In recent newspaper columns, Paul Krugman of Princeton University and Lawrence Kudlow have sounded deflation alarms. The solution to combat falling prices, they argue, is for the Federal Reserve System to increase the money supply.
Why is the dollar falling? Many commentators blame the balance of payments deficit. In fact, writes Frank Shostak, this has nothing to do with it. The main influnce on exchange rates is the purchasing power of money, which is mainly determined by supply and demand. The dollar is falling because the Fed has been pumping money.
"There can be no such thing as a nation flourishing alone in commerce: she can only participate; and the destruction of it in any part must necessarily affect all." Thomas Paine.
The measures of inequality on which analysts, policymakers, and armchair pundits typically lean may be misleading, argues Art Carden. Even when measures of real income tell us otherwise, the real differences in income and wealth generated by the free market may be much smaller today than they were 100, 50, and even 10 years ago. So maybe "inequality isn't growing fast enough" for some—it doesn't appear to be growing at all.
Some commentators have tried to revitalize the old Keynesian idea of the liquidity trap. Although the trap itself follows from the J.R. Hicks IS-LM analysis, the basic idea is borrowed from J.M. Keynes. In fact, Japan has not been been in such a trap in the years following 1990, and the whole idea of the trap is gravely flawed.
The popular notion that an increase in the stock of money is socially and economically beneficial is one of the great fallacies of our time. It has lived on throughout the centuries, embraced by kings and presidents, politicians and businessmen. It has shattered numerous currencies, inflicted incalculable harm, and caused social and political upheavals.
When the first wave of hostilities ceased in Iraq (we shall see if a second wave appears later as Iraqis tire of the U.S. occupation), U.S. authorities made sure that dollars—lots of dollars—followed in the wake of the armed forces. It was believed that the dinar would disappear—but supply and demand intervened.
Stagflation is a term that originated in the early 1970s to identify the simultaneous occurrence of recession and inflation—a phenomenon that Keynesian theory had previously suggested was impossible. The industrialized world is being rudely reminded that stagflation is indeed possible, and policymakers are at a loss as to what to do about it.
No other currency, national or international, can conceivably take the place of the American dollar. They all suffer seriously from the same ideological malady: they are the creation of political concern and authority. Whatever we may think of gold, it always looms in the background, beckoning to be used as money, as it has been since the dawn of civilization.
The classical economists were opponents of paper money. And yet in their positive case for commodity money, they made two great errors: believing that an additional supply of notes on the market confers some social benefit and believing that money's value needs to be stable in order to meet the needs of trade. These errors inadvertantly paved the way for political intervention.
