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| Yes, this I agree with. Hypothetical of no fiscal deficit, no central bank, commercial banks only, the money creation by new loans of commercial banks has defined limits. Bank capital is always the limit, bank deposits or other sources can also be a limit. Doesn't matter for the hypothetical. M2 from commercial lending in this scenario cant grow forever and would grow or contract based on the aggregate amount of loans outstanding at any given time in the economy.
That aint the world we live in. Politicians run deficits every year and they are accelerating. This floods the world with US Treasury department debt and also direct cash injects (ad hoc farm payment direct deposited into your bank account). The Fed has a dual mandate, jobs and inflation. To handle this ever increasing amount of US soveign debt, they monetize it periodically. Takes awhile to shake out. Yes, the Fed does inflate the debt away. This adds immense M2. This adds inflation, as does those direct cash payment from uncle Sam. The Fed could do nothing, but Congress would fire them all when the jobs market goes to crap.
This money creation from both direct government payments to your bank account and via Fed debt monetization adds to commercial bank's deposit base (not their capital however, that is the bank's equity). So then yes, banks have more deposits to loan and could add more M2. Except right now, US banks are under loaned as they dont want to take more credit risk than they currently are. | |
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Fighting inflation
