the 'Kansas city rule', things go differently. Although a zero short-term nominal interest rate is highly recommendable in the current context of economic deflation (and indeed it is approximately implemented in many countries), and although the need for cheap money is going to hold for a while (the point is discussed further in section 3), Wray's 'parking it' rule feasibility might be questionable in others contexts. The question of feasibility of the rule here is not to be taken in the strict sense of the word, since the central bank can reasonably be said to have a good control over the short-term rates in general; it rather relies on both the relevance or sustainability of the rule and its effectiveness with respect to the 'euthanasia of the rentier'.

As for the effectiveness, the transmission between the short-term interbank interest rate and the long-term interest rates of the economy is subject to the limitation discussed above. Sustainability on the other hand requires that no prior objectives could normally lead authorities to renounce to implement the rule. But there are recurrent forces in our economics systems which could give raise to such prior objectives if the 'Kansas City' rule was maintained unconditionally. In the face of distributive tensions aimed for example at increasing the share of profits, or wages, or government revenues, a zero refinancing rate would allow for monetary accommodation of the resulting inflationary pressures 11 . It is no doubt a good thing that the central bank accommodates the banks when they need to refinance themselves as a result of the credit-money they have created in response to viable activities, but when the demand for credit-money results from the kind of distributive inflationary pressures mentioned above, the central bank faces a dilemma: either it accommodates inflation, so that unemployment does not rise, or it fights the distributive conflict by means of higher interest and unemployment rates 12 . Such a dilemma has no objective solution that could be picked out from economic theory, especially if inflationary pressures are strong and threaten confidence in the purchasing power of money. It is a political decision, a matter for the community as a whole.

The dilemma would vanish if, as recommended in Setterfield (2007, see also [START_REF] Hein | Macroeconomic policy mix, employment and inflation in a Post-Keynesian alternative to the New Consensus Model[END_REF][START_REF] Setterfield | Inflation targeting and macroeconomic stability in a Post Keynesian economy[END_REF], Rochon & Setterfield 2007a,b), an incomes policy could harmonise the distribution of income. But even in that case, it is doubtful whether a zero-rate rule is really sustainable, for there are events which may prompt the central bank to adjust the overnight rate. For example, [START_REF] Wray | A Post Keynesian view of central bank independence, policy targets, and the rules versus discretion debate[END_REF] points out the problem of exchange rate stabilization in fixed peg regimes, although his discussion then abstracts from the problem by assuming flexible exchange rates. Yet such an assumption does not really solve the problem, especially in the case of a large or medium country. Such a country indeed cannot really have a totally independent interest rate policy even in the case of a flexible exchange rate, for there are negative externalities, some of which pass through the exchange rate variations (as in the case of 'competitive depreciation'), which normally trigger interest rate policy responses in foreign countries, aimed at offsetting the externalities and related exchange rate variations 13 . Hence, anticipating the foreign reaction, the policy of the home country may be to set the interest rate in accordance with an 'acceptable' exchange rate, instead of unilaterally implementing a 'parking it' rule.

∼∼∼

Rochon & Setterfield (2007b) comparative evaluation of the three 'parking it' variants corroborates the idea that interest rate rules that perform well in certain contexts may have lower performances in others contexts. As in the Post Keynesian tradition the economy is not attracted towards any natural or predetermined position, it follows quite logically that the adequate monetary rule depends on the current position as compared with the ideal one (full employment, high growth rate, low interest rates...).

It is an advantage that Post Keynesians offer a range of policies from which the adequate one can be picked up in accordance with the context. The Post Keynesian approach in this perspective shows some flexibility in comparison to the mainstream strict definition. Keeping this positive contribution in the background, we must however turn to the delicate point of setting long-term interest rates effectively in a context of shifting liquidity preference and money demand.

Coping with confidence

As argued in the previous section, although the long-term interest rate does not result from any market clearing process, it can nevertheless hardly be considered a pure exogenous variable that monetary authorities could put at their desired level. The reason is that the liquidity preference is likely to change in response to the central bank decisions about the refinancing rate of interest 14 of interest a 'highly psychological phenomenon' which level cannot diverge durably from the market convention. Consequently, the essential problem for the monetary policy is to have some influence on the market convention; this is a precondition for being able to adjust the long-term rate of interest towards a desired level.

The long-term interest rate as a convention

The idea that the success of monetary policy never is ensured is a recurring theme of Keynes's General Theory, especially in chapter 13 (section 3), chapter 15 (section 2), and chapter 19 (section 2 & 3). First, remember that the equilibrium interest rate 'is a highly conventional […] phenomenon. For its actual value is largely governed by the prevailing view as to what its value is expected to be. Any level of interest which is accepted with sufficient conviction as likely to be durable will be durable; subject, of course, in a changing society to fluctuations for all kinds of reasons round the expected normal.' (Keynes 1936: 203).

