The ultimate vindication of Republican supply-side economics

[EdwardBaiamonte]

Read the article or next to the last section if you don't want to read the whole article. We can learn the article title, i.e. how to reduce unemployment

so then please tell us the best way to reduce unemployment?

 

[stans]

Read the article or next to the last section if you don't want to read the whole article. We can learn the article title, i.e. how to reduce unemployment

so then please tell us the best way to reduce unemployment?

The answer to your question is to read my 6200 word article at Reduce Unemployment with Little Price Increase where the question that you just asked “What is the best way to reduce unemployment?” is explained in great detail. Anything that I say here will just be a replay of the article, and not in as great detail or with new references. The article is excerpted so that you can read the plan by itself in the next to the last section, without all of the supporting evidence of the efficacy of the plan’s components. I would be more than glad to answer any questions that you have about the plan and debate any conclusions that you arrive at where we may disagree.

But you also asked in post # 239 “a pre-war Nazi economy has little to teach us I'm afraid. What do you think we can learn from it?” and I think that you deserve an answer, so here goes. As described in my article and elsewhere in this forum, pre-war Nazi Germany recovered from the depression by the end of 1935 due to Keynesian massive deficit spending and was the only country in the world to do so and was the only country to engage in deficit spending, per my references published in post #238 of this thread. Germany’s unemployment rate went from 34.9% in 1932 to 5.7% in 1936. (Hitler came into power in January 1933.) So I recommend that we presently try to follow Germany’s economic policies of the pre-war period as best we can. Remember that there was little non-military technological investment or development in this period so that economic variable is removed, that is great economic gains could be made by technological advancement to upset the hypothesis that the economic gains of the period were due to deficit spending. But there is one problem with Germany’s policies, that is, they used wage and price controls, which we would find unpalatable. My plan does away with the need with these controls which I will go into a bit later in this posting. There is one additional component to my plan. Andrew Carnegie, the creator, builder, and owner of US Steel (his business was immediately renamed US Steel when he sold it to a group headed by J.P. Morgan. Carnegie became the wealthiest man in the world from this sale, as far as I know) only expanded his business during economic downturns. Since his company was private he didn’t have to answer to stockholders when his profits went down due to the cost of expansion. He only had to have enough liquid assets in reserve to tide him over to the next expansion (There’s more about this in my article. Read it, it’s interesting.) If we could combine Keynesian theory with Carnegie’s extremely successful regimen, somehow, then we could FORCE the four economic results that we desire, namely reduced unemployment, increased GDP, reduced National Debt (ND) to GDP ratio, and stable prices. Here’s what I suggest in a nutshell. Please see my article for greater detail or the thread that I’ve opened earlier, entitled Create Jobs by RAISING corporate taxes and giving tax credits to increase production ( 1 2). Cause business profits to fall dramatically for a few years by temporarily, RAISING business taxes, eliminating loopholes and accounting deductions such as tax loss carry forward. Simultaneously make businesses eligible for tax credits for US expansion by say, 10%-20%, of their production/service capabilities. There are additional recommendations and details described in the thread and article so please read them before you question the approach. Businesses must expand and make use of these tax credits because their competition will gain over them in the next recovery. In order to expand businesses must hire to expand, reducing unemployment and raising GDP. Since taxes have been raised and then paid back to the businesses the ND is roughly unchanged and ND to GDP ratio is lowered since GDP has increased. Prices will remain stable since manufacturers presently have excess capacity and will have more in the future since they’re expanding. So supply and demand stay in balance and we get all four of the desirable economic conditions.

 

[regent]

The recession/depressions came to their fore in the industrial revolution. At first they were treated as normal and governments waited them out. Finally in the Great Depression, government felt it could not wait it out, and various treatments were applied. They were successful in that America did not have revolutions, did not change governments and retained capitalism as her number one economic system.
The evidence points strongly that Keynes was right and the government did not spend enough, it took the spending of a WWII to have a major effect. Since the Great Depression the govenment has assumed more responsiblity for recession treatment than before. Would America today tolerate another Great Depression with the government sitting idle, waiting it out?
The major problem we don't have a sure cure as yet and the treatment and prevention has become politicial.

