Posts tagged with: monetary policy


Note: This is the latest entry in the Acton blog series, “What Christians Should Know About Economics.” For other entries in the series see this post.

The Term: Money

What it Means: In economics, money is a broad term that refers to any financial instrument that can fulfill the functions of money (more on that in a moment).

There are three basic ways to exchange goods and services: gifting (e.g., I give you a banana, expecting nothing in return); barter (e.g., I give you a banana, in exchange you give me an apple); by using money (e.g., I give you a banana, in exchange you give me $1). Money was invented (and reinvented in every culture) because it makes exchanges easier than the barter system.

What Money Is: Money is a shared belief system used to simplify exchanges of goods and services. To be used as money people have to share a belief that the item —whether paper, gold, rocks, etc. — can perform three main functions: be a store of value, be used as a unit of account, and serve as a medium of exchange.

In the next section we’ll examine these functions. For now, here are two examples of how money serves as a shared belief system:

Blog author: jcarter
Wednesday, April 2, 2014

money-and-justice-scales“If a society regards governmental manipulation of money as the antidote to economic challenges,” writes Acton research director Samuel Gregg at Public Discourse, “a type of poison will work its way through the body politic, undermining justice and the common good.”

Money: it’s on everyone’s mind sometimes. In recent years, however, many have suggested there are some fundamental problems with the way money presently functions in our economies.

No one is seriously denying money’s unique ability to serve simultaneously as a medium of exchange, a measure and store of value, and a means of calculation. Yet deep reservations about the current workings of the world’s monetary systems, both foreign and domestic, have been expressed by people ranging from Senator Rand Paul (who is fiercely critical of the Federal Reserve), to Pope Francis (who has denounced what he calls “the cult of money”) and France’s François Hollande (who once described “big finance” as his “greatest adversary”).

Read more . . .

Blog author: jballor
Wednesday, December 11, 2013

Broken bank 02In yesterday’s edition of The Transom, which I highly recommend, Ben Domenech included a discussion that places the debates over raising the minimum wage within the broader context of the effects of inflation more generally.

Here’s a section:

There shouldn’t be any debate about the reality of the problem that the costs of basic staples, health care, and higher education are chewing up ever-increasing portions of the median family budget which is, in inflation-adjusted terms, smaller than it’s been since 1995. According to the Bureau of Labor Statistics, over the past five years, the average prices for all goods are 7.7% higher; the average price of bread is 10.4% higher; and the average price of meat/poultry/fish/eggs is 16.2% higher. In the past decade, the average worker has paid 89 percent more toward their health care benefits, while their wages grew 31 percent. The rising costs of the government-fueled higher education bubble makes American parents concerned they can no longer afford to send their kids to college. On top of it all, Americans no longer feel confident about their ability to find a new job which can pay them enough to make up for the costs of these goods and services.

The problem is not that the cost of unskilled labor is too low. The problem is the costs of what workers can buy with the fruits of that labor are too high. And the reason for that is largely due to government and systems which socialize risk and insulate producers from reality, not the realities of a competitive marketplace.×9 Those who favor a free market response to these inequality-related concerns ought to view the minimum wage push as an opportunity to put forward an agenda that speaks to these real concerns with a gas & groceries agenda. This is not going to be solved by more government requirements which raise the cost of labor and will absolutely lead to more low-skilled unemployment: it is with an agenda that would smash the insulated systems which have led to these higher costs.

Ben goes on to outline in some detail what an agenda might look like, which includes “ending the government’s management Soviet-style programs of dairy and raisins.” Horror of horrors, the Daily Beast and dairy producers would have us believe that the result would be $8/gallon milk. I can’t be the only one who wonders what the market price of commodities from milk to oil and sugar might be without various protectionist measures and subsidy schemes.

Ben ends the section with a key question: “Some Republicans have taken up more populist anti-corporatist and anti-cronyist arguments in recent months, because they can read the same polls we do. But will they stand up to cronyism, or are they just interested in demagoguery on the issue until they hold the reins of power again?”

