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Yep, people keep conflating growth of the money supply should lead to rising CPI inflation. But money isn't neutral, you need to pay attention to the Cantillion

Yep, people keep conflating growth of the money supply should lead to rising CPI inflation. But money isn't neutral, you need to pay attention to the Cantillion Effect. When money enters into the economy through the wealthy, they buy stocks and it gets trapped. You can track this trapped money by looking at the velocity. When you increase the money supply by dropping interest rates, its essentially given according to whom is already wealthy. So if interest rates drop, you should expect the money supply to rise, velocity to drop, and assets to rise, but CPI should barely be touched. Therefore the more wealth inequality you have, the less that money supply increases through interest rates affects the CPI. The CPI tracks how the common person spends their money. On the other hand if you were to institute a UBI, this would barely touch the money supply, but the CPI would sky-rocket. Disentangle the two concepts. I've built up an intuition that the money supply should match changes in productivity, and that if it doesn't it will eventually lead to problems. But it's also notable that the trend is extremely important. If you do match, everything should be fine and this can last forever. If the money supply rises faster than productivity, you see what we've seen these past 50 years since we've been off the gold standard, a huge surge in asset prices. And if productivity rises faster than the money supply, people flee assets and into money. This is called a Deflationary Spiral. But the opposite state is basically an Inflationary Spiral, with people unwilling to spend their assets. Dalio in his "Explaining the Economic Machine" video talks about a "Beautiful Deleveraging". My thought currently is that such a thing isn't possible. If you wait for the debt to get so bad that you have to do something, you can't match productivity anymore. Therefore the only thing you are left to do is grow the money supply less than productivity. And that changes everything. Suddenly the trend is to money. And once the money managers work that out, they all rush out of assets and into cash. This triggers a crash. So it's the trend that dominates, and there is no way to balance the deleveraging.

ericmay 6y ago
I just wanted to say that this was a great, well-thought comment and thank you foe your time and writing it. I’d love to hear other, similar comments.
- ItsMonkk 6y ago
  Thank you. The 1960's is a fascinating decade to me for the economy because everything turned out backward to what was expected and it seems that nobody learned anything from it. Check the statistics in the 1960s. Inflation was out of control. And yet curiously, the stock market was down. How can everything be rising in price except stocks? Why was this? Well take a look at my previous comment. The 60s were under the era of the gold standard. That means that the money supply was roughly constant. Back in the 60s we had 5% productivity growth. So money was growing slower than productivity. Now we see the picture, cash was the bottleneck so it was the treasured asset. Governments used this cash for welfare starting with the new deal and continued to spend, and so people had money to spend. The economy was vibrant, the companies were actually flourishing. And so companies earnings were higher than ever, but their price was down which caused their PE to drop by a lot. This PE drop is a result of deflationary spiral. So in 1971 we flipped the script. Money supply grows, and for a decent amount of time we were cautious and grew the money supply slowly. This cautiousness ended up being that balance I mentioned. But as we grew the money supply, the fears that inflation would come back never appeared. But that is because we grew the money supply in a completely different way this time. Not through government debt but though interest rates. We keep growing the money supply, and as wealth inequality grows, we notice we can keep growing the money supply further. Drop those interest rates! All the while productivity is dropping like a rock as money managers are out-competing entrepreneurs for capital. But there's a problem. And that's today. Interest rates are at 0%. We've run out of runway. Suddenly we have to rise the money supply not by lowering interest rates, but directly though government debt. And so this is the argument that you are hearing right now between economists and in the linked article. "Well, we've increased the M2 by 4000% since 1971, so I guess that means the government can borrow just as much". They are conflating. That are assuming the perfectly spherical cow of neutral money is the system. You. Need. To. Track. Who. Gets. The. Money. Money flows. What happens when the government starts spending? Exactly what happened in the 1960s. CPI Inflation rises because people are spending it. What's happening to the money supply? Well, it's getting bigger because the government is spending, but it's getting bigger at a slower rate than we are used to and it might even match productivity. That slower growth might cause some growth stocks to take a hit, but the economy should be fine. It's possible that we slow the growth of the money supply to match our 1% productivity, and that the beautiful deleveraging occurs. But what is the FED thinking of this? They are terrified. Oh no! The inflation is back. They are thinking through the neutral money state, so they know what they have to do. To stop inflation, we rise interest rates. This is exactly what they did in the 60s. And so what we have is an economy where the money supply is shrinking, but the CPI keeps rising until the government stops spending. But the stock market is dropping, which only causes the government to spend more! The trend has reversed, the stock market crashes, interest rates spike back to 20%, and homes are going for 10% of the current prices so people are underwater, which cases them to default, and deleveraging has decimated the money supply. But due to the welfare, happiness is up. People are doing just fine. What should have happened? Well, the money supply should match productivity. This means that interest rates should not determine the money supply, the money supply should determine interest rates. If productivity is rising at 1% and the money supply is rising at 5%, well, interest rates should rise until the amount of new debt created is back down to 1%. If productivity is rising at 5% and the money supply grew at 1%, we should lower interest rates until the cheap money stimulates people to take out loans. What rate will that be? Only the economy at the time can discover it based on their biases and fears. So how much should the government borrow? People see comparison between Capitalism vs Communism as a scale, but it's just as important to track Centralized vs Decentralized. The government has a freedom to think big and long-term, but that makes them less efficient at the small stuff. People need to care about the small stuff and are punished if they do so poorly. If you have wealth inequality, you end up with a Centralized system no different than Communism, but power is granted through wealth not politics. This is what limits how much debt the government should take out.

