Maybe Hayek thoiught money supply is quantity times velocity, but most Austrians disagree. Not only that, Uncle Wikipedia disagrees. So does the Fed So that Bernanke was, I imagine, using the Fed definition of money supply, not Hayek’s.
The money is not stagnating in the bank’s reserves. They are lending it to the Us Govt, who, you can be sure, is not wasting any time spending it.
About the money having to be paid back, and thus “destroyed”. First of all, in QE1, tons of that money was not lent at all. It was givrn to the banks in exchange for all kinds of paper assets of questionable value. IN QE@, the money is going ot be lent to the US govt. How do you think the govt will repay the Fed? With existing money? Of course not. It will have the Fed porint new money to pay back the loans, and of course the interest. So that the QE2 money is never going to “cease to exist”, quite the opposite, it will expand and expand.
You say “What’s more, the Quantitative Easing money is added by buying financial instruments like bonds and notes…and when the Fed thinks the economy is recovering, it intends to SELL those instruments, and destroy the money.” There is a huge IF in that one, the size of an elephant. Who says the Fed will be able to sell those bonds and notes? If those bonds and notes are so attractive, why did the fed have to buy them? Why were they not snapped up on the open market?
Smiling Dave: “You say “What’s more, the Quantitative Easing money is added by buying financial instruments like bonds and notes…and when the Fed thinks the economy is recovering, it intends to SELL those instruments, and destroy the money.” There is a huge IF in that one, the size of an elephant. Who says the Fed will be able to sell those bonds and notes? If those bonds and notes are so attractive, why did the fed have to buy them? Why were they not snapped up on the open market?”
I agree but I want to add something else. It seems to me that the Fed could theorectically remove the money it adds if it bought a real asset that didn’t lose value. But I think when the Fed buys bonds all it can do is TEMPORARILY remove the money because when the bond matures money has to be “printed” to give to the bold holder.
2 scenarios:
Fed prints $100 and buys a silver coin. Monetary base is increased by $100. A year later Fed sells silver coin for $100 and “burns the money”. Monetary base is now decreased by $100. Monetary base is back to what it started as.
Fed prints $100 and buys bond. Monetary base is increased by $100. A year later Fed sell bond for $100 and “burns the money”. Monetary base is decreases by $100. Another year later bond matures and $120 is printed and given to bond holder. Monetary base is increased by $120. Monetary base has been permanently increased.
So in my opinion the Fed buying debt is worse than when it buys hard assets because it can’t undo the damage.
the bernank looked like a guilty child in that interview. his face was subcommunicating “i am just going to tell you this shit and it’s going to be ok, right? right?”