Saturday, January 09, 2010

Updates to weekend reading

Warren Mosler has more on the decline in private sector credit.

Also, Scott Fullwiler has an excellent post on why Ben Bernanke's "helicopter drop" is fiscal not monetary.

A comment on this last point. The last refuge of scoundrel economists, who argue that monetary policy is all you need, is the assertion that a helicopter drop is somehow "monetary" too when it is clearly fiscal. if you redefine monetary to mean fiscal, then yes, monetary is all you need, but let's be honest about what's actually happening. It's fiscal. Here's a clip from some email correspondence I had illustrating this exact subterfuge:
Academic economist: At least to me, it's clear that your example [helicopter drop] is two operations.
1) Adding 1M to bank reserves gratis is fiscal policy. Effectively it was a $1M transfer. (We've added to government liabilities without adding anything to its assets, so that's fiscal policy via my definition.)
2) Because an addition to bank reserves has increased the money supply, it's also monetary policy.

winterspeak: By this definition, all fiscal policy is monetary policy. Whenever the Treasury spends, it changes the money supply, Whenever the Treasury taxes, it changes the money supply.

Can you please define monetary policy in a way that is not fiscal policy.
There you go. If you believe that bank reserves do a damn thing, which in a normal environment they do barely as they influence the FFR, and in this environment they really don't because the Fed is paying interest on reserves, then anything that impacts reserves is monetary policy. And since deficit spending can impact reserves, all fiscal becomes monetary.


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