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Money is two things, and the source of all our problems

February 13, 2015 by 2 Comments

I read a good book review in the Economist about Making Money: Coin, Currency and the Coming of Capitalism. This one sentence captures the problems faced by central banks around the world.

In essence, history has seen a battle between money’s role as a store of value (which requires a restricted supply) and its role as a means of exchange (which can require the creation of more money).

Many of the wealthy and conservatives are inflation hawks. They want money to be a store of value. Because they are net creditors, they need cash to retain its value and not be inflated away. But for workers, creditors and Democrats, money is a medium of exchange. During the Great Recession, cash was hoarded by banks, companies and the wealthy, almost tanking our very-credit-based economy.

In reading Scott Sumner’s fascinating (and easily digestible) paper on “The Case for NGDP Targeting“, he makes the bold (and I believe correct) case that the failure of NGDP to grow consistently, which creates periods of mass unemployment, make statist policies inevitable. Just look at the New Deal in the 1930’s, Argentina’s debt crisis response, successive Japanese stimulus packages and the rants of Paul Krugman. The failure of a central bank to create expectations of NGDP growth –> periods of massive unemployment –> statism. So favoring the gold standard, the “libertarian” side, will eventually result in more socialism. Favoring easy money/NGDP targets will result in less fiscal intervention because workers won’t see any “problem” for the government to “rectify”.

Filed Under: Economics

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