Why Keynesian Economists Don’t Understand Inflation

Mises Daily: Monday, April 07, 2014 by Frank Hollenbeck

The “monetary cranks” and “ignorant zealots” of old are back preaching salvation if only we had more inflation. Keneth Roggoff and Fed President Charles Evans did not mince words, while others have been more circumspect. Christine Lagarde warns us of the “ogre of deflation” and the “risks” of low inflation, while others have been urging easier monetary policy to reduce the value of the yen or the euro. Of course, it’s much easier to let this inflation tiger out of its cage than to get it back in. We have ample evidence that once inflation picks up, it’s extremely difficult to control. Inflation in the US was 1 percent in 1915, almost 8 percent in 1916, and over 17 percent in 1917. It was about 2 percent in 1945 and jumped to over 14 percent by 1947. During the 1970s, inflation was mild in 1972, and climbed to 11 percent by 1974 and stayed at very high rates until Volker raised interest rates to 19 percent to tame the beast......the original, non-Keynesian quantity theory of money clearly shows that the demand for money reflects, not just nominal income of the GDP deflator, but all possible transactions, which we cannot measure. Money is linked to prices of anything that money can buy, consumer goods, stocks, bonds, stamps, land, etc. The use of the simplified, Keynesian version in economic textbooks and by the professional economist has caused immense damage. When your theory is wrong, your policy prescriptions will likely also be wrong......To Read More.......  

My Take -  It occurred to me as I was reading this that everyone may understand what fraction reserve banking mean, but might not know the historical foundation for it, or the arguments that are critical of it. . Follow the links!