Steve Keen, from Australia, published a blog on economics, focusing on global debt.
A good primer to start with is his explanation of how our economic system really works called “The Cavaliers of Credit”. Most of our economics classes taught us a simple model – that the Fed makes money, banks lend it, and this multiplies and makes more money.
Keen writes this is true, but that the amount of money made by banks so dwarfs what the Fed does that the Fed’s actions are inconsequential:
To make a serious dent in debt levels, and thus enable the increase in base money to affect the aggregate money stock and hence cause inflation, Bernanke would need to not merely double M0, but to increase it by a factor of, say, 25 from pre-intervention levels. That US$20 trillion truckload of greenbacks might enable Americans to repay, say, one quarter of outstanding debt with one half—thus reducing the debt to GDP ratio about 200% (roughly what it was during the DotCom bubble and, coincidentally, 1931)—and get back to some serious inflationary spending with the other (of course, in the context of a seriously depreciating currency). But with anything less than that, his attempts to reflate the American economy will sink in the ocean of debt created by America’s modern-day “Roving Cavaliers of Credit”.
Read that again…
Explained simply…. when we went off the debt cliff, the Federal Reserve printed $700 billion (or so) dollars. To replace the “bank made money” lost by the asset collapse and unwinding leverage would have taken $20 trillion dollars in instant money printing. They peed on a bonfire.
What does this mean? Basically, we have no mechanism to fix what has happened. In the words of Steve Ballmer (CEO of Microsoft):
“The perspective I would bring is not one of recession. Rather, the economy is resetting to lower level of business and consumer spending based largely on the reduced leverage in economy”.
In other words…. live smaller and take our lumps. What we shouldn’t do, however, is this.