A Bleak Employment Situation

BLS reports the bad news:

Nonfarm payroll employment fell sharply (-533,000) in November, and the unemployment rate rose from 6.5 to 6.7 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. November's drop in payroll employment followed declines of 403,000 in September and 320,000 in October, as revised. Job losses were large and widespread across the major industry sectors in November ... In November, the labor force participation rate declined by 0.3 percentage point to 65.8 percent. Total employment continued to decline, and the employment-population ratio fell to 61.4 percent.

The household survey showed an employment decline of 673,000. BLS also notes:

Over the month, the number of persons who worked part time for economic reasons (sometimes referred to as involuntary part-time workers) continued to increase, reaching 7.3 million. The number of such workers rose by 2.8 million over the past 12 months. This category includes persons who would like to work full time but were working part time because their hours had been cut back or because they were unable to find full-time jobs.

The rise in the unemployment rate sounds bad but the situation is actually worse as the fall in the labor force participation (LFP) rate masked the effect on employment relative to the population (EP). Our graph shows the two series ever since January 1999 to give some context as to how the labor market is faring today as opposed to almost 10 years ago. The need for some sort of aggregate demand stimulus could not be more clear.

Big 3 Automobile Woes and Union Wages

Kendra Marr and Steven Mufson blame the UAW:

Over the past three decades, they have lost ground to more agile foreign rivals that favored smaller cars built by non-unionized labor at lower wages.

Really? So what are the wages for the foreign rivals? They don’t tell us. Last night – Rachel Maddow did - $25 an hour. Oh, but UAW wages are $70 – right? No, try $28 an hour. Hat tip Dean Baker who adds:

Actually, many of these cars were built in unionized factories in Japan, South Korea, and Germany. Unions didn't keep foreign manufacturers from producing high-quality popular cars in these countries. Even when these companies set up shop in the U.S. they have been able to work well with unions. Toyota operated a plant in California where the workers were represented by the UAW for decades (it may still be open). There may have been problems with the way the Big Three management dealt with unions, but other car companies have been able to operate very effectively with a unionized workforce.

We will likely learn in a few hours that more workers have lost their jobs. And yet incompetent writers for the Washington Post still have theirs?

Dead Keynes Blogging

by the Sandwichman

The Sandwichman is still wondering how economists make up their guesses about how $x billion dollars of fiscal stimulus (AKA "deficit spending") will create y million jobs.

Yves Smith says they find them on the back of an envelope. Greg Mankiw says econometrics doesn't always confirm the predictions of textbook Keynesian models. Martin Wolf mentions something about how "deficits aimed at sustaining demand will be piled on top of the fiscal costs of rescuing banking systems bankrupted in the rush to finance excess spending by uncreditworthy households via securitised lending against overpriced houses." Don't you love that house-that-Jack-built volute?

Whew! It can be easy to forget that the issue here is unemployment. As Paul Krugman notes, the US employment report comes out tomorrow, Friday. "The economy is falling fast. We’ll see what tomorrow’s employment report says, but we could well be losing jobs at a rate of 450,000 or 500,000 a month."

Coming Soon: The Sandwichman Stimulus Plan. I'll show you my back of the envelope calculations.

A Golden Oldie: Invest in People

Now that stimulus is just around the corner, we are hearing more discussion of what form it should take. There is a general desire to prop up state budgets, so that legislatures are not forced to cut spending on services in the middle of a slump—a good idea. There is also an interest in putting money into roads and bridges, usually referred to as our “crumbling infrastructure”—another good idea. Here I want to broach a third.



The ranks of the unemployed are increasing by as much as half a million a month. Even if we can stop the plunge, we are in for a long, slow season, and the need for structural change in the economy guarantees that large numbers of us are going to have a rough time getting our working lives back on track. The silver lining to this very dark cloud is that it gives us an opportunity to take time out, to go back to school to get new skills, perspectives and perhaps even life goals. Already applications are up at two- and four-year colleges around the country. Meanwhile, however, the credit crunch is making it hard for prospective students to find loans, funding cutbacks are driving rapid tuition increases, and higher education is being starved for the resources it needs to continue at the same level of service, much less the increased level needed to meet the demand.

