Friday, 19 June 2009

Did the Fed double the money supply?

I just watched this YouTube video in which Ron Paul said the the Fed had just doubled the money supply. But (thinking out loud here), I suspect that what the fed have just done is doubled the monetary base, which is not the same thing at all. The money supply can only expand up to is maximum (as allowed by fractional reserve limits) if the banks can find enough people who are both willing to borrow and a good enough bet that they can pay back. Now it strikes me that if there is a sustained period in which people are reluctant to borrow, then we may not get hyperinflation after all. We may instead end up in a situation like Japan with a combination of near zero interest rates combined with close to zero inflation.

The banks would of course hate this scenario with a passion because with no borrowing their profits will dissapear. So they will try every trick in the book to get people to borrow more.

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