|Time to give Keynes another chance|
Dec 18, 2010 Ron Waller thestar.com
Re: Personal debt: Carney’s mixed message, Editorial Dec. 15
Although I think it’s wrong to fault central banks for ultra-low interest rates used to cushion the blow from a global economic meltdown, it’s clear monetary policy is in need of new ideas.
Over the past 30 years, the U.S. Federal Reserve and the Bank of Canada have used “inflation targeting” to keep inflation between 1 and 3 per cent. This tight control of the money supply caused two massive recessions (in the early 1980s and early 1990s) and caused most of our government debt (due to ultra-high interest rates and debt-servicing costs.)
Ultimately the system failed to eliminate the business cycle and completely missed the giant inflationary housing bubble in the US.
I think to improve the system we need to return to John Maynard Keynes’ ideas with the focus on demand and government involvement in monetary policy. With “co-operative inflation targeting,” governments could raise a sales tax on houses to prevent a housing bubble (where raising interest would kill growth in the rest of the economy).
Governments could also raise a value added tax to slow an overheating economy, and lower it to stimulate demand. This would lower the cost of money (great for people and businesses,) encourage saving and increase government revenues (which could be used for spending, income tax cuts and debt repayment).
Inflation targeting was largely based on Friedman’s quantity theory of money, which has since been discredited. The return to free-market economics was also an enormous failure that lowered living standards and culminated in another colossal market meltdown repeating the folly of the 1920s.
It’s time to bring Keynes back to the table, given his tremendous success in the post-World War II era.
Ron Waller, Hamilton
Ron Waller, Hamilton
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