While it's true that the Fed can print as much money as it chooses, adding to the money stock does not decrease deflation or increase inflation. It merely adds to the reserves the banks have at their disposal to lend out to businesses and consumers. Here's how British economist John Maynard Keynes summed it up:
"Some people seem to infer from this that output and income can be raised by increasing the quantity of money. But this is like trying to get fat by buying a larger belt. In the United States to-day your belt is plenty big enough for your belly. It is a most misleading thing to stress the quantity of money, which is only a limiting factor, rather than the volume of expenditure, which is the operative factor."
Here's a clip from a recent post by Reuter's Felix Salmon that helps to clarify the point:
"...businesses aren't borrowing or investing -- and insofar as they are borrowing, they're using the proceeds to buy back their stock, rather than to employ more people.See? Loan demand has still has not returned to precrisis levels; credit is shrinking and disinflation is inching towards outright deflation. Fed chairman Ben Bernanke can print more money, but how does he get it to the people who will spend it? Helicopter drops?
The net result is that the banks -- whose collective cost of funds is now less than 1% -- are now lending overwhelmingly to just one borrower: (ed--the US gov.)U.S. banks now own more than $1.5 trillion in Treasuries and taxpayer-backed debt issued by mortgage giants Fannie Mae and Freddie Mac, according to the latest weekly data provided by the Fed. It's a 30 percent increase from the week prior to the Fed's Dec. 16, 2008, announcement that it was lowering the main interest rate to 0-0.25 percent.- Advertisement -
Outstanding commercial and industrial loans at U.S. banks have fallen from $1.6 trillion in October 2008 to $1.2 trillion this past September, Fed data show. The $390 billion drop is equivalent to a 24 percent reduction in credit to businesses.
It's truly outrageous that banks are lending more money to the U.S. government than they are to all commercial and industrial borrowers combined...Bernanke's monetary policy simply isn't helping the broad mass of the U.S. population." (America's failing monetary policy, Felix Salmon, Reuters)
It's a good idea, but that's fiscal policy which means that it's congress's decision, and the new GOP-led congress has already said that they're going to pinch pennies and cut the deficit, which means it's a non-starter. So, all Bernanke can do, is increase base money, add it to bank reserves, and hope for the best. But don't expect too much--quantitative easing (QE) may lower long-term interest rates and move a few investors out of Treasuries and into stocks, but it won't increase demand, narrow the output gap, or lower unemployment in any meaningful way. And--as we'll see--that isn't the point anyway.
There's a lot of confusion about QE, so let's hear what Bernanke has to say on the topic.
Fed chairman Ben Bernanke: "There's a sense out there that, quote, quantitative easing, or asset purchases, is some completely foreign, new, strange kind of thing, we have no idea what the hell is going to happen, and it's an unanticipated and unpredictable policy....Quite the contrary: this is just monetary policy. Monetary policy involves the swapping of assets -- essentially, the acquisition of Treasuries and swapping those for other kinds of assets."
That's easy, because the preferred method for easing the effects of recession (for the last 80 years) has been varying doses of "Keynesian" fiscal stimulus. This is not some new-fangled theory; it is settled science like evolution. Unfortunately, the GOP-led "deficit hawks" in the congress want to implement austerity measures that will deepen the downturn and increase unemployment. This is the economic equivalent of "creationism".
Here's what Keynes had to say on the topic in a letter titled "An Open Letter to President Roosevelt":
"The object of recovery is to increase the national output and put more men to work. In the economic system of the modern world, output is primarily produced for sale; and the volume of output depends on the amount of purchasing power... Broadly speaking, therefore, an increase of output cannot occur unless by the operation of one or other of three factors. Individuals must be induced to spend more out of their existing incomes; or the business world must be induced, either by increased confidence in the prospects or by a lower rate of interest, to create additional current incomes in the hands of their employees, which is what happens when either the working or the fixed capital of the country is being increased; or public authority must be called in aid to create additional current incomes through the expenditure of borrowed or printed money. In bad times the first factor cannot be expected to work on a sufficient scale. The second factor will come in as the second wave of attack on the slump after the tide has been turned by the expenditures of public authority. It is, therefore, only from the third factor that we can expect the initial major impulse. ...