Wednesday, August 12, 2009

Does a Drop in Consumer Credit = Monetary Deflation?

No, not in Keynesian/Monetarist Bizarro World. Notice as Consumer Credit (red line) falls, monetary and fiscal stimulus can mitigate and reverse the effect of shrinking credit on the money supply (green line, M2 - time deposits). Observe the policy response after consumer credit began to shrink: Gov Debt (blue line) expanded rapidly, part of which was funded by banks(orange line), the fed(purple line), the foreign sector(gray line), and a lot of cash looking for a safe home(some of which was provided, or saved, by monetary/fiscal expansionary measures)

*Reserve Bank Credit (purple) is the only series scaled to the axis on the right side.