The New Arthurian Economics

Printing money causes inflation. Everybody knows it. And prices keep going up. So I guess they've been printing too much money. Everybody knows. Everybody but me.

Here is what I know to be true:
The quantity of money reached a peak in 1946 and has been falling since. The volume of debt pyramided on money hit bottom in 1947 and has been rising since.

If they've been printing money, it wasn't enough to cause the inflation we had. If money causes inflation, inflation in our time has been caused by borrowed money.

Money is green. Debt is red. The one graph shows money falling -- less green -- since 1946. The other shows debt rising -- more red -- since 1947. Less green and more red, for six decades. Our money is the wrong color.

What is the real cause of excessive credit use? The cause is economic policy.

It is policy to withdraw spending-money from the economy. It is policy to encourage spending. It is policy to encourage the use of credit. It is policy to encourage the accumulation of debt.

Why do we have all this debt? Because we use all that credit. It is policy.

"When economists write textbooks or teach introductory students or lecture to laymen, they happily extol the virtues of two lovely handmaidens of aggregate economic stabilization -- fiscal policy and monetary policy." - Arthur Okun

In 1977 when I got my three credits in economics, I learned that the government had two tools to use for managing the economy: monetary and fiscal policy. Maybe they don't teach this anymore. Maybe that is the problem.

The Big Piece

Krugman's "big state-of-economics piece" is the focus of much attention, this fifteen minutes. Here is his conclusion:

"So here’s what I think economists have to do. First, they have to face up to the inconvenient reality that financial markets fall far short of perfection, that they are subject to extraordinary delusions and the madness of crowds. Second, they have to admit... that Keynesian economics remains the best framework we have for making sense of recessions and depressions. Third, they’ll have to do their best to incorporate the realities of finance into macroeconomics...."

Here it is in shortform:
1. Economists have ignored the imperfection of markets.
2. Keynesian economics provides the best understanding.
3. Economics must incorporate the realities of finance.

Going thru the wormhole and coming out on my side, we get the following: