Friday, January 7, 2011

Jever Notice?

At work, the supervisor likes to solve your problem quickly forya. Sometimes it's good, like when I get "lost in the weeds" and just can't see the right answer. But not always. Often, the quick solution ignores half the problem and leaves you worse off than you were before you got help.

I don't mean to point fingers. My own quick answers also often create problems for me, both at my real job and in my computer code. The problem is not in who makes the decision, but in a lack of thoroughness in the decision-process.

That's how it is in my experience. So I figure that's how it is all up and down the food chain. I figure lack-of-thoroughness is a property of human nature.

Now, suppose the guys sitting around the FOMC table suffered from the same lack of thoroughness as the rest of us.

That could lend itself to a lackadaisical style of monetary management: Oh, we expect inflation? Well, let's sell some securities and take a few dollars our of circulation. So did I tellya how cute my grandson is??

Everybody knows inflation is caused by too much money chasing too few goods. Everybody knows it. So if we have inflation, it must be because there's too much money. Everybody knows it... everybody but me.

What I know is, when somebody says something like "The only reason is..." or "There is no other possibility..." or "Inflation is only caused by..." I start to doubt their words, their evidence, and their logic.

Suppose there was something else that could cause inflation, something other than "too much money." Too much credit-in-use, maybe.

Now you might say: No difference. But I would say: That's the problem. People think there's no difference between money and credit. People think they're interchangeable. Well they are interchangeable, but there is a cost difference between'em. The cost of interest, plus the payback of principal. That cost affects prices, too.

When credit-use makes up a small portion of total spending, the cost difference is inconsequential and you can get away with saying, "No difference." But when credit-use makes up a large share of total spending, you can't say that anymore. The difference cannot be ignored. That's where we are now, of course. Our spectacular accumulation of debt is evidence of our excessive use of credit. And the cost of it is the thing that holds our economy down.

So, while the FOMC guys are sitting around the table thinking they have a grasp on the problem, I'm thinking they restricted money too much, and they encouraged credit too much. They had the quick answer to the inflation problem. But we ended up with lots of debt, and not enough money to pay it off.

And we got inflation anyway.

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