Some people around the web are suggesting that the desperate times call for desperate measures and say that US should just print money to save the banks — risk of hyperinflation be damned. What exactly do they think we have been doing ?
For example Reader .A.M writes to the incredibly smart Matthew Yglesias
“We should recapitalize the banks with printed money.”
A.M. ends with a note of concern
Would this work or would it immediately cause a Weimar-republic-style hyperinflation? I ask you because you:
– like to think about these types of things
– are willing to consider crazy ideas just for the sake of argument
– have the power to get the attention of actual blogging economists.
Crazy proposal ? Wild far out idea ? What exactly do you think Bernake’s been doing ?
Accounting after the jump.
I’d say that except for the sensible proposal to
nationalize pre privatize, your correspondent is describing current US policy.
It’s just that it’s done in two steps.
1) Treasury bails out the banks with money obtained by selling Treasury bills notes and bonds.
2) the Fed buys these bonds with magic money created out of nothing.
The Fed obligations used to buy Treasury securities in open market operations aren’t actually printed. They exist mostly in computer memories. However, they are high powered money. Really just like million dollar bills as far as anyone knows ,in any case assumed by economists to be just like cash and freely exchangeable for cash at will. You will notice the money say “Federal Reserve Note” in big letters above The United States of America. It means that the bill amounts to the Fed owing you … something somehow (it used to mean they owed you gold).
So we have been printing money like crazy, faster than a speeding printing press actually.
The amount of money that has been printed is, for serious purposes, total liabilities of the Federal Reserve, which are equal to total assets of the Federal Reserve.
As of February 26 these were 1,952,216 million dollars, that is about 2 trillion. Of total assets, the Fed has 11,041 million in gold. It is possible that some of the Fed’s foreign currency holdings are old convertible (for all I know some country is still on the gold standard). Rather less than the over 68 billion in “mortgage backed seccurities” or the over 38 billion in “Credit Extended to American International Group Inc” (that is in addition to money put in by the Treasury).
In contrast on Feb 15 2007 total assets (and liabilities) were
890,690 million so in the past 2 years the Fed has electronically printed up 1 trillion 260 odd billion dollars more than doubling the high powered dollar supply. You can pick your own data here http://www.federalreserve.gov/releases/h41/ .
That hasn’t been enough to cause a hyperinflation or rejection of dollar denominated assets. It hasn’t been enough to keep interest rates on Treasury securities consistently above zero or make sure that we have any inflation at all.
I’m not sure there has been a larger expansion in money supply in world history (in real value). I’m pretty sure that, without wanting to, the Fed has obtained more seignorage that the German central bank ever obtained during the hyperinflation (oh hell or in it’s history).