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Fiscal Cliffs and the Bernanke


From Bloomberg News:

“If no action were to be taken by the fiscal authorities, the size of the fiscal cliff is” so large that there’s “absolutely no chance that the Federal Reserve would have any ability whatsoever to offset that effect on the economy,” Bernanke said.

Notice that Bernanke said “the Federal Reserve” and not monetary policy. Monetary policy could easily offset the drag on AD from the so called fiscal cliff. Under paper money, the central bank, and central bank alone have the last word on AD. A simple statement like “The Federal Reserve will make unlimited purchases of foreign currency and equities until the FOMC foresees nominal GDP growing at the tortuously slow yearly rate of 3.8% from here onward”.

Of course, the Federal Reserve and today’s macroeconomic establishment haven’t the will to say such things. Instead it looks like Bernanke has to make the best of our dysfunctional system and beg congress to do part of his job for him. These words seem to give a glimpse at the Fed’s “reaction function”, Bernanke is basically saying that the FOMC hawks are ok with 3.8% NGDP growth, but only at monetary base levels no higher than today’s. This tells me that we can more or less forget about QEIII. Better hope nanotechnology and shale oil stop dragging their feet because it is all AS from here on.

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