Friday, November 5, 2010

The Fed, Printing Money, & Reserves

I sometimes find myself disagreeing with economics writers whom I respect, because they have made good arguments in an article and then make an inconsistent statement on debt, bank reserves, or net government savings with statements on debt and net government savings usually lacking stock flow consistency..

Alea wrote a much linked short piece on the Fed does not print money which is factually correct despite some economic textbooks and commonly accepted myth.  The Pragmatic Capitalist, which I find a very useful source of opinion and information, expanded upon the Alea piece by commenting that bank reserves constrained lending, when bank lending is actually constrained by the price of reserves (see answer for question #3) and bank capitalization.  Consequently, the leverage created by banks in lending can be good (stimulates growth) or bad (overheats the economy) just as the failure to lend can be bad (deflates the economy) or good (cools the economy).

When economically incorrect beliefs reach commonly held mythic proportions of an icon, the political debate becomes falsely conceived and subject to hidden agendas as the myths are manipulated to influence and control the citizenry.

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