News-Record.com

Who knew?
Peter Schiff knew. And was derided for it.

We know who DIDN'T know, wasn't smart enough to know or didn't listen to those who told him. You named him above.

His prediction was right on target.

The question, though, is who knew it would take trillions in government stimulus spending to prevent it?

Schiff identified the problem as overconsumption and borrowing. So now the government is borrowing massively to promote consumption.

Yes, all that's way oversimplified. And I'm taking a tongue-in-cheek approach here anyway.

Not knowing much about economics etc. maybe you, or your son Andrew, could clarify something for me. Since the Gold Standard was abolished in 1972, can the Fed. just print as much money as it needs without limitation? If yes, why do we have to borrow money from the Chinese? If no, how does one determine how much is too much?

Dad, the idea behind the stimulus is that government spending replaces now very anemic private spending, otherwise our economy is full of excess capacity. What Bush should have done, a Keynsian would argue, is not run deficits in periods of growth as he did. Sound fiscal policy is to be counter-cyclical. The government can spend less in good times and more in bad times.

Savage, printing too much money would cause high inflation, which is what happened in Zimbabwe. Controlling the money supply is what the Federal Reserve does. Their job is to try to keep the money supply high enough to stimulate growth but low enough to prevent inflation. They manipulate the money supply by changing interest rates.

I have some basic econ knowledge, but I'm no economist like Andrew Brod who weighs in here from time to time. He could no doubt give you more in depth information and correct any mistakes I made.

Andrew C. is on the mark. Yes, we can make our money supply big or small, more or less as we choose. As a rule, too much money means high inflation, and we have ample experience from the 1970s of the corrosive effect that has on an economy.

We talk informally about printing money, but managing the money supply is generally done by various policies, including--as Andrew C. notes--setting interest rates. But there are other ways, such as buying or selling securities.

How does the Federal Reserve know how much money is too much? It pays attention to inflation and interest rates, as well as other macroeconomic variables (GDP growth, employment, etc.). Depending on what's happening, it assigns different weights to these indicators. If the economy were healthy, for example, inflation might be the only thing the Fed pays attention to for a while. In the current economy, inflation is far from the Fed's biggest concern.

During the Great Depression, the young Fed contracted the money supply dramatically, something which is now viewed as a big mistake, and sure enough the Bernanke Fed has let most measures of the money supply shoot way up.

It's quite probable that our measures to stimulate the economy will also stimulate inflation in the not so distant future. I'm not sure we have a choice, however. It's not like the Fed can move interest rates any lower. Fortunately, we've shown that we know how to fight inflation.

I think the bottom line is that this is a (nearly) singular time in the U.S. economy, and neither the usual prescriptions nor the usual ideologies will work.

In other words, a massive fiscal stimulus might not have made sense two years ago. Panic had not yet ensued, and panic is a big part of why things have locked up.

It's no accident that prior to the Great Depression, recessions were referred to as "panics."

So there is actually a singular person who looks at various above-mentioned indicators, picks up the phone, calls the mint, and says: "Yo, print some more moolah, and make it snappy"

And probably gets a cut.

To either of the Andrews:
I'm an abject fool when it comes to economics and all of my investments prove it. I even trusted the N&R's 401K plan. But how is the printing of money controlled if the interest rate is 0? Isn't wild inflation inevitable?

I think the short answer is normally, yes, but right now people are so afraid to spend money that they just aren't spending and prices won't go up if people refuse to buy anything.

As I said before, I think higher inflation will result from our attempts to pull out of this recession. But I wouldn't call it "wild" and in any case I'd worry more about the recession. We've shown that we can beat inflation. But a deep recession in which everything locks up? That's something we haven't seen since the '30s. I'd worry first about the wolf at the door and worry later about the one that may or may not come knocking years from now.

More to the point, however, we'd better hope for some inflation. That's the general prescription for economy that finds itself in our situation, which economists refer to as a liquidity trap with deflation: greater liquidity (i.e. increased money supply) fails to move interest rates or spur the economy. Sure enough, the money supply has shot way up since last fall, but the economy is still stagnant.

I admit that much of this is counterintuitive. Inflation is bad, right? But these are strange times, and when that happens the economics gets strange as well. As Nobel laureate Paul Krugman noted some years ago:

"The whole subject of the liquidity trap has a sort of Alice-through-the-looking-glass quality. Virtues like saving, or a central bank known to be strongly committed to price stability, become vices; to get out of the trap a country must loosen its belt, persuade its citizens to forget about the future, and convince the private sector that the government and central bank aren’t as serious and austere as they seem."

I'm not going to claim that all economists agree that we're in a liquidity trap. But I think that's our reality right now.

"Forgetting about the future"??? Isn't that how we got into this mess in the first place? Lending money to people that can't possibly pay it off. Credit card debt. Borrowing more money from China than can be paid off. Lending money to Thrid world countries that can't possibly pay it off.

Manana has come, Senores!

Mr. Bledsoe

Money I believe is created when you or I make a loan
It does not have to be printed. The plan is to get it moving around fast enough and left in the system creating capital ( houses,cars etc.).

You and I don't get it for 0%. Thats between banks ( liquidity) so they will be willing to loan to us at a higher rate.This basicly gives small banks access to the large pool of available money.

The little bank pays it back the next day when fresh depositors/payments come in.

In a sense it's a Ponzi scheme based on confidence
The difference being it is transparent. Madhoff, Ponzi, Enron etc simply cooked the books.

If you tell the truth and people have confidence it's ok

My simplified understanding.