Zeev's Turnips Patch-No Politics (ZEEV)

[mish]

From the Mogambo Guru:

[Shostak] writes, "Most economists ...are of the view that the policy makers of the Fed have learned the lesson of the Great Depression and know how to avoid a major economic slump." And what is that, you ask? Well, since the only tools they have is interest rates and money supply, then it follows as night follows day that their solution lies in more interest-rate bashing and money-supply expanding.

Let's apply those lessons to the busy mother of today. Problem: the toddler is drawing on the wall with his crayons. Old solution: take away the crayons and clean the wall. New Fed Solution: give the kid more crayons.

"Needless to say that such massive monetary pumping amounted to a massive exchange of nothing for something and to a severe depletion of the pool of real funding, that is, the essential source of current and future capital needed to sustain growth. When things start declining for whatever reason, banks get nervous" he says. "In response to this, banks curtail their lending activities and this in turn sets in motion a decline in the money stock."

Now, the Big Question is "How is it possible that lenders can generate credit out 'of thin air' which, in turn, can lead to the disappearance of money?" The answer is surprisingly simple. When I borrow money from you and subsequently pay you back with interest, the M1 money is all still there, and has traveled full circle back to where it came from.

On the other hand, since the Fed created the money out of thin air to start with, when the money comes back, there is no original owner of money, and so it disappears! He notes that right after the stock market crash in 1929, M1 dropped and kept dropping for years.

Then I took a look at our M1 with renewed interest. And it looks kinda peaked.

But this is just the start of the gloomy outlook that we seem to share. He continues, "Again, note that contrary to popular thinking, depressions are not caused by tight monetary policies, but are rather the result of previous loose monetary policies. On the contrary, a tighter monetary stance arrests the depletion of the pool of real funding and thereby lays the foundations for economic recovery. Furthermore, the tighter stance reveals the damage that was done to the capital structure by previous monetary policies."

http://www.dailyreckoning.com/home.cfm?loc=/body_headline.cfm&qs=id=3114