This just in: the Republican Party is set to rip into President Bush for embracing "socialism."
What a model of political courage this is, sticking it to the least popular president in American history with only three weeks left to go in his failed presidency. What clowns the RNC people are. Who can possibly take them seriously? As a GOP friend who has given and raised a lot of money for the RNC and its candidates in the recent past e-mails:
Where were all these people in 2001-2005, when Bush was spending all the money on Iraq, Medicare drug benefits, etc, no call for sacrifice from the American people, and zero vetos of any bills at all, much less spending bills? It's too late now - we're in crisis and the rock solid Republican austerity line is 8 years too late and will not get us out of this mess. Talk about screaming about the horse 8 years after it left the barn.
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Re: The hardest thing for the public to grasp is that money is created when it is borrowed
Since the Federal government is borrowing money, is that not inflating M in and of itself? Also, I'm not sure there's a shortage of solvent borrowers. Most businesses are not GM, and most individuals are not bankrupt. Rather, there is a shortage of people who want to borrow, especially of businesses wth any plans for expansion.
John,
I was referring to the current expansion of the base money supply and the upcoming fiscal stimulus plan in my first post, not to the 'bailout' which I mentioned in my second post. That's a separate issue.
I don't deny there is a huge insolvency problem; the idea is to prevent a significant overshoot of the trendline to the downside in the current financial panic. There are a lot of solvent and creditworthy borrowers who are not getting the credit they need to continue operating in the real economy. It's prevention of this collateral damage that I have in mind.
We need recapitalization and price discovery. I'm not in favor of papering over anything, just an orderly unwind instead of a needlessly destructive panic.
And I agree with what you say re: stimulation and balanced trade. If the other major economies do not coordinate their stimulus programs with ours, we'll be looking at a trade war via competitive currency devaluations and punitive tariffs.
Your Name: Since the Federal government is borrowing money, is that not inflating M in and of itself?
If the Federal Government borrows money from the Federal Reserve via debt monetization, then YES. If panicked private investors take their money out of the stock market, for example, and purchase government securities, then NO.
Rather, there is a shortage of people who want to borrow, especially of businesses wth any plans for expansion.
Overcapacity and overexpansion are huge problems. I agree with you there. Actually, US corporations in the aggregate have not been expanding capacity for years. They've been using easy credit to play financial games such as stock buybacks. People should have been disgusted long before the events of 2008.
Pyrrho, I'm not disagreeing that something needs to be done; the hands off approach will lead to collapse. The problem for the bankers is that they can't know which businesses will be solvent next year; they are going over acct's receivable with a fine tooth comb because they have doubts that the receivables will actually be received. The expanding monetary base has not, as far as I can tell, had the effects that a simplistic reading of the quantity theory would predict. We should be seeing lots of inflation, no? But we are not. This is the question Jon asked.
It may be that I misunderstand the quantity theory, but I think it leaves out two important issues: distribution of M and the effect of a change in M on Q. If they print up a trillion dollars and give it to me (God-willing), it will have little effect on inflation, because I couldn't spend that much fast enough (my V would be too low). If the trillion is given to speculators, it will have a low effect on inflation, because only a small portion will circulate throughout the wider economy. But if they distribute the trillion to everybody, it should have an effect on inflation. However, it will also raise expectations of producers to increase Q and make more capital available to accomplish that increase. (As an aside, the quantity theory tends to overlook the effect of real shortages as a cause of inflation, and treat it solely as a monetary phenomenon. But if there is a real shortage of some basic commodity, say oil or labor, there will be real inflation. I could be wrong about this, but every discussion I read seems to be purely monetary.)
The gold bugs interpret the theory in a very naive way, imo. But even more standard interpretations miss some things. And right now, we need a clear understanding. My fear is that Obama's team, though super-competent, all seem to be from the financial sector, the sector with the least understanding of the problem. I hope that I am wrong. Tell me that I am wrong.
John,
I'm about to take my six year old out to pet some llamas, but it seems you understand the situtation correctly. The base money supply has been expanded, the money is finding its way into the banks, and the banks are sitting on it. The velocity ain't there for the reasons you mention. PQ is falling. Thus, the gubmint has to step in as spender of last resort in block grants to state and local goverments, on infrastructure improvements, etc. I'm not saying this is going to lead to a recovery; it will only keep aggregate demand propped up to some extent. We're in for a world of hurt.
The banks are dead in the water for the reasons you cite; we have to work around them. Economists like Krugman think the key banks should be semi-nationalized to force the panicked banks to lend to creditworthy borrowers, like they did in Sweden in the early 1990s. I wouldn't be surprised to see something like this happen next year in the US.
You're right, too, about the gold bugs naivete re: QTM.
OK, off to pet the llamas.
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