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Monetary policy: The journey to there and back - a note

Hector McNeill1

Since 1971, but more obviously since 1975, monetary policy reinitiated a journey that in 1929 had ended in disaster. The new road map was based on the Quantity Theory of Money which has since been debunked by the Real Money Theory. In other words Monetary policy set out on a journey without knowing where it would end, other than attempting to make banks rich. However, since the theory behind the QTM is wrong, the situation of banks, finanical regulations and the economy as a whole has reverted back to a precarious state of affairs.

Demand comes from people's disposable incomes. Since 1975 the falling investment and failure to raise real incomes has caused real demand to decline. By feeding money from the Bank of England through banks the funds do not reach the constituency but end up as assets in the hands of a few.

So the economy needs to abandon this journey to an unknown destination to re-create the conditions of the pre-1971 economic operations.

In 1976 the real incomes approach pointed out that there is a need for a more competitive economy where the majority of the constituency, whose expenditures create "demand" through their consumption, gain access to higher disposable real incomes through investment directed at higher productivity, lower costs and moderated unit prices; everyone can benefit, including banks.

The next articles on this site will address how we can journey to a realistic destination combining real incomes growth with sustainability of the planet.

1 Hector McNeill is the Director of SEEL-Systems Engineering Economics Lab.

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