Thread by @ritwik_priya

Because NZ is thinking of including house prices into its central bank's objectives, and because @tragicbios is taking the GRRM approach, a thread on Ch. 17 ("The Essential Properties of Interest and Money") of the General Theory. 1/

Ch 17 is where Keynes 'closes' his model, the truly 'general' part of the GT and is many things to many people. The framework of own rates of interest and spot/future arb in all commodities has both neoclassical finance types and Sraffa-Robinson types declaring victory. 2/

The discussion on liquidity preference driving the 'money rate of interest' lends support to both the Tobin formulation of 'liquidity preference as aversion to risk' and the Dow-Mehrling view of liquidity preference as the disequilbrium process through short-term rates are set 3/

And the differing interpretations of the LP theory of interest rates has caused permanent controversy - are recessions best conceptualised as inter-temporal coordination failures (i.e. 'real' phenomena, *expressed* through money) or atemporal monetary coordination failures? 4/

In this fog, my angle is that some of the most insightful writing is in section 2, where Keynes compares the 'own rate of interest' of housing, wheat and money. For housing the consumption yield (rent) dominates, for wheat the (negative) storage and for money the liq premium 5/

Before moving onto what makes money special in section 3, he casually mentions, this: the source of the trouble is not necessarily the money rate of interest "it is that asset's rate of interest which declines most slowly as the as the stock of assets in general rise..." 6/

He even finishes the section with "it may be...gold will continue to fill this role.....gone over to an inconvertible paper standard". Therein is the unification of the investment collapse theories of the GD and the central bank stupidity/ gold standard / monetary theories. 7/

And therein also lies the 'real rates' core of Keynes's argument. Anything that sets an inflexible floor on broad real rates - including an 'own rate of interest' on things like gold - can induce Keynesian unemployment.
Now what's all this got to do with housing? 8/

In the old old world, as @MacRoweNick likes to remind us, economists liked to differentiate between land, labour and capital as the factors of production. Over time, economists lost land as a factor (and engaged in dreary debates on capital, but that's for another time). 9/

But what of land? It's presumably the factor that is in fixed supply, and hence unimportant for capitalist 'growth'. But what is the other defining property? Ownership of land yields rent, its 'own rate of interest'. And what if this yield is inflexible, beyond a point? 10/

Well then 'land', broadly defined, is that very asset that Keynes warns us about in those lines.
In an inflexible monetary regime or a fin system full of investors who won't accept lower yields, monetary (+ long) interest rates act as land. But that isn't our world anymore. 11/

What is however true - certainly in the UK, and likely elsewhere in G10 as well - is that rental yields on housing are not as flexible as real yields on financial assets, certainly not in the downside. A very large portion of house prices is 'land'. 12/

Add on the fact that housing is the 1. Main expression of wealth for the middle class 2. only way that most ppl engage in collateralised borrowing. So that any reduction in the price of the housing stock has a impact on the flow of new credit, in addition to 'wealth effects'. 13/

So, 1. You can bet that a house price stabilisation regime will necessarily be biased one way 2. It is equivalent to a self imposed 'homeowner's rent' standard, a middle class gold standard for our times.
14/

And perhaps large parts of G10, esp in the English speaking world, are already on this standard. And NZ is taking the lead in merely encoding it. Merely the logical conclusion of the 'moderation' experiment, where NZ also took the lead with inflation targeting. 15/end