Our over-reliance on monetary policy is the problem

Credit Writedowns has the article Our over-reliance on monetary policy is the problem.

As Marshall Auerback wrote

We don’t even have to invoke the moral arguments on inequality any longer (even though they are very strong). It should be blatantly obvious to anybody with a pulse these days that to continue to distribute the bulk of GDP’s gains to an increasingly small number of people (with the highest savings propensities to boot) is invariably going to cause one’s economy to grow less efficiently.

The author comes near to the ultimate explanation that I have understood since I learned about it in the early 1960s.

For the Fed to have any impact, there has to be a “transmission mechanism”. That’s the jargon. And the way this ‘transmission mechanism’ works is actually very much in dispute. When the Fed raises rates, it’s supposed to feed through to interest rates in the rest of the economy and then into the economy as a whole, with a lag. But it doesn’t always work that way.

The lack of a transmission mechanism is the key here. The usage of that mechanism to raise interest rates is the least important part of the quote. What is lacking is a transmission mechanism between creating money and getting it to stimulate the economy.

If you studied economics as I did before Milton Friedman took the world of economics on an extended LSD trip, you learned what John Maynard Keynes explained. If you give money to people to “invest” and there is nothing worth investing in, then they won’t invest it. Giving out money like this to encourage investing has been likened to pushing on a string. Pulling on strings gets more accomplished than pushing on strings. There is a reason why there is a sporting event called “rope tug of war”, and not one called “rope push of war”.

For there to be something worth investing in, there have to be customers able to buy what you could invest in producing. If there are already too many goods in the market that are beyond the capability of the consumers to buy, it isn’t going to do much good to put more stuff on the market.

Since governments like the USA (sovereign in their own currency) create the money, they can always buy stuff. They are the only possible entity that is big enough and has the staying power enough to buy stuff just to put people to work. For people who are unable to buy even the necessities of life, giving money to them will pretty assuredly be used to buy more.

These last two strategies are the only ones I know of to get out of the trap of people with lots of money not being able to find anything to invest in that will produce a profit or at the very least avoid a loss.

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