Wednesday, March 30, 2011

More on Monetary Policy

Here's why I say the conventional wisdom regarding monetary policy is absurd. We've had 30 years of loose monetary policy. The Fed Funds rate has decreased in fits and starts from 19% to 0%. During that same period, the rate of inflation has steadily declined. So after 30 years of loose monetary policy by the Fed, we have much lower inflation and much higher unemployment than we had to begin with! This is the exact opposite of what one would expect according to the conventional wisdom.

The simple explanation is that encouraging more private sector debt (by lowering interest rates, amongst other tools) when the economy is slumping is not the way to run an economy. While the increased borrowing will temporarily boost the economy, the more lasting effect is to increase private sector debt to unsustainable levels. This is obviously what has happened, aided and abetted by repeated bailouts of the private sector by the federal government.


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