Monday, February 23, 2009
A more balance monetary policy
| Proposal for a new monetary policy for The United States Monetary policy, simply put, is the way the government or central bank controls the supply of money. When a nation operates on a gold standard no new money can enter the system, until more gold has entered to back the paper currency. Our current monetary policy is based on confidence in the note itself, or more properly put the value of the note. If the purchasing power of one dollar is relatively stable, those who save money are comfortable with the risk of lending the dollar, because the principle will be paid back with the same purchasing power it had at the time it was lent, plus a profit in the form of the interest paid. When the government puts too much money in to circulation, we have the inflation which lowers the future purchasing power of the dollar, and so forces the lender to raise the interest rate, to compensate for the loss of purchasing power over the term of the loan. When we have deflation, the borrower is reluctant to take money from the lender when he will have to pay it back with a dollar holding much more purchasing power than he got in the first place. Without a gold standard, how can are we to calm to waters? Today we rely on the good will and intelligence of the politicians to reign in the inflation. As Mises has opined, if the people believe the inflation will end, then the inflation can continue. But if the people come to the realization that there is no end to the devaluing of the currency (no end to the inflation) the money is no longer trusted and becomes quickly worthless. The good will and intelligence of politicians over the last few decades has become less apparent, to say the least. The nation needs a check on the amount of money the government can print and the amount of new credit that can be issued. The monetary policy I propose is by no means perfect, but it will put a check on the politicians and prevent them from inflating the currency until it collapses. There are two measures we can use to limit the government and central banks efforts to inflate the money supply. The first is deflation. If the dollar falls by 1.3% over a twelve month period (lagging) we should be safe increasing the supply by 1.3%. We can also use overall productivity. If the productivity of the nation (as measured by labor, or the BLS Business Sectory Output, or some mix) rises by 2.3%, we can thus increase the money supply by 2.3%. In times of war or economic stress, we could even boost the supply above these levels as long as the rise could happen only once every few years, and not exceed productivity by more than a point or two. The history of monetary policy shows clearly that nations who do not exercise restraint in the growth of the momey supply are destined for a prolonged period of suffering and economic decline. I also have had no luck in finding a situation where rampant inflation has been rectified by government sponsered, measured deflation. It would appear that once the damage has been done, the best we can hope for is setting a new floor for the currency. In a world awash in as much private debt as there is public debt, this would not seem to be a viable solution anyway. This is by no means a gold standard approach, and is as open to abuse as any restrictions placed on the politicians. But it would be a starting point, and it would at worst, give the people some measure of confidence that the printing presses won't roll forever, and the treasury won't by its own bonds until the money becomes worthless. During tough economic times it is important to understand that some of the reckoning (if not most) is healthy in the long run. The desire of politicians to inflate the currency to pay off the public debt, and lower the value of wages in real dollars paid to unions and other interests groups can quickly devolve in to an economic collapse. A firewall is needed today, to put a backstop on the amount of future damage. A monetary policy that limits the credit expansion will go a long way to perserving our future once we are out of the current doldrums. Author is Eric Gurr and can be reached at egurr@intralinkinc.com |
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