Why will prolonged monetary expansion fail to solve unemployment?
*Barron's, by Randall W. Forsyth, October 25, 2012
”While inflation is everywhere and at all times a monetary phenomenon, as Milton Friedman taught, unemployment is the product of many economic forces. It is not simply the inverse of the price level, as the so-called Phillips Curve would posit. A little inflation won’t lower unemployment permanently as wages rise to meet higher prices and allow workers to catch up, leaving them on a proverbial treadmill.
Yet the policy-setting Federal Open Market Committee Wednesday reaffirmed its policy to continue to purchase $40 billion a month in mortgage-backed securities from federal agencies such as Fannie Mae and Freddie Mac, continue to swap $45 billion of long-term Treasury securities for shorter-term holdings, and to keep its key short-term policy interest rate near zero through mid-2015, where it’s been since late 2008 in the depths of the financial crisis.
Somehow, three decades ago the Fed said the money supply was beyond its grasp; now it says it will target the unemployment rate. As if the decision to hire hinged on the cost or the availability of credit when businesses show little inclination to borrow. Cheap money can’t overcome the hurdles of uncertainties about taxes and regulations, which entrepreneurs readily say are their main concerns.”
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