Will The Fed Print More Money?

April 12, 2012

This is an important issue right now, especially in this election year. Consensus is mixed, depending on one’s view of the “recovery”, but the market appears to have melted up in anticipation of the Fed injecting more money into the economy. Then, when the minutes of the last Fed meeting were released on March 19th, the consensus of the committee was that the economy was slowly improving but they acknowledged that employment was still a concern. Therefore, additional accommodation (printing money) by the Fed may not be necessary. However, since then, the market has begun to sell off and one reason is its disappointment with the Fed’s position to not inject more money right now. Do you think the Fed really means this? Here are some thoughts from the different sides of this argument.

The Keynesians (mostly Democrats) View

In a recent article in the New York Times, Paul Krugman argued the following:
1. Because the Fed expects low inflation and high unemployment, the Fed should be much more accommodative in order to accelerate the recovery. If we don’t, we will choke off the recovery.
2. The reason we would not be more accommodative is the Republican’s misplaced fear of inflation.
3. But, we can’t worry about inflation; we should be more worried about employment. In fact, inflation of 4-5% would be a good thing. Not a bad thing.

The Keynesian-Lite (mostly Republicans) View

In a recent report written by Brian Wesbury of First Trust, he argued the following:
1. The Fed has finally admitted the economy has improved and took QE3 off the table. There is no need to print additional money.
2. Monetary policy has been accommodative, but monetary policy is not the driving force behind the market, profits are…and profit growth will continue.
3. The Fed will start raising interest rates before its stated date of late 2014. Increasing rates will keep inflation in check.

Capitalists/Austrian Economists View

1. The economy is still in recession as none of our problems have been solved. But, the Fed has already printed too much money and is prolonging the recession with additional injections of money. The only think they have accomplished is unsustainable debt and they are laying a foundation for inflation.
2. We have printed and spent $8.5 trillion dollars in the past four years. This money has raised nominal GDP. That’s because GDP is a mathematical model in which every new dollar created adds (arguably because nominal GDP has risen only $1.4 trillion) a dollar to GDP. But now the money has been spent, we have the debt and real growth has not occurred (8 million jobs lost, 7 million homes in foreclosure, banks under capitalized, interest expenses exceed 10% of income (tax revenues), wages have not kept up with inflation, sovereign, corporate and personal debt, etc.)
3. Now however, the pace of new money creation has slowed for the past two months. Because the money created with credit has been spent, the Fed has to create more money each year than it created in the previous year or the total amount of money supply contracts…. which contracts GDP.
4. Also, Bernanke and the Fed believe we are in a cyclical recession (normal, shallow) versus a systemic recession (major, caused by structural changes.) Therefore, they believe they can fill the spending “gap” with government spending which draws consumers back into the market and ends the recession. This recession is far more serious than a temporary gap in consumer spending.

Conclusion

This recession is far more serious than a temporary gap in consumer spending.
We have below trend growth and stagnant incomes and we have an election year. Do you think the politicians will print more money and kick the can down the road past the election or opt for austerity and a return into recession? I think the answer is they will print more money, but they need “an excuse” to do so (i.e., a bad jobs number or a market sell off or a war or?) because some voters are worried about our ever increasing debt. Therefore, we are now on a path toward more money, more debt or a deeper recession.