Seeking Alpha: U.S. Economy: Sinking in an Ocean of Newly-Minted Money

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U.S. Economy: Sinking in an Ocean of Newly-Minted Money

At one time or another we have all heard it said that "you cannot get there from here." Much the same can be said of the current state of the US economy. Every prominent economic pundit is focusing on falling demand as the economy's nemesis. Nouriel Roubini points out that "85 percent of aggregate demand — consumption and fixed investment — is now in free fall." It's even worse than that because final demand as it is calculated does not include inter-business spending (spending between the stages of production). If this were taken into account the picture would change from grim to downright scary. That Treasury bills have been trading at negative rates is evidence enough of the markets fearful state. In response to the crisis the fed forced the fed funds rate down from 1 per cent to between 0 per cent to 0.25 per cent. The real funds rate is now negative. (If the rate is 0 per cent and the inflation rate is 5 per cent then the real rate of interest is a negative 5 per cent). Some commentators feel that the present negative rate is not high enough and argue that it took a much higher rate to get the Reagan boom moving. But they overlook the obvious fact that a higher negative rate requires a higher inflation rate. It is clear that this view is based on the egregious error that money is neutral and that the successful manipulation of interest rates is one of the keys to maintaining a successful rate of capital accumulation. This is a very dangerous line of thinking and one that the fed adheres to.

To expand demand (a euphemism for an inflationary policy) the fed is engaging in what economists call "quantitative easing." In plain English, the fed is adding to its balance sheet by purchasing assets from the banks. When the fed does this it adds to the banking system's reserves and forces down the rate of interest. One can get a good idea of how much money the fed has injected into the banking system from the fact that since September the fed has accumulated more than $2 trillion in assets. This was supposed to stimulate business borrowing and hence investment. Well, it ain't working, which I think has Bernanke in something of a panic. However, as the eminent British economist D. H. Robertson observed 82 years ago: