  We consider the relationship between economic activity and intervention,
including monetary and fiscal policy, using a universal dynamic framework.
Central bank policies are designed for growth without excess inflation.
However, unemployment, investment, consumption, and inflation are interlinked.
Understanding dynamics is crucial to assessing the effects of policy,
especially in the aftermath of the financial crisis. Here we lay out a program
of research into monetary and economic dynamics and preliminary steps toward
its execution. We use principles of response theory to derive implications for
policy. We find that the current approach, which considers the overall money
supply, is insufficient to regulate economic growth. While it can achieve some
degree of control, optimizing growth also requires a fiscal policy balancing
monetary injection between two dominant loop flows, the consumption and wages
loop, and investment and returns loop. The balance arises from a composite of
government tax, entitlement, subsidy policies, corporate policies, as well as
monetary policy. We show empirically that a transition occurred in 1980 between
two regimes--an oversupply to the consumption and wages loop, to an oversupply
of the investment and returns loop. The imbalance is manifest in savings and
borrowing by consumers and investors, and in inflation. The latter increased
until 1980, and decreased subsequently, resulting in a zero rate largely
unrelated to the financial crisis. Three recessions and the financial crisis
are part of this dynamic. Optimizing growth now requires shifting the balance.
Our analysis supports advocates of greater income and / or government support
for the poor who use a larger fraction of income for consumption. This promotes
investment due to growth in demand. Otherwise, investment opportunities are
limited, capital remains uninvested, and does not contribute to growth.
