The Three Monetary Policy Regimes
MP0: Hard Money (Gold-Linked)
Period: 1945–1971 (Bretton Woods). Before that throughout history.
“This type of monetary policy ends when the debt bubble bursts, and there is the previously described ‘run on the bank’ dynamic, which is a run from credit assets to the hard money, and the limited amount of hard money causes massive defaults. This creates a compelling desire to print money rather than leave the supply of it limited.” — a-00060
How it ends: bank runs exhaust hard money reserves → forced switch to fiat. This is structurally inevitable once credit claims greatly exceed gold backing.
MP1: Fiat + Interest Rate Control
Period: 1971–2008
“This fiat monetary policy phase both allows more flexibility and provides less assurance that money printing won’t be so large that it will devalue money and debt assets. The US was in this phase from 1971 until 2008. It ends when interest rate changes cease to be effective.” — a-00061
“Interest-rate driven monetary policy (which I’ll call Monetary Policy 1) is the most effective because it has the broadest impact on the economy. When central banks reduce interest rates, they stimulate the economy by a) producing a positive wealth effect; b) making it easier to buy items on credit, raising demand—especially for interest-rate-sensitive items like durable goods and houses.” — a-00181
Why it ends: Zero lower bound. When rates hit 0%, further cuts produce no more stimulus. This forces the switch to MP2.
MP2: Quantitative Easing
Period: 2008–present
“Quantitative easing as it is now called (i.e., ‘printing money’ and buying financial assets, typically debt assets), is Monetary Policy 2. It works by affecting the behavior of investors/savers as opposed to borrowers/spenders, because it is driven by purchases of financial assets.” — a-00182
“In 2008 the debt crisis led to interest rates being lowered until they hit 0%, which led the three main reserve currency countries’ central banks to move from an interest-rate-driven monetary policy (MP1) to a printing-of-money-and-buying-financial-assets-driven monetary policy (MP2).” — a-00154
Key limitation: QE benefits flow to asset owners, not debtors/spenders. Widens wealth inequality while stimulating asset prices.
Why it ends (pushing on string): When CB asset purchases fail to stimulate spending, transmission is broken. Rates already near zero, QE portfolio already large, but real economy not responding. → Move to MP3.
MP3: Direct Fiscal-Monetary Fusion
“Monetary Policy 3 puts money more directly into the hands of spenders instead of investors/savers and incentivizes them to spend it. Because wealthy people have fewer incentives to spend the incremental money and credit they get than less wealthy people, when the wealth gap is large and the economy is weak, directing spending opportunities at less wealthy people is more productive.” — a-00183
MP3 mechanics:
- Fiscal deficit (government direct transfers to lower-wealth individuals)
- CB monetizes the deficit (buys government bonds)
- Net result: money flows directly to high-marginal-propensity-to-consume population
This is the 2020 COVID response: helicopter money, stimulus checks, CB buying Treasury bonds.
“This short-term debt cycle easing began in 2020 in response to the combination of a) a COVID-induced economic crisis, b) large wealth gaps, and c) political moves to the left.” — a-00113
Transition Sequence
MP0 → MP1: Gold/FX crisis forces fiat adoption (1971)
MP1 → MP2: ZLB forces QE (2008)
MP2 → MP3: Pushing on string + wealth gap forces direct transfers (2020)
Tension MP3 is more inflationary than MP2 because it directly increases spending (not just asset prices). The 2021-22 inflation surge was partly the result of MP3 during COVID.
MP1 Phase (Fiat/Interest-Rate-Driven): 1971–2008
“This fiat monetary policy phase both allows more flexibility and provides less assurance that money printing won’t be so large that it will devalue money and debt assets. The US was in this phase from 1971 until 2008. It ends when interest rate changes no longer work (e.g., interest rates hit 0%) and/or the private market demand for the debt being created falls short of the supply being sold.” — a-00234
MP1 ran from 1971 (end of Bretton Woods) to 2008 (ZLB): more flexible than MP0 (gold standard) but less credible. CB independence and inflation targeting provided a nominal anchor. MP1 ends at either ZLB (rates can’t go lower) or when private demand for new debt is insufficient — both conditions emerged simultaneously in 2008. — a-00234
MP2 Phase (QE/Debt Monetization): 2008–Present
“This type of monetary policy is implemented by the central bank using its ability to create money and credit to buy debt assets when interest rate changes no longer work.” — a-00235
MP2 began in the US in 2008 and spread globally: the CB prints money to purchase debt when interest rate tools are exhausted. The CB becomes a direct buyer of government debt, monetizing deficits. This is the phase where CB independence begins to erode in practice — fiscal dominance gradually replaces monetary dominance. The CB’s balance sheet expands and becomes a permanent feature rather than a temporary crisis tool. — a-00235