the Fed: comment from weblog

I'm mostly posting this to get William F. Hummel's comments:

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>From the *comments* to the blog post
http://angrybear.blogspot.com/2005/07/renminbi-news.html
(Comment itself is at
http://www.haloscan.com/comments/angrybear/112144446650425646/#308327 )
See also ensuing comments there
(The stuff he quoted appears on his own website http://www.taxwisdom.org/
under the heading "The Misunderstood Relationship Between Savings &
Investment")
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Kash: "By how much will China be able to ease off on its purchases of US
securities? What will happen to US interest rates as a result?"

Answer: NOTHING is going to happen to US interest rates if the Fed doesn't
want any change to occur.

Liberal economists have got to stop blindly accepting the old Classical
Theory assumption that the SUPPLY of loanable funds that become available in
the credit markets ALL comes from aggregate savings. It does not.

"There is no limit to the amount of money The Fed can inject into the
loanable funds market. If savers were to suddenly pull most of their money
out of banks and put it under their mattresses instead (equivalent to a
dramatic reduction in savings), The Fed would still be able to easily
maintain the supply of loanable funds or even increase it by simply buying
every sort of debt instrument offered in the credit markets. Even if The Fed
bought up all of the nation?s debt---something that would never happen---and
there was still a shortage of loanable funds, it could maintain/increase the
money supply by buying buildings or land or anything else it fancies."

"Whenever The Fed buys securities in the open market, it pays for them with
money that it creates out of thin air with a keystroke. It does not draw the
money from some reserve account that is limited in size.* It is ?new money?
that did not exist prior to the keystroke that created it. With any of its
purchases of securities, The Fed provides loanable funds to banks THAT WERE
NOT SAVED BY ANY SAVER."

See why the question of what happens to US interest rates if the Chinese
become net sellers of US securities is actually kind of silly? If the Fed
buys the same number/denomination of securities from commercial banks that
the Chinese are selling, the money supply remains unchanged.

The Fed is the only determinant of money supply that matters.


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