monetary policy

Importance of a Good Monetary Policy

In ancient times bullion was used as the medium of political and commercial transactions. In most countries gold was the preferred bullion, but in some countries silver bullion was also used. If a country which used gold bullion refused to recognize silver bullion, commercial bullion transactions between these two countries were not possible because of the bullion differences. Such countries engaged in barter trade with one another.

Even 150 years ago there was hardly any exchange of bullion. Where there was a difference in the standard of bullion, commodities were not sold through gold or silver bullion but were exchanged through barter trade. The rulers (monarchy was the system in those days) used to deposit gold or silver bullion in the public exchequer. Some portion was spent on the salaries of government employees and to meet the expenses of the government’s developmental schemes.

Today, USD is a global trade currency and the monetary policies of Fed greatly impact the global economy. After the stock market crash of 2008, Fed followed its ambitious Quantitative Easing (QE) program in order to revive the US economy. If the money that Fed printed had been invested into growth of consumer demand in US economy instead, US economy would have been in much better shape today. Such an economic policy would also have increased the socio-economic development thereby benefiting all masses. As a result of the constant circulation of capital, national wealth also increases.

This policy also indirectly leads to an increased profits for wealthy due to increased economic demand and growth of economy. However, the money that was printed by the Fed in form of QE went into the pockets of manufacturers and did not benefit the consumers. This is one reason why today’s stock market seems to react like it might go out of control any day. As a consequence of the monetary policies of the Fed, even the manufacturers, even if they received free money from Fed in form of QE, will not be benefited. If the market price of a commodity is five dollars and if the salaries of the producers of goods is doubled through QE with the intention of providing them greater amenities but consumer purchasing power of rest of economy is ignored, will the purchasing capacity of the producers also be doubled? If they go to market with more money in their pockets they will find that everything also costs more. Such an approach is like adding fuel to fire. If the market price of commodities goes sky-high the country will be thrown into the clutches of high inflation. This is why US should expect an inflation in very near future because of QE policies that have been followed by Fed.

In this way, Printing money out of thin air in order to sustain country’s trade and budget deficits, which primarily benefited only the producers but did not benefit the consumers amounts to committing economic suicide. If production is increased such that wages of the employees catch with their productivity, the purchasing capacity of the people could be increased without inflation. When purchasing capacity of consumers is increased, whole economy would prosper including the producers of goods, who would then find more demand for their manufactured goods in the economy.

In pure economic terms boosting the purchasing power of consumers directly increases the national wealth and indirectly support this increase in national wealth. However, Economic terms which measure an increase the national wealth in terms of Gross Domestic Product (GDP), cannot be regarded as good metric of measuring economic growth if such terms ignore the increase in purchasing power of the consumers.

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