Taper Talk, and the $10 Bill
June 25, 2015 in Economics
Steve H. Hanke
Since May 2013, Fed taper talk has fluctuated between hot and cold. When it’s hot, the markets anticipate a monetary tightening and prices become volatile.
Recently, speculation about just when the Fed will increase interest rates has reared its head, again. Since early 2013, I have said that the Fed would not act until late 2015. Well, it’s now approaching that date and I think the Fed will act, but later, rather than earlier.
“The U.S. monetary stance remains schizophrenic and tight. In consequence, the U.S. remains in a growth recession — growing, but below the trend rate.”
The U.S. monetary stance remains schizophrenic and tight. In consequence, the U.S. remains in a growth recession — growing, but below the trend rate. The CFS Divisia M4 — the most important measure of the money supply for those of us who embrace a monetarist approach to national income determination — is growing at an anemic year-over-year rate of 2.8 percent.
How could this be? After all, over the past few years, the Fed has been engaged in the largest quantitative easing program in its history. To find explanations, we must revert to John Maynard Keynes at his best. Specifically, we must look at his two-volume 1930 work, A Treatise on Money. Keynes separates money into two classes: state money and bank money.
State money is the high-powered money (the so-called monetary base) that is produced by central banks. Bank money is produced by commercial banks through deposit creation.
Today, bank money accounts for about 80 percent of the total U.S. money supply, measured by M4. Anything that affects bank money dominates the production of money. So, we must look at bank regulations — courtesy of the Basel regulatory procedures and the Dodd-Frank legislation. These new regulations have been ill-conceived, procyclical, and fraught with danger. Indeed, bank money, the elephant in the room, has been struggling under a very tight monetary policy regime since the financial crisis of 2008–2009. This has forced the Fed to keep state money on an ultra-loose leash. The net result of this schizophrenic, tight monetary policy stance has been a sluggish growth rate in broad money and a continued growth recession, absent inflation, in the U.S.. The accompanying chart tells that tale. But, that’s not the only one swirling around Washington D.C..
In 2013, the U.S. government decided that the greenback needed a facelift. That didn’t …read more
Source: OP-EDS
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