Monetary policy and Human misery
Brad Delong tells good stories. Here he tells a story about monetary policy and about how monetary policy is supposed to work.
Back before 1990 a typical recession involved the Federal Reserve fighting inflation by imposing a liquidity squeeze on the economy–raising interest rates, making a whole bunch of business models unprofitable, and so inducing businesses then fire their workers But after the excess supply in the labor market registered, wage increases stopped, and inflation expectations fell, the Federal Reserve would simply reverse course and return asset prices to their previous levels. Thus if you were a business it was easy to figure out what you should do after the macroeconomic storm had passed. Since asset prices and interest rates were back at their previous level, what you had been doing three years earlier before the recession would still be profitable. So all you had to do is reproduce your division of labor as it had been three years before.”
The bold’s mine. Monetary policy works by inducing misery on random people and businesses. Note that his article is a long ode to fiscal policy.
Update: Here is the share of income for Labor from that well known
communist columnist, David Frum. Thx Beowulf!
Also if you need more grapics – go here check out how wonderful modern monetary policy (post Volker) is for workers wages.
[Update 11-2-2011: Welcome Zerohedgers! Feel free to walk around and find out how money works! The red meat can be found here, but I write lots of offensive posts about why monetary policy sucks. Thanks el Veijo! I used to know someone named oldman before he passed, and he was...worthy. ]