Wednesday, July 18, 2012

What's Behind the Fed's Slowdown in Money Printing?

Money supply growth has slowed dramatically, in recent months, setting up a major decline in economic activity and a potential stock market crash. What's behind this? Paul Krugman offers one theory:
Hmm. When I published a critique of Ben Bernanke’s recent performance, suggesting that he should reread his own critiques of the Bank of Japan, there were a fair number of people saying that I was just a big meanie.

But my sense is that his latest testimony, in which he declared that the Fed has the power to take action, that the economy is in really bad shape, but declined to, you know, actually take action, has left even his usual defenders more or less speechless.

It really makes no sense — except in terms of politics. I really believe that we have reached a point where the Fed is afraid to do its job, for fear of being accused of helping Obama.
Or it could be that Romney has gotten to Bernanke and Bernanke will keep money supply tight until after the election.

All this said, the Fed shouldn't be manipulating the economy and interest rates at all. It is all based on flawed Keynesian theory. Once Bernanke does open up the monetary flood gates, serious price inflation will not be far behind.


  1. Given the relationship between a collapsing stock market and the "safety" of the US treasuries, Do you think it is to maintain USD superiority?

    Global hegemony to keep nations in check and the welfare state to keep people in check is of paramount importance I would think....

  2. I don't buy either of those rationals, though it is true Bernanke can effectively choose who he wants to be president.

    I believe that the pressure in coming from international sources and not from political pressure inside the US. Bernanke is biding his time so that Europe will be pressured into QE first. The IMF is already starting to pressure the ECB to do just that.

  3. I think there is a simple explanation. Bernanke recognizes that there are limits to credit expansion beyond which the dangers of hyper-inflation lie. He is also aware of the small effect that QE1-2 had on the real economy. Krugman, is oblivious. Bernanke appears to be smarter than Krugman.

    Bernanke's job is to bail out the banks. Mission accomplished - so far. I think he recognizes, unlike Krugman, that there are limits to monetary policy. He keeps saying so.