The American Spectator : The Spectacle Blog : As for Printing Money...

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In Bloomberg View, National Review's Ramesh Ponnuru tries to make an approachable argument for the claim that the Federal Reserve's actions in the recession have left money too tight, not too loose:

We don't have loose money, and we haven't during our entire economic slump. A big reason that slump has been so deep and long is that the Fed is keeping money tight: It's not letting the money supply increase enough to keep current-dollar spending growing at its historical rate.

That view sounds crazy to a lot of people. They look at low interest rates, soaring commodities prices and an expanded money supply, and assume that these are clear indications of easy money. And sometimes these conditions do reflect monetary ease.

But not always. The late great Milton Friedman looked at Japan's lost decade and grasped that its low interest rates were, counterintuitively, a sign of tight money: The Bank of Japan had choked the life out of the economy by keeping the money supply too low, and that's what kept interest rates down.

Short-term moves in commodity prices are not reliable evidence of inflation, either. Otherwise we would have to conclude that we have loose money any time Asian consumption of precious metals increases, or there's a disruption of the oil markets.

As for the money supply, its increase signifies looseness only if the demand for money balances stays constant. If the supply rises but demand rises even faster, then the central bank has, perhaps inadvertently, allowed money to tighten.

Ponnuru then goes on to suggest that the Fed should loosen monetary conditions by any means necessary, including printing money, to boost nominal spending.

Ponnuru, and Friedman by extension, may very well be wrong about what the Fed should do in a downturn like the one the U.S. is facing. But it's hard to construe this as a heretical or even a liberal perspective.

View all comments (15) | Leave a comment

fwb| 8.16.11 @ 3:31PM

Sorry but in the United States, one cannot print money as the power to do so was never granted. And the power to print was emphatically restricted against the States. Printing of bills of credit is what the fed does. The paper that the federal reserve issues is not money regarless of what it is called (ignorance is bliss) but is a type of IOU. It matters not whether the people or the government prefer bills of credit. They are illegal and unconstitutional.

The federal government may coin money, no more no less. AND those coins must be either silver or gold.

So we are required constitutionally to have only gold and silver coins because states, which retained the sole authority of determining what is and isn't legal tender are restricted to gold and silver coins. No plastic. No paper. Nothing else.

There is truth and there are lies.

Solo| 8.16.11 @ 5:31PM

Nonsense!

The constitution grants to the Congress to power to "coin" money. In this context, "coin" is a verb not a noun. It describes an action, not an object.

And...please show me in the Constitution where it says that this action requires "gold or silver". It isn't there. Like it or not.

Besides...the Supreme Court has already adjudicated this issue...several times.

Actually...the revolutionary war was funded with fiat currency. As were many successive wars. It seems the guys who wrote the Constitution didn't share your "interpretation".

Additionally....if what you claim were true, then how does Congress get the power to produce copper coins? Hell.....they even used postage stamps as currency and, for a short time, used postage stamps framed by copper coins as currency.

Script (or "fiat" currency) has been in use from the very beginning of our republic.
I guess the founders were "NeoCons", too, huh?

LOL!

Purple Lips| 8.16.11 @ 3:32PM

"Short-term moves in commodity prices are not reliable evidence of inflation, either. Otherwise we would have to conclude that we have loose money any time Asian consumption of precious metals increases, or there's a disruption of the oil markets"

Short term? Gold has nearly tripled in price in 4 years. Does 4 years make a trend? How about the trend of the M1 supply (it's close to the same level as 2008). As a matter of fact it is far higher than the period 2001-2007. I like Ramesh, but he tried too hard to get attention.

Ramesh would be closer to the truth if he stated there is a credit crunch, not a supply shortage. The federal government consumes huge amounts of future credit when it borrows at these insane levels.

Marc Jeric| 8.16.11 @ 3:57PM

There are curable addictions, such as cocaine, heroin, marijuana, hashish, etc. There is however one addiction that has been proven incurable in the 3,000 years of known history - and that is the money printing machine addiction.

Teflon93| 8.16.11 @ 4:21PM

Look at this St Louis Fed graph:

http://research.stlouisfed.org.....RES?rid=19

That's $1.6 T of money tied up in the banking system, mainly at federal government demand but also because bankers are afraid to spend it or lend it.

There's an estimated $2 T further tied up in the Fortune 500's reserves for similar reasons.

That's where the money is. Printing money is only going to make hyperinflation worse once this money is released.

axbucxdu| 8.16.11 @ 9:55PM

Here's a thought. What will stop the money center banks (the one's in Obammy's hip pocket) from releasing that cash just in time to get The One reelected in Nov 2012? Nothing. In fact he and his party can time that release with precision to optimize his chances and increase the drama, just like during Slick's first campaign.

The story will go something like this: Poor Down and Out Obammy against all odds and armed only with his steely belief in governmentus maximus, returns triumphant to vanquish the Great Recession(of course all the while using Helicopter Ben's Free Money). Repugs better figure out fast that they're being played.

I was out driving around today running errands, and there were noticeably more construction vehicles on the road compared to just two months ago. I know it's only anecdotal. But since Obama got the increased debt limit for them, wouldn't it be prudent for primary dealers GS and JPM to return the favor by getting the party rolling? If so, the Repubs are toast.

Jeff| 8.16.11 @ 5:21PM

if money was tight interest rates would rise ... the Fed has already increased the money supply so in no real world scenario can it be called tight ...

trying to measure tight vs loose using interest rates is a fools game with the Fed controlling interest rates ... they are not a measure of money supply when the Fed has basically pegged rates at near zero ...