Therefore unemployment develops 'because people want the moon', that is, because the long-term equilibrium interest rate is not low enough when liquidity preference is too high, given the marginal efficiency of capital and the aggregate propensity to consume. According to this view, the challenge for monetary policy does not amount simply to put the short-term rate at some desired level; it is also necessary to have some influence on the convention so that the long-term interest rate adjusts in a way which allows for full employment. The task is difficult because the state of confidence is volatile and makes the liquidity preference and inducement to invest shifting variables, with the result that both the control over the long-term interest rate and the final effect on effective demand are erratic.

Also, things turn out especially delicate when it is considered that the short-term interest rate variations themselves may influence the state of confidence as well, thereby producing shifts in the macroeconomic relationships and making uncertainty endogenous to the monetary policy itself. Successful policies therefore have to 'take into account the unpredictable reactions of businessmen to those policies' (Bateman 2003: 82). Quoting Keynes again, we are led to the conclusion that '[...] a monetary policy which strikes public opinion as being experimental in character or easily liable to change may fail in its objective of greatly reducing the long-term rate of interest, because M 2 may tend to increase almost without limit in response to a reduction of r below a certain figure' (Keynes 1936: 203).

Can monetary policy change the convention?

A prudent monetary policy, on the other hand, can take advantage of the conventional nature of the interest rate:

'if it appeals to public opinion as being reasonable and practicable and in the public interest, rooted in strong conviction, and promoted by an authority unlikely to be superseded ... Public opinion can be fairly rapidly accustomed to a modest fall in the rate of interest and the conventional expectation of the future may be modified accordingly; thus preparing the way for a further movementup to a point. The fall in the long-term rate of interest in Great Britain after her departure from the gold standard provides an interesting example of this;the major movements were effected by a series of discontinuous jumps, as the liquidity function of the public, having become accustomed to each successive reduction, became ready to respond to some new incentive in the news or in the policy of the authorities' (Keynes 1936: 203-204).

Notice that if the central bank acts to decrease the long-term interest rate gradually, the expected reductions may have a negative impact on the marginal efficiency of capital 15 and if, on the other hand, the central bank attempts a sharp adjustment in the long-term interest rate, liquidity preference may rise and the marginal efficiency of capital may decrease 16 . Hence, there are conditions for the success of a monetary policy, the study of which is crucial to the design of monetary policy from the Post Keynesian point of view. The key element is that, at any time, the policy which is being implemented meets the market convention, so that pernicious effects on the liquidity preference and marginal efficiency of capital are avoided.

It turns out that, for a monetary policy to be understood and accepted, and thereby for the policy being effective, the variation in the long-term interest rate that authorities are seeking for must correspond to the public opinion expectation. This is to say that authorities should announce a long-term interest rate target in accordance with the normative objective the public opinion has debated on and agreed with. Logically, such a conventional target cannot be very distant from the current rate, for otherwise it could not meet the convention since it would require the short-term rate being adjusted immoderately (which would "strike the public"), or, if the short run is moved gradually, the long-term rate would decrease gradually (which would be harmful for the marginal efficiency of capital). Once the target is set, authorities should adjust the short-term rates they controls gradually, so that it does not look "experimental or easily liable to change...", and it allows for checking whether the policy is working well or not, if there are undesired outcomes..., so that authorities may adapt their strategy to the unforeseeable changing context. To summarize, authorities have to manage in such a way that the convention moves, which requires strong argumentation, confidence, and the short-term interest rates being adjusted gradually (but not slowly, so that the long-term interest rate adjusts rapidly to the new convention).

These conditions are probably harder to get in times of financial crisis, because of the various factors that weaken the state of the confidence, which is the point we have to examine now.

Why the 'state of confidence' has been harmed for a long time Prudential measures, even determined measures, are necessary conditions of the economic recovery, but they will not be sufficient. Several causes of concern will be lasting until the stock of bad debts has been massively reduced. Some causes should appear soon or are already working, while the others are likely to appear later, and could therefore weaken the state of confidence and the monetary policy effectiveness for a long time.

First, the current deflation is going to damage the public accounts both because of the expenditures that have been automatically and/or deliberately triggered by the economic slump and because of the decrease in government fiscal revenues. This will impact the state of confidence both directly (for increases in public debts make economic agents expect possible future taxes and/or inflationary pressures aimed at reducing the real value of the debt) and indirectly (for authorities capacity to support the economic activity will be harmed by a higher public debt).

Second, firms and households financial situation will also be severely affected, with the result that debts which were safe in the context before the financial crash will turn out bad debt in the depressed new context.

Third, the loss of confidence, in turn, tends to offset the ability of the central bank to get lower long-term interest rates and support the economic activity by means of low short rates (which, as far as it is expected, is a self enforcing force of the conventional view that long-term interest rates will remain at high levels).

Fourth, in order to preserve the financial system and to push banks to finance economic activities with moderate interest rates, authorities have pumped huge amounts of reserves into the system by means of very weak refinancing rates and conditions. When the deflation-process ends, the liquidity bumped into the market in exchange of the irrecoverable part of private debts should feed inflationary tensions (unless an improbable strong economic recovery take place rapidly and the induced money demand absorb the excess liquidity), for the money demand will be lowered when the speculative and precaution motives return towards the pre-crisis level (albeit possibly to a higher level) and the transaction motive adjusts to the depressed level of economic activity. As we can hardly imagine that the excess money will be allowed to feed a new speculative bubble in a hurry (but who really knows?), it is the price of real assets and durable goods, rather than financial assets, which is likely to be pushed up, before a possible generalized indexation effect.