 

[Foxfyre]

the refs were proof of my point, that things were rosy economically in Germany in 1935 and beyond. he referenced a book in general. I ref'd 4 qoutes from 3 books at specific pages with the specific content. Did you read the refs? Did you read my article Reduce Unemployment with Little Price Increase

You really believe Hitler pulled off an economic miracle in Germany? That's what HE said. but how did he do it?

Was it true o "did the Nazi propaganda machine move into overdrive to persuade the nation and Europe that she had achieved something that other European nations had not during the time of economic depression?"

A number of policies were introduced which caused the unemployment figures to drop.

Women were no longer included in the statistics so any women who remained out of work under the Nazi’s rule did not exist as far as the statistics were concerned.

The unemployed were given a very simple choice: do whatever work is given to you by the government or be classed as "work-shy" and put in a concentration camp.

Jews lost their citizenship in 1935 and as a result were not included in unemployment figures even though many lost their employment at the start of Hitler’s time in power.

Many young men were taken off of the unemployment figure when conscription was brought in (1935) and men had to do their time in the army etc. By 1939, the army was 1.4 million strong. To equip these men with weapons etc., factories were built and this took even more off of the unemployment figure.

With these measures in place the unemployment figure had to fall drastically and many saw the Nazi figures as nothing more than a book-keeping trick. However, many would have been too scared to speak out against the Nazis or pass negative comments on the published figures - such was the fear of the Gestapo. . . .

. . . .Strikes were outlawed. . . .

There were some public works programs similar to what FDR insituted in his New deal but these were really a drop in the bucket within the whole population such as they were a drop in the bucket in our own Great Depression.

If you MUST use Germany as an example of wonderful results from government spending, please at least make an effort to keep the history honest. Hitler's unemployment numbers were just as skewed or more skewed as those currently being used by our own government now in an effort to show marked improvement. Americans have simply been brainwashed and dumbed down enough to not question the numbers. The Germans were too intimidated to question or complain.

 

[stans]

the refs were proof of my point, that things were rosy economically in Germany in 1935 and beyond. he referenced a book in general. I ref'd 4 qoutes from 3 books at specific pages with the specific content. Did you read the refs? Did you read my article Reduce Unemployment with Little Price Increase

You really believe Hitler pulled off an economic miracle in Germany? That's what HE said. but how did he do it?

Was it true o "did the Nazi propaganda machine move into overdrive to persuade the nation and Europe that she had achieved something that other European nations had not during the time of economic depression?"

A number of policies were introduced which caused the unemployment figures to drop.

Women were no longer included in the statistics so any women who remained out of work under the Nazi’s rule did not exist as far as the statistics were concerned.

The unemployed were given a very simple choice: do whatever work is given to you by the government or be classed as "work-shy" and put in a concentration camp.

Jews lost their citizenship in 1935 and as a result were not included in unemployment figures even though many lost their employment at the start of Hitler’s time in power.

Many young men were taken off of the unemployment figure when conscription was brought in (1935) and men had to do their time in the army etc. By 1939, the army was 1.4 million strong. To equip these men with weapons etc., factories were built and this took even more off of the unemployment figure.

With these measures in place the unemployment figure had to fall drastically and many saw the Nazi figures as nothing more than a book-keeping trick. However, many would have been too scared to speak out against the Nazis or pass negative comments on the published figures - such was the fear of the Gestapo. . . .

. . . .Strikes were outlawed. . . .

There were some public works programs similar to what FDR insituted in his New deal but these were really a drop in the bucket within the whole population such as they were a drop in the bucket in our own Great Depression.

