The Fed Does Control The Money Supply

The bubbles foaming from Paul Krugman’s soapbox seem to have gone to his head. As Krugman now claims, the central bank is incapable of directly affecting the amount of money in the economy. All it can do is adjust the level of bank reserves. Whether these adjustments lead to changes in checking deposits is then left to fate and fortune.

He is wrong, clearly.

Money Unbound

Last night I realised that focussing this blog solely on secular stagnation was a mistake. Reading through a discussion by pre-eminent economists on whether secular stagnation is the cause of the slow recovery, or of Greek’s problems, it suddenly hit me: it doesn’t really matter.

That’s right: it doesn’t matter what causes deficient demand. What matters is that demand can be deficient.

The problem is that the secular stagnation debate introduces a false premise: that without secular stagnation our monetary system is civilised.

One-Month Money — Frequently Asked Questions

What is One-Month Money about?

One-Month Money (buy from Amazon UK, Amazon US, Harriman House) is divided into two parts. Part One — ‘The Case for Change’ — explains why our current economy is inherently unstable, and why our tools of fiscal and monetary policy can only ever hope to moderate, but never eliminate, this instability. This section ends with an explication of secular stagnation in developed economies. Driven by a structural decline in workforce growth, secular stagnation will make our current remedies, already inadequate, even more so.

The Productivity Trap

In my last post, I began by discussing the two definitions of secular stagnation — how one relates to the demand-side while the other to the supply-side. As a proponent of a neutral monetary system, I said that I only cared about the demand-side definition, since the main impetus behind neutral money is to solve the problem of deficient spending.

The truth is that the two definitions are inextricably linked.

The collapse in oil should make the Fed more dovish, not less

There has been a lot of talk surrounding the collapse of oil prices. On one side are the optimists who focus on the income transfers to consumers. On the other are the bears who insist that the ongoing oil shock is symptomatic of a weakening global economy. Both camps have portrayed themselves as contrarian, with Gavyn Davies of the Financial Times going so far as to say that gloominess is always more popular than bullishness. The good people at Federal Reserve, salivating at the prospect of higher disposable incomes, seem to disagree.

Let’s start with an important point: we need to abandon the notion that the world is now more productive as a result of collapsing oil prices.

Nobody Knows

“Nobody really knows.” This is a phrase we should use more often, yet it’s guaranteed to send producers at CNBC running for the hills. If you want coverage, whether in the Financial Times or Bloomberg, you better pick a side. “Austerity will unleash a boom.” “Austerity will cause a depression.” Pick one of the above, but whatever you do, don’t sit on the fence.

Well, I happen to like fences. Despite the claims of Keynesian economists like Paul Krugman, the truth is that nobody really knew, in 2010, how austerity would affect Greece.