So the solution is clear: the third big piece of the coming stimulus, overlapping somewhat with revenue sharing, should be a commitment to education—to turn the tragedy of unemployment into the promise of a new beginning. Our universities, community colleges and other institutions have a model that is intrinsically scalable; give them more money and very quickly they will be able to create more seats in more classrooms, with little or no reduction in quality. There is a vast body of economic research that shows that this is one of the most productive investments we can make as a society, one that will bring returns to us as individuals and as a country long after the immediate crisis has passed.

One nice twist to this idea is that it could be accompanied by introducing a new system of tuition financing that works on both the individual and macroeconomic levels. It goes like this: students take out loans from a government agency, but instead of paying back the precise amount they borrowed, they agree to a modest tax surcharge on their earning for several years after they graduate. If they end up with high-paying jobs, they pay back more into the student loan system. If they end up with lower-paying jobs, they pay less. The overall terms, the percent of the surcharge and the number of years, are set so that, over all the graduates combined, the money borrowed is equal to the money returned. This is a progressive approach that scales the financial contribution of those who benefit from college to their ability to pay, and it reduces the pressure on borrowers to take the most lucrative jobs rather than the ones that appeal to their interests and ideals. (More schoolteachers and fewer bond traders would be a small but positive benefit of this approach.) I don’t know who first came up with this idea, but I associate it with the late, great Ben Harrison.

From a macro point of view, instituting this reform at the same time fiscal deficits are being jacked up to pay for the immediate expansion of education sends a strong signal that those deficits are temporary. They will help pull us out of the slump, but over the longer term we are putting in place a mechanism to more fully finance tomorrow’s students. The US Treasury is currently able to borrow as much as it wants at a near-zero interest rate, but this will not last forever. At some point skepticism about the fate of the dollar will start to mount, and it will be necessary to demonstrate that fiscal policy is sustainable. Reforming tuition finance is not everything, but every $50 billion or so helps.

Mark Sanford, John McCain, and Herbert Hoover

Rich Miller and Matt Benjamin report that one of John McCain’s economic advisors during the campaign is now calling for $1 trillion in fiscal stimulus over the next two years:

economists from across the political spectrum are raising the ante on how much the government should lay out. Some are now calling for at least a $1 trillion boost. Kenneth Rogoff, a Harvard University professor who was an adviser to Republican presidential candidate John McCain, and Joseph Stiglitz, a Nobel Prize winner who served in President Bill Clinton’s White House, are among those who say President- elect Barack Obama should push for a package of that size. “They need a stimulus of $500-to-$600 billion a year for at least two years to counter what is going to be a collapse in consumption,” said Rogoff, a former chief economist at the International Monetary Fund.

Mark Sanford on the other hand wants fiscal restraint:

South Carolina's Gov. Sanford is resisting the urge to propose or accept raising taxes. Faced with a shortfall, Gov. Sanford reconvened the state Legislature in October, and it made $488 million in targeted budget cuts. Gov. Sanford, unlike most of his colleagues, speaks out against any federal bailouts, including a fiscal stimulus bill that is likely to include state aid. "When times go south you cut spending," Gov. Sanford said. "That's what families do, that's what businesses do, and I don't think the government should be exempt from that process."

Publius calls this Sanford-nomics:

This is of course dead wrong -- and confuses microeconomics with macro, as any student of Econ 101 could tell you. The micro-considerations of an individual family or business has nothing much to do with what governments need to do to get the larger economy moving again. (Or just go read someone who actually knows what he's talking about - Krugman). Even worse, it's often affirmatively harmful to adopt microeconomic solutions to macroeconomic problems. Hoover: Ain't that the truth ... One larger point here is that, while "rising stars" like Sanford and Jindal may be individually compelling, they must operate within a Republican Party that has enthusiastically embraced ignorance on a whole host of subjects, economics included. The issue is whether they can escape these constraints.

Despite the fact that Kenneth Rogoff tried to advise John McCain during the campaign – McCain also called for reductions in government spending. Go figure.

Is it true that foreigners finance American debt? - Update 2

The inexplicably high relative value of the US dollar, in the context of a badly-managed domestic economy that is now in recession - prompts the question as to why the demand for this currency worldwide is so large. Who is actually purchasing the US Dollar and why?

Are foreigners denied other currency options under the weight of US dollar hegemony? Perhaps many of these foreigners are not 'foreign' at all but merely the international subsidiary branches of US corporations. A Hong Kong based economist Enzio von Pfeil makes the point that many politicians and trade theorists still apply "the thinking and measurement of trade balances that was developed 500 years ago in Italy." He says that this is innapropriate in a world now vastly changed and where giant Western multinational corporate conglomerates dominate cross-border international exchange.


