Partially Hydrogenated

As I commented earlier, the U.S. Federal Reserve, under the leadership of HelicopterICBM Ben Bernanke, has been taking dramatic, completely unprecedented steps (at least when you only include those who know the dangers of what they’re doing and are taking only calculated risks, and exclude Zimbabwe and Hitler’s Germany) to try to stave off another Great Depression by trying to keep the money supply constant (and slightly increase it, at risk of minor inflation).

The doubling of United States currency from between Lehman Brothers’ bankruptcy and the end of 2008 should be applauded as perfect, rational, orthodox (as far as economic theory goes for dealing with unorthodox situations) monetary policy. M1 and M2 increased, but not very far. For the most part, we just kept the total money supply roughly stable and increased it slightly. To do so when confronted with such extreme deleveraging took extreme confidence that only a truly brilliant scholar of the Great Depression, like Ben Bernanke, could have.

For one, the previous monetary expansion only offset bank delevering. The excess credit expansion was minor, and it’s clear that the Federal Reserve was aiming to keep the money supply constant, with only a slight inflationary bias (because it’s better to err on the side of inflation than deflation, according the economic theory since Keynes):

However, corporate interest rates and credit spreads are still high:

A fairly standard, efficient-markets style interpretation of credit spreads is that the difference is purely the percentage probability that a corporation of the given credit rating will default in any given year. Because of the debt overhang and Fisher’s debt deflation the U.S. is still experiencing, getting out of this mess may require more than standard Monetarist economic policy of keeping the money supply stable.

In a new statement today, however, the Federal Reserve just got truly radical. In addition to the last $800B in new money they just printed, we’ve announced we’re printing $1.1 Trillion in new money! (Note: when the Federal Reserve uses the phrase “expanding our balance sheet“, that truly means they’re printing that much money on a somewhat permanent basis, and just expanded their power). The U.S. has left the territory of keeping our money roughly stable, and has gone into the “we will induce inflation and currency devaluation, no matter what it takes” mode of operating.

If you’ve read Ben Bernanke’s monograph on the Great Depression, you know that he feels strongly that the countries who executed competitive currency devaluations earliest performed the best during the Great Depression. However, competitive currency devaluations are classic “beggar-thy-neighbor” policies which Ben, and most others, feel made the Great Depression worse. It’s clear that Bernanke has watched the world become more protectionist, and Europe and China continue to be reluctant to print money, that he is giving up hope for coordinated policy among the G20 that will help the world get out of this mess, and is taking it up on the United States to save themselves at the expense of the world.

I expect that this Federal Reserve press release will be looked upon by the media as just another event among the bailouts and policy, but it is far more than that, and truly historical.

Update: deleted retarded paragraph about the difference between base money and bank reserves - the difference is virtually meaningless, and I wasn’t thinking well when I wrote it.