6 ms·

> 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 ti

by 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...
    - meri_dian 9y ago
      But that's not an answer to my question. I'm asking if - regardless of how policy is being executed now - money were distributed throughout the economy, would that accomplish the goals of monetary policy more effectively than the way it is traditionally carried out?
      - jganetsk 9y ago
        Distributing money to the economy = fiscal policy.
      - ultraluminous 9y ago
        It does answer your question - what you're misundestanding is that "distributing money throughout the economy" is fiscal policy, not monetary policy. That's what the OP meant by "fiscal policy is necessary" and "the government dropped the ball on fiscal policy". The Federal Reserve, as a body, and monetary policy in general by extension, does not posses the tools to enact fiscal policies. EDIT: oops didn't see OP already clarified.
        meri_dian 9y ago
        But monetary policy is also injecting money into the economy. Both fiscal and monetary do this, but differ in two ways: the nature of the money injected and the way the injection is performed. Monetary policy increases the money supply itself through the exchange of money for treasury bonds and relies on banks to distribute this "new" money, while fiscal policy redistributes money that already exists (previously collected through taxes) and gives it to active businesses through government purchases rather than to bond holding institutions.
sdenton4 9y ago
It depends on who gets that pile of shiny new cash!
fuddcoinn 9y ago
if they doubled money supply and distributed it 1 for 1 to all current dollar holders then in theory the expected price increases (inflation refers only to money supply amount, despite popular usage) would occur before any of the new dollars were spent into circulation. if they doubled the money supply, evenly distributed it AND those new dollars were all spent at the same velocity then the expected price increase would certainly happen. distribution & velocity are huge. the ability of the new dollars to debase the old dollars only happens when they are spent into the economy. the first parties to get and spend the new dollars receive the benefit side of inflation/price increases. these bankers and economists will try to take credit for anything that has a positive twist to it, statistically speaking, but dont be fooled the central banks have very few tools and common sense + gut instinct is your friend when you're living underneath a government instituting financial repression (macroprudental policy).
- jganetsk 9y ago
  If they doubled money supply and distributed 1 for 1 to all current dollar holders, lots of debt would get immediately paid off. Unless you are also proposing doubling everyone's debts. But, if not, then this will cause "debt deflation" rather than the inflation you are postulating.
  - andrenth 9y ago
    Would debt be immediately paid off though? Would people be able to, considering the overall price increases? And if so, how long until they’re in debt again because they can’t keep up with increased prices (since they spent their printed money to pay their debt?)
    - jganetsk 9y ago
      > Would debt be immediately paid off though? Yes. We all know a lot of people with mortgages, student debt, and credit card debt, who if suddenly given a government handout that would double their savings, would immediately pay off their debts. But I can't claim that all debts would be paid. > Would people be able to, considering the overall price increases? Of course people would be able to pay off their current balance if you hand them money. What do price increases have to do with this? Prices may go up (or may not), but your current balance on your mortgage and your credit card bill do not. And if people anticipate interest rates going up, that motivates them to pay it off sooner rather than later. But note that there is a lot of fixed-rate debt out there (like mortgages) not affected by interest rate hikes. > And if so, how long until they’re in debt again because they can’t keep up with increased prices (since they spent their printed money to pay their debt?) You keep assuming that prices would go up. Prices are determined by supply and demand. It has been claimed on this thread that prices will go up exactly 2x, but this claim has not been substantiated whatsoever. One potential mechanism for this would be a substantial increase in aggregate demand, as a result of the handout, but much of the money would go into paying off debt instead. This is called "debt deflation". So prices might not go up nearly as much as you are claiming they would.

by tbabb 9y ago

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...
  - meri_dian 9y ago
    But that's not an answer to my question. I'm asking if - regardless of how policy is being executed now - money were distributed throughout the economy, would that accomplish the goals of monetary policy more effectively than the way it is traditionally carried out?
    - jganetsk 9y ago
      Distributing money to the economy = fiscal policy.
    - ultraluminous 9y ago
      It does answer your question - what you're misundestanding is that "distributing money throughout the economy" is fiscal policy, not monetary policy. That's what the OP meant by "fiscal policy is necessary" and "the government dropped the ball on fiscal policy". The Federal Reserve, as a body, and monetary policy in general by extension, does not posses the tools to enact fiscal policies. EDIT: oops didn't see OP already clarified.
      - meri_dian 9y ago
        But monetary policy is also injecting money into the economy. Both fiscal and monetary do this, but differ in two ways: the nature of the money injected and the way the injection is performed. Monetary policy increases the money supply itself through the exchange of money for treasury bonds and relies on banks to distribute this "new" money, while fiscal policy redistributes money that already exists (previously collected through taxes) and gives it to active businesses through government purchases rather than to bond holding institutions.

sdenton4 9y ago

It depends on who gets that pile of shiny new cash!

fuddcoinn 9y ago

if they doubled money supply and distributed it 1 for 1 to all current dollar holders then in theory the expected price increases (inflation refers only to money supply amount, despite popular usage) would occur before any of the new dollars were spent into circulation. if they doubled the money supply, evenly distributed it AND those new dollars were all spent at the same velocity then the expected price increase would certainly happen. distribution & velocity are huge. the ability of the new dollars to debase the old dollars only happens when they are spent into the economy. the first parties to get and spend the new dollars receive the benefit side of inflation/price increases. these bankers and economists will try to take credit for anything that has a positive twist to it, statistically speaking, but dont be fooled the central banks have very few tools and common sense + gut instinct is your friend when you're living underneath a government instituting financial repression (macroprudental policy).

jganetsk 9y ago
If they doubled money supply and distributed 1 for 1 to all current dollar holders, lots of debt would get immediately paid off. Unless you are also proposing doubling everyone's debts. But, if not, then this will cause "debt deflation" rather than the inflation you are postulating.
- andrenth 9y ago
  Would debt be immediately paid off though? Would people be able to, considering the overall price increases? And if so, how long until they’re in debt again because they can’t keep up with increased prices (since they spent their printed money to pay their debt?)
  - jganetsk 9y ago
    > Would debt be immediately paid off though? Yes. We all know a lot of people with mortgages, student debt, and credit card debt, who if suddenly given a government handout that would double their savings, would immediately pay off their debts. But I can't claim that all debts would be paid. > Would people be able to, considering the overall price increases? Of course people would be able to pay off their current balance if you hand them money. What do price increases have to do with this? Prices may go up (or may not), but your current balance on your mortgage and your credit card bill do not. And if people anticipate interest rates going up, that motivates them to pay it off sooner rather than later. But note that there is a lot of fixed-rate debt out there (like mortgages) not affected by interest rate hikes. > And if so, how long until they’re in debt again because they can’t keep up with increased prices (since they spent their printed money to pay their debt?) You keep assuming that prices would go up. Prices are determined by supply and demand. It has been claimed on this thread that prices will go up exactly 2x, but this claim has not been substantiated whatsoever. One potential mechanism for this would be a substantial increase in aggregate demand, as a result of the handout, but much of the money would go into paying off debt instead. This is called "debt deflation". So prices might not go up nearly as much as you are claiming they would.