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Monetary policy is about increasing or decreasing the money supply. The argument is that it cannot have long-term real effects because if it did we would all b

by lottin 7y ago

Monetary policy is about increasing or decreasing the money supply. The argument is that it cannot have long-term real effects because if it did we would all be incredibly rich, since it costs nothing to increase the money supply by whatever amount. Every underdeveloped nation would simply increase their money supply and poverty would be a thing of the past.

maayank 7y ago
Not having a specific behavior at infinity != doesn't having an effect
Trias11 7y ago
Like Zimbabwe. 100 Trillion Dollar bill anyone?
a_tractor 7y ago
In the modern world its also about incentivizing/disincentivizing debt. There is no argument that cannot or does not have long-term effects, and no we would not all be incredibly rich, as it absolutely costs something to increase to money supply. When you increase the money supply you devalue each and every current piece of money in existence. Money (fiat) can be infinite but what you buy with it is not. >Every underdeveloped nation would simply increase their money supply and poverty would end for ever. No, it wouldn't. Have you heard of hyperinflation? A gallong of milk would simply cost $1000 dollars. Kind of like how milk used to cost 5 cents a gallon 50 years ago. The countries that do try what you are talking about, and there are plenty of examples, amazingly, all end up incredibly poor and economically devastated. The argument that monetary policy cannot affect the real world economy is more about its limitations, where it cannot really make up for something like a months long interruption to international trade because the world's leading manufacturing nation has quarantined half its population. The best it could to benefit the long term, I would think, is to make credit more available and cheaper to make it easier for companies and governments to weather the storm with minimal damage.
QuesnayJr 7y ago
It has real effects until the economy is at full employment, after which it only causes inflation.
- throw0101a 7y ago
  At which point rates are generally raised to cool things down.
  - seanmcdirmid 7y ago
    Which should have happened along time ago in the current economy but haven’t, you can’t cut rates in bad times if you don’t raise them enough in good.
    - QuesnayJr 7y ago
      They started raising rates but then Trump successfully bullied the Fed. Though inflation had remained low, so it's not clear that it was necessary to raise rates.
      - seanmcdirmid 7y ago
        Inflation remains low? Seriously, I have no idea how they are computing that rate when asparagus is $4.99/pound these days. It seems like low rates feed the housing bubble nicely, and if housing costs were more adequately represented in the CPI, it would be much higher.
        QuesnayJr 7y ago
        Housing costs are reflected in CPI, as imputed rent. I couldn't find the exact weights with a quick search, but IIRC housing costs are around a quarter of the basket. Asparagus is less than that.
        throw0101a 7y ago
        * https://fred.stlouisfed.org/series/FPCPITOTLZGUSA https://fred.stlouisfed.org/series/FPCPITOTLZGUSA If you doubt the official numbers, the Billion Prices Project goes out scrapes price data, and it matched pretty well with the CPI: * https://en.wikipedia.org/wiki/MIT_Billion_Prices_project https://en.wikipedia.org/wiki/MIT_Billion_Prices_project
deleted 7y ago
[deleted]
AnthonyMouse 7y ago
> The argument is that it cannot have long-term real effects because if it did we would all be incredibly rich, since it costs nothing to increase the money supply by whatever amount. Increasing the money supply is effectively a transfer of wealth from people who own/lend currency to people who owe/borrow it. It doesn't come without cost. It's effectively taxing one group and giving the money to another. As for stimulating the economy, it works as long as the borrowers are making better use of the money than the lenders would have. In a time when you may need to e.g. build new factories somewhere else because existing ones are unavailable, that becomes more true than it was the day before, because the people who want to build new factories need money to do it and now that money is cheaper to get. What it does is increase borrowing. All borrowing is really borrowing from the future, because at some point the money has to paid back. (Or have interest paid on it forever, which is effectively the same thing.) So what you get now you have to give back later, but that may be a beneficial transaction if you need it more now when some disruption is occurring than you would years from now after things have calmed down.
- nybble41 7y ago
  > What it does is increase borrowing. But only in the short term, since lenders will catch on and increase their interest rates to offset the inflation. As you said, you're transferring wealth from lenders to borrowers, which means a larger incentive will be needed to induce anyone (other than the Fed) to lend money. To maintain the effect you would not only need to maintain the inflation but also continually increase the rate of inflation to exceed expectations. That's a quick route to hyperinflation and worthless currency. The Fed can keep lending at arbitrarily low rates long after every other lender has been driven from the market because they're "lending" newly minted currency at essentially zero cost, and moreover don't particularly care whether they make a profit. However, even they can't sustain ever-increasing rates of inflation without destroying all confidence in their own currency, and it's pretty hard on the other lenders. ("Lenders" including anyone with a savings account, or with a significant fraction of their net worth in currency rather than inflation-proof assets and other investments; the poor are thus hit harder than the rich.) > ... the people who want to build new factories need money to do it ... That's an over-simplification. The people who want to build new factories need materials and labor to do it, not money. Giving them more money doesn't increase the amount of material or labor available, though it may allow them to claim a larger share of the available goods provided they do so before the inflation becomes generally known and devaluation takes effect. Naturally, if they're getting a larger share then others are making do with less. It only works out to a net benefit under the assumption that you know how those goods should be put to work better than the people directly involved—despite apparently being unable to persuade people that your plan is better rather than resorting to underhanded tricks.
dragonwriter 7y ago
> Monetary policy is about increasing or decreasing the money supply. The argument is that it cannot have long-term real effects because if it did we would all be incredibly rich No, even if the acheivable aggregate real expansionary impact of monetary policy were unbounded (which no one argues it is) we wouldn't all be rich because monetary policy also has a distributional impact. But, more to the point, having bounded real impact isn't the same as zero real impact.

