September 13, 2010
Bernanke's Choice
The Hyper-Inflation Mirage
By MIKE WHITNEY
The Fed can create as much money as it likes without any risk of inflation provided the money is tucked away where no one can spend it. And this, in fact, is what the Fed has done. They have exchanged $1.7 trillion in reserves for non performing loans and mortgage-backed securities with the banks. But the banks loan book continues to shrink. In other words, the Fed has increased the money supply, but in real terms, the money supply has shrunk. Thus, the Fed's so called quantitative easing (QE) program has failed to stimulate spending or lead to a credit expansion. Had the Fed chosen to take the $1.7 trillion and bury it in a hole on the White House lawn, the effect would have been exactly the same.
The reason the government increases the money supply during a recession is to reduce unemployment, stabilize prices and increase economic activity by stimulating demand. And, increasing demand should be fairly easy. It merely requires that consumers have enough liquid reserves (cash) that they feel comfortable spending at levels that will grow the economy. Naturally, full employment helps to increase spending and, thus, strengthens demand. The government can help to speed the process along through targeted fiscal interventions. (aka--stimulus)
At present, demand is weak because working people lost $8 trillion in equity when the housing bubble burst. They also lost another $2 trillion in retirement funds from the correction in equities. That means, it will take a long time before they recover and are able to spend as they did before the crisis. Fortunately, the government is not limited in the same way as everyone else. Consumers cannot print their own money, but a sovereign government (that pays its debts in its own currency) can. The government can print as much money as it likes; it is not capital constrained. And, the government should exercise that privilege when there is a compelling reason to do so, such as, when when the output gap is wide, unemployment is soaring, the economy is sputtering, and the risks of deflation are high.
But increasing government spending also increases the deficits, which creates an opportunity to scare people about future obligations. But deficit scaremongering is politics not economics. What really adds to the deficits are the governments fixed costs (that go up during a recession) and the shortfall in revenues which dwindle because people pay less in taxes. Stimulus is just a small part of the deficits. So, the best way to reduce the deficits is to increase employment, restore consumer spending to prior levels, and grow the economy.
Read the full article at:
http://www.counterpunch.org/whitney09132010.html
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