Semi-Daily Journal

Brad: You shouldn't mislead impressionable young children--do you want them to grow up to be monetarists, for god's sake? ;-) Uncle Milton is and always has been wrong about inflation. Inflation is everywhere and always a deficit-spending phenomenon caused by political stalemate. Once stalemates lead to non-financiable deficits, either money has to be printed, fueling an already existing inflation, or you stabilize prices and default on everything else by passing laws that prohibit the printing of money, which always end up plunging the economy into depression. It happened that way in Germany and today in Argentina.

There is only one real remedy for inflation: get spending under control--this requires that _somebody_ has to bite the bullet and cope with lower purchasing power. Period.

Sorry to sound so strident/obsessed, but this has always been one of my main peeves about macroeconomics--inflation breeding hard money fanaticism.

How does your kid know who Uncle Milton is? That's a smart kid. I don't want to sit here defending Germany, but I was under the impression that large war reparations from the Versailles Treaty were the major expense as opposed to the three items you cited. . . .

Just a guess, but that child is a daughter, right? The line about dad not being as funny as he thinks.

You've made 2 mistakes: the German money supply grew exponentially DURING the war, from around 1915 onward. The postwar period began with the sudden release of HUGE pent-up money supply. Postwar spending decisions had a second-order impact on the hyperinflation. Secondly, Hjalmar Schacht became Reichbank President in 1933 under Hitler, long after the 1919-23 inflation. He was a hard money man.

Just for color commentary -- literally.

I happen to have, (though not to look at in front of me at the moment) a small collection of notes from his period. (I was a G.I. in Germany in the early 1980's. My landlord was renovating his home and found bales of currency stuffed into the walls for insulation... he made gifts of the stuff to all his American friends)

The smallest note I have was denomated at 100 marks. It is beautifully engraved on both sides,
with portraits and watermarks, printed in a range of subtle blues, on heavily substantial, creamy colored paper. It's about 4"x6"

There are a lot of 1000 mark notes. In golden tones. Some with detailed engraving, but some,
with later print dates, where the printing is rather smudgy. Still got pictures and still on decent paper. About the same size.

The latest-printed note is a 100,000 note. It's tiny, about half the size of an index card. It's printed in primary red and blue over about 80% of one side. The paper is thin and coarse -- you can just about make out chunks of wood pulp in the substance of it. No pictures. Certainly no watermark. Milton BRADLEY prints more valuable-looking stuff as props for their board games.

You can look at the denominations, the print dates, and the quality of the bills, and just infer the increasing scorn the German mint must have had for their own product.

I'd think that a government deliberately taking an inflationary course would invest at least a little effort into keeping the physical quality of the scrip high enough to support the community illusion that the stuff has some intrinsic value.
Put an assortment of pictures of historica landmarks on stuff. Big elaborate portraits. Watermarks on the bills and gold tones on the coins. This day and age, maybe some sort of "copy protection" feature that suggests the originals are rare and valuable.

Oh.

Hmm....

I think I need to go re-read Krugman's article about liquidity, the baby sitter's club, and the coupons he and his friends invented.

No, she doesn't know who Uncle Milton is yet...

Melcher, I think there's another fairly obvious explanation why bills got shoddier and shoddier. It just wasn't worth it to print proper bills because nobody knew when an end of inflation was in sight. So it would have been a waste of money to print nice bills - and even with hyperinflation people actually don't like to waste money. ;-)

An Icelandic friend told me an anecdote about an inflationary period there, when the government started coining aluminum; people punched holes in the coins and used them as washers as washers because they were worth more in that application than their face value. A-and what's Mr. Berle got to do with monetarism?

"The Nine-Year-Old: What is inflation, exactly?"

"Me: When everyone thinks they have more money in their pockets and bank accounts than they need, and everyone tries to spend it at once, and so prices in terms of money rise: money becomes worth less--and, in the German case in the early 1920s, worthless."

"The Nine-Year-Old: Dad?"

"Me: Yes?"

"The Nine-Year-Old: You're not as funny as you think you are. I just think you should know that."

??? Geez, I hate to think this, but maybe even the Nine Year Old in the DeLong household is above my level of sophistication?

Was Dr. Dad really kidding, with his explanation inflation? If he wasn't, I think the explanation was pretty bad. It makes inflation into something magical...what people "think." Whereas, inflation is a quantifiable and explainable phenomenon. I would have explained inflation with the isolated desert island explanation...

