We Need to Remember What Reagan Knew About Economics

Source: The Wall Street Journal.

I am very glad to see this story. It amplifies a point I made in a post not long ago where I said, If you want to understand economics, put money out of your mind. The real economy is the economy of goods, meaning their production and consumption.

This WSJ piece says essentially the same thing. Here is the money quote: “Pre-Reagan, orthodox economics—-monetarist and Keynesian alike—-assumed the answer to inflation was to control the money supply, which Keynesians called ‘aggregate demand.’ Mr. Rutledge saw that the real supply of money was beyond government’s control. People, especially investors, were in charge.”

Put another way, the quantity of money is not the key to economic health; instead how money is used is the key.

To see how this is true you must realize that an investor causes money to be created out of thin air, either by borrowing from a bank or by serving as a lending bank himself. That is, some part of the total quantity of money in circulation is created by private interests that do so because they hope the effort will prove worthwhile (meaning, goods will be produced that can be sold at prices higher than the cost of their production).

Let this insight sink in. You may begin to appreciate that it is almost impossible for government to control all the money creators; that in fact it is foolish for government to try.

14 thoughts on “We Need to Remember What Reagan Knew About Economics

  1. Sure, if I go to Walmart and charge a new tire, Wal Mart takes that electronic equivalent of a charge slip and deposits it in the bank, as though it were money. The bank then adds that to their assets and loans money based on that asset.

    That charge slip circulates as money just like dollars printed by the mint, based on the full faith and credit of Don Tabor, until I redeem it, and it’s just as much a part of the money supply as Federal debt.

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      1. People buy stuff on credit cards every day without money in the bank based on future earnings, That’s why they are called credit cards.

        But the point is that until they pay their bills with legal tender, the banks circulate that debt instrument as though it were currency.

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        1. So, where do you think the funds that the bank uses to pay the bills you ran up comes from? The ether?

          You can spend money you do not have because the bank has money created the old fashioned way – deposits made by people with funds to bank multiplied by the current reserve requirements.

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          1. How can you have been in finance and not know this?

            That credit card slip is listed as an asset for the bank, just like savings in the accounts.

            The bank can then loan money based on that asset. And with the fractional reserve system, they can loan about 8 times the amoount of their assets

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          2. “How can you have been in finance and not know this?”

            There is a lot of made up stuff I don’t know.

            The bank may have an asset when you use their credit card – money that you owe to them – but that asset was not created out of the ether either. To create the asset they had to pay out that amount. Duh! So their net assets from the transaction is zero. Eight times zero is zero.

            Your “analysis” says that the credit card debt you owe is like a savings deposit. No, it is loan.

            Liked by 1 person

  2. The way I see it is Biden is another Carter, maybe worse, and we need another Reagan asap to fix this mess. We are in an exact copy of the failures of the Carter administration without goofy hillbillies and Billy beer but instead cackling Kam and border invasion among others.

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        1. Obama was a centrist. Too much of one, IMHO. He had to push through the ACA over 100% GOP opposition. Given such opposition even for a GOP plan – Romneycare – he should have used that early political capital to push through Medicare-for-All. But he didn’t. So yeah, kind of conservative.

          Liked by 1 person

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