Has Keynesian Monetary Policy in India only created Jimmy Carter Stagflation?

Posted by PITHOCRATES - May 19th, 2012

Week in Review

Milton Friedman said, “Inflation is always and everywhere a monetary phenomenon, in the sense that it cannot occur without a more rapid increase in the quantity of money than in output.”  This means only government can create inflation by ‘printing’ too much money.  And they ‘print’ money these days by keeping interest rates low to ‘stimulate’ economic activity.  But when you increase the amount of money each unit of that currency becomes worth less.  And therefore takes more if it to buy the same things as it did once before.  Which is why prices rise when you ‘print’ money.  Just like they did in India (see April CPI inflation accelerates to 10.36 pct y/y by Manoj Kumar posted 5/18/2012 on Reuters).

India’s consumer price inflation accelerated in April to 10.36 percent, making life harder for the RBI as it looks to kickstart a flagging economy, government data showed on Friday…

The Reserve Bank of India, which unlike other central banks uses mainly the wholesale price index for monitoring inflation, slashed policy rates by a steeper-than-expected 50 basis points last month to boost a sagging economy.

The Reserve Bank of India (RBI) lowered interest rates in April to stimulate the economy.  At the end of April the consumer price inflation increased to 10.36%.  Just like Milton Friedman said.  Only government can create higher prices with inflationary monetary policy.  A lesson we all need to learn.  Especially the Keynesians whose answer to everything is to lower interest rates and spend money.  So India followed this Keynesian advice.  Now they have a flagging economy and double-digit inflation.  Reminiscent of Jimmy Carter’s stagflation in the Seventies.

Will Keynesians ever learn?



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