Monetary and Fiscal Policy Won’t Help

The comments below are an edited and abridged synopsis of an article by James Rickards

Fed money printing is monetarism, an economic theory associated with Milton Friedman. Its basic idea is that changes in money supply are the most important cause of changes in GDP.

Monetary and Fiscal Policy Won't Help | BullionBuzz
Monetary Policy concept illustration

Rickards discusses fine tuning monetary policy by controlling velocity and price levels; this is fairly simple as long as the velocity of money is constant. It turns out, however, that money velocity is not constant. It’s like a joker in the deck, the factor that the Fed cannot control.

The factors the Fed can control, such as base money, are not growing fast enough to revive the economy and decrease unemployment. Monetary policy can do little to stimulate the economy unless the velocity of money increases. And the prospects of that happening aren’t great right now.

Can fiscal policy help get the economy out of depression? Keynes’s idea was straightforward. He said that each dollar of government spending could produce more than $1 of growth. When the government spent money (or gave it away), the recipient would spend it on goods or services. Those providers of goods and services would in turn pay their wholesalers and suppliers.

However, there is strong evidence that the Keynesian multiplier does not exist when debt levels are already too high.

In fact, America and the world are inching closer to what economists Reinhart and Rogoff describe as an indeterminate yet real point where an ever-increasing debt burden triggers creditor revulsion, forcing a debtor nation into austerity, outright default or sky-high interest rates.

The next two decades of US growth could look like the last two decades in Japan. Not a collapse, just a slow, prolonged stagnation. This is the economic reality the US is facing, and neither monetary policy nor fiscal policy will change that.

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