Monetary Policy: Contemporary Issues – Pt. II Monetary Policy: Contemporary Issues – Pt. II ECO Dr. Dennis Foster W.A. Franke College of Business

The Fed and its Policies Has it maintained the value of the dollar?Has it maintained the value of the dollar? Has it stabilized the economy?Has it stabilized the economy? Is it enhancing moral hazard?Is it enhancing moral hazard? Is it creating distributional problems?Is it creating distributional problems? Is risk of inflation gone?Is risk of inflation gone?

The Unemployment Rate – Dec. ‘ % June ‘ % June ‘ % Oct. ‘ %

A Tale of Four Recoveries +28% +19% +16% +12%

Tracking Prices and Inflation 3 rd Q yr-to-yr +1.8%

Are Monetary Policies Effective? “No”... –Investment channel collapses. –People are rational and counteract. –Lag problems. –It introduces systemic distortions. “Yes”... –Various transmission mechanisms. –Policy is unanticipated. –Wage & price rigidity.

: A Great Depression Story

Sept. 5.9%

Rethinking Policy: The Austrian School of Thought Recessions are the solution, not the problem!Recessions are the solution, not the problem! Keynesian policy -  interest to  spending.Keynesian policy -  interest to  spending. Leads to misallocation of resources.Leads to misallocation of resources. Leads to an unsustainable boom.Leads to an unsustainable boom. Leads to eventual conflict (C vs. I).Leads to eventual conflict (C vs. I). What should we do? Wait!!What should we do? Wait!!

GDP (2011) = $18.3 tr. vs. $13.3 tr net gain = $34.6 tr.

Rothbard - A Return to Sound Money Get back on the gold standard. Define $ in terms of gold. No more suspensions of payment in gold. Abolish the Federal Reserve. Redeem every $ of M1 in gold… Get government out of money. Bank notes will replace FRN. 100% reserve ratio Or, let banks fail. Abolish FDIC, US Mint.

The Results of Sound Money 1.No bank panics. 2.No convoluted regulation. 3.No inflation. 4.No discretionary monetary policy. 5.No monetizing of federal gov’t. debt. 6.An end to the business cycle!!

Let bad firms/banks go bankrupt.Let bad firms/banks go bankrupt. –We don’t lose real resources!!!!! Abolish Fannie & Freddie.Abolish Fannie & Freddie. End the Fed.End the Fed. End the government monopoly on money.End the government monopoly on money.

Where are we headed? Interest rates can’t stay low forever!Interest rates can’t stay low forever! Right? Fed is “committed” until Inflation is a looming danger!Inflation is a looming danger! Isn’t it? Will it be a surprise? Can it be controlled? Unemployment will fall slowly!Unemployment will fall slowly! Or not. LFPR is down and if … Best case scenario?Best case scenario? Economy is sluggish; growth of 2%. Will recovery last longer than GD?

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ECO 481: Public Choice Theory Dr. Dennis Foster FCB #208 Tue/Thur 9:35 am - 10:50 am The W.A. Franke College of Business Northern Arizona University Spring 2015

Monetary Policy: Contemporary Issues – Pt. II Monetary Policy: Contemporary Issues – Pt. II ECO Dr. Dennis Foster W.A. Franke College of Business