James’s Musings

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from an unrelentingly curious Silicon Valley entrepreneur

Now That It’s Over (??), Why Didn’t Monetary Policy Help?

by James G. Beldock on June 13, 2010

18 months ago, the Treasury and the Fed em­barked on un­prece­dent­ed mea­sures to save the US econ­o­my from col­lapse. On Friday, Treasury re­port­ed that re­pay­ments of TARP ex­ceed­ed loans for the first time. So I got to think­ing: did the much-vaunt­ed mon­e­tary pol­i­cy strat­e­gy have much to do with the sta­bi­liza­tion?

First, a quick re­fresh­er from my “Monetary Policy is Working–A Little” post back in November 2008:

    1. The Fed did every­thing it could to fu­el the mon­ey sup­ply1 in late 2008. In 2 months, it in­creased the base mon­ey sup­ply by 43% 

    2. The Fed’s ef­forts dwarfed anal­o­gous (but much small­er) ef­forts af­ter 9/11 to keep the econ­o­my from tank­ing:

    3. At the time, every­one un­der­stood that, while the Fed could in­crease the base mon­ey sup­ply, it can on­ly ef­fect “nar­row mon­ey,” and it would take a while for the broad­er mon­ey sup­ply (in­clud­ing cred­it) to feel the im­pact.

So, what were the re­sults. ::drum roll:: 

You will be for­given for think­ing that the re­sults are a whole lot of noth­ing. They ba­si­cal­ly are: a com­plete­ly un­prece­dent­ed, rough­ly $1.5 tril­lion in­crease in the mon­ey sup­ply, and ze­ro no­tice­able im­pact?! What gives? Our ex­pec­ta­tions. ed note 7/5/2010: stay tuned for a post ex­plain­ing why the Fed’s print­ing mon­ey didn’t work.

I’ll close with one more in­ter­est­ing sta­tis­tic: thanks to the John Williams at Shadow Government Statistics, we can track an old friend. For the past three months, M3, the broad­est mea­sure of the mon­ey sup­ply, and a sta­tis­tic no longer tracked by the Fed, has been grow­ing in­creas­ing­ly slow­ly. Just this mon­th, it stopped grow­ing al­to­geth­er. M3 con­tains all of the mon­ey sup­ply mea­sured by M2 but al­so in­cludes all oth­er CDs (large time de­posits, in­sti­tu­tion­al mon­ey mar­ket mu­tu­al fund bal­ances), de­posits of eu­rodol­lars and re­pur­chase agree­ments.

What’s go­ing on here? Unfortunately, it is clear that the Fed’s mon­e­tary ex­pan­sion sim­ply didn’t re­sult in a broad­er mon­ey sup­ply in­crease. In fact, there was a con­trac­tion. One could ar­gue that the mon­ey mul­ti­pli­er was there­fore neg­a­tive.

ed note 7/5/2010: stay tuned for a post about why mon­e­tary base ex­pan­sion worked bet­ter in China than the US.

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  1. For an ex­cel­lent ex­pla­na­tion of all the­se mon­ey sup­ply mea­sures, see http://www.shadowstats.com/article/money-supply. []

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