Presidential hopeful Gov. Rick Perry, R-Texas, forcefully expressed his opposition to the Federal Reserve increasing the supply of money, but National Review‘s Ramesh Ponnuru suggests that the Fed has failed to expand the money supply fast enough to keep up with rising demand for cash.
Contrary to popular belief, Ponnuru argues that the money supply is tight, despite the quantitative easing measures already undertaken, because people and banks increasingly have hesitated to spend or invest their money.
Bloomberg has the whole column – here are a few paragraphs:
As for the money supply, its increase signifies looseness only if the demand for money balances stays constant. If the supply rises but demand rises even faster, then the central bank has, perhaps inadvertently, allowed money to tighten . . .
If markets believe the Fed will follow through, expectations of the future path of nominal spending will adjust upward and that should, in turn, increase nominal spending levels right now. Part of that increase would take the form of an uptick in inflation — which markets currently expect to be extremely low for the next decade — but part of it would also be increased economic activity.
Ending the Fed’s tight-money policies need not punish savers, as is often alleged, because a healthy economic recovery should raise real returns. Conservatives are suspicious of any loosening because they think of it as a government intervention in the free market. But they are wrong. A central bank that keeps the supply of money too low is just as interventionist as one that keeps it too high.
There’s a strong case against central banking itself — against, that is, having a government agency with vast discretion over the money supply. But as long as we have one, it ought to set the best policy it can. And as long as we’re debating its conduct, we ought to be asking the right questions.
If markets believe the Fed will follow through, expectations of the future path of nominal spending will adjust upward and that should, in turn, increase nominal spending levels right now. Part of that increase would take the form of an uptick in inflation — which markets currently expect to be extremely low for the next decade — but part of it would also be increased economic activity.
Ending the Fed’s tight-money policies need not punish savers, as is often alleged, because a healthy economic recovery should raise real returns. Conservatives are suspicious of any loosening because they think of it as a government intervention in the free market. But they are wrong. A central bank that keeps the supply of money too low is just as interventionist as one that keeps it too high.
There’s a strong case against central banking itself — against, that is, having a government agency with vast discretion over the money supply. But as long as we have one, it ought to set the best policy it can. And as long as we’re debating its conduct, we ought to be asking the right questions.
