Wednesday, April 25, 2012

Changing Our Basic Assumptions of Monetary Policy

It remains true that if there is inflation because there is too much spending-money, then the quantity of spending-money should be reduced. That is not true, however, if there is inflation because there is too much credit-use.
And it remains true that credit-use is good for growth when there is little credit-use. But when credit-use is already excessive, when debt is already excessive, increased credit-use is not likely to be an effective way to boost growth.
Even before policy can change, our basic assumptions must change.
Read it at the New Arthurian Economics
Something's Missing

By The Arthurian

Focusing solely on base money creation has led many individuals to incorrect predictions about inflation over the past several years. The amount of credit outstanding is a large multiple of spending money currently in the system (and of base money).
Declining credit use has been a major deflationary force during the past few years and excessive debt continues to pose significant risks for future economic growth. Meanwhile, government policies continue to encourage increasing credit-use, not recognizing the futility of these actions in solving a crisis caused by excessive credit. The Arthurian is spot on in expressing that our assumptions about monetary policy must change before any lasting resolutions can begin.

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