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Thursday, November 4, 2010

Very, very well-written explanation.

1 comment:

Jeffrey said...

The problems the economy faces in a recession are the problems of resource misallocation. That means that millions of people and businesses miscalculated demand and put money, time, labor, and resources into things that will not pay off. For these millions of small mistakes to be corrected quickly and efficiently prices need to fall and savings need to appreciate because real savings creates real new investment. If the government fights deflation or a stronger dollar with inflationary measures then prices do not fall and savings do not appreciate making reallocation of resources a very difficult and slow process.

The way I see it the Federal Reserve is just a price controller - they control the price of access to money not yet earned. If they lower the price they are stealing demand from the future not helping to create real demand now. I say let natural supply and demand determine the price of loanable funds. Supply and demand has worked better in all other aspects of the economy.