A huge portion of international trade could be more accurately described as NON-MARKET/NON-TRADE. Intra-corporate 'trade' between branches of the same (mostly US) transnational corporations. “In North America trade associated with U.S. parent multinationals or their foreign affiliates accounted for 54 percent of U.S. exports of goods and 36 percent of imports. Forty percent of trade between the US and Canada in 1998 was intra-corporate. “Forty percent of the US-Europe trade is between parent firms and their affiliates, and in respect of Japan and Europe, it is 55 per cent; with regard to US-Japan trade, it is 80 %.”[2]

Enzio von Pfeil logically asks: “What is meant by "foreign ownership?...Are we talking about "pure" foreigners, or also about U.S. citizens as well as MNCs with overseas financial vehicles? He points to problems with the official Treasury records that detail the owners of US 'foreign' debt - "there appear to be no data available on how much U.S. Treasury debt is held by U.S. MNCs . What, he says, do U.S. MNCs do with at least a portion of all of that money they are making in their fabulously successful overseas operations? Optically, there is an extremely good "fit" Between the overseas investments of U.S. MNCs and "foreign" ownership of America's federal debt. This suggests that plenty of U.S. government debt is held legally by American MNCs in legitimate foreign tax havens.” [1]

International trade (and global intra-corporate transactions) is dominated by the use of a single currency - US dollars.

"...At present, approximately two thirds of world trade is conducted in dollars and two thirds of central banks' currency reserves are held in the American currency which remains the sole currency used by international institutions[3] The US provides the world - but mostly itself- with these dollars by buying goods (such as oil and other commodities), and services produced by US corporations in foreign countries. Since the US does not have a corresponding need for foreign currency, it sells far fewer goods and services in return...." [3]

Clearly, the privileged position of the US, in terms of its relative lack of need to earn foreign currencies, is a large contributer to an ongoing over-valuation of its currency. But the huge global shadow financial system must surely have an even greater impact.

When we look at trade deficits, rather than financial deficits, the UK and US do not fare well and these nationas are also the homes of the largest transnational corporations. Clearly the governments of these two countries have actively encouraged this paradigm of trade imbalance in the first instance. They have heavily subisided their corporations on an ongoing basis, given generous grants for them to extend their operations in other nations and their artificially high exchange rates have allowed these large MNCs to accumulate foreign productive assets relatively cheaply in other countries.[4] Essentially it is corporate imperialism by another name.

Finally, there's the third world debt crisis. One created by the deliberately lax lending policies of large US (and London) banks [5]. Euromarket 'cowboy' salesmen from Citibank and others pushed unaffordable loans onto the leaders of 'developing' nations and the consequent debt repayments have acted as a heavy tax on every household within their borders. A tax that had to be paid (again) in overvalued US dollars [6]. This debt, as such, has been used as an instrument of exploitation and control and its repayment continues to perpetuate and worsen global currency and trade imbalances.

[1] Trade myth five : foreigners finance America by Enzio von Pfeil, Hong Kong.
http://www.asiasentinel.com/index.php?option=com_content&task=view&id=1482&Itemid=469&limit=1&limitstart=1
Also see: http://k.daum.net/qna/view.html?qid=3gnR7

[2] It's NOT international trade. Don't be fooled. Brenda Rosser. Thursday, July 24, 2008
http://econospeak.blogspot.com/2008/07/its-not-international-trade-dont-be.html

[3] 'Petrodollar or Petroeuro? A new source of global conflict.' By Cóilín Nunan. Accessed on 8th August 2008. http://www.feasta.org/documents/review2/nunan.htm

[4] Now that these same corporations are caught in a recession with high levels of debt are we now seeing a taxpayer-funded bailout of these same multinational corporations?

[5] And those London banks also involved in Euromarket lending.

[6] Witness Paul Volker’s raising of US interest rates to usury levels in October 1979 to maintain US dollar hegemony when the currency came under attack the year before. The most alarming result was that much of the third world debt ‘sold’ by large US banks became permanently unpayable.

