It’s a classic idea everyone has sooner or later: “Hey, why don’t I just take this really complicated toy apart and try to fix it?” There is no reason why you should be doomed to fail from the start and, should success prove elusive, you can always replace everything back and be where you started.
There is no reason, but nobody we know has prevailed at this yet. Typically, when you try to put everything back, there are always too many pieces.
Quantitative easing can and does work. An expansion of the monetary base to, say, finance public deficit (or, as it is the case in the US, substitute for the private funds that are being diverted from financing the private sector toward public debt) can eventually stimulate demand and help get out of an excess capacity deflationary situation.
The problem is putting back the pieces when the toy seems to be fixed. To see what this entails, let’s first remember who is Monetic Multiplicator and what he does to money supply:
After some radioactive experiments kept secret at an ancient Central Bank, an intern working there experienced a horrible mutation. He acquired superpowers that allowed him to increase the amount of money in circulation much like yeast does to flour (a much more boring explanation can be found here, and the gist of it is: when money is deposited in a bank, the bank uses this money to lend to other clients. Both the depositor and the debtor client have now money to spend: one writes checks against his account, the other has the money the bank lent him. The original amount has been expanded… )
The power of Monetic Multiplicator (more boringly called Monetary Multiplier) emanates from and is proportional to the willingness of the banks (public) to give (take) credit, while the limits to this alchemy are set by minimum capital requirements imposed by laws to banks to avoid bankruptcies (a proportion of assets – which are basically credit given – that they have to keep as capital to cover possible losses in these credits) .
When the crisis struck, Monetic Multiplicator arch-rival and super villain, Dr. Deflation, took advantage of the confusion to kidnap our hero and crunch him in a special press bought through the Internet to a certain LordofDepression.com You can see in the above drawing the unsightly effect this had on the young mutant.
Fedman, a regular Univ. prof entrusted with keeping law and order in Money City by appointment of a secret wise-men council (follow his crazy adventures here!), duly came to the rescue and daringly elongated Monetic’s sister, Monetika Baze (boringly known as monetary base). You see, since Monetic Multiplicator basically projects the size of his sister to achieve a larger amount of money in circulation (most boringly known as M1) a larger Monetika should result in a constant M1 in the face of the crunched Monetic Multiplicator. ¿A little confusing? See the gorgeous picture.
I have included a graph for the benefit of those who can’t smell a horse without a chart of its droppings, and decorated it with some doodles for the benefit of those who, like me, never got to read Anna Karenina in a form other than the comic version. You can see how happy Fedman is with the initial outcome of his plan.
He has good reason to. He has fully made up for the crunch of Monetic Multiplicator by stretching Monetika Baze! Her size is given by the green line and the red one shows a gently climbing M1, appropriate to combat Dr. Deflation. With recovery, people (banks) taking (giving) credit will give Monetic his powers back.
Now for the tricky part. As Multiplicator starts unfolding (and if you are recovering from a frozen shoulder like I am, you have an idea of just how painful this is going to be for the little guy), Fedman will have to start gradually shrinking his sister, Monetika Baze. Failing this, old Uncle Sam will get pinned to an imaginary ceiling by an exploding M1, since a recovered Monetic will work his magic with help from his now huge sister.
I can distinctly hear the back row shout “So what? Shrink her!” Well… As it happens, Monetika used to be this kind of chubby girl, very darling and all, but honestly, nobody to attract the look of anyone in the high school cafeteria when she walked through the door. After Fedman gave her a couple sessions in an old Spanish Inquisiton interrogation prop, however… Well, you better have a look by yourself
And who can blame all these middle aged men who will beg, threat, supplicate and get on their knees to get Fedman to leave her be? After all it’s nobody’s fault if Monetika Baze just likes wealth. She loves the company of affluent people and their business. She brings a joy and a rhythm to the party that can warm the old, weary partygoers’ hearts. She has been known to score the illegal substance Inflation and pass it around for free…
So, I’m not saying it won’t happen. All I am saying is it not going to be easy to time and measure correctly the resizing of Monetika Baze and all the risks are skewed towards inflation. The public and the powers that be will be much less enthusiastic about down-sizing Monetika than the opposite move.
As per the therapist´s instructions for my shoulder stretching exercises, “expect some resistance”.