Subject: The Myth of Full Employment via Money Expansion
Date: Fri, 15 Oct 2010 10:42:33 -0400
Fed Chairman Ben Bernanke is confused about the money supply, the price level, and the benefits of manipulating both to achieve full employment. In his speech at the "Low-Inflation Environment Conference", he states that it is the Fed's intention to promote price stability and full employment via a two percent general price inflation rate. So, which does he want--price stability or two percent price inflation? And how exactly will either promote full employment? The simple and well-know "rule of 70" reminds us that prices will double in the number of years equal to 70 divided by the inflation rate. So at a two percent price inflation rate, the price level will double in thirty-five years. That is hardly price stability. Plus, the only way the general price level could remain the same in a growing economy is for the money supply to increase in proportion to the increase in production, causing repeated boom/bust business cycles. In a stable money environment prices would fall as production increases, a boon to every level of society. Sixty years ago the great German economist Wilhelm Ropke demolished the fallacy that full employment could be achieved via money expansion. I suggest to your readers his excellent essay on the subject, "The Economics of Full Employment", found in The Critics of Keynesian Economics.