by James Rickards
Daily Reckoning
Monetary and fiscal policy won’t lift us out of the new depression. Let’s first take a look at monetary policy.
Fed money printing is an exhibition of monetarism, an economic theory most closely associated with Milton Friedman, winner of the Nobel Memorial Prize in economics in 1976. Its basic idea is that changes in money supply are the most important cause of changes in GDP.
A monetarist attempting to fine-tune monetary policy says that if real growth is capped at 4%, the ideal policy is one in which money supply grows at 4%, velocity is constant and the price level is constant. This produces maximum real growth and zero inflation. It’s all fairly simple as long as the velocity of money is constant.