The magnitude of the forthcoming inflationary pressures will depend on the capacity of authorities to withdraw the amount of reserve that has been pumped in exchange of private debts. The optimistic scenario being that bad debts become good debts thanks to a general economic recovery which would improve substantially the private financial situations. In this case, meanwhile bad debts become safe, authorities (including central banks, governments and the ad hoc institutions that have been created in order to withdraw and recycle bad debts) can withdraw liquidities in exchange of the debts they hold (whereas withdrawing liquidities in exchange of bad debts would have negatives consequences on the banks balance sheets and the whole financial system). 17

To strike at the root of the problem Unfortunately, there is place for less optimistic views, with long-lasting financial imbalances, inflationary pressures and, possibly, magnified economic depression if price stability and public finance orthodoxy were given priority in the conduct of monetary and fiscal policy. How could the state of confidence be recovered in this second scenario? The design of an appropriate response requires first of all to strike at the root of the problem, which is the huge amounts of bad debts that weaken private and public accounts. The spontaneous, necessary and urgent response authorities have given has been to collectivize to the problem by means of money pumping, financial support, nationalizations and ad hoc institutions aimed at recycling bad debts. But as long as bad debts remain bad, a reflection about how the burden of the collectivized share of private losses is to be distributed among economic agents. There are two sources of collectivization in this respect: the one possibly initiated by the central banks acceptance of bad debts as collateral in refinancing operations, and the one initiated by the governments (direct or indirect) purchases of bad debts.

As regards the central banks, the collectivization process may consist in letting inflation going on, until the real value of debts has depreciated enough as to compensate for the value of the stock of irrecoverable debts (to the detriment of creditors). This solution would preserve economic activity and employment, while the alternative solution of a monetary policy aimed at stabilizing the price index would put the burden of losses collectivization on unemployed (and debtor, as interest rate would increase), until the stock of unrecoverable debts is recognized as losses 18 . Thus, in the absence of an alternative solution, central banks could hardly continue denying the inflation/unemployment trade-off.

As regards governments, the collectivization process may consist in increasing taxes so that fiscal revenues balance the government purchases of irrecoverable private debts. As government purchases of irrecoverable debts do not support economic activity at all, while taxes certainly reduce the private demand for goods and services, this solution would eventually put the burden on unemployed (and taxpayers). If on the other hand current taxes did not compensate totally for bad debts purchases, unemployment would raise to a lesser extent, and some inflationary pressures would remain. Again, in the absence of an alternative solution, the inflation/unemployment trade-off would prevail (but redistributive effects would differ).

The process of collectivization of private losses itself, along these lines, would therefore induce fiscal and monetary responses which could hardly support economic activity. Even if inflation and budget deficit were the chosen solutions, it would only spare restrictive measures like tax and/or interest rates increases. Hence, although authorities will show aversion towards deliberate stimuli as long as the collectivization process is not achieved (that is, as long as inflationary pressures and weakened fiscal revenues persist), it could be advantageous to anticipate such policies for several reasons. First, expansionary policies are likely to produce strong expansionary effects in a depressed system, by stimulating the expected demand directly and by strengthening the 'state of confidence'. Second, the share of irrecoverable debts is likely to be much lower in a context of economic recovery, which could reduce considerably the source of the trouble, including inflation pressures. Third, strong economic recovery induces fiscal revenues which may help the government to socialize private losses without having to increase tax rate. In a context of low economic growth, a temporary deficit may eventually induce higher economic activity, lower public deficit and lower inflation.

In this perspective, even though monetary policy will be at disadvantage in the ground of economic stimulus as long as the state of confidence remains weakened, monetary accommodation should be welcomed as far as credit-money finances safe economic investments rather than doubtful speculative operations. The danger would rather be that a restricted credit policy put the burden of past mistakes on current safe economic projects. In addition, the more central banks will effectively support the economic activity, the less government deficits will need to be; or, put in a negative form, the less central banks will impede the recovery, the more government deficits will benefit to the economy.

Conclusion

Although the Post Keynesian interest rules discussed in the paper may be feasible and sustainable in favourable circumstances, we have emphasized the shared difficulty of setting long-term interest rates effectively in a context of strong uncertainty and shifting liquidity preference. According to Keynes theory of the rate of interest, the problem amounts basically to manage to have some influence on the market convention; this is a precondition for being able to adjust the long-term rate of interest towards a desired level. It is a matter of confidence between markets and authorities 19

19 See Le [START_REF] Le Héron | Alan Greenspan, the confidence strategy[END_REF][START_REF] Le Héron | The New Governance in Monetary Policy: A Critical Appraisal of the Fed and the ECB[END_REF] for an analysis of Greenspan's strategy in terms of confidence versus credibility.

