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This is very confused "Internet economics" take on the issue. Money in band account that is not used is just a number. As Fed puts more money into the economy,

by nabla9 6y ago

This is very confused "Internet economics" take on the issue. Money in band account that is not used is just a number. As Fed puts more money into the economy, the velocity of money decreases as the money is used less. https://fred.stlouisfed.org/series/M2V https://fred.stlouisfed.org/series/M2V Federal Reserve can increase and decrease effective money supply as it pleases. Money supply does not determine the prices as we have learned over last two decades. --- Edit: some real issues affecting stock price valuation. (1) Global savings glut https://en.wikipedia.org/wiki/Global_saving_glut https://en.wikipedia.org/wiki/Global_saving_glut (2) low real interest rates, typically measured as yields on inflation-indexed government bonds https://fred.stlouisfed.org/series/DFII10 https://fred.stlouisfed.org/series/DFII10 If real interest rate is 10%, only this years earnings matter. If the interest rate is very low or negative, like they are now, time horizons grow accordingly. --- Edit2. "real" things in economy are things like real output. The level of goods and services produced depends on the factors of production. How much capital, labor, level of technology rather than the amount of currency circulating. This means that the money supply can't affect the real level of output in the long run.

zeckalpha 6y ago
Instead of M1, would this make more sense as a currency adjusted chart, with USD against a basket of non-USD currencies (or gold)?
- nabla9 6y ago
  No. The whole premise is flawed. Nominal prices don't determine market valuations. Economy is a process. Companies are priced against their future cash flows. If you want to get some idea of what is going on, use ratios like CAPE or market cap to GDP.
- georgeplusplus 6y ago
  You may be eluding to it but for others that don’t know, There is an index chart that measures the USD against a basket of non USD currency called DXY.
dragonwriter 6y ago
> Federal Reserve can increase and decrease effective money supply as it pleases. Money supply does not determine the prices as we have learned over last two decades. That's assuming, contrary to the motivation for loose monetary policy, that there wouldn't have been deflation without it. It's not loose money produces low velocity but loose money as a reaction to low velocity.
- jkhdigital 6y ago
  All this talk of velocity... starting to think we’ve reached terminal velocity for the consumption-based economy. That is, loose money is truly “pushing on a string” for advanced economies.
swixi 6y ago
> Money in band account that is not used is just a number. As Fed puts more money into the economy, the velocity of money decreases as the money is used less. https://fred.stlouisfed.org/series/M2V https://fred.stlouisfed.org/series/M2V A couple questions because I don't understand this very well. Do we have an idea how much is actually sitting in a bank account vs being put into the market? And, if people put money into stocks and park it there, wouldn't the velocity still be much lower than it usually is (when people are spending more on goods and services)? My interpretation of what's being shown here is that a large amount of newly "printed" money has gone into the stock market, thereby inflating asset prices. I don't see how low velocity refutes that.
- ItsMonkk 6y ago
  You can't just put it into the market. There are two sides to every transaction. You give money, they give stock, they get money, you get stock. When more money enters the economy than stuff is created, the price that the person willing to sell/price you are willing to buy that stock for goes up.
  - jkhdigital 6y ago
    Thank you for saying this, because it is incredibly easy to overlook. However, we must also remember that dollars are effectively debt—banks create them by loaning money. So while it is true that dollars cannot be “parked” in assets since there are two sides to every transaction, if the seller goes on to pay down debt with the proceeds then the money in circulation will decrease.
    - epr 6y ago
      > However, we must also remember that dollars are effectively debt They are debt in the most literal sense possible. They are listed as liabilities in the fed's balance sheet. The "note" in "Federal Reserve Note" written on every dollar bill is referring to the legal definition. It's a promise to pay.
  - swixi 6y ago
JMTQp8lwXL 6y ago
> Money supply does not determine the prices as we have learned over last two decades. I don't think we can just accept this as fact, based on two decades evidence. The Phillips curve held for much longer for two decades, until it didn't. 2 decades of verified observation cannot be extrapolated into an infinite future.
- jkhdigital 6y ago
