I'm with Cutten on this. I think it is more dangerous to increase money supply by double digits for many years than small increases in money supply.
While a stable money policy admittedly would increase the short term risk of recession, it is in my opinion far riskier to increase money supply in ever larger quantities, until like a rubber band about to snap, inertia is so high that you are forced to reduce money supply quickly to defeat inflation and risk a much greater recession or even worse due to bursting of asset bubbles.
It is no coincidence that the bubbles we've seen (first technology stocks, then housing, now commodities, next general inflation/ all prices), have occurred during a period of sustained double digit increases in money supply. In fact, these asset bubbles (and thus the accompanying busts) historically require this kind of loose monetary policy to flourish and that's exactly what we're seeing.
The disadvantages of dealing with constant asset bubbles and asset panics are higher than the disadvantages of dealing with the sticky wage problem (less flexibility in labor markets due to lower ease of enacting real wage cuts-- without inflation you have to give nominal wage cuts which can increase short term unemployment rates, also there is the hidden reduced impact of lowering real government benefits such as retirement benefits due to headline CPI being lower than true inflation rates). Still-- I think the disadvantages of loose monetary policy are being demonstrated today.
What is the end-game? It is difficult to predict, but probably inflation begins to spiral higher in terms of general prices and expectations, and within 1-4 years after that the Reserve Banks enforce a more drastic and painful adjustment period of lower rate of increase monetary supply (and thus much higher real interest rates) than had the policy been more stable money supply. The irony of it all is in this frantic attempt to avoid mild recessions at any cost, it actually increases the risk for a much more severe recession down the road and causes massive misallocations of resources in the meantime as the economy deals with constant bubbles and panics.
While a stable money policy admittedly would increase the short term risk of recession, it is in my opinion far riskier to increase money supply in ever larger quantities, until like a rubber band about to snap, inertia is so high that you are forced to reduce money supply quickly to defeat inflation and risk a much greater recession or even worse due to bursting of asset bubbles.
It is no coincidence that the bubbles we've seen (first technology stocks, then housing, now commodities, next general inflation/ all prices), have occurred during a period of sustained double digit increases in money supply. In fact, these asset bubbles (and thus the accompanying busts) historically require this kind of loose monetary policy to flourish and that's exactly what we're seeing.
The disadvantages of dealing with constant asset bubbles and asset panics are higher than the disadvantages of dealing with the sticky wage problem (less flexibility in labor markets due to lower ease of enacting real wage cuts-- without inflation you have to give nominal wage cuts which can increase short term unemployment rates, also there is the hidden reduced impact of lowering real government benefits such as retirement benefits due to headline CPI being lower than true inflation rates). Still-- I think the disadvantages of loose monetary policy are being demonstrated today.
What is the end-game? It is difficult to predict, but probably inflation begins to spiral higher in terms of general prices and expectations, and within 1-4 years after that the Reserve Banks enforce a more drastic and painful adjustment period of lower rate of increase monetary supply (and thus much higher real interest rates) than had the policy been more stable money supply. The irony of it all is in this frantic attempt to avoid mild recessions at any cost, it actually increases the risk for a much more severe recession down the road and causes massive misallocations of resources in the meantime as the economy deals with constant bubbles and panics.
