Quantitative Easing, Version 2.0

Per the FOMC announcement:

To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve's holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities. The Committee will continue to roll over the Federal Reserve's holdings of Treasury securities as they mature.

Here, we see an attempt by the Federal Reserve to prevent price deflation. Whether or not you believe price deflation will occur (I would wager that the readers of this website tend to view price inflation as the likely outcome), this particular move is inflationary as the Federal Reserve has not committed to reducing the size of its balance sheet.

Many intelligent people (e.g., Mish) are forecasting that price deflation will occur in the short-term. I tend to agree with Mish (in regards to the short-term). As noted in one of the Mises Daily articles for today:

After the crisis arrives and the depression begins, various secondary developments often occur. In particular, for reasons that will be discussed further below, the crisis is often marked not only by a halt to credit expansion, but by an actual deflation — a contraction in the supply of money. The deflation causes a further decline in prices. Any increase in the demand for money will speed up adjustment to the lower prices. Furthermore, when deflation takes place first on the loan market, i.e., as credit contraction by the banks — and this is almost always the case — this will have the beneficial effect of speeding up the depression-adjustment process.

The above quotation is courtesy of Murray Rothbard's book: Man, Economy, & State.

Oh No...Not...Deflation *GASP*

It seems as though the Federal Reserve chairs and board members across the country have their knickers in a bunch over what appears to be one of the biggest threats to the recovering economy. Aside from a few branches (Philly & Kansas City) most Fed members are calling for action to combat what could be a "Japan-like" deflationary trap.

Let's begin here by looking a little bit further into deflation itself...

Deflation is the increase in the value of money which then allows for the prices of goods and services to lower, because your money is worth more. Deflation can happen for many reasons combining supply and demand, however some of the most basic reasons for deflation are the increases in the supply for goods, people saving (hoarding) money, and the contraction of the money supply.

Fiat Currency: Redesigned

StumbleUpon brought me to a page of proposed redesigns for American currency.  I thought a couple of them were worth sharing here:

• For those who refuse to understand the simplest of Latin mottoes, let's be clear that we're "One Nation from Many People":
  
  
• Here's rich irony -- Lincoln with the Fourth Amendment (I do like the idea of having the Bill of Rights on something so commonly handled as money though.  It would still be a fiat currency, but at least people might be a little more familiar with their rights):
  
  
• Appropriately frivolous -- "It's, like, totally a Federal Reserve Note, OMG":
  
  

The Bloggers Strike Back

Many of you remember the diatribe passing as an academic paper written by Federal Reserve economist Kartick Athreya.

However, it seems some bloggers are striking back (including here at YAL) as well as the Daily Telegraph's Ambrose Evans-Pritchard who had this to say about the Fed:

Central banks were the ultimate authors of the credit crisis since it is they who set the price of credit too low, throwing the whole incentive structure of the capitalist system out of kilter, and more or less forcing banks to chase yield and engage in destructive behaviour.

The full article is here.