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> It’s pretty easy to understand that if the government were to suddenly double the number of dollars in circulation, the value of a dollar would go down by app

> It’s pretty easy to understand that if the government were to suddenly double the number of dollars in circulation, the value of a dollar would go down by approximately half. Just because it's easy to understand doesn't mean it's correct. For example, the US money supply more than doubled in the last 10 years, yet the value of a dollar has not halved. M0 quadrupled in 10 years: https://imgur.com/a/L9mDx https://imgur.com/a/L9mDx M1 tripled: https://imgur.com/a/AaLNS https://imgur.com/a/AaLNS M2 doubled: https://imgur.com/a/0RGeQ https://imgur.com/a/0RGeQ Money doesn't work like shares of stock, where a two-for-one split makes each share worth half as much. Velocity, yield curves, economic growth and exchange rates all get to vote. If you double the number of dollars "in circulation", it also matters which economic actors hold those extra dollars. US money supply more than doubled, but the balance in most people's bank accounts and wallets didn't double. The doubling went to actors who didn't spend it, driving velocity down. This stuff is complicated with many variables. Unfortunately the "easy to understand" version doesn't explain what happens in the real world.

dragonwriter 9y ago
> US money supply more than doubled, but the balance in most people's bank accounts and wallets didn't double. The doubling went to actors who don't spend it, driving velocity down. Note that this was done in response to the velocity going down for reasons unrelated to the money supply, and largely because the government completely dropped the ball on fiscal stimulus so the central bank was left pushing the one lever it has, even though the circumstances were such that that lever was obviously not well suited to move the economy in the intended direction.
tbabb 9y ago
> M0 quadrupled in 10 years: https://imgur.com/a/L9mDx https://imgur.com/a/L9mDx Presumably the demand and market forces have changed for the dollar in that time. If the central bank doubled the supply in one day, don't you think that would have an (approximately) halving impact on the value?
- panarky 9y ago
  Here's a way to think about it using simple identities. 1) Nominal GDP = Money Spent 2) Nominal GDP = Price Level * Real GDP 3) Money Spent = Money Supply * Velocity Therefore 4) Price Level * Real GDP = Money Supply * Velocity So if supply doubles but velocity halves while real GDP remains constant, then there's no effect on prices. Economists call this "pushing on a string". The Federal Reserve increases the money supply when it buys securities like Treasury bonds and collateralized mortgages. This puts more money in the hands of banks, brokers, and wealthy investors who used to own Treasury bonds and collateralized mortgages and now they own money instead. Banks, brokerages and wealthy investors don't spend money as fast as regular people do. The money sits idle in savings and bank reserves. That drives the velocity of money down as supply increases, and it's exactly what happened over the last 10 years: https://imgur.com/a/dtVJq https://imgur.com/a/dtVJq As M2 supply doubled, velocity dropped a lot. That's why the value of a dollar didn't halve even though the supply doubled, tripled, or quadrupled depending how you measure it.
  - zxcb1 9y ago
    So, would that mean, if this low velocity money where to engage with crypto currencies, it would be distributed to regular people who would actually spend it? Enabling the equivalent of helicopter money?
  - meri_dian 9y ago
    So if the Fed was somehow able to increase money supply by getting money into the hands of the average consumer rather than wealthy individual and institutional bond holders, monetary policy would be more effective?
    - jganetsk 9y ago
      Monetary policy is just not that effective, overall. The Fed is not putting money into anyone's hands. It's just making bank balance sheets replace higher-interest paying asserts (Treasury bonds) with lower-interest paying assets (bank reserves) in the hopes that more lending will happen. But it won't. Fiscal policy is necessary. http://neweconomicperspectives.org/2012/01/mmp-blog-31-functional-finance-monetary.html http://neweconomicperspectives.org/2012/01/mmp-blog-31-funct...
