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Why Can't We Deleverage Gradually?


The richest and most successful Keynesian on Wall St has summarized his current policy advice succinctly. The Fed should monetize all kinds of debt in order to keep the nominal economic growth rate north of the nominal interest rate. In this way, necessary deleveraging can take place gradually and less painfully.

This policy of course won't work. Instead of letting the economy adjust to reality, it will just make more ( and more painful) adjustment necessary. It might be nice to have a short but  more technical explanation of why it won't work. If one of you wish to take this on, I would be glad to share it with the Keynesian in question for response.

Apropos of this, although QE 2 supposedly ended, the Fed is still growing the monetary base at a rapid clip ( 4.1% over the last 26 weeks). As Ned Davis has pointed out, this is like QE 3 in disguise. Some of this may be an attempt to deleverage the economy gradually, but it may also reflect the Fed’s fear that the government securities market will collapse without help. Over the same half year, global central banks have provided monetary ” stimulus” at a rate equaling about 50% of what was done at the peak of the crisis.

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