I regret to inform you that it is about time Academics woke up and deleted certain economic ideas from their data bank.
Mr Milton Friedman was wrong on the fact that increasing the money supply ‘will always and everywhere’ lead to inflation, either that or he omitted a few important caveats.
And for those Academics, Central Bankers and wankers out there, go get a life. Look at history, it is self explanatory, in particular Japan for the past 25 years and more recently in the US where the monetary base was increased by 142% between 2008 and 2009, yet inflation declined over the same period and fell to as low as -2% in mid-2009?
That’s right, the US money supply more than doubled, yet the economy went into deflation. Friedman omitted caveats to his ambiguous statement and will just say, that in concert with the ‘money growth inflation view’ that banks ‘must’ lend the monies, the borrowers ‘must have the capacity to repay’ and the Government and politicians must shut the f&ck up.
The amount of money has no real bearing on the ‘production possibilities’ of any nation’s economy and the Central Bank, whether they recognize this or not, interference in attempting to maintain price level stability just blows bubbles.
Productive capacity of any nation is its people.
Now on Mr Friedman, he presumed we were intelligent enough to realise that Governments and politicians in general, are self serving pompous bureaucrats. Caveats are necessary on increasing the money supply.
This was proven by none other than Mr Keynes approach to Governments running deficits. History proves this correct in the US (1930) and Sweden (1934) but …. Always a but, what was important during the implementation of this policy (Roosevelt’s New Deal) was that there were built in stabilizers, whereby the social security system (which included unemployment insurance) and the income-tax system both were set up so that government revenues would fall off, while government expenditures increase. These two important issues are paramount in the policy succeeding.
Governments and politicians are apparently ignorant of this simple situation and are intent on political posturing to disrupt any policy implemented. Technically in the ‘New Deal’ the socialists came out on top. This therefore tipped the scales from Capitalism to Socialism, let’s just say a capitalist socialist mix.
Confidence by the people, in the Government will allow their productive capacity, as a whole to grow. Instead the Governments and politicians misallocate resources and stick their collective noses into looking after their own self interests (donors, taxation, benefactors, banks etal).
Time is a huge problem in an economic downturn, as people (and businesses) are required to deleverage. Time is required and disrupted by the deflationary impact of lower demand on commodities and services. Interest rates are low, because the demand for borrowed funds is weak. If people and businesses do not borrow, they do not spend.
If they do not spend, then we have deflation. Confidence is lacking.
So Mr Friedman’s theory was incomplete. An increase in the money supply is only the first component of inflation. The second is a willingness (confidence) to borrow and spend.
Now on that point who has confidence in the Government or politicians?