“Should the Fed Pump Even More”

“The only way fiscal and monetary stimulus could “work” is if the flow of real savings (i.e., real funding) is large enough to support (i.e., fund) government activities and activities that sprang up on the back of loose-monetary policy while still permitting a positive rate of growth in the activities of real-wealth generators. (Note that the overall increase in real economic activity is in this case erroneously attributed to the loose fiscal and monetary policies.)

If however the flow of real savings is falling, then, regardless of any increase in government outlays and monetary pumping overall, real economic activity cannot be revived. In this case, the more the government spends and the more the central bank pumps, the more will be taken from wealth generators — thereby weakening any prospects for a recovery.

When loose monetary and fiscal policies divert bread from the baker, he will have less bread at his disposal. Consequently the baker will not be able to secure the services of the oven maker. As a result, it will not be possible to boost the production of bread, all other things being equal.” Read more.

“Should the Fed Pump Even More”
Frank Shostak
The Christian Science Monitor, July 28, 2010.

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