Friday, March 20, 2009

The right amount of quantititative easing.

Krugman has a post up expressing approval of the Fed's announced intent to buy 1 trillion in long-term bonds. I'm all for quantitative easing (I wonder what Orwellian instinct causes them to avoid the proper phrase "printing money") but not on this scale. M1 is only about 1.6 billion (and was less that 1.4 last summer) so this is about a 60% increase in the money supply, coming on the heels of some significant printing in Q3-Q4 2008. Crudely, you'd expect about 60% inflation from this and that's far too much. As Krugman points out, the prices of these bonds will drop as the economy recovers and interest rates decrease. So even if the Fed pulls back as hard as it can in a year or so we're still left with about a 15% increase and I very much doubt the Fed will pull back even that hard as IMO that would throw us into a depression.

I think a better guide would be to print enough money, excuse me, "quantitatively ease" enough, to keep the leading indicators moderately positive. That should be enough to get us out of recession without risking the worst inflationary shock since the Constitution was written.

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