Thursday, March 19, 2009

Fed Follows Friedman

In early February I mentioned Milton Friedman's recommendation for how the government should stimulate the economy.
Friedman concludes that the most reliable plan for stimulus would be to print money and use it to buy existing government bonds. Historically a one-time printing of money need not lead to inflation, and removing government bonds from the market would move money previously used in those investments to private consumption or investment.
Today the Federal Reserve began doing exactly that in a really big manner.
All told, the Fed will pump as much as an extra $1.15 trillion into the economy via bond purchases. The Fed will buy as much as $300 billion in long-term Treasurys in the next six months. It will increase the ceiling on purchases of mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac to $1.25 trillion, up from $500 billion. The Fed also is doubling potential purchases of their debt, to $200 billion.
Now the Big Question is whether the Fed's effort is too big, or whether the combination of this and the other governmental efforts to stimulate the economy is too big. Then Friedman's plan would be derailed by the government causing inflation. Sadly, I do expect this to happen.

UPDATE: China also expects U.S. inflation.

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