ericmay 6y ago

I just wanted to say that this was a great, well-thought comment and thank you foe your time and writing it. I’d love to hear other, similar comments.

ItsMonkk 6y ago
Thank you. The 1960's is a fascinating decade to me for the economy because everything turned out backward to what was expected and it seems that nobody learned anything from it. Check the statistics in the 1960s. Inflation was out of control. And yet curiously, the stock market was down. How can everything be rising in price except stocks? Why was this? Well take a look at my previous comment. The 60s were under the era of the gold standard. That means that the money supply was roughly constant. Back in the 60s we had 5% productivity growth. So money was growing slower than productivity. Now we see the picture, cash was the bottleneck so it was the treasured asset. Governments used this cash for welfare starting with the new deal and continued to spend, and so people had money to spend. The economy was vibrant, the companies were actually flourishing. And so companies earnings were higher than ever, but their price was down which caused their PE to drop by a lot. This PE drop is a result of deflationary spiral. So in 1971 we flipped the script. Money supply grows, and for a decent amount of time we were cautious and grew the money supply slowly. This cautiousness ended up being that balance I mentioned. But as we grew the money supply, the fears that inflation would come back never appeared. But that is because we grew the money supply in a completely different way this time. Not through government debt but though interest rates. We keep growing the money supply, and as wealth inequality grows, we notice we can keep growing the money supply further. Drop those interest rates! All the while productivity is dropping like a rock as money managers are out-competing entrepreneurs for capital. But there's a problem. And that's today. Interest rates are at 0%. We've run out of runway. Suddenly we have to rise the money supply not by lowering interest rates, but directly though government debt. And so this is the argument that you are hearing right now between economists and in the linked article. "Well, we've increased the M2 by 4000% since 1971, so I guess that means the government can borrow just as much". They are conflating. That are assuming the perfectly spherical cow of neutral money is the system. You. Need. To. Track. Who. Gets. The. Money. Money flows. What happens when the government starts spending? Exactly what happened in the 1960s. CPI Inflation rises because people are spending it. What's happening to the money supply? Well, it's getting bigger because the government is spending, but it's getting bigger at a slower rate than we are used to and it might even match productivity. That slower growth might cause some growth stocks to take a hit, but the economy should be fine. It's possible that we slow the growth of the money supply to match our 1% productivity, and that the beautiful deleveraging occurs. But what is the FED thinking of this? They are terrified. Oh no! The inflation is back. They are thinking through the neutral money state, so they know what they have to do. To stop inflation, we rise interest rates. This is exactly what they did in the 60s. And so what we have is an economy where the money supply is shrinking, but the CPI keeps rising until the government stops spending. But the stock market is dropping, which only causes the government to spend more! The trend has reversed, the stock market crashes, interest rates spike back to 20%, and homes are going for 10% of the current prices so people are underwater, which cases them to default, and deleveraging has decimated the money supply. But due to the welfare, happiness is up. People are doing just fine. What should have happened? Well, the money supply should match productivity. This means that interest rates should not determine the money supply, the money supply should determine interest rates. If productivity is rising at 1% and the money supply is rising at 5%, well, interest rates should rise until the amount of new debt created is back down to 1%. If productivity is rising at 5% and the money supply grew at 1%, we should lower interest rates until the cheap money stimulates people to take out loans. What rate will that be? Only the economy at the time can discover it based on their biases and fears. So how much should the government borrow? People see comparison between Capitalism vs Communism as a scale, but it's just as important to track Centralized vs Decentralized. The government has a freedom to think big and long-term, but that makes them less efficient at the small stuff. People need to care about the small stuff and are punished if they do so poorly. If you have wealth inequality, you end up with a Centralized system no different than Communism, but power is granted through wealth not politics. This is what limits how much debt the government should take out.