D-oh!!!! I see here:

http://www.oswego.edu/~dighe/lstumwk7.htm

...an explanation of "inflation" that is completely incompatible with what *I* learned. (At Virginia Tech, where economics professors knew about the value of a dollar. ;-))

This website seems to be saying that a *relative* change in prices can cause "inflation." But at Virginia Tech, we were taught that ONLY printing more money could cause inflation. I would have gotten an "F" for the explanation of inflation that's given on the website...unless I made it clear that the island government had expanded the money supply from $200 to $240.

Interesting!

P.S. If Dr. Dad truly *was* kidding...that reminds me of Calvin's (of Calvin and Hobbes) Dad's explanation of why ice floats: Dad: "Ice floats because it's cold. It's cold, so it wants to get close to the sun." Calvin: "Really?" Dad: "You could look it up." Calvin (grumbling): "I shoulda done that, in the first place." Dad (happily...mainly to himself) "You can learn a lot from your old man."

Oh! Scratch that! "Worth less," "worthless." Good...it's just been so long since I've been around 9-year-olds, that I don't even remember what their humor is tuned to.

Soooo...I definitely think the, "When everyone thinks they have more money in their pockets and bank accounts than they need,..." is a terrible explanation. It makes it sound like magic that everyone has more money. But it ain't magic. It's just a printing press. (Which is still pretty amazing...but not magic.)

My dad told me about inflation when I was about 12.

Dad: Saammy, do you know what inflation is?

Me: No.

Dad: It's what makes the prices go up. Do you know what causes it?

Me: No.

Dad: It's when you go to your boss and say: "I need more money, cause I've done such a good job or what have you." and your boss says: "Sure." But he can't just give you the money, he has to raise prices somewhere else. When he does, other employees will ask the same of their bosses, and so prices just keep going up.

So my father's 12-year-old was left with cost push inflation, while yours is left with an expectations-augmented Phillips Curve.

Much as it will read like I'm trying to start a food fight so Brad's daughter will look totally mature in comparison, I'll have to say that you guys are wrong and that that part of Brad's explanation is right: printing money is a symptom of inflation, not its cause. The real cause of inflation is deficit spending, i.e., when people think that there is at least as much money as they need. But Brad spoiled it then by saying that if you stop printing money inflation will stop--what actually happens is that if you stop printing money without also reducing deficit spending, you get a type of repressed inflation--people's demand for income is controlled only by the inability to purchase the factor of production that they sell, i.e., recession/depression, and one macroeconomic imbalance is replaced by another.

As someone else pointed out, Hjalmar Schacht was anything but an inflationary finance minister. In fact, he was dismissed by Hitler precisely because he didn't believe one could have guns and butter, and he thought the butter more worthwhile getting than the guns.

Also, I seem to recall that the Weimer-era hyperinflation was deliberately instigated by the government to avoid meeting its reparations obligations under the Treaty of Versailles. That it had the effect of wiping out Germans' savings was no more than a side-effect (and a welcome one at that, at least in hyper-nationalist circles, in as far as it enflamed public opinion against both the French and the SPD).

As someone else pointed out, Hjalmar Schacht was anything but an inflationary finance minister. In fact, he was dismissed by Hitler precisely because he didn't believe one could have guns and butter, and he thought the butter more worthwhile getting than the guns.

Also, I seem to recall that the Weimer-era hyperinflation was deliberately instigated by the government to avoid meeting its reparations obligations under the Treaty of Versailles. That it had the effect of wiping out Germans' savings was no more than a side-effect (and a welcome one at that, at least in hyper-nationalist circles, in as far as it enflamed public opinion against both the French and the SPD).

... when I first discovered trillion-Reichsmark notes in my grannies house I was five years old and a bit confused by kajillions of zeros behind the ones. When I asked my dad he told me that - yeah, we're actually really rich, but I should not tell anybody.

I did not get it at the time, but I guess he was as funny as he thought he was.

And I wonder if calling Hjalmar Schacht a hard money man is really justified given his "magical" MEFO-war financing strategy?

Love the play.

Anne

"Me: When everyone thinks they have more money in their pockets and bank accounts than they need, and everyone tries to spend it at once, and so prices in terms of money rise: money becomes worth less--and, in the German case in the early 1920s, worthless."

This really does make sense to me. Why the quibbles?