crdoconnor 9y ago
Personally I think this is fairly obvious too. If the government prints a whole bunch of dollars and gives them to somebody who will just put them in a Scrooge McDuck vault so that they can dive in to them the net impact on inflation will be nil. Less obvious is the strong dampening effect that industrial slack has on inflation. Printing more dollars can mean more cars get shifted off the lot instead of the same cars going for a higher price.
- tbabb 9y ago
  Yes, agree that it gets way more complicated. But the point remains that nobody has control over the supply lever with a cryptocurrency, and that causes problems for the value of the currency.
patrickg_zill 9y ago
Q: do you believe the govt-published inflation stats are accurate? Or is inflation under-reported by the US government?
- thanatropism 9y ago
  No inflation stat is actually "accurate". Each person has its own consumption basket and the rise of prices affects him/zir differently. In any case -- what matters is that the inflation index of note is wrong in the same exact way every week. This isn't the nature of economics, it's the nature of numbers. My masters' thesis is about simulating certain physical systems. There we stipulate G=1 and get the fuck on with the real work.
pwagland 9y ago
I think that you'll find the author meant that if the number of dollars doubled, with all else held the same, that the currency would go down by roughly half. M0 doubling over ten years is not surprising if the underlying wealth that it measures also doubled, and doubling in ten years is on the right order of magnitude. Of course, there are also other factors at play, so it would be unlikely to map exactly to the inverse of supply, but as a good rough first order approximation, it works OK.
xapata 9y ago
> suddenly double Implying ceteris paribus -- all else held constant. Historical observations are generally not controlled experiments, as we only have one path through time.
- panarky 9y ago
  > ceteris paribus OK, so walk us through it. What are the mechanics that transmit the money supply increase to wages and prices? If the money supply instantly doubled by magically changing Treasury bonds and collateralized mortgages into cash, what would happen? Cash balances would go up for banks, brokerages and wealthy investors but cash balances would stay the same for most people who don't own these securities. Would that cause an instant doubling of wages and prices throughout the economy? Or would banks, brokerages and wealthy investors just hold on to their new, bigger balances? This isn't really about timing, since even if the money supply instantly doubled, you'd probably see velocity instantly cut nearly in half.
  - pitaj 9y ago
    If you were to magically split every dollar into two dollar bills, prices would almost immediately double to compensate. That implies that the dollar is now half as valuable.
    - hndamien 9y ago
      Not immediately at all.
  - xapata 9y ago
    > cash balances would stay the same You read the original comment differently than I did. I assumed some magical doubling, as if every dollar bill in someone's pocket duplicated itself. If you want to play "What If?" I guess we need to figure out if we're magically erasing everyone's memory of their previous holdings. If not, the world would go a bit crazy. Journalists would report it, we'd learn about the existence of magic, etc. So, I guess we'll need to assume that the magic doubling also makes people forget what they had before. Let's see ... there might be a bit of a wealth effect [0], but if we're saying people don't remember their old balances, would they really perceive themselves as wealthier? This question is just too nonsensical to really pursue. It could be a fun thought experiment, but it's hit the point where I'd rather get some work done instead. [0] https://en.wikipedia.org/wiki/Wealth_effect https://en.wikipedia.org/wiki/Wealth_effect

