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Monetary Policy: Contemporary Issues – Pt. II ECO 473 - Dr. Dennis Foster W.A. Franke College of Business The Fed and its Policies • Has it maintained the value of the dollar? • Has it stabilized the economy? • Is it enhancing moral hazard? • Is it creating distributional problems? • Is risk of inflation gone? The Unemployment Rate – 1980-2014 Oct. ‘09 - 10.1% Dec. ‘82 - 10.8% June ‘92 - 7.8% June ‘03 - 6.3% A Tale of Four Recoveries +19% +28% +16% +12% Tracking Prices and Inflation 3rd 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. 1920-21: A Great Depression Story 2008 1981 1920 Sept. 5.9% Rethinking Policy: The Austrian School of Thought • Recessions are the solution, not the problem! • Keynesian policy - interest to spending. • Leads to misallocation of resources. • Leads to an unsustainable boom. • Leads to eventual conflict (C vs. I). • What should we do? Wait!! GDP (2011) = $18.3 tr. vs. $13.3 tr. 1990 - 2011 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. 2. 3. 4. 5. No No No No No bank panics. convoluted regulation. inflation. discretionary monetary policy. monetizing of federal gov’t. debt. 6. An end to the business cycle!! • Let bad firms/banks go bankrupt. – We don’t lose real resources!!!!! • Abolish Fannie & Freddie. • End the Fed. • End the government monopoly on money. Where are we headed? • Interest rates can’t stay low forever! Right? Fed is “committed” until 2015. • Inflation is a looming danger! Isn’t it? Will it be a surprise? Can it be controlled? • Unemployment will fall slowly! Or not. LFPR is down and if … • Best case scenario? Economy is sluggish; growth of 2%. Will recovery last longer than GD? Get on the mailing list for Spring 2015 – [email protected] The W.A. Franke College of Business Northern Arizona University Spring 2015 ECO 481: Public Choice Theory Tue/Thur 9:35 am - 10:50 am Dr. Dennis Foster FCB #208 Monetary Policy: Contemporary Issues – Pt. II ECO 473 - Dr. Dennis Foster W.A. Franke College of Business