by lottin 7y ago

maayank 7y ago

Not having a specific behavior at infinity != doesn't having an effect

Trias11 7y ago

Like Zimbabwe. 100 Trillion Dollar bill anyone?

a_tractor 7y ago

In the modern world its also about incentivizing/disincentivizing debt. There is no argument that cannot or does not have long-term effects, and no we would not all be incredibly rich, as it absolutely costs something to increase to money supply. When you increase the money supply you devalue each and every current piece of money in existence. Money (fiat) can be infinite but what you buy with it is not. >Every underdeveloped nation would simply increase their money supply and poverty would end for ever. No, it wouldn't. Have you heard of hyperinflation? A gallong of milk would simply cost $1000 dollars. Kind of like how milk used to cost 5 cents a gallon 50 years ago. The countries that do try what you are talking about, and there are plenty of examples, amazingly, all end up incredibly poor and economically devastated. The argument that monetary policy cannot affect the real world economy is more about its limitations, where it cannot really make up for something like a months long interruption to international trade because the world's leading manufacturing nation has quarantined half its population. The best it could to benefit the long term, I would think, is to make credit more available and cheaper to make it easier for companies and governments to weather the storm with minimal damage.

QuesnayJr 7y ago

It has real effects until the economy is at full employment, after which it only causes inflation.

throw0101a 7y ago
At which point rates are generally raised to cool things down.
- seanmcdirmid 7y ago
  Which should have happened along time ago in the current economy but haven’t, you can’t cut rates in bad times if you don’t raise them enough in good.
  - QuesnayJr 7y ago
    They started raising rates but then Trump successfully bullied the Fed. Though inflation had remained low, so it's not clear that it was necessary to raise rates.
    - seanmcdirmid 7y ago
      Inflation remains low? Seriously, I have no idea how they are computing that rate when asparagus is $4.99/pound these days. It seems like low rates feed the housing bubble nicely, and if housing costs were more adequately represented in the CPI, it would be much higher.
      - QuesnayJr 7y ago
        Housing costs are reflected in CPI, as imputed rent. I couldn't find the exact weights with a quick search, but IIRC housing costs are around a quarter of the basket. Asparagus is less than that.
      - throw0101a 7y ago
        * https://fred.stlouisfed.org/series/FPCPITOTLZGUSA https://fred.stlouisfed.org/series/FPCPITOTLZGUSA If you doubt the official numbers, the Billion Prices Project goes out scrapes price data, and it matched pretty well with the CPI: * https://en.wikipedia.org/wiki/MIT_Billion_Prices_project https://en.wikipedia.org/wiki/MIT_Billion_Prices_project

deleted 7y ago

[deleted]

AnthonyMouse 7y ago

> The argument is that it cannot have long-term real effects because if it did we would all be incredibly rich, since it costs nothing to increase the money supply by whatever amount. Increasing the money supply is effectively a transfer of wealth from people who own/lend currency to people who owe/borrow it. It doesn't come without cost. It's effectively taxing one group and giving the money to another. As for stimulating the economy, it works as long as the borrowers are making better use of the money than the lenders would have. In a time when you may need to e.g. build new factories somewhere else because existing ones are unavailable, that becomes more true than it was the day before, because the people who want to build new factories need money to do it and now that money is cheaper to get. What it does is increase borrowing. All borrowing is really borrowing from the future, because at some point the money has to paid back. (Or have interest paid on it forever, which is effectively the same thing.) So what you get now you have to give back later, but that may be a beneficial transaction if you need it more now when some disruption is occurring than you would years from now after things have calmed down.

nybble41 7y ago
> What it does is increase borrowing. But only in the short term, since lenders will catch on and increase their interest rates to offset the inflation. As you said, you're transferring wealth from lenders to borrowers, which means a larger incentive will be needed to induce anyone (other than the Fed) to lend money. To maintain the effect you would not only need to maintain the inflation but also continually increase the rate of inflation to exceed expectations. That's a quick route to hyperinflation and worthless currency. The Fed can keep lending at arbitrarily low rates long after every other lender has been driven from the market because they're "lending" newly minted currency at essentially zero cost, and moreover don't particularly care whether they make a profit. However, even they can't sustain ever-increasing rates of inflation without destroying all confidence in their own currency, and it's pretty hard on the other lenders. ("Lenders" including anyone with a savings account, or with a significant fraction of their net worth in currency rather than inflation-proof assets and other investments; the poor are thus hit harder than the rich.) > ... the people who want to build new factories need money to do it ... That's an over-simplification. The people who want to build new factories need materials and labor to do it, not money. Giving them more money doesn't increase the amount of material or labor available, though it may allow them to claim a larger share of the available goods provided they do so before the inflation becomes generally known and devaluation takes effect. Naturally, if they're getting a larger share then others are making do with less. It only works out to a net benefit under the assumption that you know how those goods should be put to work better than the people directly involved—despite apparently being unable to persuade people that your plan is better rather than resorting to underhanded tricks.

dragonwriter 7y ago

> Monetary policy is about increasing or decreasing the money supply. The argument is that it cannot have long-term real effects because if it did we would all be incredibly rich No, even if the acheivable aggregate real expansionary impact of monetary policy were unbounded (which no one argues it is) we wouldn't all be rich because monetary policy also has a distributional impact. But, more to the point, having bounded real impact isn't the same as zero real impact.