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« Card Check is Likely Coming | Main | How to Reduce Charitable Giving »

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Joel

Isn't a central part of this problem a direct result of the Fed paying interest on deposits? Could we develop a program that started making those deposits less amiable to banks and ease the money supply higher?

Phil

The problem right now is the spike in the adjusted monetary base which, at some point, is going to have to come down to tame inflation.

Richard C Schiming

The monetary base is the raw material for money creation. The impact of monetary base on inflation depends on the size of the money multiplier. If you take a look at the money multiplier, it is at an all-time low. The reason that growth rate of monetary base is so high is to compensate for the dramatic downturn in the size of the money multiplier. If the Fed did not dramatically increase monetary base, the money supply would be shrinking and we would be worried about deflation. The combination of a deep recession and deflation would be painful. The impact of the growth of monetary base on inflation is greatly muted by the reduction in the size of the money multiplier.

Richard C Schiming

Just a follow-up to my previous comment. If you look at the M1 money multiplier at http://research.stlouisfed.org/fred2/series/MULT,
you can see the dramatic decline in the size of that multiplier.

Richard C Schiming

PS: Make sure to drop the comma at the end of the URL to get the right address.

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