Where I Was Wrong About The Current Economic Crisis

There seem to be lots of econoblogsters confessing their sins of bad forecasting out there. I will do so also, perhaps especially because I have been parading around the econoblogosphere bragging about having called the housing bubble, the derivatives mess, and that the whole thing would lead to a recession, without having called the latter too early as some who are now being widely praised did. My error was to think that the crash of the housing bubble would lead to a long-awaited crash of the dollar, given that perhaps the most extreme of deep imbalances in the world economy is the massive US current account deficit that has led to the US becoming by far the largest net foreign debtor in world history. I thought the housing and derivatives crashes would catastrophically crash the dollar. I was wrong.

Instead we had that old bizarre phenomenon of the dollar as the ultimate "safe haven," with US Treasury securities being the ultimate safe haven within the safe haven, even as measurable risk spreads on such securities have widened noticeably in this crisis (heck, nothing is safe). So, instead of the dollar crashing, it has risen noticeably in the last few months, from a low of around 1.6 to the euro to around 1.26 today, or thereabouts. And 90-day Treasury bills are yielding an astoundingly low one basis point, which is effectively negative in nominal terms, given purchase fees, and while looking like a nasty liquidity trap, does not at all indicate any problems for the US Treasury in borrowing money, despite our massive foreign indebtedness and dependence on the kindness of strange foreigners, especially the Chinese, to fund our forthcoming fiscal stimulus.

Jonah Goldberg’s Stimulus Proposal – Temporary Tax Cuts

If you want your kids to learn economics, do not send them to the National Review school of economics:

But rather than blow money on a lavish reenactment of the New Deal, or continue bailing out undeserving corporations, why not really think outside the box? Rep. Louie Gohmert (R., Texas) suggests an across-the-board reprieve on paying 2008 income taxes. This would leave an extra $1.2 trillion in the hands of Americans, who are the best stewards of their own money.

I guess Mr. Goldberg never heard of the Ando-Modigliani life-cycle model of consumption or Milton Friedman’s permanent income hypothesis. These models would predict that much of this tax rebate would be saved and not consumed. Hey, wasn’t that the explanation for why Bush’s version of this did so poorly as far as stimulating aggregate demand?

Update: I emailed Mr. Goldberg a link to this post and he was not particulary amused. His retort?

Heaven forbid Americans save their money, which usually amounts to putting it in the market, 401ks

That confirms it - he has no idea that the issue at hand is insufficiency of aggregate demand yet he deems himself qualified to write a post on this topic. Go figure!

Cost and Benefits from a Fiscal Stimulus: Baker, Krugman, and Even the FED Chairman Tend to Agree

Dean Baker says Greg Mankiw gets something slightly amiss in Greg’s praise of Keynesian economics:

Greg Mankiw must know better than he indicates in his analysis of debt in today's NYT. He complains that efforts to use large-scale stimulus to boost the economy may put excessive burdens on our children.

Dean’s accounting is a must read and makes sense if one accepts the fixed interest rate version of the Keynesian multiplier. Paul Krugman has a similar take and explains:

Right now there’s intense debate about how aggressive the United States government should be in its attempts to turn the economy around. Many economists, myself included, are calling for a very large fiscal expansion to keep the economy from going into free fall. Others, however, worry about the burden that large budget deficits will place on future generations. But the deficit worriers have it all wrong. Under current conditions, there’s no trade-off between what’s good in the short run and what’s good for the long run; strong fiscal expansion would actually enhance the economy’s long-run prospects. The claim that budget deficits make the economy poorer in the long run is based on the belief that government borrowing “crowds out” private investment — that the government, by issuing lots of debt, drives up interest rates

Paul seems to think we are in a liquidity trap where monetary policy is powerless and fiscal policy’s potency is not offset by this crowding-out effect. Ben Bernarke appears to be saying similar things:

Federal Reserve Chairman Ben Bernanke said Monday that further interest-rate cuts are "certainly feasible," but he warned there are limits to how much such action would revive an economy likely to stay weak well into next year. The Fed's key interest rate now stands at 1 percent, a level seen only once before in the last half-century … "Although further reductions ... are certainly feasible, at this point the scope for using conventional interest rate policies to support the economy is obviously limited," Bernanke said in the speech. The Fed can lower its key rate only so far — to zero — and it's getting ever closer to that threshold. Bernanke said there are other ways that the Fed might bolster economic activity. The Fed, for instance, could buy longer-term Treasury or agency securities on the open market in substantial quantities, he said. This might lower rates on these securities, "thus helping to spur aggregate demand," Bernanke said. Given the limits to how low the Fed can go in reducing interest rates, the central bank over the past year has resorted to a flurry of other radical — and often unprecedented actions — with the hope of busting through credit jams and getting financial markets operating more normally.

