4 ms·
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 *
by 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 agoSo, 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 agoSo 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 agoMonetary 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 agoBut 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 agoDistributing money to the economy = fiscal policy.
- ultraluminous 9y agoIt 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 agoBut 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.
- jganetsk 9y agoThe interpretation that banks distribute that money is wrong. Banks don't lend out reserves: https://www.kreditopferhilfe.net/docs/S_and_P__Repeat_After_Me_8_14_13.pdf https://www.kreditopferhilfe.net/docs/S_and_P__Repeat_After_...
- FabHK 9y ago> getting money into the hands of the average consumer That's basically fiscal policy, and was not implemented much after the initial Obama stimulus (or not at all in Europe, really, due to all the austerity rhetoric by very serious people).