Sunday, December 12, 2010

Contraction is not a monetary phenomena

When we contract the economy, we do so because the lines are long and inventory scarce, this is not a price issue.   Money is out of the loop, and money comes back in to the loop after the contraction.  The purpose of money is to monitor relative inventories about the equilbrium.  The contracted economy has lower bandwidth, the old money agreements have to be redone, it happens fairly quickly, much more quickly than monetary stimulus can effect.  Bankers can never catch up to a contraction, the cows are going home and we know the route.

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