dragonwriter 9y ago

> US money supply more than doubled, but the balance in most people's bank accounts and wallets didn't double. The doubling went to actors who don't spend it, driving velocity down. Note that this was done in response to the velocity going down for reasons unrelated to the money supply, and largely because the government completely dropped the ball on fiscal stimulus so the central bank was left pushing the one lever it has, even though the circumstances were such that that lever was obviously not well suited to move the economy in the intended direction.

tbabb 9y ago

> M0 quadrupled in 10 years: https://imgur.com/a/L9mDx https://imgur.com/a/L9mDx Presumably the demand and market forces have changed for the dollar in that time. If the central bank doubled the supply in one day, don't you think that would have an (approximately) halving impact on the value?

panarky 9y ago
Here's a way to think about it using simple identities. 1) Nominal GDP = Money Spent 2) Nominal GDP = Price Level * Real GDP 3) Money Spent = Money Supply * Velocity Therefore 4) Price Level * Real GDP = Money Supply * Velocity So if supply doubles but velocity halves while real GDP remains constant, then there's no effect on prices. Economists call this "pushing on a string". The Federal Reserve increases the money supply when it buys securities like Treasury bonds and collateralized mortgages. This puts more money in the hands of banks, brokers, and wealthy investors who used to own Treasury bonds and collateralized mortgages and now they own money instead. Banks, brokerages and wealthy investors don't spend money as fast as regular people do. The money sits idle in savings and bank reserves. That drives the velocity of money down as supply increases, and it's exactly what happened over the last 10 years: https://imgur.com/a/dtVJq https://imgur.com/a/dtVJq As M2 supply doubled, velocity dropped a lot. That's why the value of a dollar didn't halve even though the supply doubled, tripled, or quadrupled depending how you measure it.
- zxcb1 9y ago
  So, would that mean, if this low velocity money where to engage with crypto currencies, it would be distributed to regular people who would actually spend it? Enabling the equivalent of helicopter money?
- meri_dian 9y ago
  So if the Fed was somehow able to increase money supply by getting money into the hands of the average consumer rather than wealthy individual and institutional bond holders, monetary policy would be more effective?
  - jganetsk 9y ago
    Monetary policy is just not that effective, overall. The Fed is not putting money into anyone's hands. It's just making bank balance sheets replace higher-interest paying asserts (Treasury bonds) with lower-interest paying assets (bank reserves) in the hopes that more lending will happen. But it won't. Fiscal policy is necessary. http://neweconomicperspectives.org/2012/01/mmp-blog-31-functional-finance-monetary.html http://neweconomicperspectives.org/2012/01/mmp-blog-31-funct...

crdoconnor 9y ago

Personally I think this is fairly obvious too. If the government prints a whole bunch of dollars and gives them to somebody who will just put them in a Scrooge McDuck vault so that they can dive in to them the net impact on inflation will be nil. Less obvious is the strong dampening effect that industrial slack has on inflation. Printing more dollars can mean more cars get shifted off the lot instead of the same cars going for a higher price.

tbabb 9y ago
Yes, agree that it gets way more complicated. But the point remains that nobody has control over the supply lever with a cryptocurrency, and that causes problems for the value of the currency.

patrickg_zill 9y ago

Q: do you believe the govt-published inflation stats are accurate? Or is inflation under-reported by the US government?

thanatropism 9y ago
No inflation stat is actually "accurate". Each person has its own consumption basket and the rise of prices affects him/zir differently. In any case -- what matters is that the inflation index of note is wrong in the same exact way every week. This isn't the nature of economics, it's the nature of numbers. My masters' thesis is about simulating certain physical systems. There we stipulate G=1 and get the fuck on with the real work.

pwagland 9y ago

I think that you'll find the author meant that if the number of dollars doubled, with all else held the same, that the currency would go down by roughly half. M0 doubling over ten years is not surprising if the underlying wealth that it measures also doubled, and doubling in ten years is on the right order of magnitude. Of course, there are also other factors at play, so it would be unlikely to map exactly to the inverse of supply, but as a good rough first order approximation, it works OK.

xapata 9y ago

> suddenly double Implying ceteris paribus -- all else held constant. Historical observations are generally not controlled experiments, as we only have one path through time.

panarky 9y ago
> ceteris paribus OK, so walk us through it. What are the mechanics that transmit the money supply increase to wages and prices? If the money supply instantly doubled by magically changing Treasury bonds and collateralized mortgages into cash, what would happen? Cash balances would go up for banks, brokerages and wealthy investors but cash balances would stay the same for most people who don't own these securities. Would that cause an instant doubling of wages and prices throughout the economy? Or would banks, brokerages and wealthy investors just hold on to their new, bigger balances? This isn't really about timing, since even if the money supply instantly doubled, you'd probably see velocity instantly cut nearly in half.
- pitaj 9y ago
  If you were to magically split every dollar into two dollar bills, prices would almost immediately double to compensate. That implies that the dollar is now half as valuable.
  - hndamien 9y ago
    Not immediately at all.
- xapata 9y ago
  > cash balances would stay the same You read the original comment differently than I did. I assumed some magical doubling, as if every dollar bill in someone's pocket duplicated itself. If you want to play "What If?" I guess we need to figure out if we're magically erasing everyone's memory of their previous holdings. If not, the world would go a bit crazy. Journalists would report it, we'd learn about the existence of magic, etc. So, I guess we'll need to assume that the magic doubling also makes people forget what they had before. Let's see ... there might be a bit of a wealth effect [0], but if we're saying people don't remember their old balances, would they really perceive themselves as wealthier? This question is just too nonsensical to really pursue. It could be a fun thought experiment, but it's hit the point where I'd rather get some work done instead. [0] https://en.wikipedia.org/wiki/Wealth_effect https://en.wikipedia.org/wiki/Wealth_effect