Double dip: Milton Friedman reigns supreme

The alarming market indicators of the last days are a perfect illustration of Friedman’s theory that inflation and busts result from a too loose money supply. When the total quantity of money increases, it creates a (short lived) boom. Inflation rises, and people start to realise that they have been fooled: their increased wealth was based on devaluing currency. They become more careful; save their money in assets, and hold back on entrepreneurial activity. That is the bust. Inflationary booms always end in tears.

This is precisely what is happening today. Gordon Brown’s and the Bank of England’s loose monetary policy of the noughties resulted in the 2007/2008 bust. Governments applied the Keynesian medicine of increasing the money supply through quantitative easing and other money supply loosening methods. The indicators this month are the inevitable bust.

When will governments come to their senses and ditch Keynes?

Read more in ‘Milton Friedman – A concise guide to the ideas and influence of the free-market economist’, by Eamonn Butler, Harriman House Limited 2011, pages 33 to 65. 

Source: http://feedproxy.google.com/~r/TheAdamSmithInstituteBlog/~3/AuoqqB-6Evc/

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