Andres: If inflation is caused by deficits, why is Japan in DEflation?

George: I'm talking about deficit spending across the whole economy, not just the public sector (and deficit spending which is not, by the way, financed by foreign lending). If the private sector in Japan were going on as big a binge of deficit spending as its private sector, then Japan would see some inflation. Maybe that's what it needs.

Oops. That should read "as its public sector". Serves me right for posting too quickly.

There's a refinement on all this, that was discovered in the late 18th century, practised in colonial situations in the 19th century when the countries involved were relatively advanced (so it doesn't feature in English speaking tradition), and was even applied by Germany to Vichy France and its North African possessions.

It's quite simple. Don't just print money for current purposes, acquire revenue yielding resources like land, factories, etc. This gives you a wealth transfer with long term consequences and it LOOKS as though you are providing a capital inflow rather than just mobilising local resources. You can sometimes even keep local inflation down by reducing the local subsistence economy - as people get shifted into the cash economy they get a greater transaction demand for cash, and their greater cash incomes give a spurious impression of getting better off (remember that when you read Dollar & Kraay).

All this may yet happen to the wider world, using the US$ as a reserve currency this way with restrictions on foreign ownership eliminated.

Saam Barrager writes, "So my father's 12-year-old was left with cost push inflation,..."

I don't agree that such inflation is possible. Nothing but the government printing more money can cause a rise in ALL prices. If the government doesn't print more money, for each price rise, there has to be a price that goes down somewhere, or a demand that goes down somewhere. This absolutely MUST be true, because money doesn't appear from thin air.

So, in your example, if you demand more salary, and your boss gives it to you, and your boss raises his prices, then either: 1) the amount demanded of *his* product must go down, or 2) the amount demanded of someone *else's* product must go down, or 3) the price of someone else's product must go down, or 4) some combination of those three things.

That's because there is a specific, finite amount of money in the system...all of which is created by (or allowed to be created by) the government. A single worker or group of workers...or even ALL workers...demanding more money can't change the money supply. Only the government (well, int the U.S. there is also its designated representative, the Fed) can cause inflation.

"A-and what's Mr. Berle got to do with monetarism?"

Uncle Miltie is, in this case, Milton Friedman. (The Nine Year Old is wrong, her father's a real card. ;-))

"I'll have to say that you guys are wrong and that that part of Brad's explanation is right: printing money is a symptom of inflation, not its cause. The real cause of inflation is deficit spending, i.e., when people think that there is at least as much money as they need.

I'll agree that *government* deficit spending is a cause of inflation. But *personal* deficit spending can't cause inflation, unless the government obliges by printing money. What happens if there is lots of *personal* deficit spending going on, and the government *doesn't* print more money, is that lots of people go bankrupt. But the money supply doesn't increase. It can't, because nobody but the government can print money. (I'm deliberately ignoring that the Fed can increase the money supply, by lowering the required reserve ratio for banks. I'm essentially lumping the Fed in with "government.")

"If inflation is caused by deficits, why is Japan in DEflation?"

My own personal explanation for that is: 1) *Unanticipated* inflation hurts savers, and helps debtors, 2) the Japanese government is heavily in debt, and so would benefit from creating *unanticipated* inflation, but 3) the Japanese people are generally savers, so they would be hurt by unanticipated inflation...sooooo, 4) the Japanese government refuses to print money, to cause inflation (to help itself) for fear of ticking off all the savers in their citizenry.

In other words, I agree with Andres, that *if* the private sector was heavily in debt in Japan, then Japanese government would create inflation.

But I definitely disagree with Andres' implication that private borrowing can ever *cause* inflation. Only the government printing money (or allowing banks to lend more money, for a given amount of reserves) can cause inflation.

>>That's because there is a specific, finite amount of money in the system...all of which is created by (or allowed to be created by) the government. A single worker or group of workers...or even ALL workers...demanding more money can't change the money supply. Only the government (well, int the U.S. there is also its designated representative, the Fed) can cause inflation.<<

Hmmm. I think that strange Bahner alien is trying to communicate with us again. ;-)

Too bad we don't speak each other's language, but let me reiterate--once the wage-price spiral that's described above is in effect, the government can either validate this spiral by printing money, in which case you get a general increase in the price level (this is _one_ form of inflation), or, if the the government does not choose to validate by printing money, you get a buildup in wage payment arrears to workers and/or payment arrears to firms (I believe this is a _another_ form of inflation, but I admit I am in the minority). This latter form of imbalance can only be eliminated by mass layoffs, which transform an inflation problem into an unemployment problem.

