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The theory of monetary disorder: debt finance, existing assets, and the consequences of prolonged ultra-easy policy

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  • Thomas Palley

    (Economics for Democratic and Open Societies, USA)

Abstract

This paper introduces the notion of monetary disorder. The underlying theory rests on a twin circuits view of the macro economy. The idea of monetary disorder has relevance for understanding the experience and consequences of the recent decade-long period of monetized large budget deficits and ultra-easy monetary policy. Current policy rests on Keynesian logic whereby a large fall in aggregate demand warrants robust offsetting monetary and fiscal policy actions. That logic neglects potential monetary disorder being bred within the financial circuit in the form of inflated asset prices and leveraged balance sheets. That disorder is likely to develop long before inflation accelerates so that inflation targeting fails to protect against it. Political factors increase the policy danger as the benefits of disorder are front-loaded and the costs backloaded. The paper concludes with a policy discussion regarding how to prevent Keynesian goods market counter-cyclical stabilization policy from causing monetary disorder.

Suggested Citation

  • Thomas Palley, 2023. "The theory of monetary disorder: debt finance, existing assets, and the consequences of prolonged ultra-easy policy," PSL Quarterly Review, Economia civile, vol. 76(307), pages 315-335.
    • Handle: RePEc:psl:pslqrr:2023:41
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    File URL: https://rosa.uniroma1.it/rosa04/psl_quarterly_review/article/view/18265/17122
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Monetary disorder; twin circuits; inflation; asset price bubbles; budget deficits; modern money theory (MMT);
    All these keywords.

    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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