Tuesday, September 30, 2008

Another scraping from the back recesses of my brain

Again, a comment from Megan McArdle's, What am I so afraid of?, I post:
One thing that just hit me at lunchtime: Where is the government going to get this magical $700 billion? The Treasury doesn't have it laying around in a sack under Mr. Paulson's office. The government only has 2 ways to get that $700b:
  • Sell Treasury paper on the open market (or more likely straight to sovereign funds and central banks). M2 right now is around 7.7 trillion dollars (US style). 700B is around 9% of that. If you believe Shadow Stats, M3 is around 14 trillion. $700b is 5% of that. How are the money markets supposed to react to 5% of the total supply of dollars suddenly being pulled into Treasuries?
  • Have the Fed "buy" the Treasury paper with new money. How exactly is inflation supposed to react if we magically increase M2 by 9%? Fed-printed money is supposedly M3 (i.e. doesn't really count), so the whole justification in inflating the crap out of M3 was that it didn't leak into M2. Making M2 jump 10% in a matter of days just can't be healthy. Sounds a lot like Weimar Germany to this Packrat.

Neither option makes a lot of sense to me, and the latter sounds downright painful. I'm almost suspecting that a natural deflationary recession would be better for us all.

The money system is a zero-sum game. If you spend $50, you had to get it from somewhere. If you try to get it from nowhere (fiat money creation), you end up taking it from everyone.

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