. As Keynes put forward, for a monetary policy to be effective, the variation in the longterm interest rate authorities are seeking for must correspond to the public-opinion's expectations. Authorities should therefore announce a long-term interest rate target in accordance with the normative objective the opinion has debated on and agreed with. We have argued that such a conventional target cannot be very distant from the current rate, and that authorities should adjust the short-term rates they control gradually but not slowly, so that it does not look "experimental or easily liable to change..." and so that authorities may adapt their strategy according to the observed effectiveness and unforeseeable changing context.

Moving the interest rate convention is harder to get in the context of the current crisis, because of the deleterious effects on private and public accounts that the innumerable amounts of bad debts have carried. To restore the 'state of confidence', authorities will have to get rid of the poison of potentially irrecoverable debts, without throwing the baby out with the bath water. In this perspective, there are strong arguments in favour of temporary large public deficits and accommodating monetary policies (which is not to say permanent large deficits and inflationary policies), even though long-term interest rate do not respond much to the shortterm impulses of central banks. Fortunately, this is the kind of response authorities have implemented rather promptly around the world. As a matter of fact, those who are in favour of unconditional anti-inflation monetary policy and fiscal orthodoxy have become inaudible nowadays, for politicians, when they become Keynesian, turn wiser than the mainstream-economics scientists.

Table 1 -Post Keynesian interest rate rules and operating channels Op ing . channel Interest rate of the rule Income distribution (parking it rules) Output gap (activist rules) Nominal interest rate

 1

		Short-term nominal rate	Long-term nominal rate
		('Kansas city rule' -Wray)	('Picks a quadruple' -Palley
			'Neutral rate' -Atesoglu)
		Long-term real rate	Long-term real rate
	Real interest rate	('Fair rate' -Pasinetti/Lavoie,	('Flex. opport tic rule' -Fontana &
		Smithin's rule)	Palacio-Vera 8 , Sawyer)

There is a consensus about the ultimate objectives of interest rules "in terms of their capacities to promote desirable (high growth, low inflation) macroeconomic outcomes and to assist the growth and inflation targeting objectives of the policy authorities"[START_REF] Rochon | Post Keynesian interest rate rules and macroeconomic performance: a comparative evaluation[END_REF].

In Palley's model, income distribution also plays a role as far as the long run consequences of the monetary policy are concerned, but the derived interest rate policy is not of the parking it type.

This is related to the backward-bending Phillips curve of the model: as real wage resistance increases as inflation increases, the 'grease effect' on employment, which is associated with the negative effect of inflation on real wages, erodes as inflation increases. See[START_REF] Palley | Macroeconomics and monetary policy: competing theoretical frameworks[END_REF] for details.

If real wages do not rise too steeply as unemployment decreases, authorities may reach the MURI without encountering a growth trade-off; otherwise, there may be a trade-off between growth and pushing the unemployment rate to the MURI(Palley 2007: 74).

It is not clear whether the flexible opportunistic approach needs to be specified in terms of a real interest rate rule.

Hein and Stockhammer (2007:17) suggest that low real interest rates rather reduce inflationary pressures and that it is, on the contrary, high interest rates that fuel inflation, based on a cost push argument. Although such a mechanism must of course be considered, notice that there are many cost push channels which could feed distribution conflict even when interest rates are low, and that in this case, the monetary accommodation induced by the 'parking it' rule would certainly fuel inflation.

This dilemma between what[START_REF] Davidson | Can, or should, a central bank inflation target?[END_REF] called "income policy of fear" and inflation shows that inflationary distributive tensions develop when the central bank allows for it, that is, when, under the central bank refinancing conditions, banks accommodate the increase in money demand resulting from the rising nominal prices, wages... In this sense, it can be said that monetary accommodation feeds inflation, but the primary cause is the income distribution conflict.

This is not to say that the short-term nominal interest rate is the appropriate instrument for achieving a specific exchange rate target; it is rather to say that monetary authorities may hardly disregard the effects that short-term rates may have on the exchange rate (through their effects on long term rates, international capital flows, balance of payments…).. Keynes therefore considered the rate

The debate on whether the long-term interest rate is exogenously or endogenously determined is a reductionist one. It may make sense in the field of macroeconomic modeling, as conventions are necessarily considered exogenous for those models being tractable. But, obviously, such a simplification cause severe limitations to the models conclusions, insofar as the possible interactions between the interest rate policy and the market convention are not considered.

This is a second-order argument, where the expectation that future investment will be content with a lower yield (because of the expected falls in the future rate of interest) depresses the prospective yield of current investment(Keynes 1936: 143). The argument is also developed in relation to expected money-wage decreases inKeynes (1936: 263), where monetary policy also is considered.

'Just as a moderate increase in the quantity of money may exert an inadequate influence over the long-term rate of interest, whilst an immoderate increase may offset its other advantages by its disturbing effect on confidence...'(Keynes 1936: 266-267).

In this scenario, if the liquidities withdrawing process is not rapid enough as to offset for the decrease in liquidity preference, temporary inflationary pressures may develop until it is achieved.

