Sunday, November 8, 2009

Easy Money Confusion

In my view, the latest to contribute to the confusion over easy money is Jerry O'Driscoll. Over at Think Markets, he writes:
The Fed is promising near-zero overnight interest rates out as far as the eye can see. The effects of the easy money have not yet manifested themselves in US consumer prices.
This near zero interest rate policy is not however contributing to a growth in money supply. For all practical purposes, over the last six months there has been no growth in money supply (M2). Excess reserves (not in the economy bidding up goods) now stands at a near trillion dollars, as of October 1st. $994.734 billion to be exact.

It should be noted that as recently as August of 2008, excess reserves were only $1.9billion. The complete "easy money" view simply fails to take into consideration that the money being created is simply being stockpiled at the Fed and is not entering the economy at large in any fashion. May gold coins saves us, if those balances do start entering the system, but they are not now and it simply appears to be confusion to think they somehow are, and that this is therefore an easy money period. From my view it is not.


  1. It reminds me of a WWII defensive firemine. An unremarkable barrel with a remarkable load of fuel sitting quietly in the ground, waiting for an enemy to attack. Flick a switch, and the unsuspecting attackers are forcibly cremated right on their feet. in this case that would be a last line of defense against stubborn politicians or unruly sheeple.

  2. Could you explain this in more detail. I understand how the Fed is funding the banks' excess reserves and paying them interest, but I thought that Austrians in general think that a low rate gives a false signal to producers to invest in projects that savings can't support, but I think that they do state that a an interest rate below the market clearing level does increase the money supply. Correct?

  3. Good question. Which means the real interest rate must be very low, otherwise banks wouldn't be sitting around taking the low rate from the Fed. They would ne loaning it out!