Government Debt

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While the government can create and destroy money, banks can too. So if the government creates a lot of dollars via spending but banks destroy it via reducing lending, then the amount of dollars floating around the economy won’t go up, and companies will be less likely to freak out and start raising prices rapidly. This happened during the Great Recession. But we don’t really know what makes banks do this, or when the process might stop. Presumably banks could reduce lending all the way to 0, but would they? And what would the economy look like then?)--Noah Smith,

I'd never thought of that. What would Fischer Black say? He thought the money supply was endogenous. I think the implication is that instead of inflation, we might just have the banks stop lending and the economy would go into a death spiral. That's worse than hyperinflation.

Could it be that Fed anti-recession policy caused the Great Recession, as in 1930 its opposite anti-recession policy caused teh Great Depression?