However, it is important to not fall into a lazy mechanical model of inflation and monetary policy.
Monetary policy is not just how many reserves are injected or drained from the private sector and on what terms. Banks create money, so bank regulation is also monetary policy. Open lending of reserves to commercial banks at a low, stable cash rate, combined with strict regulation of the lending activities that banks are allowed to engage in, can be a "looser" monetary policy than a policy of generating fewer reserves, but placing no genuine restraint on what banks can do in terms of creating new forms of liquidity.
In the end, Central Banks cannot restrain the creation of money under the terms that they permit, though they do, of course, have much wider powers than have been used in recent times to dictate the terms under which money is created.
And that is precisely the way to view monetary policy over the past thirty years. It is not whether it is "tighter" or "looser" monetary policy that is the principle shift from the collapse of Bretton Woods to today ... it is the shift in the channels into which money is created.
Since the 1970's, Central Banks have increasingly raised interest rates whenever there is a risk of productive activity getting strong enough to allow wage laborers to gain substantial bargaining power across the board. So with regard to the activity of the productive sector, monetary policy has been "biased to be tight whenever it matters".
By contrast, in the ongoing eliminating of restrictions on creating money to provide liquidity directly to the Finance Sector, which is to say in response to complaints from the Finance Sector that they require more liquidity ... the Finance Sector has been faced with a monetary policy that has been "biased to be loose whenever it matters".
Central Bank monetary policies have by no means just been "creating" liquidity which "happened" to flow into financial assets rather than into the income-expenditure cycle ... they have, rather, been proceeding to encourage the creation of money by commercial banks in service of inflation of financial assets, at the same time as they discourage emergence of a full employment productive sector. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
If we continue to depend on "cheap enough" oil, that's dangerous enough in geopolitical terms. But if we run our economy so we finance our oil imports by borrowing heavily from the outside world (not all from China; the Middle East and Japan are also big providers of net savings), we are asking for trouble. The collapse of the dollar is not necessarily imminent, and the temporary use of deficit spending makes senes as a way to get through this deep recession. But when exactly do we plan to wean ourselves off (a) the oil, and (b) the borrowing from abroad? This doesn't have to be done tomorrow, but it has to be done - unless it is somewhere written that the US will stay powerful and solvent forever. -Skip- Just don't tell me that the financial sector will collapse if we make any moves in the right direction, e.g., cutting back on our current budget-breaking implicit subsidies to that enormous rent-seeking sector; we're on our way to doubling our debt/GDP ratio, from around 40% to near 80%, directly because of the way this sector has behaved. Remember the excessive power of particular sectors (and all their policymaking friends) consistently hampers sensible efforts to reform any economy. If that's too vague for you, look at how and why Gorbachev failed - and all the awful consequences.
The collapse of the dollar is not necessarily imminent, and the temporary use of deficit spending makes senes as a way to get through this deep recession. But when exactly do we plan to wean ourselves off (a) the oil, and (b) the borrowing from abroad? This doesn't have to be done tomorrow, but it has to be done - unless it is somewhere written that the US will stay powerful and solvent forever.
-Skip-
Just don't tell me that the financial sector will collapse if we make any moves in the right direction, e.g., cutting back on our current budget-breaking implicit subsidies to that enormous rent-seeking sector; we're on our way to doubling our debt/GDP ratio, from around 40% to near 80%, directly because of the way this sector has behaved. Remember the excessive power of particular sectors (and all their policymaking friends) consistently hampers sensible efforts to reform any economy. If that's too vague for you, look at how and why Gorbachev failed - and all the awful consequences.
