Originally posted by Jim Scott
The right thing to do to loosen up credit and get the economy moving is to produce enough money for the economy to function.
This is the mistake they made in the Great Depression. They did not provide enough money to get the country working and moving again.
This time they got it right. In theory, if you have interest rates at the bottom, and you produce loads of money, and there is no inflation...you
need more money.
Good reply, Jim! I have a number of questions / points to bring up.
1) You are right - in theory - the role of the Fed would be to open up the credit market, but in reality that is not happening. Interest rates cannot
go lower than they are at this point and credit continues to contract. Both personal and business credit.
(edit - yes, they can technically go negative... but would any bank lend on that when they are not even lending now)
So, if they are follow the correct theory but results are not showing what the theory would expect how can we say they are taking the correct
2) Your point about the wealth destruction is very important, and is one many people look past when talking about all the money put in the system over
the last year. However, there is no accurate records that point out the debt destruction vs. newly minted money.
That said, is there is no good guide to how much money vanished - destroyed - how can we say we are not entering a period of debt deflation?
3) If the actions were protective, and working as expected, why the continued downward pressure on the dollar?
Let's forget the "Evil Fed" discussion and just look at the economic factors.
Credit continues to contract , banks are not lending, and the only spending the economy really is seeing is thanks to govn't spending / programs.
When those lines of funding vanish the economy will still be in a world of hurt.
While some economic indicators are showing improvement that is only due to the fact that the previous few months were so poor. So, the indicators are
"improving" over what happened 3 months ago the results are still extremely poor over a year to year comparison let alone a two year comparison.
(and this is in most areas of the economy - port traffic, sales, business spending, employment, housing)
On another note, you are right that the Feds lack of reaction added to the severity of the Great Depression; however, the economic realities of today
do not resemble what the US faced during that period of time. To assume the what policies would have improved the conditions during the GD would fit
for our current economy is false.
While we can see what "not to do" based on past experience we would need to apply it to our current situation. It appears the leaders in Govnt and
the Fed did not apply that approach.
Anything can change, anything can happen, but at this very moment it is not working out. While the Fed is in theory taking the steps a classic Milton
Friedman-esque economist would expect, the results are not yet showing positive affirmations. So, as of right now, no, the Fed isn't working.
[edit on 23-9-2009 by tk1967]