The Fed and pumping money into the economy

by cactus

We all know the Fed has been pumping money galore into the economy lately. It makes sense, after all – the economy sucks right now and will for the foreseeable near future. Even if the NBER concludes in a few months that the Great Recession ended in the first half of the year, we aren’t about to see a booming economy in the near future.

Another reason for the Fed to pump money into the system is the CPI – right now, deflation seems to be a bit more of a risk than inflation.

There’s also one very bad reason for the Fed to keep shoveling money out of the helicopter door: the mistaken but widely held belief that the system is suffering from a lack of liquidity. (The lack of liquidity belief is clearly false – as it happens – as Dean Baker has noted a zillion times, that lousy business models can’t get funding any more speaks to the demise of a particular widespread delusion rather than a lack of liquidity).

But here’s the problem. As is often the case, what we all know is false. Wrong. Bull$#%&. The Fed has not been pumping money into the economy lately, at least if you define lately as being “since December” and going through May, the last date for which data is publicly available in FRED, the Federal Reserve Economic Database maintained by the St. Louis Fed. Check out the following graph from FRED, which shows M1, the narrowest of the monetary aggregates, and the one most perfectly controlled by the Fed:

Regardless, the peak in the graph came in December. Its not unusual for the Fed to prime the pump in December – that’s the Christmas shopping season, after all… but the timing seems awful this year, what with the fact that the Fed only seemed to realize the economy was in major doo-doo toward the end of last year.

So during one of the lowest points for the US economy in decades, only the North Korean counterfeiting machine was doing anything to keep the money supply loose. I don’t have a copy of Bernanke’s textbook handy, but I’m pretty sure I’d remember if “let Kim Jong Il handle it” was the recommended prescription for dealing with a recession. It makes me wonder what other stupidity surprises Bernanke has in mind.
by cactus