Tuesday, April 14, 2009

Credit Expansion

"It is believed that banks fund economic activity by means of credit expansion. ... We suggest, however, that what matters when it comes to economic recovery is the state of real savings. Contrary to popular thinking, it is real savings that fund economic activity and not bank lending. ... Since the heart of credit is real savings, it is obvious that no government schemes, such as cleansing banks' balance sheets, can increase fully backed credit. These government plans can only redistribute a given pool of real savings", my emphasis, Frank Shostak (FS), 2 April 2009 at http://www.lewrockwell.com/orig9/shostak7.html.

"There's an old saying on Wall Street: Don't fight the Fed. ... The danger is that inflation ultimately will surge before policymakers can sop up all the excess liquidity they have created. ... The stock market's powerful endorsement on Mar. 23 of the Treasury Dept.'s plan to relieve banks of $1 trillion worth of 'legacy' assets was the first hopeful sign that the banking system can begin its healing process. ... Most analysts believe the Fed will have plenty of time to take back its excess funds without fueling inflation or disrupting markets. But it will be a delicate maneuver that the Fed has never attempted before. ... That's because the recession has created enormous slack in the economy in terms of unemployment and excess production capacity, which is weighing heavily on pricing power and wage growth", my emphasis, James Cooper (JC) at Businessweek, 6 April 2009.

Actually, FS is optimistic. In redistributing savings, the government destroys some.

Does JC believe Zimbabwe Ben will reduce the monetary base in the future? If so, JC, I've got a bridge to sell you. JC's analysis shows all the ills of Keynesianism. He does not understand "capital" is not monolithic, but specific. Inflation, here we come!

3 comments:

misiti3780 said...

apparently the FED may be able to solve this problem of "sopping up liquidity" without selling the illiquid assets on its balance sheet by manipulating the interest payments it makes on the reserves it holds these banks hold at the FED:

http://www.voxeu.org/index.php?q=node/3444

Jr Accountant said...

The Fed wishes it was smart enough to pull that one off. Or perhaps is delusional enough to believe it is.

Anonymous said...

The economy and credit system as a model run on a giant grid computer... the wizards must control and freeze in place as many components as possible... except that "consumers" (errr... people/voters/taxpayers/savers/churchgoers/sportfans/on/on) have had enough consumption to last several lifetimes... "stimulating them" is near criminal... careful wizards... magic can misfire... kaboom...