Solo| 8.16.11 @ 5:40PM

The reason is that the economy is frozen in its tracks. There is no shortage of capital. There are Trillions sitting in corporate coffers.
What we lack is "demand" for money (despite the QE) and this is what is keeping inflation low and the economy stuck in neutral.
We're actually sitting on the precipice of De-flation and the printing of money is a reaction to that fear....as are the low interest rates.

Should the demand for money suddenly go up, the FED will have to be very quick to draw back the excess money supply or we will then have run-away inflation.

Teflon93| 8.16.11 @ 7:06PM

You are absolutely correct, sir! I worry about hyperinflation more than deflation because as we've seen with the rush to clear foreclosed homes out of the mortgage system when the levee breaks the deluge will be impressive.

Contra the original post if money's tight interest rates tend to fall, which is the theory Bernanke's applying. Reducing interest rates makes borrowing more attractive which in turn increases money in circulation without the impact printing more has on the currency.

Bernanke claims he has a plan---but so did the creators of LOST.

Prof| 8.16.11 @ 6:32PM

As Solo says, it is not the money supply per se that is the problem. It is the velocity of the money, and currently it is exceptionally low. When money moves there is a multiplier effect to the money supply. If money does is not moving, the multiplier is low. Ponnuru is only technically right. In order to move the economy solely by increasing the money supply we would have to increase money supply by a factor to 10!
The reason velocity is low is fear, not uncertainty. In fact we are fairly certain that tax rates will go up, that Obamacare will kill businesses, that the EPA will kill businesses, that mileage requirements on large trucks will kill businesses, in fact almost every action taken by this administration will kill businesses. Even with the cost of borrowing at zero there is no incentive to take risks. After all, unlike the government, businesses have to actually repay the money that they borrow. (Unless they are banks)

Teflon93| 8.16.11 @ 7:11PM

This is right on too. "Uncertainty" is uncertainty relative to how and where the axe will fall, not that it will fall. There is no safe investment right now, commodites like precious metals perhaps being safest of the unsafe.

Think about it---do you invest in real estate? In manufacturing? In healthcare? In government? Not so long as there's a default mortgage crisis, low consumer demand, ObamaCare, and the looming threat of default you don't. Foreign investment is no sure thing either given the crisis is global.

So you sit on it---drawing nothing thanks to all of this currency manipulation and hoping to God it isn't eaten by inflation before you can put it somewhere to work.

If Democrats are to believed it isn't even safe in our 401ks for long....

axbucxdu| 8.16.11 @ 7:53PM

While I agree with much of what you wrote, I have to disagree with your point about velocity. Paraphrasing, I would say that it isn't the velocity of the money supply per se that is the problem, but the extremely tight loop within which that money stock circulates.

The money flow during this crisis doesn't look that much different from the way it circulated during the RTC troubles back in the late 80's to early 90's. As a shareholder in a de nova community bank, I witnessed first hand as the Fed effectively forced RTC bonds onto a balance sheet that was otherwise financially sound.

They were able to do so by perverting capital requirements. The Fed's tier capital credits for holding those RTC assets were generous compared to the discounts it took for the bonds that were also on our books as a result of what our bank normally did: i.e., lend money to individuals and small businesses in the local community.

In effect, the private circulation of money was commandeered by the Federales and pressed into service to amortise RTC debt.

The same is now true: banks go to the discount window, borrow at zero interest, and then loan it back to a single customer (guess who?) at positive interest. Until the debt ceiling fiasco of the past few weeks this amounted to a license to collect free money, courtesy of that same private sector that was enslaved back in the 90's.

Despite whatever illegal strong arming or extortion is used to achieve this advantage, when the Federal government is presented to a bank as a better bet for profitable lending, that's where they will loan the cash, pure and simple.

Given this tight money cycle, the resulting low growth that we're witnessing is also demonstrable evidence beyond any doubt of the absolute stupidity of the Keynesians. They're stealing $1.6T more from private circulation than they confiscate directly through taxation and they have nothing, absolutely nothing to show for it.

Had that cash been permitted to flow through private hands we would have been out of this mess a long time ago.

But it's Uncle Sam that's grabbin' up the whole scene, baby! (Courtesy of Sylvester from It's A Mad, Mad, Mad, Mad World ;)

Dai Alanye| 8.16.11 @ 10:14PM

If interest rates were reasonably high, wouldn't potential lenders be eager to loan money out, thereby making a good profit? But if rates are too low, what's the advantage to taking a risk?

We ought also remember that quite a few people depend on interest payments for income, myself among them. I don't want my bonds to have a low payoff, nor the low resale value that goes along with it.

In short, the Fed's strategy of loose money combined with artificially low interest rates is probably counter-productive to economic growth.

axbucxdu| 8.16.11 @ 10:24PM

Bingo. Hence they run home to Mama Fed's discount window and invest the fresh digital bits in T-Bills. Something is better than nothing, particularly when one is able to borrow interest free.

Ross Kaminsky| 8.16.11 @ 10:22PM

The velocity of money is low because there is no demand for credit and no business expansion. The measures of money supply are highly misleading if most of that money ends up stuck in bank reserves.

By the way, what sense does it make for the Fed to lower short-term rates to zero but still pay banks 0.25% on reserves they hold at the Fed.

Sounds insane to me.