This Federal Reserve deserves a lot of credit for doing what it can to alleviate the recession – but clearly it needs help from the fiscal side as well. Even Greg Mankiw agrees with this Keynesian premise. Let’s hope Congress goes along with the President-elect on this one.

Breaking News – Recession Started a Year Ago

MarketWatch reports:

The U.S. economy entered a recession in December 2007, a committee of economists at the private National Bureau of Economic Research said Monday. The economy reached a peak in December and has been declining since, according to the business cycle dating committee of the NBER.

While this sounds about right, many of us have been saying we’ve been in a recession for many months now. Glad the NBER finally made it official and here’s hoping we don’t have to wait very long for the recovery. Oh wait – we have to wait another 50 days to have a real President. Ahem!

The Second Coming of J. Maynard Keynes

by the Sandwichman

It's official. Big fiscal stimulus package is the flavor of the day! Let's get fiscal, fiscal. I wanna get fiscal. Let's get into fiscal. Let me hear your money talk, your money talk, Let me hear your money talk.

Sandwichman was wondering, though, "how do they get from $X billion of fiscal stimulus to X million jobs created?"

Dean Baker must have been reading my mind. "Assuming that employment is roughly proportional to output..."

Is that all there is?

Percent of GDP in additional government spending times multiplier equals percent increase in GDP and -- assuming an employment effect roughly proportional to output -- equals percent increase in employment?

Is that actually how economists estimate the employment effect of a fiscal stimulus package? Because if it is, the old Sandwichman has news for you economist folks:

EMPLOYMENT IS NOT ROUGHLY PROPORTIONAL TO OUTPUT.

But you already knew that, didn't you?

New Deal Economics: George Will Trumps Amity Shlaes for Stupidity

Paul Krugman has busy keeping up with the nonsense from Amity Shlaes and George Will so we should forgive him for not covering every point.

I was going to let the following Schlaes line go even if this graph shows that total government spending and revenues did not significantly rise as a share of GDP during FDR’s first two terms:

New Dealers raised taxes again and again to fund spending.

But then Will had to compound the nonsense with:

But people whose recipe for recovery today is another New Deal should remember that America's biggest industrial collapse occurred in 1937, eight years after the 1929 stock market crash and nearly five years into the New Deal. In 1939, after a decade of frantic federal spending -- President Herbert Hoover increased it more than 50 percent between 1929 and the inauguration of Franklin Roosevelt -- unemployment was 17.2 percent.

One graph in this post does show an increase in Federal spending as a share of GDP during Hoover’s Administration - but for the 1929 to 1937 period, the increase in Federal revenues offset the increase in Federal spending. But could someone tell Mr. Will that Hoover was not President during the New Deal era?

Paying Interest on Bank Reserves

Since Peter Dorman has been questioning the Fed’s decision to pay interest on bank reserves, I thought it would be interesting to note how Real Time Economics posed the case for this decision:

Banks are required by law to hold a certain fraction of their deposits in reserve accounts at the Fed, but receive no interest on these deposits. Having the authority to pay interest would solve two technical headaches for the Fed. If they earned interest from the Fed, banks would have no incentive to lend out excess reserves for less. That would make the Fed’s benchmark federal-funds rate, which banks charge on overnight loans to each other, less likely to plunge below the Fed’s official target — now 2% — on days when the banking system was awash in cash. In addition, the Fed could theoretically combat the credit crunch by buying securities or extending loans without limit without causing the federal-funds rate to fall to zero, something that could fuel inflation or distort markets.

In other words, the concerns were that banks would hold too few reserves and that we would end up with higher inflation. But today’s concerns seem to be that banks are holding onto too many reserves and that we may be in for a deflationary spiral and inadequate aggregate demand.

This post also noted that Congress originally intended for interest to be paid on reserves starting in 2011 out of concern that the government might lose income to private banks. While pumping a few extra millions of dollars into the private sector right now might be good Keynesian economics, perhaps delaying this new policy until 2011 would have been better given the collapse of the money multiplier.

