Paul Krugman points out in his latest blog post that Mark Thoma, a professor of economics at University of Oregon, and David Altig, senior vice president at the Atlanta Fed, are both way off base to react to Arthur Laffer’s assertion that the unprecedented expansion in the monetary base (see chart below) will ultimately result in huge inflationary pressures.
Here is Krugman’s view:
From The NYT: Let me add, for the 1.6 trillionth time, we are in a liquidity trap. And in such circumstances a rise in the monetary base does not lead to inflation. I had a couple of charts in my lectures this past week. First, Japan:
Next, America in the 30s:
Notice, in this case, that a Friedman-style focus on a broad monetary aggregate gives the false impression that Fed policy wasn’t very expansionary. But it was; the problem was that since banks weren’t lending out their reserves and people were keeping cash in mattresses, the Fed couldn’t expand M2.
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