If you MUST use Germany as an example of wonderful results from government spending, please at least make an effort to keep the history honest. Hitler's unemployment numbers were just as skewed or more skewed as those currently being used by our own government now in an effort to show marked improvement. Americans have simply been brainwashed and dumbed down enough to not question the numbers. The Germans were too intimidated to question or complain.

There were about 150,000 women workers who were fired and Jews were less than 0.8% of the population. There were about 19 million workers in Germany so not including women and Jews in the unemployment statistics had changed the unemployment rate of 34.9% less than 1%. Both of these obfuscations are dealt with in my article which you obviously didn't bother to read or you wouldn't have brought them up. You also said that strikes were outlawed, which is true, but you forgot to say that employers couldn't fire employees without the governments permission which was hard to get. Then you said that Hitlers unemployment numbers were skewed, again without a reference.

You're the dishonest one, not me. The topic is from 1933 to the middle of 1936. You talk about the 1.4 million man army in 1939 to dishonestly imply that the army was large in 1936. The army size was 312,000 in 1935 and approximately 400,000 in 1936, both included in my article. In post #219 of this thread you gave the present German unemployment rate of 7.4% to refute my claim that 1933-36 was a massive recovery period, again posting irrelevent information trying to imply that 1933-36 was not a massive German recovery period.

I suppose you believe that J.K. Galbraith, one of my references publishing his referenced works in 1975 and 1977 was fooled. My second reference published in 1973 is John Garraty, a historian.
My third reference is a German journalist/historian, a severe critic of Third Reich, who originally published his book in German in 1978, and who obviously was active in 1942 Germany, and you believe that he was fooled also. Did you even bother to read my referecnces in post #228.

The book that you reference in your post #224, "The History Place, Rise of Adolph Hitler", was copyrighted in 1996, very far removed from 1936 and more importantly it covers the period from October 1929 to April 1933 which is different than the one that I'm talking about. I also read the follow on book (up to 1937) (copyrighted in 2001) that covers the period from 1933 to 1939. Both of the books are purely political with no economic numerical data at all. The first book says in the "Night of the Long Knives" section that Germany's army at the beginning of 1934 was 100,000 strong. At the beginning of the "Nurmberg Laws" section your book says that Jews made up less than one percent of the 55 million strong German population, substantiating my claim of an 0.8% Jewish population. Then the follow on book says in the "Nazi's March into Rhineland" section that on March 16, 1935 hitler announced that he was going to reintroduce military conscription and build an army of 550,000 men. The next reference is about 1937 which I didn't bother to read.

To sum it up, you offered no applicable references and whatever you said was subtlely implying that I was lying, while I offered references that you can easily check

 

[DSGE]

The evidence points strongly that Keynes was right and the government did not spend enough,

What evidence? There is no such evidence. There is however evidence that demand-side recessions are invariably ended by monetary policy and not fiscal policy:

What Ends Recessions?

it took the spending of a WWII to have a major effect.

Again, no such evidence. In fact the spending of WWII crowded out private consumption and investment. There is however evidence that tight monetary policy caused the Depression and loosening of monetary policy ended it:

A Monetary History of the United States, 1867-1960, Friedman & Schwartz (1963)

 

[Foxfyre]

the refs were proof of my point, that things were rosy economically in Germany in 1935 and beyond. he referenced a book in general. I ref'd 4 qoutes from 3 books at specific pages with the specific content. Did you read the refs? Did you read my article Reduce Unemployment with Little Price Increase

You really believe Hitler pulled off an economic miracle in Germany? That's what HE said. but how did he do it?

Was it true o "did the Nazi propaganda machine move into overdrive to persuade the nation and Europe that she had achieved something that other European nations had not during the time of economic depression?"

A number of policies were introduced which caused the unemployment figures to drop.

Women were no longer included in the statistics so any women who remained out of work under the Nazi’s rule did not exist as far as the statistics were concerned.

The unemployed were given a very simple choice: do whatever work is given to you by the government or be classed as "work-shy" and put in a concentration camp.