This is why hard money solutions to inflation are utterly suicidal, at best leading to a delayed economic collapse and at worst allowing people like the Nazis to take power. About the only thing Bahner and I agree on is that the government is to blame for allowing inflation to take place. But it's not the guys in the printing presses who are to blame, it's the people writing the budget statements. Shall I see if there's anyone who can translate, Mark? ;-)

Japan's private credit intermediation function is famously broken, with existing borrowers unable to pay off their debts, and fresh private lending all but frozen.

"Too bad we don't speak each other's language, but let me reiterate--once the wage-price spiral that's described above is in effect,..."

Stop right there. I don't agree that "wage-price" spirals ever exist, without the government printing more money.

As I mentioned previously, if a worker demands more money, and the employer pays him more, and then the employer raises the price of his product, then either: 1) the demand for his product goes down, or 2) the demand for someone else's product goes down, or 3) the price of someone else's product goes down.

Unless the government prints more money, there can't be inflation.

"..., in which case you get a general increase in the price level (this is _one_ form of inflation),..."

That is the only form of inflation I can see that can exist.

"...or, if the the government does not choose to validate by printing money, you get a buildup in wage payment arrears to workers and/or payment arrears to firms (I believe this is a _another_ form of inflation, but I admit I am in the minority)."

Yes, I don't see how this sort of inflation can possibly exist...in a country like the U.S., anyway. I get paid every month (or two weeks, now that I'm working less than 40 hours per week). My employer can't possibly get in "arrears" to me. I stop working when I stop getting paid.

"This is why hard money solutions to inflation are utterly suicidal, at best leading to a delayed economic collapse and at worst allowing people like the Nazis to take power."

That's complete nonsense, Andres. The United States operated on a "hard money" gold standard, right up to the 1930's. (With some dalliances into silver.)

The result was, if you look at inflation, for the entire period from 1800 to 1931, it was....ZERO. There was absolutely ZERO inflation, for a period of 130 years.

In that time, there were no governmental collapses, or flirtations with fascism. (In fact, the United States is arguably MORE fascistic now...if fascism is defined as a very big federal government.)

Further, economic growth wasn't SUPPRESSED during that period. It was actually *greater* than since the U.S. completely left the gold standard, during the Nixon administration.

The only thing I'll grant you about the period that the U.S. was on the "hard money" gold standard is that economic growth was more volatile. It had higher highs, and lower lows (if you don't count the Depression of the 1930s). But, once again, ON AVERAGE, U.S. economic growth was higher when we were on the hard money gold standard. (That's because hard money protects savers, and therefore encourages saving/investment.)

"But it's not the guys in the printing presses who are to blame, it's the people writing the budget statements."

Oh, yes. Obviously. It's Congress (with the help or hindrance of the President) that causes inflation. No one in a Treasury printing office can just print whatever amount of money they choose.

As long as you agree with me that what private people do can't cause inflation, we're golden. The government causes it (or prevents it).

"Japan's private credit intermediation function is famously broken, with existing borrowers unable to pay off their debts, and fresh private lending all but frozen."

I'm not sure exactly how many "existing borrowers" we're talking about. But my impression is that Japan is chock-full (has a large number) of elderly people who basically saved a very large percentage of all that the earned, after they started working, after WWII.

So my impression is that Japan has a large fraction of the electorate that has money saved...and they'd be pretty p@ssed if the government inflated away all their hard-earned savings. (Especially since they're close enough to retirement that they can't earn much more.)

*That,* I think, is why the Japanese government hasn't simply turned on the money spigots, to erase the big (government) debt.

Now...unfortunately, I now see that doesn't explain why there isn't already huge inflation in the U.S. (Since we have few savers, and the government in debt.)

Soooooo...my explanation for THAT would be, either: 1) U.S. inflation will soon start up, big time, or 2) there is something about the global economy that it's hard for a government like the U.S. to "decouple" and inflate its debts away.

Couple of comments first.

Number One : Inflation is absolutely normal, and a Good Thing.

The Western economies have had inflation since the thirteenth century at least. The nineteenth and early twentieth centuries were unusual, in that you didnt have the regular drift upwards in prices.

