Tuesday, January 11, 2011

L. Randall Wray Spots Some Wingnuts (Including Me)

There is a big pow wow in the Rocky Mountains. The Allied Social Science Association is having its annual meeting this week in Denver. Economic textbook king, Greg Mankiw, is there. Also in attendance is L. Randall Wray, who is Professor of Economics at the University of Missouri-Kansas City, Research Director with the Center for Full Employment and Price Stability and Senior Research Scholar at The Levy Economics Institute.

Wray delivered a paper at the conference. In part of the paper, he informed the ASSA masses:
What's going on here it that Wray doesn't understand the difference between Fed high powered money and Treasury securities. As I have pointed out before, Treasury securities are near money, but not money. There is no market for example between $100 bills an $20 bills where the price fluctuates between the two. Nor is there such a market with currency and checking deposits. That's one measure of what money is. It doesn't fluctuate against itself. That Treasury securities, though extremely liquid, fluctuate in price against dollars is an important indication that they are not money. Thus, when the Fed uses its facilities to buy Treasury securities (especially when those securities being bought are now even longer in range). The Fed is adding money to the system.

Further, the idea is not that this Fed printing will create inflationary expectations (that will occur) but that  the new money increase in terms of dollars is in the system will result in increasing the demand for goods.

Within roughly six months, it will be obvious what a colossal error Wray has made in his understanding of basic monetary economics. And the term wingnut won't do justice to describe the crazed error he is making.
Helicopter Ben is supposedly injecting trillions of dollars of money into the economy to create expectations of inflation—to counter the deflationary real world forces. And many wingnuts actually ARE expecting inflation—running around like Chicken-Littles, buying gold and screaming about hyperinflation and collapse of the dollar...The wingnuts will be proven wrong. The Fed cannot create inflation...
Wray reaches this conclusion, this way:
Quantitative easing supposedly pumps money into the economy to generate spending in order to create expectations of inflation. But all it really amounts to is substituting reserves for treasuries on bank balance sheets...

1 comment:

  1. Amusing how Wray can so dismiss the Fed's monetizing activity, and it makes some sense if the banks don't ever lend the money (it sits as excess reserves). The buying operation also changes around prices.

    The fundamental distinction between the treasuries and the reserves is that the treasuries existed before the Fed transaction while the reserves didn't - so not exactly just "substituting."