Wednesday, March 14, 2012

More on the Fed

Way back in August,  I posted something on Federal Reserve policy, suggesting that what was missing from the discussion of Fed policy was the importance of velocity.  Critics of Bernanke’s easing seemed to be arguing that any increase in the money supply would lead to inflation, but that isn’t the case if the velocity of money decreases and it seemed to me very likely that the velocity of money had declined.

Along similar lines is this article on the misuse of Milton Friedman:

UPDATE:  There is a related post on the Powerline website.  It includes this from a reader:

"Yes, base money has been cranked up from ~$800B to about $2.8T. But the velocity has crashed so hard (and with it, the multiplier) that M2 hasn’t really shown a hiccup at all."

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