Inflation again appears to be dependent on whether the monetary policy accommodates a distributive conflict or not.


Angel Asensio Cepn

Bad money and distributive conflict: is stagflation coming back after the great depression?

The paper argues that the world economy might experiment inflationary pressures (or restrictive policies aimed at fighting them) when the economic depression triggered by the financial crisis is stabilized. The primary cause is that bad money has been (endogenously) delivered which did not lead to a proportionate increase of real wealth, thereby creating an artificial purchasing power into the economic system. According to Keynes and Post Keynesians 'true inflation' develops when the quantity of effective demand increases at full employment, but financial 'inventiveness' proved to be capable of creating the possibility for houses and assets prices to inflate whatever the level of unemployment is. If the ongoing reinforced regulations get to limit the artificial increase of assets prices, the circulating bad money may trigger a generalized inflationary process. Public deficits have been seriously damaged during the depression; in addition, authorities have provided the required liquidity to the banking system in exchange of private bad debt, part of which might have turned out irrecoverable. The paper also points out that this amounts to a collectivization of private losses, which carries lasting difficulties in terms of a trade-off between inflation and higher unemployment. Some general policy principles are suggested to relieve the post crisis growth regime of the bad debts/bad money plague.

----

"Some means must be found for withdrawing purchasing power of the market; or prices would rise until the available goods are selling at figures which absorb the increased quantity of expenditures -in other words the method of inflation." John Maynard Keynes, 'How to pay for the war ', 1940 (CW, vol.9, p. 378).

Introduction

Important amounts of credit-money have been created in exchange of private debts that cannot be recovered as debtors have failed. According to the truistic Fisher's 'equation of exchange', increases in the money quantity do not fuel inflation in a safe economic context, for the credit money in this case finances real income generating projects. In the current context, however, large amounts of money have been (endogenously) created which have no real counterpart (to which we refer as 'bad money'). Until the autumn 2009, no inflationary pressures have been observed because of the strong increase in the liquidity preference and money holding. But, when the depressive phase of the crisis ends, if the prudential regulation does not fail to prevent a new bubble in the assets pricing, holders will probably seek to substitute goods for money much more rapidly than the increase in real income, thereby allowing for inflationary pressures.

The paper argues that the mechanism of inflation in this case is similar to the one which is involved in financial or housing bubbles. It is related to the excess of purchasing power bad money carries 1 1 Keynes (1940) and Minsky (1986) dealt with such an inflationary mechanism, though in different contexts. Keynes focused on the excess purchasing power induced by the money earnings distributed to workers that produced arms (not commodities) during WWII. Minsky on the other hand put forward the inflationary pressures owed to the huge amounts of liquidities that must be pumped into the capitalist system in order to avoid or get out of a great depression.

. That is, the primary cause in this case is a demand-pull mechanism, not a cost-push one, although factor costs -capital goods, oil, indexed wages... -must simultaneously be impacted if the production prices are to be increased. Hence, while the Post Keynesian literature usually emphasizes costpush inflation in the presence of unemployment and demand-pull inflation at full employment, the paper puts forward the possibility of a demand-pull inflation in the presence of unemployment, owing to the limited speed of capital accumulation and productive capacity accumulation. Such a mechanism may also be interpreted in terms of distributive conflict, in accordance with the Post Keynesian approach to inflation, for it develops because money holders claim the right to get a proportionate share of the wealth produced in the economy (which is insufficient at previous prices).

The depression has seriously damaged public deficits. Also, in order to rescue the financial system, authorities have provided banks and non-bank institutions with liquidity in exchange of private bad debt, part of which might have turned out irrecoverable. This amounts to a collectivization of private losses which raises the question of who is going to bear the burden. The paper argues authorities will therefore be faced with hard choices in terms of a trade-off between inflation and higher unemployment, which could hinder the recovery trajectory. The paper is organized as follows. Section 2 develops the theoretical argument on excess/bad money and the possibility of a demand-pull inflation process below full employment. Section 3 discusses the reasons why it did not happen until autumn 2009, and the way inflationary pressures could propagate after the current great depression. Section 4 explores the hard choices authorities are going to be faced with and suggests general principles which are likely to relieve the post crisis growth regime of the bad debts/bad money plague.

Bad money and demand-pull inflation below full employment

'The view that any increase in the quantity of money is inflationary (unless we mean by inflationary merely that prices are rising) is bound up with the underlying assumption of the classical theory that we are always in a condition where a reduction in the real rewards of the factors of production will lead to a curtailment in their supply' (Keynes, GT, p. 304). There are many things in this quotation, but let us first emphasize two ideas comprised in the first part of the sentence: i) the quantity of money does affect the price of goods and ii) an increase in the quantity of money may increase the price of goods without being inflationary, which also means that inflation may (although it need not) be caused by an (excess) increase in the quantity of money 2

Increasing prices of goods and services are the normal consequence of any increase in the production under conditions of decreasing factor productivity (in the short run). It goes along with a decrease of the real factors costs provided the factors . rewards are not increased simultaneously in the same proportion. As workers are more likely to be able to impose strong wage indexation when the economy is working at full employment, it is rather in such a context that Post Keynesians usually consider the possibility that a demand-pull inflation process becomes 'true inflation' 3

The Post Keynesian literature on inflation also emphasizes the possibility that inflation develops before full employment as a result of a cost-push process with indexation. This may be triggered by a conflict over the distribution of income or an increase in the price of imported resources like oil (Davidson 1994, p 143) . Until this point, as suggested in the quotation above, a reduction in the real rewards of the factors of production caused by rising prices will not lead to a curtailment in their supply.

