Doug Henwood wrote:
> Weird. I'm guessing the "secondary effects" of relative price changes
> would be the rise in import prices (relative to domestic production).
> But this almost sounds like he's taking finance to be neutral - as if
> a country that borrows $1 billion a day to finance a marginal
> propensity to consume of 110% wouldn't face a problem if the loan
> supply were cut off.
.
Right. The rise in import prices would reduce real incomes before the lower export prices started generating higher sales.
That idea that finance isn't neutral is what makes Dean's mechanistic scenario sound unlikely, but it's hard to put into words. All you can say is something like, a sudden outflow of capital would cause big financial problems; but that's kind of vague. Doesn't sound as good as "secondary effects due to adjustment in relative prices."
Seth