Why Monetary theory doesn't work.

According to Brian Bloom, author of Beyond Neanderthal:

The “theory” of the monetarists is that if you flood the market with money then people will continue to buy the same quantity of oil. The “reality” is that if there is less stock available (for whatever reason) and/or if there is a reduction of the rate at which people are replacing what they bought before, then an inflation of the money supply causes an inflation of prices.

Another problem to which the monetarists seem blind is that wages lag inflation. First price rises and then, in response to increasing difficulties being experienced by consumers to make ends meet whilst continuing to buy the same volume of goods, they hold out their hands for more wages. Employers – who are experiencing their own problems – don’t react immediately. Thus, in the short term, consumers have no option but to buy fewer goods and services. It follows that, in an economy where 66% of GDP is accounted for by consumer purchases, any extraordinary inflation of the money supply is virtually guaranteed to exacerbate a slowing velocity of money and a concomitant slowing rate of consumer purchases. At the extreme, if the authorities drop dollars from helicopters, all that they will achieve is that they will hasten the arrival of an Economic Depression. Perhaps the following example will make it crystal clear: Today, in Zimbabwe, a loaf of bread costs somewhere around half a billion dollars and the unemployment rate is around 80%. How many of the 80% unemployed do we think can access half a billion dollars? At the extreme, when you print too much money, the economy tanks.

In summary, dear reader, if you have a robust engine powering a robust vehicle which, in turn, is pulling your 5 ton load then, by depressing the accelerator (increasing the money supply) the car will easily negotiate the next hill. But if the vintage economic vehicle is not sufficiently robust – which is what we are now facing – then you want to be very circumspect about increasing the money supply. This is one of those times when implementing monetary theory will be counterproductive. What will likely happen under these circumstances – as an example – is that the oil price will rise to $150 a barrel. Then, when it collapses again because people can’t afford to pay $4 a gallon for gasoline because wages lag inflation, what you will be faced with is a fall in demand and a consumer who has been burned. And we all know that “a burned child dreads the fire”. If you offer the consumer a box of matches after he has been burned, he will run a mile in the opposite direction. Printing yet more money in today’s environment will not give rise to the desired outcome.