Skip to main content

View Diary: Creating Money (49 comments)

Comment Preferences

  •  Velocity (7+ / 0-)

    You touched on but didn't fully explain the concept of velocity.

    A reason that the huge influx of "new" money from the Fed during the recent financial crisis has not created inflation is because there was a nearly one-for-one decrease in the rate at which banks were lending and folks were spending.

    We as citizens and the people we elect to represent us must become comfortable with the reality that money is an abstraction, and that the real wealth of a society lies in the goods, services, resources, and knowledge we have and are capable of producing.

    Unfortunately, too many believe that money and particularly the trading of money in the financial markets is a path to wealth.  It makes me cringe to hear these idiots use the words "financial industry" as they worry about inflation and deficits, when we have so much unused capacity in the real economy.

    Labor was the first price paid for all things. It was not by money, but by labour, that all wealth of the world was originally purchased. - Adam Smith

    by boatwright on Tue Jan 29, 2013 at 03:10:18 AM PST

    •  It's the path to PersonalWealth IfU AlreadyHave$$$ (0+ / 0-)


    •  Excess reserves (0+ / 0-)

      The vast majority of "new" money "printed" by the Fed since the 2008 crisis sits on bank balance sheets at the Federal Reserve.  So you're right - businesses and households are deleveraging and the banks aren't lending, so all that "new" money is just sitting there.  Velocity = 0.

      Another way of looking at it: If you perfectly counterfeited and SPENT a trillion dollars, that would be inflationary - there would be a lot of "extra" money out there chasing an unchanged amount of goods and services.  But if you buried that money in your yard, it's not inflationary at all.  The fact that a couple trillion extra dollars has come into existence is not a problem because the huge majority of it just sits at the Fed, about as inflationary as if it were buried in the ground.

      When the economy picks up and those reserves start being turned into loans and the money starts circulating, the Fed could start tapping the brakes by trading reserves for bonds, raising the Fed Funds rate and perhaps even (not sure) raising the reserve requirement.  We're not going to jump from our current low level of loan activity to 10 trillion extra dollars circulating overnight, so there is plenty of time and plenty of ways for the Fed to act to keep inflation from spiking without killing the recovery.

Subscribe or Donate to support Daily Kos.

Click here for the mobile view of the site