Explaining the Need for Money Supply Growth

In recent months, it’s become popular to bash the Federal Reserve, Ben Bernanke, Hank Paulson, and anyone else involved in money supply growth and/or the handling of last year’s frozen credit market.  I can’t say that TARP was done correctly.  There are some legitimate arguments about whether or not the executive branch defied the bounds of the Constitution by extending TARP funds to GM and Chrysler.  History and a deeper examination of the issue should provide us better answers than we have today.  What does worry me right now is the propaganda being unleashed in regard to the printing of money.  I’m very concerned about how money supply growth could fuel future inflation.  However, a number of intelligent economists and investors don’t believe inflation is a concern for today.  In fact, we really need wage growth to provide a fertile environment for inflation.

Obviously, the Fed and the federal government are quite capable of devaluing the dollar in relation to other currencies.  At some point in the future, Bernanke will likely have the unenviable duty of tamping down inflation with higher interest rates while the government is borrowing to finance ridiculous deficits.  Hopefully, he or whomever holds his current post is able to do this in the face of stiff political pressure.

Another point worth noting is that money supply growth has actually been flat since its significant spike.   Bob McTeer layed out his thoughts on the issue in terms simple enough for even me to understand.  To make a long story a bit shorter, Bernanke has done what needs to be done vis a vis the money supply to ensure the viability of the U.S. financial system and broader economy.  The greatest free market economist of all time, Milton Friedman, basically argued that the money supply should have been increased to combat banking fears during  the Great Depression.  Glenn Beck can assert himself as a spokesman for limited government, and in many ways he is.  However, Friedman understood the important functions of the Federal Reserve in terms of backstopping the entire financial system.  Alexander Hamilton, a person who is probably most responsible for laying the groundwork  of what is now the Fed, viewed a strong central bank as a way to insure confidence and stability in the country’s financial system.

Instead of me rambling on, I’ll let Milton Friedman explain via a nice video clip of the late, great economist and ardent supporter of individual freedom.