>>>>>A recession happens when, for whatever reason, a large part of the private sector tries to increase its cash reserves at the same time. Yet, for all its simplicity, the insight that a slump is about an excess demand for money makes nonsense of the whole hangover theory<<<<<
I am persuaded by this argument, although it is admittedly Keynesian. Someone else on SI sent me a PM which I thought was a good explanation, and have asked him to let me excerpt it, but have not heard back yet. To paraphrase, the amount of money available for credit is a multiple of the amount of reserves on deposit. Reducing the amount of money deposited in banks, and therefore bank reserves, causes a contraction in the money supply, and in credit available for commercial loans. A credit crunch leads to reduced economic activity, because it takes money to make money.
We all know that too much money can cause inflation, it ought to be evident that too little money can cause recession.
CobaltBlue
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