Monday, March 21, 2011

the dollar will always be important

the dollar will always be important
the dollar will always be important
 
The use of money released mankind from close dependence on nature and local markets; but, in facilitating a high degree of specialization and exchange, money has caused individuals to rely on the entrepreneurial success of others. Yet, even those normal hazards of business and trading relationships can be exacerbated by an untrustworthy monetary system. Price signals - the means by which diverse activity is coordinated - are corrupted by monetary disturbances. The nature and detail of that disruption is the focus of monetary economics, where a primary requirement is to identify ideal conditions whereby economic coordination may best be achieved.

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The influence of money is described as "neutral," when it neither impedes nor enhances activity in real sectors of the economy. With neutrality, markets and money are analogous to engines and lubricating oil. The fundamentals of free exchange or engineering can be explained in the absence of money or lubricating oil, but the practicalities remain. Neutral money, like a frictionless engine, provides a conceptual benchmark. It is an abstraction, the conditions for which can "never be given in the real world." So, there is no corresponding stratagem: no "maxim which is immediately applicable to the practical problems of monetary policy" (Hayek, 1935, p. 129). The concept of neutral money is simply an enabling device to reach a greater depth of understanding of the essential problems of the money economy.
In practice, money cannot be neutral. Not least for the fact that it does not exist in a pure form,(1) the presence of money necessarily intrudes on the circumstances of real resources allocation and exchange. Whether in the context of classical economics or that of more recent macroeconomics, many of the economic "bads" that are associated with business cycles and international payments disequilibria originate in monetary disturbances. Yet, the explanations that are provided by classical theory are very different from those of Keynes' General Theory. So, it is necessary to exercise judgment on their respective plausibility

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