The money supply isn’t expanding, it’s collapsing.

Few will agree with that, because M0, M1, M2 are all moving upwards. But none of these include newer debt instruments.

Debt is traded and transferred like other forms of money. Over 60 TRILLION dollars of credit default swaps (CDS) alone existed at their peak. The value of this form of money is plummetting, and this represents a rapid collapse of the effective money supply that is an order of magnitude greater in the downward direction than the upwards movement of M2 and other measures.

The Federal Reserve is expanding the more traditional measures of money supply to compensate for the collapse of the total real money supply. The seemingly-reckless expansion of M2 is a result of attempting to compensate for the far-larger collapse of the real money supply.

Thus, the “asset deflation” is really no different from price deflation and reflects the contraction of the money supply. Welcome to 1929, relived.

What the Federal Reserve is doing (quantitative easing) is absolutely correct, but probably still too small to achieve the needed effect.

The fiscal stimulus of big federal budget deficits is also perfectly appropriate, but probably too small to achieve the needed effect.

Steve

The money supply isn’t expanding, it’s collapsing.

Few will agree with that, because M0, M1, M2 are all moving upwards. But none of these include newer debt instruments.

Debt is traded and transferred like other forms of money. Over 60 TRILLION dollars of credit default swaps (CDS) alone existed at their peak. The value of this form of money is plummetting, and this represents a rapid collapse of the effective money supply that is an order of magnitude greater in the downward direction than the upwards movement of M2 and other measures.

The Federal Reserve is expanding the more traditional measures of money supply to compensate for the collapse of the total real money supply. The seemingly-reckless expansion of M2 is a result of attempting to compensate for the far-larger collapse of the real money supply.

Thus, the “asset deflation” is really no different from price deflation and reflects the contraction of the money supply. Welcome to 1929, relived.

What the Federal Reserve is doing (quantitative easing) is absolutely correct, but probably still too small to achieve the needed effect.

The fiscal stimulus of big federal budget deficits is also perfectly appropriate, but probably too small to achieve the needed effect.

Steve

The best argument for fiscal stimulus is that traditional and untraditional monetary policy have failed. In my opinion, people in support of this fiscal policy too easily dismiss untraditional forms of monetary policy or assume monetary policy comes just in its traditional, “normal” times form. Delong gets Friedman's views on policy wrong in just this way:

“In Friedman's view, if the task of monetary stabilization could be accomplished via technocratic manipulations by a non-political central bank, there would be no need for much of the apparatus of the post-World War II social insurance state.”

This misrepresents Friedman's views in both its antecedent and its consequent. First, Friedman didn't insist on a particular implementation of his optimal policy. His “helicopter drop” is the ultimate in untraditional monetary policy (notice in its implementation, this would be considered fiscal policy). Second, he wasn't against social insurance. For example, he originated the idea of the negative income tax, aka EITC. In that famous video, he said he shared the goal to help the less well off. He just complains that usually policies aimed at doing this have the unintended consequence of hurting the people they're trying to help.

Bizarre.