Jews lost their citizenship in 1935 and as a result were not included in unemployment figures even though many lost their employment at the start of Hitler’s time in power.

Many young men were taken off of the unemployment figure when conscription was brought in (1935) and men had to do their time in the army etc. By 1939, the army was 1.4 million strong. To equip these men with weapons etc., factories were built and this took even more off of the unemployment figure.

With these measures in place the unemployment figure had to fall drastically and many saw the Nazi figures as nothing more than a book-keeping trick. However, many would have been too scared to speak out against the Nazis or pass negative comments on the published figures - such was the fear of the Gestapo. . . .

. . . .Strikes were outlawed. . . .

There were some public works programs similar to what FDR insituted in his New deal but these were really a drop in the bucket within the whole population such as they were a drop in the bucket in our own Great Depression.

If you MUST use Germany as an example of wonderful results from government spending, please at least make an effort to keep the history honest. Hitler's unemployment numbers were just as skewed or more skewed as those currently being used by our own government now in an effort to show marked improvement. Americans have simply been brainwashed and dumbed down enough to not question the numbers. The Germans were too intimidated to question or complain.

There were about 150,000 women workers who were fired and Jews were less than 0.8% of the population. There were about 19 million workers in Germany so not including women and Jews in the unemployment statistics had changed the unemployment rate of 34.9% less than 1%. Both of these obfuscations are dealt with in my article which you obviously didn't bother to read or you wouldn't have brought them up. You also said that strikes were outlawed, which is true, but you forgot to say that employers couldn't fire employees without the governments permission which was hard to get. Then you said that Hitlers unemployment numbers were skewed, again without a reference.

You're the dishonest one, not me. The topic is from 1933 to the middle of 1936. You talk about the 1.4 million man army in 1939 to dishonestly imply that the army was large in 1936. The army size was 312,000 in 1935 and approximately 400,000 in 1936, both included in my article. In post #219 of this thread you gave the present German unemployment rate of 7.4% to refute my claim that 1933-36 was a massive recovery period, again posting irrelevent information trying to imply that 1933-36 was not a massive German recovery period.

I suppose you believe that J.K. Galbraith, one of my references publishing his referenced works in 1975 and 1977 was fooled. My second reference published in 1973 is John Garraty, a historian.
My third reference is a German journalist/historian, a severe critic of Third Reich, who originally published his book in German in 1978, and who obviously was active in 1942 Germany, and you believe that he was fooled also. Did you even bother to read my referecnces in post #228.

The book that you reference in your post #224, "The History Place, Rise of Adolph Hitler", was copyrighted in 1996, very far removed from 1936 and more importantly it covers the period from October 1929 to April 1933 which is different than the one that I'm talking about. I also read the follow on book (up to 1937) (copyrighted in 2001) that covers the period from 1933 to 1939. Both of the books are purely political with no economic numerical data at all. The first book says in the "Night of the Long Knives" section that Germany's army at the beginning of 1934 was 100,000 strong. At the beginning of the "Nurmberg Laws" section your book says that Jews made up less than one percent of the 55 million strong German population, substantiating my claim of an 0.8% Jewish population. Then the follow on book says in the "Nazi's March into Rhineland" section that on March 16, 1935 hitler announced that he was going to reintroduce military conscription and build an army of 550,000 men. The next reference is about 1937 which I didn't bother to read.

To sum it up, you offered no applicable references and whatever you said was subtlely implying that I was lying, while I offered references that you can easily check

Sorry, but I probably obtained my six hours of university European history (amidst other history courses) closer to 1939 than you obtained your history education. Galbraith was required reading in economics class and I think I've read everything he ever wrote. As was Friedrich Hayek who was pretty pointedly critical of Galbraith's work. Experience has not been all that kind to many of Galbaith's theories and/or conclusions. I believe the only thing I've read of Garraty is The American Nation which I don't recall dwelling on the German economy though it possibly mentioned it in relation to America's involvement in that period of European history.

