Reply To: Need help answering this guy: Rich taxes & deficits


Anyone who thinks that data can verify or falsify economic theory doesn’t understand what economic theory is (as Austrians conceive of it).

Economic theory demonstrates that if the money supply is larger with money demand the same, then the purchasing power of money would be lower. So there are two possibilities in the current situation. First, the monetary base is only part of the money stock and the relationship between the monetary base and the overall money stock is not mechanical, but depends on the actions taken by bankers. Since the crisis, they have been selling assets to the Fed in exchange for reserves (which are part of the monetary base) and holding the reserves in excess of what the Fed requires. As a result the money stock has not dramatically increased. Second, money demand has risen. People tend to hold more money during a depression to bolster both their liquidity and solvency.