4 . However, cost-push inflation can only develop provided the central bank satisfies the additional demand for money induced by cost pressures, thereby avoiding an increase in interest rates. Notice that in this case, even if there is unemployment, money is endogenously supplied to allow firms to pay higher nominal rewards to the previously hired factors, not to allow them to hire new factors and produce additional output. If on the contrary monetary authorities aim to avoid inflation, they do not prevent the rise of interest rates and its depressive impact on effective demand, which releases inflationary pressures as far as unemployment and depressed activity temper the distributive conflict 5 . Hence, as far as cost-push inflationary pressures only develop when the central bank allows them to pass on effective demand, it turns out that there is a demand side in any cost-push inflation story 6

Excess money, which also supposes an easy money policy, is basically a demandpull inflationary process, with the specific feature, however, that it may happen before full employment . 7 3 'When a further increase in the quantity of effective demand produces no further increase in output and entirely spends itself on an increase in the cost-unit fully proportionate to the increase in effective demand, we have reached a condition which might be appropriately designated as one of true inflation.' (Keynes, 1936, p 303).

. In normal times, endogenous money cannot produce inflationary pressures before full employment for the pumped liquidity contributes to finance productive projects which revenues assure that no excess money circulates. The case for true demand-pull inflation before full employment therefore is a case for troubled times where the money supply and the related purchasing power pumped over some period do not find the corresponding value of goods and services at previous prices.

It is true that in The General Theory the 'critical point' is rather assimilated to full employment, but "there is nothing in [The General Theory] which actually impedes understanding of the conjunction of unemployment and inflation" (V. Chick 1983, p 280). In the series of The Times articles, Keynes (1937) expressed his concern with possible inflationary pressures owing to the government proposal to finance rearmament partly by means of borrowed money. The rate of unemployment at this time was about 12% in the UK. In the present context, Keynes's way of thinking invites us to consider the possible inflationary effects of excess money owing to the fact that the expansion of productive capacity is limited because of the limited speed at which the capital accumulation can be conducted 8

This resembles the problem Keynes (1930) dealt with in terms of Commodity or Capital inflation (or deflation), when spot prices increase relative to flow-supply prices , not because productive resources are going to be allocated to the production of arms. 9 . In normal circumstances, such a discrepancy between spot and flow-supply prices sends a signal to producers in such a way that the production is reduced when the spot prices are below the flow-supply prices (a contango), while it is increased in the reverse case (backwardation). In both cases, the spot price eventually rejoins the flow-supply price, so that only temporary capital inflation/deflation arises, but as [START_REF] Davidson | Post Keynesian Macroeconomic Theory[END_REF] 143) suggested, though he did not discuss the possible reason, spot price "can affect [...] changes in flow-supply prices" and thereby produce what Keynes called 'income inflation'. A reason why the normal process of backwardation might fail and eventually induce an increase in the flow-supply prices is that, when the liquidity preference goes back towards the pre-crisis level, producers will hardly provide within normal delays the elevated amount of goods which is necessary to absorb the total amount of liquidity pumped in the economy. Indeed the corresponding capacity of production did never exist, since much money did feed the demand for housing and financial assets, not the demand for a flow-supply of goods 10 8 In addition, the existing capacity have suffered during the crisis.

. Therefore, expectations of future increases of the flow-supply prices are 9 See [START_REF] Davidson | Post Keynesian Macroeconomic Theory[END_REF] 142 10 M. Hayes (2006, p 211-213) also suggests a "theoretical link between the quantity of money and the price-level of output, via liquidity-preference and the liquid capital-goods employed in production, which does not assume full employment". According to the author, "[...] stocks of liquid capital-goods may come to command a liquidity premium under conditions of uncertainty and low money interest rates", which increases the demand for those stocks of liquid-capital goods as a hedge against possible "losses through price volatility and disruption in production, as a result of shortages of capital-goods at particular point in the supply chain". Note that, again, the reason why a 'backwardation' of the (spot) prices of those stocks of capital-goods would not operate is not discussed. But above all, there is an important difference with respect to the inflationary process under consideration in the present paper, since in Hayes mechanism "the quantity of money has no direct significance here; the shift in the hierarchy of liquidity-preference arises from the low rate of interest on money". likely to feed precautionary and speculative demand in the spot markets by those who, instead of financial and real assets, hold large amounts of money. 11 3. Why inflationary pressures did not happen yet and how they could propagate So far, we have identified a demand-pull inflation mechanism which can transmit to the flow-supply price below full employment. The mechanism however may be inhibited if a new bubble takes place, or if money is massively hoarded, as in the depressive phase of the crisis. In order to put this in terms of the 'equation of exchanges', let us divide transactions in two separated categories: the one related to the flow of goods produced over the period considered (Q), and the one related to the stock of existing goods and assets (A): 12

