Tuesday, July 15, 2008

Monetary policy matters

Until about six to eight months ago, I had never really thought about monetary policy.

Frankly, I just kind of figured it was the same as fiscal policy and used the two interchangeably.

And though I've been following Ron Paul for, perhaps, a decade now... I never bothered thinking about the difference between monetary policy and fiscal policy. I always knew The Fed was important, but left it at that.

Thankfully though, Ron Paul ran for President... and changed the public dialogue. I now realize that monetary policy is just as important as fiscal policy.

But what exactly is monetary policy?

To me, I think a perfect example of the different schools of thought on monetary policy is shown here:

Federal Reserve Chairman Ben Bernanke told Congress that "numerous difficulties" are racking the U.S. economy, and warned that rising prices for energy and food are elevating the risks of inflation. - Federal Reserve Chairman Ben Bernanke on the faltering economy (Yahoo News, July 15 2008)

Now compare that with this:

Ludwig von Mises used to say that governments will always try to get people to focus on prices when thinking about inflation. But rising prices are a result of inflation, not inflation itself. Inflation is the increase in the money supply. If we understood inflation that way, we would instantly know how to cure it: simply demand that the Federal Reserve cease increasing the money supply. By focusing our attention on prices instead, we are liable to misdiagnose the problem, and we are more apt to accept bogus government "solutions" like wage and price controls, as in the 1970s. - Congressman Ron Paul on inflation (The Revolution: A Manifesto, May 2008)

I'm sure you can guess the school of though to which I belong. But whether or not I'm correct, I hope the American MainStreamMedia begins to have a real discussion on monetary policy... rather than just spoonfeeding us garbage like "the good news is both parties agree that Fannie Mae and Freddie Mac need help."

And a little more food for thought... with both gold and oil increasing in cost... if the US were still on a gold standard... would "energy costs" be in the forefront of our minds?

I'd love to return to a gold standard... or at least return to the days of William Jennings Bryan and have a nice little debate on the merits of bimetallism.

Tim White

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