Money Supply

Am I a hypocrite?

In my last post, I wrote that Krugman was wrong to say that the Federal Reserve has no control over the money supply. In the comments section, the astute Barney Rubble pointed out that elsewhere on the blog I stated that central banks have limited control over the money supply. His comment is here:

I think it might be necessary to clarify the apparent contradiction….As in other posts you have mentioned the FED doesn’t have so much control….”In other words, if the central bank wants to boost the money supply from £1 trillion to £2 trillion, it could do so with ease. Today, the central bank does not have this control.”

So am I a hypocrite? No – at least I don’t think I am.

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.