St. Louis Fed Calls for Monetization to fight Deflation

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machinehead's picture
Status: Diamond Member (Offline)
Joined: Mar 18 2008
Posts: 1077
St. Louis Fed Calls for Monetization to fight Deflation

In a speech to a New York business group, St. Louis Fed president
James Bullard calls for massive doses of helicopter money to fight
deflation. I am not making this up --

"While the monetary base has expanded at an extraordinary
fast pace during the fall and winter, much of that expansion
has been closely related to the Fed's lender of last resort
function, and cannot be counted on to keep expectations of
disinflation and deflation at bay."

"Because of this, the Fed needs a more systematic method of
keeping the persistent component of monetary base growth rates
elevated in order to combat the risk of a deflationary trap."

He said the Fed could set quantitative targets for monetary
policy, "beginning with the growth rate of the monetary base."

Most of the establishment figures supporting the Fed's monetary
'heavy lifting' have assured us that the recent doubling of the
monetary base, which is now trickling down into the M's with the usual
lag, will be withdrawn before inflation ignites with a sickening whoosh.

Now comes Bullard, saying 'No, let's keep that doubled monetary base doubled ... we pump you long time!'

Well, if the old rule of thumb still holds that monetary policy
involves a 12 to 18 month lag, keeping the monetary base doubled at its
current level for another year ought to push M1 growth into the 50-100
percenr range, with M2 close on its tail. Do you think this might cause
some inflation? I do.

Indeed, if you're an overcommitted debtor -- such as Usgov --
inflation is just what the doctor ordered to shrink that debt tumor in
real terms, and cure what ails you. The burden of proof should be on
those who claim this won't happen. Why would Usgov not
wave the magic wand of monetization, and inflate its way right out of a
debt-servicing squeeze? Benny and Bully stand ready to help, and
they've got the tools to do so.

Mike Pilat's picture
Mike Pilat
Status: Platinum Member (Offline)
Joined: Sep 8 2008
Posts: 929
Re: St. Louis Fed Calls for Monetization to fight Deflation

machinead: Thank you for this quote.

I am going to guest lecture at Virginia Tech tomorrow and use this statement. I will pick this apart to get students to determine what direction where shooting in and how viable that strategy is.


strabes's picture
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Joined: Feb 7 2009
Posts: 1032
Re: St. Louis Fed Calls for Monetization to fight Deflation

St Louis is still stuck in Friedman's thinking from the 60s.  The world has changed big time.  The Kansas City fed is now up-to-date and incorporates a better understanding of debt/credit/derivatives and how that, not govt money, drives global liquidity.  and how a few trillion from the govt will do nothing to stop deflation of a 50 trillion bank-produced credit system.

machinehead's picture
Status: Diamond Member (Offline)
Joined: Mar 18 2008
Posts: 1077
Re: St. Louis Fed Calls for Monetization to fight Deflation

In the interest of full disclosure, Ben Bernanke spoke today and
somewhat contradicted yesterday's statements by St. Louis Fed president
James Bullard. Bloomberg quotes Bernanke as follows --

The Fed can scale back its balance sheet “relatively
quickly” once it deems credit markets are returning to normal
and “prospects for the economy” have improved, Bernanke said. A
“substantial portion” of central bank assets are short-term in
duration and can be allowed to run off, he said.

“We will take all necessary actions to ensure that the
unwinding of our programs is accomplished smoothly and in a
timely way, consistent with meeting our obligation to foster
maximum employment and price stability,” he said.

I don't doubt that scaling back the monetary base is Ben's honest
intention. But how many times have political leaders promised to
'balance the budget within five years' -- then some emergency comes
along, and the deficit gets larger than ever.

If Ben actually tries to continue unwinding his balance sheet --
which he's been doing for the past 6 or 8 weeks -- the economy is going
to enter a fresh fainting spell. In fact, the S&P
500 hit its 2009 high on the third trading day of January, shortly after Ben
ended his toxic asset shopping spree, and has been swooning rather
alarmingly in recent days.

Whatcha gonna do, Ben -- keep on 'scaling back' in Volcker mode as
stocks go over the waterfall ... or open the taps wide, and accept your
knighthood for services rendered like Sir Alan? Your move, buddy ... errrr, I mean 'Sir Ben.' Wink

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