Thursday, October 06, 2011

Did someone say monetary expansion?

It has become almost fashionable to claim that the Fed is not doing nearly enough to revive the economy. This conclusion follows from the same logic that the "stimulus was too small" meme employs: Has the economy recovered? No? Then policymakers have not done nearly enough.

Check out what's happened to the monetary base since the crisis began:



(clic the pic for a more vertiginous view)

The base has gone from a path of roughly doubling each decade to more than tripling in three years.

8 comments:

Hasdrubal said...

If you want to see something scary, look at excess reserves held by banks. In Aug 2008, they were $1.875 billion, by Aug 2011 they were up to 1,583.525 billion.

They've increased about 845 times, not percent, times. Eight-Hundred-Forty-Five Times.

The Fed thinks they can pull that out of the system before significant inflation starts. I sincerely hope they will be able to. (Secondarily, it really makes QEI and QEII look more like bailouts than stimulus.)

Norman said...

Without a change in the Fed's preferences, shouldn't we expect this? Dumping massive amounts of reserves into the system should have disappointing effects because no one should believe it's permanent.

Looks to me like evidence that what matters is the target, not the base.

Alex Salter said...

"Looks to me like evidence that what matters is the target, not the base."

This. That graph shows an aspect of the supply-side. That's only half the picture. The whole point is that money demand has skyrocketed.

In a world of free banking, each bank trying to maximize its profits leads to the fortunate (unintended) consequence of maintaining monetary equilibrium, i.e. stabilizing NGDP. It seems reasonable, in a second-best world, to have the Fed attempt to mimic that outcome. If you object based on political economy/public choice reasons, that's fine. However, you can't just show the supply-side without mentioning the demand-side and declare monetary equilibrium theorists/market monetarists are nuts.

Anonymous said...

Let me paraphrase the argument:

"Of course it's big enough! Just look at it! No, don't bother with any analysis - just look at the size of it!"

Angus said...

@anon 1:58. I am not making any such argument. I am just pointing out that the Fed has not done nothing.

I would say that from looking at the graph that it's not obvious to me that an even further expansion of the monetary base will do much good at this point.

Norman said...

"I would say that from looking at the graph that it's not obvious to me that an even further expansion of the monetary base will do much good at this point."

I completely agree with this. Unless the Fed's preferences change from the 1-2% inflation target range, there's no reason to believe money demand won't just soak up additional reserves.

Again, it's the target, not the base.

James Oswald said...

Reserves that pay interest are not money in any meaningful sense, they are a form of bonds. Notice any similarity to your graph?
http://research.stlouisfed.org/fred2/series/EXCRESNS

Anonymous said...

Late returning Angus, but what you were saying was not "the Fed has not done nothing." It was it's not true that "policymakers have not done nearly enough" -- just look at this picture! It's huge! How could it not be enough?!

Okay, that last part's not obvious from the text. Close, though.