(08-26-2013, 08:42 PM)kandrathe Wrote: Right. Which is why the Feds balance sheet went from less than a trillion, to almost 2.5 trillion over night. I see their involvement here as a barrier to normalizing the economy.
The Fed can print money. It's not in limited supply, unless the Fed says it is. Inflation is muted to nonexistent. Unemployment is high, and only falling very slowly. What's the alternative to QE? Massive deflation? If you're not wanting to push monetary policy, and you're not wanting to push fiscal policy, the alternative is liquidation. Perhaps that's what you mean by "normalizing"?
Quote:Have you looked at the more alarming monetarist charts lately? Particularly, velocity, CPPI, total money supply, unemployment (U6 or U7b), labor force participation rate.
CPI has been very low. Unemployment and labour force participation rate have been extremely poor. Hence, why reflation is a great idea, and deflation is a terrifying prospect.
Velocity is not defined except for a given monetary base - it is simply the term that equilibrates M with PY. We have no method of measuring it independently, we just divide whatever we think of as monetary stock by nominal GDP.
This matters, because the total money supply has *shrank*, not increased, if you use a broad understanding of money, like Divisia M4. But that also means the velocity of money has not decreased. If you use narrow money, then the velocity of money has skyrocketed. Those are symmetrical ways of viewing the economy. However, both imply that the collapse of *credit*, which is far more important than paper notes, has been substantial, and has barely recovered in level, let alone returned to trend. That the Fed has printed a lot of bills and created a lot of reserves has not even counteracted the collapse in private credit.
Quote:We find ourselves zero-bound, due to too many years of low interest rates.
The US is at the zero lower bound, if anything, because of too *few* years of low interest rates. You don't get to 0% interest by generating inflationary expectations. You get there by killing them. This is Milton Friedman 101. Otherwise, governments would just hand out free money all day, with no consequence.
Quote:I read recently a paper by the St. Louis Feds analysis of the impact of QE, where they project a possible net increase in inflation of up to 4 percent over the next decade.
4%? *faints*
Since when are we allergic to inflation? A little inflation lowers debt burdens, and increases employment. Unless the central bank loses credibility that it will raise interest rates in light of inflation, we know how to deal with inflation. It's an easy problem. It's unemployment we're having trouble with.
Quote:But, as I said above, we probably have more to fear in that once the QE manipulation is tapered, that we re-enter a deflationary trend.
So, if I have this straight: We must stop QE "manipulation", because otherwise, when we stop QE, there will be deflation!
Does this make sense to you? It doesn't make any to me.
-Jester