Friday, November 14, 2008

An interesting thought

Brian, quiet guest and occasional poster, pointed to the full NY Times article by Paul Krugman, in which he notes that the hypothetical "Paradox of thrift" is likely to be mitigated by the Federal Reserve working to increase the money supply. Let's take our hypothetical "cash in the mattress" person, and let's see with Bernanke and Krugman would do in order to coax that cash back into what they view as the economic system.

Or, for that matter, let's see what is being done now--pumping two trillion dollars plus the trillion dollar bailout into the economy--and consider its likely effects. Keep in mind here that printing money does not in itself generate economic activity--money is only the means of transaction.

Without arrogating to myself the job of guessing the exact extent, I would have to guess that prices would be higher than they otherwise would be. Anyone smart enough to save for the future loses from Marriner S. Eccles' attempts (oops, Ben Bernanke's) to avoid deflation. Can we say "moral hazard"?

On the bright side, the sheer scope of the disaster that may be now unfolding will either confirm or reject Milton Friedman's position that Eccles and Black's mistake was to "not do enough" to increase the money supply. Unfortunately, I think that at this time, this is one position of Friedman's that is going to suffer shipwreck on the rocks of historical data, just as anyone familiar with Japan's economic slowdown over the past two decades might also suggest.

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