Phil Gramm: I told you so!

I'm sure I fully agree with you on this.

Not long ago, I had a real doozy of an argument about the Great Depression and its causes. One of the more intriguing aspects was the money supply itself. Back then, hard currency was pegged to gold. If the government wanted more currency, gold was to be obtained to back it. There was a finite and physical amount of hard asset vs paper representation. But the economy grew way faster due to credit and the circulation of what I call "fiat" money, than did the money supply. When the credit evaporated, the money supply did not reflect the true size of the economy and deflation occurred.

We've recently seen a large evaporation of credit used as money, but with no commensurate downsizeing of the economy.

Is the Fed printing money? perhaps. But the increase in the paper or hard currency is all but necessary to make up for the lack of fiat money that was in use due to widely extended credit. If too much is printed, we'll see dollar devaluation and inflation. If not enough, we'll see a depression era type deflation and an implosive credit crunch as the pool of money (both real and fiat) dries up.

I'm old school, in that I think that "printing money" is a dangerous thing, very easily inflationary, but in view of the sudden and very sizeable decrease in credit availability, it seems necessary to prevent a deflationary period which would result in a depression that made the 30's look like a walk in the park.

One of the few times I have agreed with Phil Gramm, I would say the GDP growth is also due to exports. But the majority appears to be exports of
grain/agricultural products. Good for farmers, not that good for the rest of us. Real income is down from the year 2000, most people are worse off,
especially now with the housing collapse. I think Watcher is right in the past tense, in the sense that they were printing more money to cover the credit expansion, but not now, there is no reason to.

I still can't understand why the dollar is suddenly getting stronger, unless they're reducing the supply. Right before the U.S. presidential election.

Countries are heavily buying U.S. T-bills, driving the yield down, makes me think there are not good alternatives perceived by the world market. As in, something is impending. Hope I'm wrong.

Watcher
I'm old school, in that I think that "printing money" is a dangerous thing, very easily inflationary, but in view of the sudden and very sizeable decrease in credit availability, it seems necessary to prevent a deflationary period which would result in a depression that made the 30's look like a walk in the park.

You're right, that's why the Fed uses multiple measures of the 'money supply'. The first one is just all printed money, whereas all the others count money multiple times...like when it's 'in the bank' but also loaned out to people. (I put 10 in the bank, you borrow 8, there's '18 dollars' floating around somewhere, despite the fact that only 10 exist. Or at least, economically, we operate as if there are 18.)

There are like four different measures, including stuff like money in stocks. And, indeed, all the other money supplies have shrunk as loans have vanished, so printing more isn't completely irrational.

And, at the end of the day, the economy and the money supply are the same size. If the economy doesn't fit inside the money supply, it shrinks. And if it the money supply is bigger, we get inflation which 'corrects' the money supply back down. (You may want to read 'economy' as 'amount of money we need to live'. It's not the economy per se.)

This, incidentally, means all the people who think 'stopping inflation' is a useful goal of anyone are fools. We want as little inflation as possible, but if we want the economy to get bigger (We must make the pie bigger!), we must have the money supply at least a little larger than the amount of money we actually need, which is going to cause some inflation.

OTOH, when we're not having growth (and we're really not having much, despite this article), we need to cut back on the extra money so we don't have too much. Luckily, the 'loaned out' money supply is somewhat self-correcting in this regard...less people get loans when times are bad, so there actually is less money floating around.