On Tue, Aug 9, 2011 at 2:20 PM, Doug Henwood <[email protected]> wrote: > What else can they do? They're going to keep interest rates close to 0 for > two more years and they've bought $600 billion in Treasury paper over the > last year or so. Would we be better off if they'd bought $850 billion? >
Oh come on, they can certainly do more - a lot more. Although of course, the same result can be achieved much more efficiently using fiscal policy, if this is not an option, monetary policy is far from being impotent. Instead of fixing a dollar figure for quantitative easing, they could aim for a specific inflation target. Krugman and even people like Mankiw and Rogoff have argued for a temporarily higher inflation target of 4-5%. Wasn't it Ben "printing press" Bernanke who gave a speech back in 2002 arguing precisely that the central bank has plenty of weapons even after hitting the zero bound on interest rates? http://www.federalreserve.gov/boarddocs/speeches/2002/20021121/default.htm --------------------------------snip As I have mentioned, some observers have concluded that when the central bank's policy rate falls to zero--its practical minimum--monetary policy loses its ability to further stimulate aggregate demand and the economy. At a broad conceptual level, and in my view in practice as well, this conclusion is clearly mistaken. Indeed, under a fiat (that is, paper) money system, a government (in practice, the central bank in cooperation with other agencies) should always be able to generate increased nominal spending and inflation, even when the short-term nominal interest rate is at zero. The conclusion that deflation is always reversible under a fiat money system follows from basic economic reasoning. A little parable may prove useful: Today an ounce of gold sells for $300, more or less. Now suppose that a modern alchemist solves his subject's oldest problem by finding a way to produce unlimited amounts of new gold at essentially no cost. Moreover, his invention is widely publicized and scientifically verified, and he announces his intention to begin massive production of gold within days. What would happen to the price of gold? Presumably, the potentially unlimited supply of cheap gold would cause the market price of gold to plummet. Indeed, if the market for gold is to any degree efficient, the price of gold would collapse immediately after the announcement of the invention, before the alchemist had produced and marketed a single ounce of yellow metal. What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation. _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
