Comments on: Krugman: Monetary Base Expansion Doesn’t Necessarily Lead to Inflation http://wallstreetpit.com/5059-krugman-monetary-base-expansion-doesnt-necessarily-lead-to-inflation Tue, 22 May 2012 19:21:52 +0000 hourly 1 http://wordpress.org/?v=3.3.1 By: Clark Johnson http://wallstreetpit.com/5059-krugman-monetary-base-expansion-doesnt-necessarily-lead-to-inflation#comment-18199 Clark Johnson Sat, 20 Jun 2009 15:28:37 +0000 http://wallstreetpit.com/?p=5059#comment-18199 Nearly all of the 2008-2009 increase in monetary base has come as excess reserves. But these are piling up because the Fed now pays more interest on such reserves than the Treasury pays on t-bills. So banks dump t-bills and place money at the Fed. This is the equivalent of open market sales, except they are undertaken by commercial banks rather than by the Fed. There has been little change in cash or in required reserves since the Fed began its quantitative easing, or whatever they call it. This is no evidence whatever of a "liquidity trap" -- it is evidence that the Fed has utterly failed to provide additional liquidity. Indeed, it is evidence that the Fed has not even tried to provide additional liquidity. Similarly, the sharp increase in reserves beginning in 1936 and reflects a rise in reserve requirements that year, and reinforced the following year. This is evidence of contractionary monetary policy, not of a liquidity trap. By the way, Friedman usually used a narrow definition of money rather than a broad one. Nearly all of the 2008-2009 increase in monetary base has come as excess reserves. But these are piling up because the Fed now pays more interest on such reserves than the Treasury pays on t-bills. So banks dump t-bills and place money at the Fed. This is the equivalent of open market sales, except they are undertaken by commercial banks rather than by the Fed.

There has been little change in cash or in required reserves since the Fed began its quantitative easing, or whatever they call it. This is no evidence whatever of a “liquidity trap” — it is evidence that the Fed has utterly failed to provide additional liquidity. Indeed, it is evidence that the Fed has not even tried to provide additional liquidity.

Similarly, the sharp increase in reserves beginning in 1936 and reflects a rise in reserve requirements that year, and reinforced the following year. This is evidence of contractionary monetary policy, not of a liquidity trap.

By the way, Friedman usually used a narrow definition of money rather than a broad one.

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