MV=PT=P Q Q+P A A
Hence, a sustained increase in M, as compared with a moderate increase in the nominal income P Q Q, is perfectly conceivable as far as the money value of assets P A A is allowed to increase accordingly. Now, when the money value of assets P A A collapsed during the financial crisis, the flow-supply prices of goods did not explode. The reason is that, during the depression, the liquidity preference and demand for money shifted hugely and absorbed the whole amount of the circulating money, thereby shoving the money velocity down. The relation between an upward shift in the liquidity preference and a fall of the velocity of money may be stated formally if one considers that Keynes's monetary equilibrium equation: M = L 1 (P Q Q)+L 2 (r) combined with the 'equation of exchange' above. Since PT/V = L 1 (P Q Q)+L 2 (r), we get the velocity of money as an increasing function of the money value of transactions and a decreasing function of the money demand: V = PT/[L 1 (P Q Q)+L 2 (r)]. Accordingly, a shift of the function L 2 (given the interest rate), that is an increase in the liquidity preference aimed at 11 Keynes dealt with a similar, though not identical, problem in his 'How to pay for the war', when the excess purchasing power as compared with the production of commodities (which was amputated by the production of arms) carried the important potential inflation his program was aimed at avoiding. He clearly distinguished those times from normal circumstances: "This is a great change from peacetime experience.[...] We have been accustomed to a level of production which has been below capacity. In such circumstances, if we have more to spend, more will be produced and there will be more to buy. Not necessarily in the same proportion. Supply for immediate consumption may not increase as much as demand, so that prices will rise to some extent. Nevertheless, when men were working harder and earning more, they have been able to increase their consumption in not much less that the same proportion (Keynes, 1940, in CW vol. 9, p 375)." 12 When PT is assimilated to P Q Q, it is implicitly assumed that money only serves to buy the flowsupply of goods, a very unrealistic -though usual-assumption.

preserving savings from increased uncertainty, produces a decrease in V. 13 But when the depression stops and the economy is stabilized or starts recovering, which supposes the financial system recovered the public confidence, the liquidity preference normally returns towards the pre crisis level (though maybe to a higher level), while the transaction motive adjusts to the depressed level of the economic activity. Hence, assuming that V and Q are not higher than their pre crisis level, while P A A is much lower, the equation of exchange yields: P Q '>>P Q , that is, the price of the flow-supply of goods is likely to be pushed up, unless the prudential regulation fails to prevent another speculative bubble Hence, going back to the 'equation of exchange' above, although M had been increased and Q and P A A were decreasing during the crisis, P Q did not increase and even decreased because banks and private agents increased hugely their money holding instead of spending.

14

As inflation is an increase in the production prices, the demand pull process must impact some factor cost/reward directly or indirectly. This may result directly from the spending of excess money in those durable goods (like buildings) or natural resources (like oil) that are involved in the production process. But it may be also the magnifying effect of an indexation of the factors reward on the increasing cost of living. At the beginning of the process, such an indexation is likely to take place after the increased cost of living has been observed, but if the primary cause of inflation is not removed rapidly enough, indexation may take place in advance, as far as inflation is expected to hold in the future.

, so that P A 'A'>> P A A (or a doubtful (very) strong economic recovery takes place: Q'>>Q).

It is true that inflation did not develop after the 1929 financial collapse, but this was concomitant to the prolonged high unemployment economies experimented then. Indeed, inflationary pressures can always be repressed if authorities are prepared to pay the cost. During the 2007-2009 crisis, accommodationist monetary policies took place instead of the rough mechanism of the gold standard, and authorities seem to have learnt the importance of prolonging their support to the economy. As a matter of consequence, the depressive phase could be weaker and shorter than it was during the nineteen thirties (though further financial turmoil remains plausible). But this is not to say that all problems vanished, for authorities will remain faced with the pernicious effects of the excess purchasing power, and this could arm the recovery process durably as discussed in the next section.

13 Notice that during the collapse V must have fallen more than M had increased, since P Q Q+P A A clearly decreased. 14 A new bubble could postpone the problem by concentrating the inflationary pressures again in the financial sector, until the next crisis ... Inflationary pressures in the flow-supply of goods are not a necessary outcome of excess/bad money.

Bogged down policies

The quantity of bad money has been increased both before and during the financial crisis, when authorities rescued the financial system by means of money pumping in exchange of private debts, financial support, nationalizations and ad hoc institutions aimed at recycling bad debts. Banks and private agents therefore have accumulated important reserves at low cost during the rescue episode. Although authorities claim that they are withdrawing all this excess liquidity without any trouble, there is some doubt left, for a proportion of this liquidity has been pumped in exchange of bad debts, some of which may have turned out unrecoverable because of the depression. Central banks in this case can hardly withdraw completely the excess high powered money (thereby putting bad/irrecoverable debts into circulation again) without harming the fragile financial system. The good thing is that banks can offer easy credit-money at low rates when private agents start borrowing again to finance new projects; the thorn of the rose is that banks and other lenders also can accommodate the additional demand for money involved by the increasing factor cost if inflation develops. Of course, central banks have technically the capacity of removing inflationary pressures, but the social cost of a restrictive policy may appear excessive in a context of financial fragility and high unemployment.

