Sunday, February 8, 2009

Interesting monetarist view of the stimulus issue

This article talks about the relationship between the money supply and GNP, and how changing ratios between the two affects the economy. A key paragraph:

"In 2007, a dollar of M1—base money plus demand deposits—supported 10 dollars of gross domestic product, up from $6.30 of GDP in 1993. Allowing for 3percent growth from mid-2008, a healthy GDP in 2009 would total about $14.8 trillion. If you put the new money in the Fed balance sheet and the Treasury's emergency spending on top of the midyear total, M1 would need to support only $5.30 of GDP to achieve that 2009 target. This is the lowest ratio of GDP to M1 the United States has seen since the early 1970s. New perceptions of risk certainly mean that fewer dollars will be lent on each dollar of M1 for the foreseeable future. But even accounting for that change, it is very likely that enough has been added to the base to restore economic activity."

Some good economic education here.

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