I’m not as panicked as Kevin, SayUncle, and PDB about the vast expansion of the money supply. While I would not sell myself as any economic expert, the risk in inflation the money supply is, well, inflation. But my understanding is that the reason to do this is to prevent giving rise to a much worse beast, which is deflation. We’re already experiencing deflation in a lot of sectors, like Housing, which was the match that lit this fire.
If this recession is fundamentally a problem of people over-borrowing, and business being over leveraged, and falling asset prices, one easy way out of the problem is to inflate your way out of it. The problem with deflation is that it gives people an incentive to hoard money. Not to spend, or invest it, but just to sit on it, because it’ll be worth more tomorrow than it is right now. That’s very damaging to the economy.
Inflation is painful to people who have saved, which isn’t many of us these days. Too much inflation is indeed a bad thing, but if the problem is too much debt, and declining asset prices, an inflationary cycle would actually help alleviate the problem. Unfortunately, runaway inflation is also a big problem, and stopping it can be highly painful. I suspect this massive expansion in the money supply is going to have detrimental effects at some point, as the fed will have to tighten the spigot to deal with inflationary pressures. That’s going to suck, but I suspect it will suck a lot less than the consequences of deflation. Given that, I’ll worry about what effect a rapid expansion in the money supply is going to have when it comes time to cross that bridge. The really scary part to me is, everyone, even expert economists, seem to be playing this by ear. No one seems to really understand what’s going to get us out of this.