The magnitude of the inflationary pressures (or the magnitude of the measures that could be adopted in order to fight them) depends on authorities capacity to withdraw the bad money and related excess purchasing power rapidly enough as to offset the decrease of the liquidity preference. The optimistic scenario is that bad debts become good debts thanks to a very rapid general economic recovery which would improve substantially the private financial situations. In this case, meanwhile bad debts become safe, authorities (including central banks, governments and the ad hoc institutions that have been created in order to withdraw and recycle bad debts) can effectively withdraw liquidities in exchange of the debts they hold without endangering the financial system. 15

Unfortunately, there is place for less optimistic views [START_REF] Asensio | The financial crisis, its consequences and how to get out of it. A Keynesian perspective[END_REF]. If authorities cannot get rid of some significant amount of the unrecoverable private debts, because of the pernicious effects it would have on the financial system, private losses would be transferred to the public sector, which budget also suffered from low tax revenues. This raises the question of how the burden is to be distributed is this case. There are two sources of the collectivization process in this respect: the one initiated by central banks acceptance of bad debts as collaterals in refinancing operations, and the one initiated by the governments (direct or indirect) purchases of bad debts, besides the decrease in tax revenues.

As regards central banks, the collectivization process may develop in two different ways. The first one consists in letting the inflation process going on (rather than implementing an 'income policy of fear'), until the real value of debts has depreciated enough to compensate for the value of the stock of unrecoverable debts (to the detriment of creditors). This solution preserves the economic activity and employment, while the alternative solution of a monetary policy aimed at stabilizing the price index puts the burden on unemployed (and debtor, as interest rate increases).

The collectivization of private losses by the governments is also subject to the inflation/unemployment dilemma, but redistributive effects differ. One possibility is to increase taxes so that fiscal revenues increase enough to balance the government purchase of unrecoverable private debts and offset the fiscal losses the economic depression generates. As government purchases of unrecoverable debts do not support economic activity at all, while taxes certainly reduce the private demand for goods and services, this solution eventually puts the burden on unemployed (and taxpayers). If on the other hand current taxes do not compensate totally for the unrecoverable debts purchase and fiscal losses (which means an increase in public debt or a decrease in public capital holdings), unemployment rises to a lesser extent, and some inflation develops. The process of collectivization of private losses therefore is likely to induce fiscal and monetary responses that would hardly support the economic activity and could on the contrary have depressive effects. Even if inflation and budget deficit were preferred, it would only spares restrictive measures such as tax and/or interest rates increases. At best, stagflation would ensue. Hence, there is no way out. Unrecoverable debts, whatever they are held by private or public agents, mean that somebody will support the burden, either by means of debt depreciation (inflation) or by means of increased unemployment, with different distributive effects depending on the way the process goes on.

There are two types of measures authorities could take in order to relieve the economic recovery. First, the 'cheap money' policy should not be discarded provided the credit-money finances safe (non inflationary) economic investments. The danger would rather be that a restricted credit policy put the burden of past mistakes on current safe economic projects. Investments that improve the productive capacities are of course to be encouraged, since the root of the problem is the insufficient productive capacity.

As the speed of the capital accumulation and productive capacity development is likely to be slower than the liquidity preference decrease towards its pre-crisis level, it is not assured at all that monetary policy alone can successfully get rid of the problem. This suggests that governments may helpfully adopt the kind of debt management policy Keynes advocated in his time in order to reduce the long-term interest rates (Tily 2006(Tily , 2007)). In addition, government could borrow important

Excess money here does not refer to an excess of the supply over the demand for money, which would be inconsistent with the Post Keynesian approach to endogenous money, where the money supply sticks to the demand; it refers to the notion of 'bad money', as defined in the previous section.

As far as taxes take part of the production cost, inflation can also be related to a private/public conflict over the distribution of income.

This is what[START_REF] Davidson | Can, or should, a central bank inflation target?[END_REF] referred to as 'incomes policy of fear'.

Trivially, there is also a cost side in any demand-pull inflation story, as 'inflation in the flow-supply prices of producibles is everywhere and always a rise in somebody's income'(Davidson 1994, 143).

Such a demand pull process has also a distributive conflict side: the incompatible claims for goods that results, at previous prices, from the excess amount of money.

In this scenario, if the liquidities withdrawing process is not rapid enough as to offset for the decrease in liquidity preference, temporary inflationary pressures may develop until it is achieved.

amounts from private money holders 16 , and then start progressively financing public investments and fiscal incentives for private investments, spreading expenditures over time so that the productive capacity of capital goods never is overwhelmed.