Saturday, March 21, 2009

CBO predicts $2.3 trillion more deficit

The Congressional Budget Office predicts that the public deficit over a decade will be $2.3 trillion more than earlier estimates as a result of Obama's budget.
This does not need to be. When stimulus funds are paid to our auto companies and others, there is no reason for the treasury to first borrow more from China and others. If the Federal Reserve can bail out banks by writing numbers after the bank's accounts at the Fed, it could write numbers after the Treasury Department accounts, and the Treasury could then write checks to keep businesses going. Remember, there is no opportunity cost to putting unused resources to work. No one need save first and defer consumption.
Of course, there is one reason to keep doing things as done in the past--myth and superstition!

How Does the FED Do It?

Finally our daily newspapers accurately describe how the Federal Reserve puts $1.7 trillion into the economy:
"Are Tax Payers on the hook?
No, the Fed prints money. Not literally--the Treasury ... makes the nation's paper currency. Instead the Fed creates the money to buy the Treasury bonds and other securities. It then adds those securities to its balance sheet .... "

The Associated Press, LSJ, March 20, has this part right, but could do the public a service if it added that it is the same basic process that adds to the money supply when a commercial bank makes a loan.

"Are there any downsides to this? The main risk is that the flood of new dollars will increase inflation as more dollars chase the same amount of goods."

Here the AP goes wrong--the new dollars will create new output, maintenance of state and local roads, schools, etc. The amount of goods is not fixed.

The FED always faces the difficult task of adjusting the money supply (in normal times via monetary policy) to the capacity of the economy to produce. But, does anyone think we can't produce more if we put the unemployed to work?? Sure, they could make a mistake and maintain the stimulus when we again reach full capacity. But, we are far from that now. The greatest danger is that because of old myths and superstitions, we will not put in enough new money. The danger of deflation is greater than the danger of inflation.

Thursday, March 19, 2009

Fed to Buy $1 trillion in Securities

The New York Times writer keep labeling the FED's purchase of securities as "creating money out of thin air." Of course it is, but this is nothing different than when a commercial bank makes a loan and writes a credit besides the borrowers name. All money is debt and and created. There is no other kind. If our government gives commercial banks the power to create money, surely the government's own bank, the Federal Reserve, can do it also when private borrowers will not borrow enough to use all of the economy's resources.