If you consider any challenge to your perception of history as 'accusing you of lying' I can't really help you. That was not my intent and I apologize if it came across to you that way. It is just that I believe I have a sufficient grasp of that period of history to know that Hitler did not 'fix' the German economy and that it was nowhere near the glowing success that your sources appear to present. And I provided a source to back up my opinion on that just as you did. Rebut my source if you can.

 

[regent]

The evidence points strongly that Keynes was right and the government did not spend enough,

What evidence? There is no such evidence. There is however evidence that demand-side recessions are invariably ended by monetary policy and not fiscal policy:

What Ends Recessions?

it took the spending of a WWII to have a major effect.

Again, no such evidence. In fact the spending of WWII crowded out private consumption and investment. There is however evidence that tight monetary policy caused the Depression and loosening of monetary policy ended it:

A Monetary History of the United States, 1867-1960, Friedman & Schwartz (1963)

Well I can't argue that Friedman didn't go through that period because we went to school together. But few consumer products were made during the war and many were rationed. At the end of the war Americans had money and a pent up desire to buy, and they spent and spent and bought and bought. Many people had their first refrigerator, first telephone and so on. To buy a new car one had to wait and pay under the table. New car manufacturers came on the scene. Tucker, Kaiser, Jeep and old dying ones got new life, Nash, Hudson, and so on. Was that the loose monetary policy?

 

[DSGE]

The evidence points strongly that Keynes was right and the government did not spend enough,

What evidence? There is no such evidence. There is however evidence that demand-side recessions are invariably ended by monetary policy and not fiscal policy:

What Ends Recessions?

it took the spending of a WWII to have a major effect.

Again, no such evidence. In fact the spending of WWII crowded out private consumption and investment. There is however evidence that tight monetary policy caused the Depression and loosening of monetary policy ended it:

A Monetary History of the United States, 1867-1960, Friedman & Schwartz (1963)

Well I can't argue that Friedman didn't go through that period because we went to school together. But few consumer products were made during the war and many were rationed. At the end of the war Americans had money and a pent up desire to buy, and they spent and spent and bought and bought. Many people had their first refrigerator, first telephone and so on. To buy a new car one had to wait and pay under the table. New car manufacturers came on the scene. Tucker, Kaiser, Jeep and old dying ones got new life, Nash, Hudson, and so on. Was that the loose monetary policy?

Yes. The collapse in nominal spending came from a collapse in the money supply. How was nominal spending revived? Monetization of the war debt. So in that sense I'm happy saying "WWII ended the Depression". But that doesn't mean any government spending needed to take place. Simply printing money and giving it to people would have sufficed.

The upshot is: theory tells us that monetary stimulus is vastly superior to fiscal stimulus. In fact, if the monetary authority is targeting inflation or the price level, etc, fiscal stimulus is entirely offset by the monetary authority. History confirms that story.

 

[regent]

Well I would like to know the historical evidence that confirms that monetary policy is superior to fiscal policy. Just giving money to people may mean mattress stuffing not spending. Isn't that why Townsend insisted the money under his plan be spent by the end of the month?
As for monetary policy over fiscal seems we just had another instant of fiscal policy being used with the bailouts. In any case, has Friedman's answer to economic problems pretty much gone by the boards now?
I think I'll wait for the movie.

 

[DSGE]

Well I would like to know the historical evidence that confirms that monetary policy is superior to fiscal policy.

I gave you Romer & Romer (1994) earlier didn't I?

What Ends Recessions?

Just giving money to people may mean mattress stuffing not spending. Isn't that why Townsend insisted the money under his plan be spent by the end of the month?

If that's the case, fiscal policy won't work either. Government spending won't be able to "crowd in" private spending like it does in the Keynesian model if people just save most of their income. But that's not an issue. If it were the case that people did that we'd see nominal spending collapse toward zero pretty quickly. Since that doesn't happen, we can conclude that it's possible to satisfy the demand for money, and so giving people more money balances than they wish to hold means they'll start shedding money (spending).

