Tuesday, May 08, 2012

Rebuttal to Ron Paul's FT 5/8 article

Ron Paul's idea about monetary policy is completely wrong. Unfortunately there are still sizeable people who are misled by him and believe what he says.

The main goal of QE is to fight deflation. And only a scholar who knows the Great Depression so well as Bernanke can use this policy so timely and boldly.

The fact is after printing $2 trillion dollars, the cumulative inflation is hovering around 2%, right on target.

Japan's lost decade of 1991 to 2001 is exactly due to central banker's reluctance to use QE. It was an unconventional tool back then and only academics like professor Bernanke was advocating it.

Ron Paul advocated return to gold standard, so as to tie central bank's hands to print money. What he doesn't know, or doesn't care to know is that the policy he advocated caused deflation and is the main cause of the Great Depression.

It would be a tragedy of a generation if his policy is ever adopted by any central bank.

It is also untrue to claim the housing bubble is a result of money printing by central bank. Housing peaked in 2006 before any QE was put into action.

The theoretical justification for printing money, is that the velocity of money flowing through economy slows down significantly due to a severe financial and confidence crisis. When liquidity flows very slowly, more quantity is justified. The goal is to maintain the price level and quantity of production.



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