Note that the inflation of the sixteenth century began before the American silver started turning up (cf Earl Hamilton). This (to my mind) casts a little doubt on the theory that "inflation == increase in the money supply"

Inflation is a Good Thing, because if we do not have inflation, we can get deflation, and deflation causes people to put off buying things until they are cheaper, and then the capitalist machine breaks down.

Germany in general - and the Weimar State in particular - survived the Inflation of 1923. The Great Depression and the associated Deflation of 1929-1932, on the other hand, caused the fall of Weimar.

Secondly, governments are not the only people who create money. To think otherwise is to follow the error of the Fuggers, who complained that the Genoese had "More paper than hard cash". If money is something that is a means of exchange and a store of value, then negotiable corporate shares, debt and so on are "money". Now, "government money" is usually more acceptable, but I dare say I can find people who will accept a parcel of IBM shares in exchange for a house.

By the way, if anyone wants to read a good book on the German Inflation, read Remarque's "The Black Obelisk" ... he's the guy who wrote "All Quiet on the Western Front" btw.

Ian Whitchurch

Hmmm. Mark, I have to admit I had you tagged wrongly; I didn't think you were a hard money ideologue (and yes, I'm a soft/fiat money ideologue, I'm unashamed to admit), especially as hard money is a form of government intervention in currency markets, which libertarians are supposed to be against. i.e., it is the government which constantly has to maintain the correspondence between the money supply and gold supply, which means not letting banks do what they will. But let's look at the individual passages:

“Yes, I don't see how this sort of inflation can possibly exist...in a country like the U.S., anyway. I get paid every month (or two weeks, now that I'm working less than 40 hours per week). My employer can't possibly get in "arrears" to me. I stop working when I stop getting paid.”

In Russia in the 1990's and Argentina during the Tequila and default crises, when it was not legal or acceptable for government agencies and many firms to lay off workers, such wage and payments arrears were the order of the day. Workers had to either put up or not show up, which might endanger their long-term career prospects. Obviously, such wage/payment arrears are impossible in the good ol’ USA, where your employer has the freedom to fire your ass if it suits his bottom line (unless you are one of these despicable tenured academic types).

“That's complete nonsense, Andres. The United States operated on a "hard money" gold standard, right up to the 1930's. (With some dalliances into silver.)”

Oh, what a can of worms. The US never dallied with silver after 1870 (Bryan failed in all three attempts at President). Before WWI, the gold standard was arguably to blame for some periods of very high unemployment, (e.g, the Depression of 1870). In general, the gold standard worked in a half decent manner before WWI only because of fortuitous circumstance, namely, that the four largest economies (the US, UK, Germany, and France) were of roughly the same size and level of financial stability, which resulted in capital flows and gold being evenly distributed between the four. After WWI, this essential symmetry was destroyed and the gold standard turned out to be a disaster of catastrophic proportions.

Take the U.S. Before WWI, the US did well on average because there were never any sort of labor-induced cost-push pressures like that discussed earlier, due mainly to large immigration which kept the labor force above the number of good jobs and also to the predominantly anti-union political atmosphere. In the late 1920's however, a different set of cost-push pressure emerged. Germany and the UK were debt-ridden basket cases and France was not much better off. The resulting inflows of capital(gold) to the U.S. created the cost-push stock market bubble. The Fed decided to stop validating this bubble, in effect by not increasing the money supply in response to gold inflows. The result: a collapse of the stock market. In the resulting financial panic, the Fed disastrously pushed up real interest rates in an effort to prevent gold from flowing out, leading to a complete collapse of liquidity and collapse of the economy.

Or take Germany. The hyperinflation of 1922-23 was caused by massive deficit spending on the part of both the private and public sectors, for which there was no external financing and which could thus only be met with the printing press. When Hjalmar Schacht took over the Reichsbank in Nov. 1923, he stopped inflation cold not only by introducing the Rentenmark but more importantly by firmly anchoring it to gold in a return to the gold standard. _But_, this policy did not address the question of long-term solvency for the government and firms. For a while, the renewed confidence in the German economy led to capital inflows which staved off financial collapse. Soon, however, it became clear that Germany was unable/unwilling to meet its reparation and foreign debt burdens, which led to the disappearance of foreign capital inflows, and since the Reichsbank could not print money, to wholesale economic collapse. Except for the subsequent rise of Adolf Hitler and the Nazis, this is exactly the same story as Argentina’s ill-fated experiment with the dollar standard in 1991-2001.

