Monetary policy: Money delusion →
Free Exchange on The Economist:
After years of bitter experience, most rich countries put their money supplies in the hands of independent central banks, because it was determined that linking them to the supply of shiny rocks often generated dangerous and costly economic volatility. Sometimes, it turned out, the demand for money would skyrocket, and when the supply of shiny rocks didn’t rise accordingly a dangerous deflationary downturn followed. Now, much of the rich world finds itself in a period of deep economic uncertainty and fear, in which safe stores of value are in high demand, and that includes many of the colourful pieces of paper rich-country governments print. The wise thing to do would be to make more of that paper, so that we don’t run into the same, not-enough-shiny-rocks problem we did in the 1930s. A lot of people find this to be a frightening prospect, because they associate money printing with inflation, but they’re only considering the supply side of the money-printing equation. If central banks are committed to maintaining price stability—and absolutely nothing in the behaviour of central banks through the recovery suggsts they aren’t—then there’s no reason for a dangerous departure from trend inflation (to the upside, anyway). Through this crisis, with just a few rare exceptions, when central banks have erred they have erred on the not-enough-shiny-rocks side.
