Monetarists Follow Milton Friedman to Grave

Caroline Baum answers that question with the following comment:
"What planet are these people on? "

Monetizing the debt and letting the printing presses run wild would see to be a very powerful tool.
What that tool will do is another question...

It won't do anything if nobody spends the money, and b) it's very different from being a pure "printing press," which would be to make deposits in commercial banks without monetarization. THAT always causes inflation.

This argument gets repeated way too often, it almost sound correct.

If you double the supply of dollars, debt denominated in this currency all things being equal.. it becomes less attractive. Right now, what is saving the u.s. dollar is the fact that the Euro is more screwed up than it is. We have a fiat currency and what provides the value of a dollar is its relative scarcity(if you could call it that) and the faith placed in it by the people that use it. If you double the base you half the scarcity.

Of course the big lie becomes the truth if you repeat it often enough...

the problem is that in the real world, all things are never equal. no demand, no inflation. businesses can raise prices in the face of declining demand but will discover that demand will be reduced even further. perhaps some isolated pockets of the luxury high end may appear to be somewhat immune but bottom line is that as long as demand remains shaky inflation cannot take hold.

Gold standard again, RS?

The problem with your dumb theory - besides that it's dumb - is that it doesn't work when there is a need to expand the money supply, or when there is a need to speed up velocity (or to slow it down). The result is that you suffer an endless cycle of booms and busts, as occurred in the 19th century.

But you will continue to believe as you will, despite the complete inadequacy of monetarism as an economic theory, and its failure when tested empirically.

steve likes to just state conclusions without any sound basis for them, and call other people dumb. Hence steve's bizarro world.

IYHO, which part is bizarro this time, LICC?

I didn't call him dumb. I called the theory dumb.

Expanding the money supply is easy, Contracting it is like putting the tooth paste back in the tube. Let's see Bernanke manage that feat!

"Contracting it is like putting the tooth paste back in the tube."

Actually, not at all. The monetarization is done through swaps, which mature. Just don't renew them, and TA-DA! Toothpaste back in the tube.

Not sure which swaps you are referring to , but Bernanke has talked about reverse repos as a way of sopping up the liquidity, which although interesting has the peculiar effect of leaving the entire credit risk Beranke took on staying on the Fed's balance sheet( as a taxpayer liability).

There's not that much of a difference between a swap and a repurchase agreement, except that in a swap the notional value is not transferred, just the benefits. A repo / reverse repo are just the mirror images of the same transaction; ditto swap and reverse swap.

There is some credit risk with repos though the Fed only buys top-rated paper. I would say, though, that you don't seem to understand these instruments, which may be why you're such as Austrian.

I'm familiar the Fed uses liquidity swaps with foreign gov't where they take dollars in exchange for foreign currency. I'm not a Fed watcher.

http://2.bp.blogspot.com/_pMscxxELHEg/S5AjIgcp6VI/AAAAAAAAHrM/GuiBxT6JMF0/s1600-h/FedBalanceMar42010.jpg

Backing of Fannie & Freddie debt ends in 2012. So anytime the Fed lends dollars in exchange for GSE debt with a maturity past 2012 they are potentially taking credit risk and if so doing something the Fed has never done, CREATE MONEY.

Of course they CREATE MONEY. That's the purpose. Why you think that it's better to create money by digging it out of the ground than using scrip is beyond me: it's primitive, inflexible, and nonsensical.

You - and monetarists in general - confuse money and wealth. Money is not wealth. Money is a means of exchange. Wealth is a store of value. Money has no intrinsic value, nor need it - just as a stock certificate has no intrinsic value in and of itself. In a sense, money itself is a derivative: it represents the value of an underlying thing, but it is not that value, nor that thing.

That's why you don't NECESSARILY get inflation when you do what the Fed is doing: monetarizing assets. All it's doing is creating a place to sell them. ALL BANKS CREATE MONEY: that is their purpose. In the olden days in the US - and still today in Scotland - every bank issued its own currency. Commercial banks make money by taking in deposits, leveraging them, and keeping on reserve only a portion of the amount of the loans they make. When they stop making loans, they stop "printing" money (and "making" money, too).

You NECESSARILY get inflation if the Central Bank merely credits commercial banks with money, without exchanging something of value for it. It's a credit transaction without a corresponding debit. All the Fed is doing is saying, "You're holding a bond worth x that you can't lend against - I'll give you money that you can lend in exchange for that bond."

That CAN cause inflation if not managed properly, but it doesn't have to. The only way you can understand this is to stop thinking that money itself has an intrinsic value. It doesn't, any more than a check you write has an intrinsic value beyond the cost of the ink and paper.

What is funny is that MOST economists, included MOST of those at the Fed and the big i-banks and investment funds are BOTH monetists AND Keynsians. This is how I learned it at undergrad and at b-school. BOTH frameworks are useful, and are not in any way mutually exclusive. Its those on this board who seem to think its like Mohamed versus Budha or something.

Of course they CREATE MONEY

um that's not how it is supposed to work. The Fed is only supposed to create credit. The treasury is the one with the printing press.

Uhm, no, Riversider. Banks are supposed to create money; the Fed is the Central Bank. That's all.

http://ecedweb.unomaha.edu/ve/library/hbcm.pdf

And that's what you don't know, and that's why your economic theories make no sense. You need to take Money and Banking, usually called Econ 103. The problem with the gold standard is that the only way to make money is to dig up up out of the ground.

And jason is correct - as I said above and elsewhere, monetarism (supply-side) is useful for understanding certain situations, but it's not a comprehensive theory of economics. Neither is labor economics or public finance. Most of Friedman's work fits nicely into Keynesian economics, sort of like a snap-on model of what happens at the extremes. A lot of the work, however, such as inflation as a purely monetary phenomenon (Schiff, for instance, is famous for spouting this melarky), is just plain dumb.