Monday, January 10, 2011

Billy Today

In today's Billy Blog we have Bill quoting Elizabeth A. Duke of the Federal Reserve:

Moreover, the linkage between the level of reserve balances and the monetary aggregates in the current environment is quite weak. You were probably taught, as I was, that the broad monetary aggregates increase when reserve balances increase because the larger volume of reserves supports increased lending...

Support comes from below. If reserves support increased lending, that means lending is able to increase. It does not mean lending will increase. You can't push on a string, as the saying goes.

While that argument might hold in normal circumstances, in the current environment excess reserves are many multiples of required reserves, and adding reserves is unlikely to spark a further increase in the volume of deposits.

You can't push on a string.

Billy says, "That argument never holds in a fiat monetary system." I don't know if I'm ready to buy that. But the argument certainly isn't holding at present.

Billy says, "She is correct in saying the money stock aggregates (M1 and M2) are driven by demand for credit which reflects the 'strength of the economy.'" I can buy that.

Billy writes too much. I've read enough. I'm not sure where he takes this post. But I can guess. I think Billy would say we need to increase government spending in order to improve the strength of the economy. I think that's the wrong focus. The problem is not that there is too little government spending.

The problem is that there is too much private-sector debt. The right focus is to call for reduction of private-sector debt. If that means in fact that we need more government spending, so be it. But don't call for more government spending. We have increased government spending since 1974 without solving the problem, because increased government spending only enables private-sector debt to grow even faster.

Call for the reduction of private-sector debt.
Call for accelerated repayment of private-sector debt.
Call for the Fed to print money and use it to pay off private debt.
Call for the Fed to simply cancel the MBS it owns today.
Call for forgiveness.
Take your pick. But don't call for more government spending.

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