If $1 Trillion net was really injected into the economy we would see dramatic improvements in employment and capacity utilization. The Fed doesn’t have the ability to do that. Only the government can accomplish that through higher spending or lower taxes.

But that’s what the Federal Reserve does all the time. They need to give the name “Federal” back to the people and see how they fare doing business under a truer title, such as Stand-in Wall Street Fluffers-R-Us.

“WASHINGTON — The Federal Reserve sharply stepped up its efforts to bolster the economy on Wednesday, announcing that it would pump an extra $1 trillion into the financial system by purchasing Treasury bonds and mortgage securities.”

I know you don’t believe me – and you’ll never get any closer to understanding what I’m saying by reading the likes of Mankiw – but I repeat it again: the Fed cannot inflate. Fiscal policy is the only monetary policy that matters.

In fact, a quick google search led me to this, a summary of the chapter on the Fed from Greg Mankiw’s popular book

http://www.csun.edu/bus302/Lab/ReviewMat erial/macro6.pdf

Enjoy

“The willingness of the market to finance government shortfalls” is irrelevant. The Treasury could stop issuing treasuries tomorrow and it wouldn’t affect our government’s capacity to spend in the least. The United States government can spend whatever amount of US dollars it wants without taxing or borrowing to fund those expenditures. That’s what it means to be a monetary sovereign.

“All those that sold treasuries to the fed during the past year got electronic cash in return. This is new cash that did not exist before.” – Not true. The cash they received is not new money, high-powered or otherwise. How did they acquire those treasuries in the first place? At some point they exchanged dollars for treasuries (interest-bearing dollars, in essence). These treasuries are so liquid and so secure that owning them instead of “cash” represents no compromise of private spending power. Treasuries are as good as cash. When the Fed or anyone else buys them from you it doesn’t give you new money (excepting interest) – it just gives you your money back in another form – all that changes is the composition and term structure of your dollar assets. You aren’t any richer. And it doesn’t boost private spending power the way a tax cut would. A tax cut, by the way, that doesn’t need to be funded or financed.

This all started because you suggested Quantitative Easing was needed on a massive scale. But most of the examples you’ve provided (aid to states, tax cuts) have nothing to do with monetary policy – they are purely fiscal. And these funding mechanisms you and MarshalN describe are not how we can achieve inflation or reflation or boost demand in the aggregate. I’m just trying to show how little the Fed (or any central bank) can do to accomplish your desires. All they really control is the rate paid on reserves. The way to combat deflationary forces is to run larger (unfunded) deficits. Something like a payroll tax holiday would be far more effective – that’s the kind of Quantitative Easing we all could handle.

Peace

The Fed can simply buy treasuries (and they did this to the tune of $1 trillion in the past year or so). This has been, in essence, new high-powered money that goes into the system. All those that sold treasuries to the fed during the past year got electronic cash in return. This is new cash that did not exist before.

Indeed, through the mechanism MarshalN talks about, there have been substantial new cash infusions into the economy. Aid to the states in 2009 and tax rebates, part of Obama’s stimulus plan, were funded when the treasury issued debt while the Federal Reserve bought up the debt.

Theoretically the Fed can sell these treasuries back into the market and drain that liquidity back out but there is no sign of that on the horizon.

The Federal Reserve cannot “print money” in the way you are describing – creating new financial assets. The federal government, in contrast, “prints money” every day of the week. They also destroy a fair amount of money each day through taxation. The question is this: will they create more and destroy less? The deficit must increase – that is the only way to “print money.” The central bank has nothing to do with this.

I’m not saying that’s what they should or would do. I’m just saying that there is nothing stopping them from printing money.

They can only purchase bonds that already exist – bonds which are held by private parties and represent non-government financial assets. Exchanging bonds for cash just changes the composition of these assets and doesn’t create anything new.

The Fed can’t give people money through monetary operations. Only the fiscal authorities can do that – by taxing less or spending more.

That’ll solve any and all deflation fear. It’s the environmentally friendly helicopter.

The really big gun you describe is FISCAL policy not monetary policy. The Fed cannot impose taxes or spend money or print dollars and drop them from helicopters. The Fed cannot inflate. The US Congress can – and probably should.

True quantitative easing is a real big gun. Ask a Zimbabwean if it is possible to manufacture inflation. I am certainly not suggesting that level of money creation, but it is clear that unsterilized Q.E. kills deflation, if it is big enough.

And guess what: in March 2009, Bernanke didn’t even whip out the really big guns. He bought bonds and mortgages, which put money in banks where it can trickle slowly into the economy.

What is are the really big guns? New money-financed tax cuts (discussed by Milton Friedman) would put money directly in the hands of the people. Ben didn’t do anything like a helicopter drop but a money-financed tax cut would be it.

The deflationary destruction of credit is substantial and a trillion or two may not be enough to cause inflation, but as sure as the sun comes up, there is a number at which Q.E. gets inflation going.