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re: Debunking wild conspiricies
Posted on 5/22/14 at 8:52 am to BennyAndTheInkJets
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
Posted on 5/22/14 at 9:28 am to The Sultan of Swine
quote:
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. 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.
Got it and agree, which is kind of the goal of monetary policy effectiveness. If you want to argue that they have at times been too loose at times and too tight at times then that's fair and I can pick out specific instances where that was the case.
However, the point is its always a matter of alternatives. If you look over history, pre-1933 recessions happened more often and were much more severe (in terms of %GDP impact). The flip side is they corrected themselves quicker. Post 1933 we've had less recessions that were less severe, however they correct slower. My preference lies in the disdain for higher volatility with non-central bank economics. Volatility erodes confidence and development. Hell, even mathematically if you have a security that goes up 60% and down 40%, while another security goes up 6% and down 4%, the first is worth lower than your initial investment while the second is worth more. I know this isn't exactly an apples to apples comparison by any means but you can understand why volatility is detrimental to economic development. Volatility creates uncertainty, which curtails spending, which curtails investment and the cycle goes on.
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