Here’s a letter that I sent yesterday to the Washington Post:
Robert Samuelson writes that “Depression prevention means supporting consumption and asset markets” (“The next economic bubble?” Nov. 10). This claim contains a modicum of truth resting atop a mountain of misunderstanding.
What’s true is that the supply of money should be prevented from collapsing relative to people’s demand for money. But beyond this, policies to “support consumption and asset markets” cause trouble.
At any given point in time consumption markets and asset markets compete against each other for resources. If income-earners today save more, they must today spend less, and vice-versa. Sound money allows interest rates to accurately reflect income-earners’ preferences for deferring consumption – that is, for investing resources in asset markets. The huge problem with active monetary policies – and not least with those that aim to restore prices to boom levels – is that these policies distort interest rates, causing markets to misallocate resources between consumption markets and asset markets. The upshot is the recurrent need for markets to slough off investment projects that are not sustainable over the long haul.
Sincerely,
Donald J. Boudreaux
