My first claim to fame (at least among my colleagues) was when I wrote an open letter to Krugman in March, and he actually responded.  Of course his response was a quick dismissal of my plea for more monetary ease.  He did so by denying my claim that he had several times acknowledged that massive unconventional QE might work.  At the time, he favored fiscal policy, partly because he thought monetary policy had run out of ammunition, and partly because he felt that central banks were too conservative to do the really unconventional things necessary, like promising to inflate. 
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Over the last 10 months I have become increasingly aggressive in my criticism of the current state of macroeconomics.  I talked about all of the double standards.  Fiscal policy is discussed in terms of whether it can create jobs.  Monetary policy is discussed in terms of its impact on inflation.  Which sounds better, jobs or inflation?  Obviously jobs.  Yet there is nothing in macro theory that would justify this dichotomy.  Indeed, if anything an AD shock driven by government spending would be expected to be more inflationary than equivalent shock created by monetary policy.  That’s because the private sector can usually spend money a bit more efficiently than the public sector.
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I thought I would take another shot at Nick Rowe’s recent post on bad banks.  I was motivated to do this by his comments in response to some of my recent posts, which made me take a second look at what he wrote.  Banks are not my speciality, so take these comments as provisional, as a part of the ongoing conversation.

Nick tries to simplify things by imagining a world with no currency held by the public.  I am not too fond of that assumption, nor do I quite agree with his view that (in the modern world) currency is much less important than checking account balances .  I agree that checking balances are bigger, especially if broadly defined to include MMMFs, but until last year most of the base was currency held by the public, and I still think that is important.  Nevertheless, for the sake of argument I am going to go with Nick’s assumption of M1 being 100% DDs.

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Suppose the gold industry was a government monopoly, and also suppose the demand for gold was unit elastic.  Now suppose the government monopoly suddenly doubled the supply of gold.  What would happen to the relative price of gold in terms of other goods?  It would fall in half, wouldn’t it?  And that is true regardless of whether or not gold has any role as money.  We would get a sort of “gold inflation.”  Stuff would cost more in gold terms.  But not in dollar terms.

Now suppose that at some point gold was no longer used for anything other than (full-bodied) gold coins.  No more gold teeth and no more gold jewelry.  Now what happens if the government doubles the amount of gold, say from $100 per capita, to $200?  Again the value of gold would fall in half in terms of all other goods.  But this time prices wouldn’t just rise in terms of gold, prices would double in nominal terms, as gold is now money.  And this is true no matter how small a fraction of our wealth is held in the form of gold.
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This post is a reply to a recent post by Nick Rowe:

If the central bank increases the supply of reserves, and banks respond by increasing the supply of loans, the money supply expands, regardless of whether those borrowing from the bank demand a greater quantity of money. Banks really are like helicopters, in that they can increase the quantity of money held without needing to create a demand to hold more money. For any other asset, if you wanted people to hold more, without getting them to want to hold more, you would have to give the asset away, for free. Throw it out of a helicopter.

Now commercial banks certainly don’t give away money for free. But they can “force” people to hold more money even when people don’t want to hold more money. Each individual borrower accepts money in exchange for his IOU, because he can get rid of that money by buying something. But in aggregate they can’t get rid of the money they don’t want to hold. One person’s spending of money is another person’s receipt of money. But their attempts to get rid of that money are what gets us out of the recession, by eliminating the general glut of other goods.
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