What on earth has he been reading? It surely can't be anything I've written here. I've said several times that there's no magic level for the money supply; what's important is that the money supply itself remains stable so that price information is real market information, and so that governments aren't stealing our wealth by means of inflating the currency.
Just for the record then (and to answer my questioner), here's PC's Four-Point Plan to fix the foul up. (Click on Inflation or Reserve Bank tags to see all the posts I've produced on the cause of the foul ups.)
- Slash government spending to the bone. it's govt spending more than consumer spending that's keeping up price inflation: slash it to the bone, and give people back their own money to invest. That's money that will be invested to going to grow the economy, not to buy elections. (But won't tax cuts be inflationary? No, we've answered that one before. Several times. And doesn't "too fast growth" cause inflation? No, that's another myth put out by economic morons.)
- Consign the Resource Management Act to the flames. If there's one thing that's increased the price of housing more than any other, it's the power the RMA has given the ill-named "planners" to restrict the growth of housing supply to meet rampaging housing demand. Time to consign this egregious piece of drek to the flames and free up housing supply. As a minimum, abolish immediately the Metropolitan Urban Limits the so called planners have applied around our cities like a noose, and prohibit them introducing these restrictive constraints again.
- Leave the Official Cash Rate to the market. Even Reserve Bank boosters admit that the best the Bank can do with the Official Cash Rate is to set it at something approaching the natural interest rate. Why the bureaucratic middle man? Having either bureaucrats or politicians meddling with something they clearly know nothing about, (and which they say at best simply emulates the natural workings of the market) is a recipe for disaster, especially when the market is working contrary to the failed economic theories of the bureaucrats and politicians. Leave the OCR to the market, and begin working to disestablish the Reserve Bank itself.
- Prohibit the Reserve Bank from inflating the currency. The money supply has increased by roughly fifteen percent year on year for the past few years, this more than anything else has contributed to any across-the-board price inflation that does exist. While the Reserve Bank still does exist, I would prohibit it from inflating the currency.
In addition, it is important to recognize that the demand for free bank-created, “inside” money represents an act of short-term voluntary savings by consumers. The supply of inside money represents an act of investment in that new inside money comes into being via the process of creating loans and deposits. Under free banking, saving and investment move together, as do the supply of and demand for credit. Therefore, the market rate of interest remains equal to the natural rate of interest. Since departures of the market rate from the natural rate are the cause of most if not all business cycles, then free banking is likely to avoid all such economic disruptions.That's the long-term solution then: Remove the Reserve Bank's monopoly powers, and cut the govt's apron strings from the currency.
By contrast, in a fiat money, central banking system liquidity is a “common pool”. Costs have been socialized---spread across all citizens. That is, the monopoly issuer of currency and lender of last resort (the central bank) itself faces essentially zero marginal costs. It can increase the supply of money at will. So damaging expansions of money and credit are to be expected from central banks.
Mark this well. Central banks are the source of both inflation and business cycles. Tragically, many people seem to believe that both inflation and boom-bust cycles are somehow an intrinsic part of a market economy. They thus turn to the central bank to solve the problems that the central bank itself created. I might add that the very existence of a central bank introduces into all markets pervasive “regulatory risk” that would not otherwise exist. That is, market participants expend real resources in an attempt to forecast---and then cope with---the manipulations of money, credit, prices, and interest rates undertaken by the central bank. It all sounds frighteningly familiar.