“Further, economic growth wasn't SUPPRESSED during that period. It was actually *greater* than since the U.S. completely left the gold standard, during the Nixon administration.”

Wrong. The U.S. never went back to the gold standard after 1933. From 1944-1971, only other countries’ central banks could trade in dollars for gold at a fixed ratio with the Fed. This meant that an essential component of the gold standard–the ability of individuals to trade in money for gold at a guaranteed ratio, was gone for good. The gold standard thus definitely cannot take the credit for the Golden Age of economic growth 1946-1973.

“As long as you agree with me that what private people do can't cause inflation, we're golden. The government causes it (or prevents it).”

We're not golden (standard), god forbid. The private sector _can_ cause inflation if it spends too much and doesn't save enough, _and_ either the government does not counteract this with fiscal policy or there are not enough foreign capital inflows. In that case, the central bank is left with a pretty miserable choice: (1) print money and allow price inflation to happen, or (2) don't print money and allow either suppressed inflation (wage and payment arrears) or large-scale unemployment. i.e., it's the government's responsibility to make sure that its level of saving and spending offsets that of the private sector, or you're going to have a macroeconomic imbalance one way or the other.

In general, Mark, I'm surprised that you are a gold bug. Read Uncle Milton's passages on the gold standard and exchange rate policy in _Capitalism and Freedom_--they're about the only chapters of the book that I heartily agree with. Even Alan Greenspan has foresworn his youthful fetish for the gold standard. Fossil monetarists like Allan Meltzer and Anna Schwarz have also come out against the gold standard. Whatever you think about the good or bad effects of inflation (Ian's comments are in the right direction, but highly exaggerated), the gold standard and hard money in general is an idea whose time has gone.

"Now...unfortunately, I now see that doesn't explain why there isn't already huge inflation in the U.S. (Since we have few savers, and the government in debt.)"

Mark, you're still thinking in terms of a closed economy. Both private and public sector net savings in the U.S. are negative, but this is counteracted by large foreign capital inflows to the US. If these capital inflows ever slow down suddenly, the U.S. will either have to inflate away its foreign debt or will have to engage in large scale default with a resulting level of output collapse.

As others have commented, Schacht was only appointed currency commissioner in 1923 and really can't really be blamed for the Weimar inflation.

Mark: Think about the *velocity of circulation* of money. It's not a constant.

As regards Mr. Bahner's assertion that cost-push inflation cannot happen w/o the government printing money because there is a finite amount of it in circulation -- how does the phenomenon of credit cards affect this? Is there anything to stop the mass of people from going on a credit binge and together spending more money than is actually in circulation? (Not an economist, I have no clue what the upshot of such a binge would be nor how it could tie into the topic of inflation -- just throwing a thought out for consideration.)

Oops, sorry 'bout the impatience to post -- I see Mr. Bahner answered my question immediately below the post I was responding to.

I was thinking of Japanes business/commericial/industrial borrowing being frozen.

Japanese households are very liquid, but reportedly favor anything that'll get interest rates up, so they can get a return on their cash exceeding zero.

Yes, I know that in deflation, even a zero nominal rate is a positive real return, but that's too subtle a point for some, if press reports are to be believed.

> Inflation is absolutely normal, and a Good Thing.

IIRC, under the gold standard, the British rate of inflation was nearly zero over the course of more than a century, which included wars and the industrial revolution.

As for it being a "good thing", obviously that is only true if one owns appreciating assets and/or does not exist on a fixed income.

"(Not an economist, I have no clue what the upshot of such a binge would be nor how it could tie into the topic of inflation -- just throwing a thought out for consideration.)"

Oh, don't worry about that. I certainly am not, either. (And I've forgotten 99+% of whatever I learned in the very few economics courses I took, 20+ years ago.)

Now, global warming, I could tell you a thing or two about (though that isn't my super-duper specialty, either) :-)

http://pages.prodigy.net/mark.bahner

Mark -

You are laboring under the misapprehension that governments or central banks have any control over the money supply (not surprising, since that's what is taught in most macro classes...). The disatrous monetarist experiments of the early 1980's should have disabused people of this notion, but it seems to be a peculiarly robust idea. Central banks supply money the same way utilities supply electricity: they provide the system with whatever whatever is demanded, else the system comes crashing down...