Remember the “fiscal cliff”? It wasn’t a cliff.

Over at Neighborhood Effects, James Broughel asks the question, “Has the Sequester Hurt the Economy?”

So have the sequester cuts hurt the economy? One possible answer comes from a new paper by Scott Sumner of Bentley University. Sumner argues that cuts to government spending don’t have serious deleterious macroeconomic effects when the Federal Reserve is targeting inflation. This is because the Fed ensures that prices stay stable under an inflation targeting regime, which keeps demand stable even in the face of government spending cuts. Similarly, when the Fed stabilizes the price level it also offsets any beneficial effects that fiscal stimulus might have, which helps explain the lackluster results from the 2009 American Recovery and Reinvestment Act (aka the “stimulus”).

Implicit in Sumner’s theory is that expansionary austerity, or the idea that the economy can grow even in the face of large government spending cuts, is indeed possible. Some of my colleagues at the Mercatus Center have described other ways in which expansionary austerity is possible.

First of all, I would like to be clear that I do not disagree that “expansionary austerity” may be possible. Nor do I disagree that the sequester cuts have not significantly hurt the economy. However, while the sequester included spending cuts and, therefore, technically qualifies as “austerity,” it was not what everyone was making it out to be. (more…)

It’s no secret that the economy of the European Union is, ahem, struggling. But Vikas Bajaj says the global economy is worse than anyone seems to want to acknowledge:global-economic-growth

In a new report released on Tuesday, the International Monetary Fund says that China, India, Brazil, Mexico and other developing countries are growing more slowly than previously thought. That weakness, combined with Europe’s enduring recession and middling growth in the United States, means the global economy will grow at 3.1 percent this year, about the same as last year and down from the I.M.F.’s April forecast of 3.3 percent.

Developing economies are struggling for a variety of reasons. Some, like Brazil and Russia, are hurting because there is less demand for their exports in the United States, Europe and elsewhere. China is trying to reduce its reliance on exports and investments while increasing the importance of domestic consumer spending. Some countries are also under pressure as foreign investors start moving money out of emerging markets to invest it in the United States, where interest rates have risen in recent days.

Bajaj points out that economist have been talking about this for months, but the response has been “a collective shrug” from policy makers. The International Monetary Fund calls for nations’ policymakers to create more robust attempts to stimulate economies, but Bajaj worries: “Is anybody listening?”

At some point everyone has heard an idea being discussed in Washington, D.C. and thought or said, “That’s insane.” Americans generally recognize there is, more often than not, something not quite right about inside-the-Beltway thinking. But to those who have never lived or worked in the D.C. area, let me tell you: You don’t know the half of it.

Think of your craziest uncle, the one who when you visit for Thanksgiving has some pet theory about how to fix the economy. Now imagine that intelligent, highly educated people heard your crazy uncle’s idea and took it seriously. Now also try to imagine that the idea was taken seriously enough that it was being discussed in the business section of a major newspaper’s website. That is the culture that is D.C.

For example, today the Washington Post’s Wonkblog has a story about the “platinum coin option”, a method for President Obama to get around the debt ceiling:

In today’s Wall Street Journal, Jon Hilsenrath and Kristina Peterson report, “The Federal Reserve is heading toward launching a new round of stimulus to buck up the weak economy, but stopped short of doing so right away.” The predicted means of stimulating the economy is another round of the unconventional policy of quantitative easing (QE), i.e. when a central bank purchases financial assets from the private sector with newly created money in effort to spark economic growth. Thus, the quantity of US dollars would be increased, debasing their value and causing inflation.

The authors note that this strategy has received significant criticism:

Critics say there is little more the Fed can do to help, having already pushed short-term interest rates to near zero. They contend its unconventional actions could do more damage by sparking inflation, and that in the meantime the Fed is punishing savers who are getting little return on their bond investments. (more…)