As for monetary policy over fiscal seems we just had another instant of fiscal policy being used with the bailouts.

That's not counter-cyclical spending. In fact we're better off putting it in the "supply-side spending" category since the entire point was to prevent financial contagion and a giant intermediation shock. Not that the bailouts are in any way relevant.

In any case, has Friedman's answer to economic problems pretty much gone by the boards now?

Nope. But Keynes' has. That's what 75 years will do to your theory. Friedman's prescription for a "money growth rule" has gone by the boards also, since we now know that monetary velocity isn't stable. But the basic idea that monetary policy is more potent, faster acting and more reliable than fiscal policy is still mainstream. Also the idea that under an inflation targeting central bank (like the Fed) the government spending multiplier is roughly zero.

That is actually something I was meaning to bring up. Effectively, Krugman is the only person still hammering away with recommendations of fiscal stimulus. But he's well aware that even considering fiscal policy for half a second requires that we be in a "liquidity trap" (since normally the Fed just offsets government spending by adjusting monetary policy). If you've read his 1998 paper on the liquidity trap, you'll know that even he thinks monetary policy still works at the zero lower bound, but it requires a level target. God knows why now he's pushing for fiscal stimulus, rather than level targeting. He's vocal about how the ECB are pursuing tight policy, wonder why he's not so critical of the Fed? But the point is, not once have I heard you mention the liquidity trap; something crucial for any suggestion of fiscal stimulus to be taken seriously. So what's going on?

 

[EdwardBaiamonte]

The evidence points strongly that Keynes was right and the government did not spend enough, it took the spending of a WWII to have a major effect.

so, does the silly liberal think we should start building planes and tanks and dumping them into the sea to end this recession? Is there any reason on earth to think that might work?? See why we have to be positive a liberal will be slow? What other conclusion is possible?

 

[DSGE]

The evidence points strongly that Keynes was right and the government did not spend enough, it took the spending of a WWII to have a major effect.

so, does the silly liberal think we should start building planes and tanks and dumping them into the sea to end this recession? Is there any reason on earth to think that might work?? See why we have to be positive a liberal will be slow? What other conclusion is possible?

See you're calling his fiscal stimulus "liberal", and you frequently call me "liberal", yet I disagree with fiscal stimulus. Do you see the inconsistency? An astute mind might suspect that you don't actually know what liberalism is; you just call anybody who disagrees with you "liberal". In which case the word is meaningless.

 

[stans]

And I provided a source to back up my opinion on that just as you did. Rebut my source if you can.

What is your source? Would you repost it? I must have missed it.

 

[itfitzme]

The evidence points strongly that Keynes was right and the government did not spend enough, it took the spending of a WWII to have a major effect.

so, does the silly liberal think we should start building planes and tanks and dumping them into the sea to end this recession? Is there any reason on earth to think that might work?? See why we have to be positive a liberal will be slow? What other conclusion is possible?

See you're calling his fiscal stimulus "liberal", and you frequently call me "liberal", yet I disagree with fiscal stimulus. Do you see the inconsistency? An astute mind might suspect that you don't actually know what liberalism is; you just call anybody who disagrees with you "liberal". In which case the word is meaningless.

There are two positions; conservative and liberal. All conservatives know that supply side economics. All liberals incorrectly believe that fiscal stimulus works. All conservatives know that fiscal stimulus does not work. All liberals incorrectly believe that supply side economics does not work.

If you do not believe in supply side economics then you are a liberal. All liberals believe in fiscal stimulus. Therefore, if you do not believe in supply side economics, you are a liberal.

You cannot not believe in fiscal stimulus and also not be a liberal. There is no such thing as a non-liberal that does not believe in fiscal stimulus.

Therefore, you do not exist.

 

[itfitzme]

Rather, you consider NGDP targeting through monetary policy of managing bank reserve amounts, discount window interest rates, and the reserve ratio.

