Don’t underestimate the power of printing money, part 2

Paul Kasriel thinks the Fed announcement that it is monetizing the U.S. Federal Government’s deficit is very important. He ends his article at Northern Trust with these words:

In the coming months, the federal government is going to be increasing its debt issuance to finance its increased spending as a result of the recently-passed fiscal stimulus program. The Congressional Budget Office is forecasting a federal budget deficit for fiscal year 2009 of about $1.8 trillion. As mentioned above, the Fed is on course to create about $2.15 trillion of new credit in the months ahead. All else the same, the Fed’s monetization of debt through the purchase of mortgage-backed securities, Treasury securities or through the TALF program in conjunction with the federal government’s increased spending will generate stronger economic activity. If the increased federal spending were being funded with increased taxes, then those paying higher taxes would cut back on their spending as the federal government increased its spending. Net, net, there would not be much increase in total spending. The same would hold true if the federal government’s increased spending were being funded with increased Treasury debt purchased by the non-bank public and not offset by Fed purchases of some kind of debt. But if the Fed purchases some kind of debt in amounts equal to the federal government’s increased debt issuance, then the federal government can increase its spending without any one else having to cut back on his or her spending. In the short run, this will boost real economic activity. Of course, farther down the road, this will increase the rate at which prices rise – prices of goods, services and assets. Ben Bernanke’s “money-dropping” helicopter has been replaced by a C-5 Galaxy transport!

I agree with Paul here. The Fed’s announcement, the Geithner plan, the TALF and the stimulus will collectively be a huge boost to the economy. However, if the economy does recover, inflation will be a serious problem. We can see that already with the price of oil, which has broken out of a trading range from $32-$48 a barrel. Get ready.

Source Fed Monetization – Not What It Buys, but How Much of Anything It Buys (PDF) – The Econtrarian


Originally published at Credit Writedowns and reproduced here with the author’s permission.

2 Responses to "Don’t underestimate the power of printing money, part 2"

  1. Tom McPeak, Ph.D. (Land Economist)   March 24, 2009 at 2:07 pm

    Has anyone thought about the historical fact that President Andrew Jackson killed the national bank of his day? It was The Second Bank of the United States, and served a role similar to Federal Reserve System. It was authorized for a twenty year period during James Madison’s tenure in 1816. As President, Jackson worked to rescind the bank’s federal charter. In Jackson’s veto message, the bank needed to be abolished because:1. It concentrated the nation’s financial strength in a single institution.2. It exposed the government to control by foreign interests.3. It served mainly to make the rich richer.4. It exercised too much control over members of Congress.5. It favored northeastern states over southern and western states.Jackson felt the Bank improved the fortunes of an “elite circle” of commercial and industrial entrepreneurs at the expense of farmers and laborers. Jackson succeeded in destroying the Bank by vetoing its 1832 re-charter by Congress and by withdrawing U.S. funds in 1833.Now, I am certainly not suggesting that we do away with the Federal Reserve System. However, just thought it might be fun to remind ourselves that it is NOT a part of the Federal Government, but rather is a wholly private institution. Its decisions are profit motivated, with a long economic rate of time preference. The Federal Reserve System has enormous private profits as the direct and indirect result of monetization of debt (printing of money).It might be good to keep in mind that the actions of the Fed are not from the same motivation as the theoretically non-self-serving publicly elected Congressman and Senator, although there are significant areas of overlapping interest. This is not taught in college text books, probably because knowing how central bank economics works has no benefit unless one is in a position to capitalize on the knowledge, or be a Federal Reserve Bank beneficiary.

  2. Bill   March 27, 2009 at 1:10 pm

    I say we DEFAULT on our PAYMENT TO THE FEDERAL RESERVE, then kick them out and start anew without them.