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Is The Fed Flushing Out The “Excess Credit” Demons?
by Aaron Krowne - Sept. 24, 2007
My summary answer to this question is “no”. The debate spurring my remarks here, which is presently raging in the Fed-skeptic/hard money camp, has splintered into the “austere Fed” vs. “profligate Fed” sub-camps. There are assumed to be important practical ramifications of the answer to this question regarding investing, trading, and the health of the economy. And there are. However there is a major problem with each side’s position: the austerity camp, which argues that “the Fed is shrinking the monetary base” is correct, but only about a different (and as I’ll argue, narrower) question than the one posed above. And the profligate Fed side, with its “the Fed is pumping inflation” argument (often pointing to M3) is generally right — but for the wrong reasons. I will argue here that the Fed is in fact (or almost certainly) adding more credit to the system — which is just what most hard-money cynics would expect — but is not doing so in any way the monetary aggregate-watchers would tend to see. Here’s why.
by Aaron Krowne - Sept. 24, 2007
My summary answer to this question is “no”. The debate spurring my remarks here, which is presently raging in the Fed-skeptic/hard money camp, has splintered into the “austere Fed” vs. “profligate Fed” sub-camps. There are assumed to be important practical ramifications of the answer to this question regarding investing, trading, and the health of the economy. And there are. However there is a major problem with each side’s position: the austerity camp, which argues that “the Fed is shrinking the monetary base” is correct, but only about a different (and as I’ll argue, narrower) question than the one posed above. And the profligate Fed side, with its “the Fed is pumping inflation” argument (often pointing to M3) is generally right — but for the wrong reasons. I will argue here that the Fed is in fact (or almost certainly) adding more credit to the system — which is just what most hard-money cynics would expect — but is not doing so in any way the monetary aggregate-watchers would tend to see. Here’s why.
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