The One Sentence Everyone Needs to Read and Understand
The Fed has talked openly about new procedures to soak up the bank reserves it has created even as those reserves remain largely idle and unlent.
You don’t get inflation if there is no money multiplier in play. So long as the banks are just holding the cash, worries about monetary policy leading to inflation are at best a shibboleth.
(via Brad DeLong)
The St. Louis Fed’s M1/money base multilplier is at 0.852 in its mid-January reading, just over half the normal rate of around 1.6. The trend in the multiplier from July to December was down.
Of course the administration is screamiing at banks to start lending again. So what do they want?
warprofiteers=warmongers
The issue that faces the Fed is responding when the money multiplier rises. Since the Fed has injected a great deal of cash into the system, a moderate rise in the multiplier can have a pretty large impact. That would mean the Fed might have to react fairly quickly. The realization that there is no need to hike now, but that hikes, when they come, may have to be substantial, is evident in much of what we hear from Fed officials lately. The distiction between now and some later date when conditions have changed is often missed.
Now, the multiplier is just an abstraction. What we are really talking about is increasing the speed at which base money circulates, which means how fast it is lent out. Bank credit growth isn’t all that good now. Any ideas on reliable leading indicators of the near-term direction of bank lending? Indicators which would work in extreme situations like this one?
What bothers me the most is the apparrent internal inconsistency of many of the high inflation forecast.
Monetary policy works through nominal GDP and if policy creates too much nominal GDP much of it can be inflationary.
But so many of the people forecsting high inflation are also forecasting that the economy will barely grow over the next few years. Sorry, while such forecast are possible they are so improbable as to be useless.
If you want to forecast that all the Fed policy moves over the last couple of years will generate soaring nominal and real growth over the next few years that will end up with high inflation I could take you seriously. But not a forecast of economic stagnation, massive excess capacity and idle resources and high inflation. It does not compute.
But, but, but…..Cantab says we’re not in a liquidity trap!
Regarding “Money Multipliers” check this out
The Myth of the Money Multiplier http://bilbo.economicoutlook.net/blog/?p=1623
The real problem with the monetarists view of inflation is they listened to Milton Friedman when he said ” Inflation is always and everywhere a monetary problem”. To them its a simple matter of raising the stock of money, devaluing it and making everything more expensive. The problem with that view is that its hogwash, especially with our floating exchange rate currency regime we operate in now.
Here’s the equation all the good little monetarists are taught in school MxV= PxY where M is money V is velocity P is prices and Y is employment. The theory (used very loosely here) is that increasing M will always increase P because V and Y can be assumed to be constant.
Now what universe must you live in for the velocity of money (how eagerly you wish to get rid of it) and employment to remain constant? NOT THIS ONE!!
Inflation is such a complex problem that does not lend itself to overly simple mathematical formulas. This is the main problem with mainstream economic teaching, its overly simplistic and assumes too many things no one has a right to assume.
In most every recent incidence of true inflation (not every time a price rises is it inflation) the seminal event was a supply shock in a a crucial commodity. Oil in the USA during the 70s, mining operations in Weimar Germany in the 20s and severe loss of agricultural production in Zimbabwe most recently. The money printing (in Germany and ZImbabwe) came as a RESPONSE to the supply shock and price rise. Yes the money printing did not help but it was NOT causative.
If you think about it,one can have inflation/hyperinflation (extreme demand for a critical good)even in an economy without money.
In fact, we are discussing the very issue which led Friedman to give up the notion of simple monetary rules. A simply monetary rule depends on a stable velocity of money, which is to say, a stable multiplier. When velocity began to accelerate late in Friedman’s career, he was honest enough to admit it made a hash of simple monetary rules. That, in itself, doesn’t debunk the notion that inflation is a monetary phenomenon, of course.
“That, in itself, doesn’t debunk the notion that inflation is a monetary phenomenon, of course.”
Ummm I’m not so sure about that kharris. If you are saying that only in an economy with money can you have inflation I would disagree. If you are saying that inflation is reflected in money I would agree but that doesnt make it a monetary phenomena. It is first and foremost a scarcity phenomena. Scarcity of something valued by all which makes the demand out of proportion to the average ability to make a claim for it.
I’ve always been intrigued by the mainstream notion (which I believe Friedman said…. but maybe not) that money is a “neutral veil” over the economy. Yet this neutral veil has the ability to cause inflation? Doesnt sound neutral to me.
hi?