Neither White-washing the Reality of Inflation Nor Peering at It Through Rose-colored Glasses

by Don Boudreaux on January 23, 2009

in Financial Markets, Monetary Policy

Economists David Rose and Larry White make a compelling case, in this op-ed, that the root cause of today's economic turmoil is excessive growth in the money supply between 2001 and 2006.  Here are two key paragraphs:

In reality, excessive money growth drove asset prices up and drove
interest rates down, making people feel richer than they really were
and lowering the cost of borrowing money to facilitate more spending.
Since the level of spending before the period of excessive money growth
was just sustainable, the resulting level of consumption and business
investment spending was unsustainable. The solution is to allow asset
prices to fall to levels that accurately reflect what our economy can
produce. This will make it clear to people that they are not as rich as
they thought two years ago and thereby return spending to sustainable
levels.

Still, virtually everyone agrees that we need to further stimulate the
economy even though current attempts to solve our crisis by increasing
spending is exactly the wrong thing to do. No one wants to bear the
political cost for appearing to be uncaring by favoring a policy of
"doing nothing." Out of political cowardice, the federal government is
attempting to produce a solution that is penny-wise and pound foolish.
You can't solve an excessive spending problem by spending more. We are
making the crisis worse.

Comments

50 comments    Share Share    Print    Email

Previous post:

Next post: