by Steve H. Hanke

This article appeared in the August 2012 issue of Globe Asia.

Heads of state continue to rush from one meeting to the next. Worryingly, they (and the army of pundits that follow them) continue to focus most of their rhetoric on whether fiscal austerity or more fiscal stimulus is the right strategy to contain the crisis and turn things around. Instead, they should be focusing on the money supply. As history shows us, money and monetary policy trumps fiscal policy.

When the monetary and fiscal policies move in opposite directions, the economy will follow the direction taken by monetary (not fiscal) policy. For doubters, just consider Japan and the United States in the 1990s. The Japanese government engaged in a massive fiscal stimulus program, while the Bank of Japan embraced a super-tight monetary policy. In consequence, Japan suffered under deflationary pressures and experienced a lost decade of economic growth.

In the U.S., the 1990s were marked by a strong boom. The Fed was accommodative and President Clinton was the most austere president in the post-World War II era. President Clinton chopped 3.9 percentage points off federal government expenditures as a percent of GDP. No other modern U.S. President has even come close to Clinton’s record. …

Continue reading at Cato.org…

image: flickr.com/kevsunblush

Share on Facebook

Read more at Sound Money Project