Government deficit spending circulates worthless money and increases the money supply beyond demand. This dilutes the value of the dollar. It also increases the cost of imports and oil in particular.
To stem the inflation tide, the central bank increases interest rates to tighten the money supply. This makes less money available to the economy but does nothing to halt the reason for the start of the inflationary cycle: government deficit spending.
How can the central bank's efforts be effective as long as government spending is out of control?
2007-06-27
00:12:57
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8 answers
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Politics & Government
➔ Politics
The problem with the gold standard is that it doesn't keep up with the rate of the expansion of the economy.
There is only so much gold on the planet. It cannot be dug up and put in reserve as fast as the economy expands.
The current monetary system depends on the assets on the reserve banks. As the value of their assets increase, they are allowed to circulate money script.
All money issued since 1971 has been Federal Reserve notes, not U.S. dollars.
2007-06-27
00:57:55 ·
update #1