Saturday, January 10, 2009

Bernanke's Monetary Reserve Problem

The Fed will add even more monetary reserves into the system then they normally would based on this new development. The money multiplier has collapsed.The M1 money multiplier just slipped below 1. So each $1 increase in reserves (monetary base) results in the money supply increasing by only $0.95 (In 2000, it was above $1.80):

The fear in the system is astounding. At some point, it will subside and banks will put these reserves to work. When that happens, Bernanke's plan has to be to withdraw reserves from the system, so that a true volcanic monetary eruption does not occur. His ability to get this right is probably slim to none. If he leaves too many reserves in the system, inflation will go out of control. A dramatic reversal of money reserves on the other hand will crash the economy. It's not a pretty picture. The likelihood is that he will err on the inflationary side.

(Via Bill Seyfried through Greg Mankiw)

1 comment:

  1. Sorry, Chairman Ben S. Bernanke, But Quantitative Easing Won't Work.

    In a Liquidity Trap although Saving (S) is abnormally high investment (I) is next to 0.

    Hence, the Keynesian paradigm I = S is not verified.

    The purpose of Quantitative Easing being to lower the yield on long-term savings and increase liquidity it doesn't create $1 of investment.

    In a Liquidity Trap the last thing the Market needs is liquidity.

    Quantitative Easing does diminish the yield on long-term US Treasury debt but lowers marginally, if at all, the asked yield on long-term savings.

    Those purchases maintain the demand for long-term asset in an unstable equilibrium.

    When this desequilibrium resolves the Market turns chaotic.

    This and other issues are explored in my tract:

    A Specific Application of Employment, Interest and Money
    Plea for a New World Economic Order


    This tract makes a critical analysis of credit based, free market economy, Capitalism, and proves that its dysfunctions are the result of the existence of credit.

    It shows that income / wealth disparity, cause and consequence of credit and of the level of long-term interest-rates, is the first order hidden variable, possibly the only one, of economic development.

    It solves most of the puzzles of macro economy: among which Unemployment, Business Cycles, Under Development, Trade Deficits, International Division of Labour, Stagflation, Greenspan Conundrum, Deflation and Keynes' Liquidity Trap...

    It shows that no fiscal or monetary policy, including the barbaric Quantitative Easing will get us out of depression.

    A Credit Free, Free Market Economy will correct all of those dysfunctions.

    The alternative would be, on the long run, to wait for the physical destruction (through war or rust) of most of our productive assets. It will be at a cost none of us can afford to pay.

    In This Age of Turbulence People Want an Exit Strategy Out of Credit,

    An Adventure in a New World Economic Order.

    We Shall Hence Abolish Interest Bearing Credit and Cancel All Interest Bearing Debt.

    A Specific Application of Employment, Interest and Money [For Economists].

    Press release of my open letter to Chairman Ben S. Bernanke:

    Sorry, Chairman Ben S. Bernanke, But Quantitative Easing Won't Work.

    Yours Sincerely,

    Shalom P. Hamou AKA 'MC Shalom'
    Chief Economist - Master Conductor
    1776 - Annuit Cœptis.