Avoid Deflation By Avoiding It

 

A blog about business and economics.
May 15 2013 11:58 AM

If The Economy Will Collapse When The Fed Stops Printing Money Then Lets Keep Printing

Gawker's Hamilton Nolan concludes a discussion of the European Depression with his best Zero Hedge imitation:

It's only a matter of time before the Fed stops pumping money into our economy and we deflate along with everyone else and then the demographic retirement bomb hits and we have fewer younger workers supporting the baby boomer retirees and health care costs explode and everyone's cranky and hope seems like a faraway dream and all the Europeans are laughing atus. So enjoy this brief moment of self-satisfaction while it lasts.

I'm always a bit confused by this particular strand of monetary policy pessimism. If our economy will deflate just like Europe's when the Fed stops pumping money into our economy, then the obvious solution is for the Fed to keep pumping money into the economy. It's only a matter of time until the sun runs out of hydrogen atoms to fuse into helium and the entire solar system becomes unviable. It's only a matter of time until the heat death of the universe dooms us all. But unlike hydrogen atoms there is no objective limit on the quantity of money the Fed can create. It should not create so much money as to cause an annoying level of price inflation, but it should create enough money to avoid deflation and should keep doing so forever.

You often here that the Fed is artificially supporting the economy, but that's no more true than saying that America's hard-working police officers are artifically supporting the economy by arresting murderers. You can't have a prosperous economy without a properly functioning state, and conducting expansionary monetary policy is just part of the job of a 21st century state.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

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