Morning Must-Read: Paul Kasriel: The Monetary Base and the Money Multiplier: U.S. and Eurozone

…by the Fed and is taken up by the European Central Bank (ECB), let’s compare the behavior of nominal domestic demand in each central bank’s economy and venture a reason for any differences. Plotted in Chart 1 are index values of the nominal Gross Domestic Purchases in the U.S. and the eurozone, respectively…. Now, let’s examine the behavior of credit created by the central banks and depository institutions in each of these economies. This is credit that is created figuratively out of thin air. When central banks purchase securities in the open market, such as they do when they engage in quantitative easing (QE), they create credit out of thin air. When the depository institution system expands its loan and securities portfolios, it creates credit out of thin air. Credit created out of thin air enables the borrower to increase his/her current nominal spending while not requiring any other entity to reduce its current spending…