Radical Money Printing Just Like the Continental Congress

From within the Fed in the days that the policy of quantitative easing became official, Philadelphia Federal Reserve Bank President Charles Plosser alerted us that “(recent economic statistics) prompted some commentators to suggest that the United States is facing a threat of sustained deflation, as we did in the Great Depression or as Japan faced for a decade.

“I do not believe this is a serious threat… (but) the Fed must credibly commit to preventing sustained deflation from becoming widely anticipated, just as it must prevent sustained inflation from becoming widely anticipated.”

All this is well and good. But between the lines one gets the feeling that Plosser and much of the Fed want to be inflation hawks and are maybe a little bit irritated that they have to stop and do something so radical as print money just like in the olden days of the Continental Congress, the French National Assembly, or the Weimar Reichsbank, as if the current circumstance had nothing to do with their having presided over a doubling of the broad money supply from $7 trillion to $14 trillion in the eight years ending in 2008.

Up until now Fed governors felt very effective, having seen strong income and employment growth, yet inflation was subdued. In the eight years through 2008, the CPI-U increased at an annual rate of just 2.9 percent, well below the 4.6 percent average of 1971-2007 or the 3.3 percent felt from 1913 to 2007.

But so much focus on the targeting of inflation has permitted robust credit expansion to stowaway on the economic ship, lifting total commercial bank credit ($10 trillion) to 77 percent of GDP from 45 percent of GDP in 2000, and seeing debt in aggregate rise to 360 percent of GDP, twice the level touched in 1929.


Bill Baker,
for The Daily Reckoning

[Editor’s note: This passage is reprinted from William W. Baker’s book, Endless Money: The Moral Hazards of Socialism, with the permission of John Wiley & Sons, Inc (©2010). You can get your own copy of his book here.]

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