Tuesday, August 16, 2011

Federal Reserve policy

Like most of the people commenting on and fretting about the Federal Reserve's easing of the money supply, I'm so far from being qualified to be a central banker  I can't even see it.   Still, I've been surprised by how the velocity of money has been missing from the discussions of Fed policy that I've seen.  As I'm sure most of you will remember from your econ. courses the supply of money is a combination of the amount of currency in circulation and its velocity, that is how fast or often that currency is changing hands. 

Posting on Bloomberg, conservative writer Ramesh Ponnuru brings up velocity and doesn't accuse the Fed Chairman of treason.  Whether his analysis is correct I really don't know, but I'm inclined to believe that it is much better to try to attack our economic problems through the Fed than through any fiscal stimulus, and the velocity of money must have slowed dramatically.  Anyway, I think this is worth a look:

One final point, I think this is where conservatives get themselves into a bit of trouble.  They have little or no faith with elites, and with good reason.  But not everything is simple or can be discerned through common sense.  Central banking is one of those areas where you need real expertise.  Populist rants against the Federal Reserve show more often than not, that the speaker doesn't know what he's talking about.  I sure hope Bernanke is right, because I'm certain that I couldn't tell you when or why he was wrong if he was wrong.

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