Sunday, August 30, 2009
What really killed the economy?
Was it the bursting of the real estate bubble or the credit crunch or high oil prices? All of the aforementioned have been offered as reasons for the collapse in the global economy and asset prices that started two years ago.
The real reason, however, may have been as simple as the Fed engineering money growth rates to practically zero in early 2007. Money is ike the blood of the economy and the most basic "money" is that which the Fed creates: Federal reserve notes and reserves. These represent the two biggest components of the monetary base (coins are the third). Think of an inverted pyramid, the apex being the monetary base and all other money--bank debt, private credit etc--flowing upward toward the top.