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Home Publications Blogs Beat the Press The Fed Prints Money as an Alternative to Larger Deficits, Not an Alternative to Smaller Deficits

The Fed Prints Money as an Alternative to Larger Deficits, Not an Alternative to Smaller Deficits

Monday, 08 November 2010 03:24

The NYT got the story 100 percent wrong when it told readers that:

"International concerns about the high budget deficit in the United States, and Washington’s seeming willingness to print money rather than tackle tough debt-cutting measures, help partly explain the recent anti-American criticism from countries as diverse as Brazil, China and Germany."

Actually, the Fed is taking more expansionary monetary policy; the government is not engaging in more stimulus. It would likely print even more money if the government began raising taxes and cutting spending.

This article is written largely like an advocacy piece. It does not include the view of any economists or any economic analyst who points out that the high current deficits are primarily the result of the economic collapse. Nor does it point out that the advocates of economic austerity lacked the competence to recognize the enormous housing bubbles, the collapse of which wrecked much of the world's economy. Readers should know that the admonitions for austerity are coming from highly paid people of questionable competence.


Comments (10)Add Comment
written by Mich, November 08, 2010 5:15
Phase 2. Print money.

written by Tom, November 08, 2010 5:19
Dean, sorry to bother you with my silly question, but I am not sure I understand why the Fed would print more money if we were cutting deficits. Is there some logical necessity, or is it that it would try an even more expansionary monetary policy to compensate for anti stimulatory effects of deficit cutting?
Foreign Criticism of QE2
written by Ron Alley, November 08, 2010 6:23
Krugman's comment in today's column seems aimed directly at the piece Dean cites.

This time, much of the noise is coming from foreign governments, many of which are complaining vociferously that the Fed’s actions have weakened the dollar. All I can say about this line of criticism is that the hypocrisy is so thick you could cut it with a knife.

After all, you have China, which is engaged in currency manipulation on a scale unprecedented in world history — and hurting the rest of the world by doing so — attacking America for trying to put its own house in order. You have Germany, whose economy is kept afloat by a huge trade surplus, criticizing America for running trade deficits — then lashing out at a policy that might, by weakening the dollar, actually do something to reduce those deficits.
written by izzatzo, November 08, 2010 6:59
Actually, the Fed is taking more expansionary monetary policy the government is not engaging in more stimulus. It would likely print even more money if the government began raising taxes and cutting spending.

Baker just means the Fed is stepping in to stimulate the private sector with more "monetary stimulus" because the government fiscal stimulus was so weak, where the current objective is to raise the equity value of private stocks compared to government bonds.

It gets confused because Baker also repeatedly points out that any debt incurred by the Treasury for the purpose of government fiscal spending can easily be held by the Fed instead of say, China, but technically they need not be linked.

While the effect of the new debt bought up by the Fed is targeted at the private, not public sector, it still constitutes more debt held and makes more room for fiscal spending should it occur.
written by Vince, November 08, 2010 7:21
It would be for the reason you cite. Since cuts would be contractionary the FED might decide to be even more expansionary.

The NYT article is clearly trying to imply the FED is trying to inflate away our debts. Make the dollars we pay the debts back in worth less than the ones we got "lent". And, that they are doing this instead of tackling the debt head on. Dean is pointing out that the real purpose is to stand in for the fiscal measures the government refuses to take.
written by diesel, November 08, 2010 10:20
And the government refuses to take fiscal measures because what, after all, is the use of programs that directly put millions back to work building or rebuilding parks, boat launches, public swimming pools, recreation programs, renovating historic theaters, old rural bridges, cleaning up super fund sites, modernizing energy squandering homes, installing sidewalks along suburban malls, creating crosswalks and bicycle trails to serve rural and suburban schools and so forth, all of which would give the entirely erroneous impression that government can actually accomplish something of use to society in general and you in particular?

No, in our tweedle dee/dum political world, government must masochistically demonstrate it's impotence so as not to upstage the bumbling private sector which wields the whip.
written by diesel, November 08, 2010 11:36
“The scale of the deficits are just so big,” said Philip R. Lane, a professor of international economics at Trinity College in Dublin. “The issues are political as much as they are economic.”

They want a simple problem to be complex. The scale of deficits may be "big", but larger still is the scale of untapped demand in these countries and the world at large. The money supply can be expanded without long-term harm because so many people's standard of living could be raised. The only problem is to inject this money into the economy in such a way as not to throw out of kilter existing relationships that establish relative value of investments. But some of these relations are false. Like any system, inefficiencies become institutionalized or calcified. This in direct opposition to rational market theorist's contentions. Systems, like tectonic plates, must periodically shift and this results in temporary confusion. We are in the midst of such an upheaval today. Injection of massive money into a system must be apportioned amongst players in proportion to existing relations if not to result in dislocation of value but some dislocation is inevitable and good, not to mention fair. Existing power elite resist this unless it can be guaranteed to bolster their positions as lenders. Their argument is wrongheaded. The larger public good must be served and there will be some dilution of their holdings. It is the flip side to the aggregation that just transpired, with their active connivance. They cannot see how more money in the hands of more people will stabilize the long term health of the system they sit atop of, unless they themselves are the conduit for that money stream.
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written by yiwu fair 2010, November 09, 2010 12:50
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written by PC, November 09, 2010 2:56
U.S. leaders consistently make anti-Chinese criticisms, regarding their trade surplus policy . . . . "anti-American"? seriously?! I know this isn't an economics point, but, what the hell? What journalist would call criticisms of Europe's economic policy, "anti-European"?
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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.