A recent column by Paul Krugman left me asking a question of myself. Is Mr. Krugman trying to deceive his readers or is this just one more superficial column written to meet a deadline?
The column is an attack on Ron Paul's views on economics. The core principle of that view is the concept that printed money must be backed by gold. Mr. Paul is opposed to "fiat money" or "monetary expansion" as practiced by the Federal Reserve since the early 1970's when the gold standard was abandoned.
Mr. Krugman points out that the "Federal Reserve doesn't actually print money (the Treasury does that). But the Fed does control the "monetary base," the sum of bank reserves and currency in circulation. (italics mine) So when people talk about Mr. Bernanke printing money, what they really mean is that the Fed expanded the monetary base."
I conclude this means that the Fed, using reserves and currency in circulation, i.e., existing, already printed, "lends large sums to banks as well as buying a wide range of other assests in a (successful) attempt to stabilize financial markets, in the process adding large amounts to bank reserves.
Did you get that subtle tail of 9 words tacked to the end: 'in the process adding large amounts to bank reserves?'
Mr. Krugman ends the paragraph with this: "The combined effect of these actions was that the monetary base more than tripled in size."
I know that Mr. Krugman is trained in economics. His work is recognized and read around the world. Indeed, he has won the Nobel Prize for Economics. So why doesn't he explain how the Fed, without printing more money, can triple the size of the monetary base?
I conclude that Ron Paul is correct. The monetary base is 'expanded' by fiat money. Fiat is a latin term which means "let it be so." Mr. Bernanke, finding the Fed needs trillions of dollars to stabilize the economy, says "Let it be so" and, magically, money is 'loaned', 'sent out', or 'transferred' as required or needed. Thus the monetary base is expanded.
My dictionary defines 'expand' as "to increase dimensions of; cause to swell or distend."
It then cites a quote from Virginia Woolf as an illustration: "One's perceptions blowout rapidly like air balls expanded by some rush of air."