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Politics : President Barack Obama -- Ignore unavailable to you. Want to Upgrade?

To: tejek who wrote (115369)	6/14/2012 1:38:26 PM
From: RetiredNow	Respond to of 149317

That is why the feds have adopted the fiscal approach they have.........the fear has been deflation; not inflation. Yes, agreed. They do fear deflation, but they do not understand it. They think all deflation is bad and requires a policy response. However, this is where Austrians like Hayek have a much different opinion. They correctly point out that deflation has multiple different and contributing root causes: 1) Deflation caused by money base contraction (currency appreciation). 2) Deflation caused by demand shrinkage. 3) Deflation caused by supply increases. Should monetary policy always be used to fight deflation like Bernanke has insisted in doing his entire term? The answer is a resounding no. Here's why and it is common sense: 1) If the Monetary base is contracting in a time of economic growth or there is a liquidity crisis, then a monetary response may be required. Economic growth requires larger money supplies, just as more people at a pool party require a bigger pool. This is A-OK. 2) If demand is shrinking because a product or economy has become less competitive, then increasing the money supply does not solve that problem. All it does is create inflation, which destroys the purchasing power of the masses, while stopping the economy from correctly winding down a non-competitive enterprise. 3) If supply increases are bringing prices down, then that is a natural process as is happening in the natural gas industry and warrants no policy response, because that is what we call economic progress and it is what drives increasing standards of living....we can buy more and better things for the same money we used to buy things last year. Think of the improvements in computers, while prices have come down. So the real question is how does the Fed figure out which scenario we are in, and therefore, when to apply monetary response? The answer that Austrians will give you is that there is no reliable way. Therefore, the Fed should leave interest rates alone to allow the free market to set prices and ultimately to set the supply of bonds based on demand and risk tolerance, which by itself would regulate the sustainable speed of growth in the economy. Keynesians like Bernanke take the view that they are smarter than free market forces and figure they can time the market to produce a better result. Their efforts have been disastrous, which has resulted in massive financial bubbles followed by spectacular bursts. It's time for the Austrians to take the reigns. Ron Paul believes in Austrian economics.