So, what is the mechanism by which the money in reserves affects the amount of money used for purchases (or affects spendable income), assuming the velocity of money is constant? And, how do we measure it?

 

[DSGE]

so, does the silly liberal think we should start building planes and tanks and dumping them into the sea to end this recession? Is there any reason on earth to think that might work?? See why we have to be positive a liberal will be slow? What other conclusion is possible?

See you're calling his fiscal stimulus "liberal", and you frequently call me "liberal", yet I disagree with fiscal stimulus. Do you see the inconsistency? An astute mind might suspect that you don't actually know what liberalism is; you just call anybody who disagrees with you "liberal". In which case the word is meaningless.

There are two positions; conservative and liberal. All conservatives know that supply side economics. All liberals incorrectly believe that fiscal stimulus works. All conservatives know that fiscal stimulus does not work. All liberals incorrectly believe that supply side economics does not work.

If you do not believe in supply side economics then you are a liberal. All liberals believe in fiscal stimulus. Therefore, if you do not believe in supply side economics, you are a liberal.

You cannot not believe in fiscal stimulus and also not be a liberal. There is no such thing as a non-liberal that does not believe in fiscal stimulus.

Therefore, you do not exist.

Well that's bad news.

 

[DSGE]

I disagree with fiscal stimulus.

Rather, you consider NGDP targeting through monetary policy of managing bank reserve amounts, discount window interest rates, and the reserve ratio.

So, what is the mechanism by which the money in reserves affects the amount of money used for purchases (or affects spendable income), assuming the velocity of money is constant? And, how do we measure it?

The "hot potato" effect. Base money is (normally) a non-interest bearing asset. If you include inflation, it has a negative real return. Base money is good at being a medium of exchange; it's not so good at being a store of value. The result being that once we have enough money to satisfy our liquidity preference, once we have what we need for making transactions and protecting against uncertainty, etc, we don't want to hold any excess. We want to shed our excess money balances and buy interest bearing assets or real goods and such. This is "spending". Since everybody is trying to shed money at once, but the quantity of money is fixed by the central bank, aggregate nominal spending rises.

A method for measuring the effect is looking at free reserves (since we don't do direct money transfers to households, we just change bank reserves). We measure free reserves. Perform open market purchases. After time measure free reserves again. If free reserves are the same before and after, banks have shed their excess reserves. This is assuming, as you said, a constant velocity.

How does that relate to the current size of the monetary base? Well remember, the "hot potato" effect applies to non-interest bearing base money. Reserves are now interest bearing base money. They Fed pays 25 basis points of interest on them! There's more to the story, expectations and whatnot, but we can go into that after if you want. The point is it's hard to call the giant monetary base "easy money" when the Fed has dramatically increased the demand for base money by paying interest on it.

Compare with the Riksbank. They expanded their balance sheet to 25% of GDP and charged their banks 25 basis points of interest on reserves. Surprise, surprise, the Swedes managed to restore nominal spending.

 

[regent]

And that's the end result of economics, always the attempt to bend it to the left or right, and that's because it is mostly theories, terminology, politics, economists and textbooks.

 

[itfitzme]

I disagree with fiscal stimulus.

Rather, you consider NGDP targeting through monetary policy of managing bank reserve amounts, discount window interest rates, and the reserve ratio.

So, what is the mechanism by which the money in reserves affects the amount of money used for purchases (or affects spendable income), assuming the velocity of money is constant? And, how do we measure it?

The "hot potato" effect. Base money is (normally) a non-interest bearing asset. If you include inflation, it has a negative real return. ...Compare with the Riksbank. They expanded their balance sheet to 25% of GDP and charged their banks 25 basis points of interest on reserves. Surprise, surprise, the Swedes managed to restore nominal spending.

Perhaps I should be more specific. I think like a reporter, "who, what, where, when and how." When the Federal Reserve increases reserves, reduces the discount rate, and reduces the reserve requirement, who borrows the money and for what purpose? How do we determine how much has been borrowed, when, by whom, and for what purpose?