April 26th, 2010 by Alex

This is Australian (not Austrian) economist Steve Keen from September of 2009. He’s in the deflationist camp. And he talks about how it is private money creation through lending that first causes inflation; government money creation he claims is a kind of after effect.

That seems basically right to me; that is why in Dissolving Dollars I used the phrase “too much debt (not money) chasing too few debt free goods and services” to describe inflation. Just consider these words by William C. Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York from July of 2009.

“A related concern is the question of whether the Federal Reserve will be able to act quickly enough once it determines that it is time to raise rates. This concern reflects the view that the excess reserves sitting on banks’ balance sheets are essentially “dry tinder” that could quickly fuel excessive credit creation and put the Fed behind the curve in tightening monetary policy…In terms of imagery, this concern seems compelling—the banks sitting on piles of money that could be used to extend credit on a moment’s notice. However, this reasoning ignores a very important point. Based on how monetary policy has been conducted for several decades, banks have always had the ability to expand credit whenever they like. They don’t need a pile of “dry tinder” in the form of excess reserves to do so. That is because the Federal Reserve has committed itself to supply sufficient reserves to keep the fed funds rate at its target. If banks want to expand credit and that drives up the demand for reserves, the Fed automatically meets that demand in its conduct of monetary policy. In terms of the ability to expand credit rapidly, it makes no difference whether the banks have lots of excess reserves or not.” http://www.newyorkfed.org/newsevents/speeches/2009/dud090729.html