Sunday, December 28, 2008

Still way too much money sloshing around for a depression

Despite the fact that many banks, some businesses, and some consumers have had liquidity problems over the past year, the simple fact is that overall there is still way too much money sloshing around in the economy for a depression to take root in the near term. Sure, some people are short, but others have more than enough to spare. There are several trillion dollars in money market funds alone. For a depression to take root we would need to see a substantial chunk of the current money supply simply evaporate. Sure, that could happen, but it has not happened to date. As long as the Federal Reserve and Congress succeed with the various stimulus programs already underway and currently anticipated, we will be unlikely to see the kind of evaporation of liquidity in the overall economy that would be needed for a true depression to take root and thrive.

Sure, the Federal Reserve and Congress still could manage to stumble and make enough policy mistakes that could lead to a depression, but we are not seeing any evidence of such mistakes, yet. In fact, some people are arguing that the Fed is pumping too much liquidity into the economy.

-- Jack Krupansky


At December 29, 2008 at 11:08 AM , Blogger Avrion Fos said...

Hi Jack,
I can't pretend to understand the significance of having a sufficient money supply to the question of whether or not we'll see a depression--Zimbabwe has a massive money supply, but their dollar doesn't buy anything. The definition of depression is a bit vague--it seems to be simply a long and more severe recession. We've already seen four quarters of decline in GDP and the outlook does good for 2009. How will we dodge the bullet?


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