Pethokoukis

Why is the Bernanke Fed ignoring the money demand problem?

Here’s why Ben Bernanke made a big mistake by effectively tightening monetary policy with all his taper talk: Since 2008, the US economy has been suffering a massive shock to money demand, which the Federal Reserve has failed to fully satisfy. Let’s look at just one bit of data, which economist David Beckworth has in the past pointed to as relevant.

Here are household deposit assets and government bonds as a share of total household assets. Looks to me like Americans still want to be pretty liquid, reflecting a lack of certainty about future nominal income. That doesn’t say easy Fed to me.

062113demand

And, of course, let’s look at long-rates which have been backing up but are still pretty low. Why? Because of ongoing economic weakness that has decreased the demand for credit, both here and globally.

062113demand2

And as I mentioned earlier, we have not seen a huge increase in the broad money supply since 2008.

3 thoughts on “Why is the Bernanke Fed ignoring the money demand problem?

  1. I wouldn’t be surprised if it’s related to how the silver market was manipulated so the banksters could cover their silver “shorts” and avoid bankruptcy. The metals market is probably about to smash through the roof now, showing the true demand for the metals that are way below the demand for them (unless you consider the fake “paper silver” to be worth more than the paper they’re written on)

  2. ? M4 hasn’t expanded because the short-term credit has contracted. The CP, MM, repo markets are smaller today than they were in 2008. Here is a chart of the CP outstanding:

    http://research.stlouisfed.org/fred2/series/COMPUTN?rid=86

    Here is one for Asset-Backed commercial paper:

    http://research.stlouisfed.org/fred2/series/ABCOMPN?rid=86

    Short-Term debt is very common among financial crisis. It shouldn’t be surprise that the debt instrument commonly used to fund the bubble would contract significantly.

    Also, I wouldn’t call the liquidity number out of the ordinary considering it just went back to mid 90′s level. The late 90′s to 2008 is just as likely an aberration as people decided to keep money in riskier assets. Ugh, Macro people are terrible. They should be ticket takers on trains so they can’t do too much damage yet provide good conversation for travellers.

  3. Great blogging.

    The Fed, encrusted in yesteryear’s wars and mantras and shibboleths, has ossified into “fighting inflation.” A typical public agency, it is frozen in a previous era.

    We cannot get a better central bank through market forces. Like HUD, of the VA, or the DoD, or the USDA, the Fed is there whether they do a good job or not.

    One idea is to place the Fed into the Treasury Department. At least we could indirectly vote on monetary policy.

    Don Regan, of Ronald Reagan days, proposed just that….

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