Conservatives – Relax: Government Ownership of Banks Will Not Be Permanent

Phillip Stevens seems worried that we’re turning into socialists:

We are watching a bonfire of the old orthodoxies as well as of the vanities. This week Barack Obama promised to spend hundreds of billions of taxpayers’ dollars to prop up the sinking US economy. Gordon Brown’s British government announced it would soak the rich to pay for an economic rescue package … "Something big is happening. What started out as a series of pragmatic ad hoc responses by governments and central banks is moving the boundary between state and market. Politicians are now overlaying expediency with ideology. Government is no longer a term of abuse. Things could move still faster in the months ahead. With their myriad rescue schemes and loan guarantees, the US and British governments have nationalised their respective banking systems in all but name. The banks pretend they are still answerable to their shareholders, but it is a charade. They survive only with the explicit financial guarantee of the state. Still, the markets remain frozen, starving business of the oxygen of credit. Unless things change soon, the politicians will have little choice but to take direct control, and quite possibly, ownership, of the banks. Nationalisation could be the first act of an Obama presidency.

Please! The free market is not working that well right now so government has to step in lest we face a major recession. Paul Krugman calmly explains what we should be doing:

What the world needs right now is a rescue operation. The global credit system is in a state of paralysis, and a global slump is building momentum as I write this. Reform of the weaknesses that made this crisis possible is essential, but it can wait a little while. First, we need to deal with the clear and present danger. To do this, policymakers around the world need to do two things: get credit flowing again and prop up spending ... The obvious solution is to put in more capital. In fact, that's a standard response in financial crises. In 1933 the Roosevelt administration used the Reconstruction Finance Corporation to recapitalize banks by buying preferred stock—stock that had priority over common stock in terms of its claims on profits. When Sweden experienced a financial crisis in the early 1990s, the government stepped in and provided the banks with additional capital equal to 4 percent of the country's GDP—the equivalent of about $600 billion for the United States today—in return for a partial ownership. When Japan moved to rescue its banks in 1998, it purchased more than $500 billion in preferred stock, the equivalent relative to GDP of around a $2 trillion capital injection in the United States. In each case, the provision of capital helped restore the ability of banks to lend, and unfroze the credit markets … My guess is that the recapitalization will eventually have to get bigger and broader, and that there will eventually have to be more assertion of government control—in effect, it will come closer to a full temporary nationalization of a significant part of the financial system. Just to be clear, this isn't a long-term goal, a matter of seizing the economy's commanding heights: finance should be reprivatized as soon as it's safe to do so, just as Sweden put banking back in the private sector after its big bailout in the early Nineties. But for now the important thing is to loosen up credit by any means at hand, without getting tied up in ideological knots. Nothing could be worse than failing to do what's necessary out of fear that acting to save the financial system is somehow "socialist."

Exactly. Paul also turns his attention to the need to increase government spending:

The next plan should focus on sustaining and expanding government spending—sustaining it by providing aid to state and local governments, expanding it with spending on roads, bridges, and other forms of infrastructure.

We should also keep in mind that this boost in spending will not be a permanent increase in the size of the government. The President-elect has already told us he intends to find ways of scaling back portions of Federal spending over the longer-term. Conservative critics would do well to stop and think about the difference between the short-term economic crisis versus long-run economics before writing silly things like this op-ed from Mr. Stevens.

Collapse of the Money Multiplier

Paul Krugman writes:

A central theme of Keynes’s General Theory was the impotence of monetary policy in depression-type conditions. But Milton Friedman and Anna Schwartz, in their magisterial monetary history of the United States, claimed that the Fed could have prevented the Great Depression — a claim that in later, popular writings, including those of Friedman himself, was transmuted into the claim that the Fed caused the Depression. Now, what the Fed really controlled was the monetary base — currency plus bank reserves. As the figure shows, the base actually rose during the great slump, which is why it’s hard to make the case that the Fed caused the Depression. But arguably the Depression could have been prevented if the Fed had done more — if it had expanded the monetary base faster and done more to rescue banks in trouble. So here we are, facing a new crisis reminiscent of the 1930s. And this time the Fed has been spectacularly aggressive about expanding the monetary base.

Paul graphs the monetary base, which increased by 72 percent from September 10 to November 19 of this year. We should also note that the money supply – whether measured by M1 or by MZM – has increased by less than 1 percent. Over the same period, this has been a very substantial increase in bank reserves. Much of what the Fed has been doing has been to accommodate this increase in bank reserves so as to avoid a fall in the money supply.