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Answer to PatriceAyme

Dear Patrice, as i tried to explain in my book, if you look at money as an instrument and not as a holly grail, its value in circulation can be regulated according to economic aims of the government. The question is with what tool to regulate the money is less important if you have clear position about your economic goal. Let us assume the goal is to reduce unemployment, then you can increase the public spending or reduce the interest rate or do the both. Interest rate can be reduce by printing new money by purchasing government securities or by reducing reserve rate requirement of the commercial banks. But interest rate reduction can help with unemployment only if the banks translate the additional liquidity to new credit for the private sector. This is not the case since 2008. The banks since then increased substantially their deposits in the federal reserve and now they are more than twice above the minimum reserve requirement. This situation will continue until there will be no demand for credit, or no will of the banks to give new loans under the existing economic circumstances. So BB can freely print US$ and it comes back to him as deposits of banks, on which he started to pay lately interest, and don’t ask me why.

As to Krugman, he is mainly for increasing the government expenses and if it causes additional government deficit let it be. He claims that if the economy reaches the turn-point from deflation to inflation, the government will have the time and tools to slow down the economy. Many have doubts and worries, if the economist have the tools to recognize the turning point of the economy in time. I fully understand their worries and even agree with them. I personally would follow the credit of US households and mortgages. Since 2008 the credit exposure of households decreased rather dramatically, and it can turn around again. This would mean additional non governmental demand.

As to the tools to fight inflation, they can be monetary, and here the alternative can be selling government securities, or to my opinion a better way could be to increase the minimum reserve rate requirement, because then the government doesn’t have to pay interest on the securities. Both monetary tools cause increase in interest rate. The fiscal tool to fight inflation is by cutting federal budget, and it is more painful than the monetary.

All this short analysis is subject to the assumption that non of the foreign debtors of US, (Japan, China, oil producing countries, etc.) decide to act one day similarly like Samson, when he said, “Let me die with the Philistines!”, And he bent with all his might so that the house fall on the lords who were in it. Judges 16:30

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Economics One

A blog by John B. Taylor

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