quote:
But perhaps there is an optimal level of spending, which can only be determined through market activity, and not by a central bank. Some wealth needs to be saved for investment. Some wealth may even need to be hoarded to mitigate risk.

Central banks don't determine spending levels. They can only operate in markets by buying securities. And yes, there are optimal levels of spending, saving, investing, etc.. However I think you may be overestimating how much the Fed can actually do.

quote:
Perhaps, if the central bankers overestimated the optimal level of spending, the result would be a few years of prosperity followed by a major crash and lower growth in the long run.

You have these backwards, if the Fed overestimates economic activity then they will tighten monetary policy sooner than they should. If they underestimate economic activity/leverage/etc. then they will keep policy loose. Again, they don't control spending, they just operate in the markets.

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Posted by The Sultan of Swine

Member since Nov 2010

7792 posts

Posted on 5/22/14 at 8:52 am to BennyAndTheInkJets

quote:
Central banks don't determine spending levels. They can only operate in markets by buying securities. And yes, there are optimal levels of spending, saving, investing, etc.. However I think you may be overestimating how much the Fed can actually do.

But Fed does affect spending levels through monetary policy. They can provide more liquidity to the banking system, and in turn, a larger supply of credit, lower interest rates, and more spending.

quote:
You have these backwards, if the Fed overestimates economic activity then they will tighten monetary policy sooner than they should. If they underestimate economic activity/leverage/etc. then they will keep policy loose. Again, they don't control spending, they just operate in the market

What I'm saying is - assume the Fed overestimates the amount of optimal spending (that is, they overestimate what the spending level *should* be. In such a case, the fed would try to maintain a spending level above what it should actually be.

I realize the way I said it may have been a little convoluted.

This post was edited on 5/22/14 at 8:53 am

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