  Especially when there is also centuries of past evidence that conflicts with this assertion
eloff 6y ago
I find the "Internet economics" argument more compelling than your argument that "Money supply does not determine the prices". It's intuitive. You increase the amount of money chasing assets, asset prices go up. It's not affecting the price of milk or electronics. But look at land, housing, tuition, medical, stocks, bonds, and gold.
- nabla9 6y ago
  I know. That's the tragedy if internet economics. It's incredibly natural and intuitive and wrong.
  - eloff 6y ago
    Its not your job to convince me, but you've been unsuccessful at it. I care what the truth is, not for any particular side, so I should be easier to convince than many. Why would increasing monetary supply not cause inflation? I'm aware there is a group in macroeconomics that believes that, but I think they're crazy. Do you have anything to support your position?
    - gamegoblin 6y ago
      It's not just the money supply, but the "velocity of money" [1] that matters. If the Fed prints 1 trillion dollars and gives it to me, but I keep it in my basement and never spend it, why would inflation be expected? The velocity of that money is zero, hence its impact on prices is zero. Inflation rises relative to the money supply multiplied by the velocity of money. [1] https://en.wikipedia.org/wiki/Velocity_of_money https://en.wikipedia.org/wiki/Velocity_of_money
      - geitir 6y ago
        But now you have 1 trillion dollars so my money is deflated at your whim to use it
      - eloff 6y ago
        And if that money is used to purchase financial instruments, say bonds, from investment banks and hedge funds, those funds then have money to put into other bonds or stocks, both of which have risen spectacularly in price. The velocity of money may still be low in this case, but asset inflation happened. It may be that the money hasn't trickled out into the real world in large enough quantities to cause inflation yet.
cft 6y ago
CPI is determined by M1V , i.e. velocity of M1. Since M1 is already out there, we just have to wait for the V. For now it's parked in the inflated stocks. Most importantly, without high M1, high M1V is not possible.
- nabla9 6y ago
  That's kind of thinking takes quantity theory of money too seriously (axiomatically). Instead of looking if that has been true, you just assume that it must be true.
  - jkhdigital 6y ago
    Except that fiat money can be analyzed axiomatically, because it is essentially just numbers in a balanced double-entry ledger. The difficult part is in translating theorems into practical knowledge about the economy, but just because this is difficult doesn’t mean that the axiomatic approach is wrong.
    - nabla9 6y ago
      > Except that fiat money can be analyzed axiomatically Not in a meaningful way. (meaningful = related to real economy). If you just look at the numbers in a silly accountant fashion, and population doubles, analysis is meaningless. You need want to keep money relatively stable (say 2% inflation) you need to keep adding money to match changes in demand or factors of production.
- dragonwriter 6y ago
  > Since M1 is already out there, we just have to wait for the V M1 can change day to day without change of the monetary base by behavior changes, and the Fed can reduce monetary base pulling down on M1 through open market policies. M1 is already out there means little, because it's not fixed. > Most importantly, without high M1, high M1V is not possible False. There’s no hard limit on V, so you can arbitrarily high “M1V” with any M1.
  - 6y ago
dragonwriter 6y ago
> Federal Reserve can increase and decrease effective money supply as it pleases It can adjust monetary base as it pleases, effective money supply of the type measured by M1 and M2 relies on market behavior which the Fed can't control as well as monetary base, which it can.
jkhdigital 6y ago
On a time scale of decades, you’re absolutely right—the money supply can have very little effect on prices of consumer goods. But... things change. Sometimes abruptly.

by nabla9 6y ago

zeckalpha 6y ago

Instead of M1, would this make more sense as a currency adjusted chart, with USD against a basket of non-USD currencies (or gold)?

nabla9 6y ago
No. The whole premise is flawed. Nominal prices don't determine market valuations. Economy is a process. Companies are priced against their future cash flows. If you want to get some idea of what is going on, use ratios like CAPE or market cap to GDP.
georgeplusplus 6y ago
You may be eluding to it but for others that don’t know, There is an index chart that measures the USD against a basket of non USD currency called DXY.

dragonwriter 6y ago

> Federal Reserve can increase and decrease effective money supply as it pleases. Money supply does not determine the prices as we have learned over last two decades. That's assuming, contrary to the motivation for loose monetary policy, that there wouldn't have been deflation without it. It's not loose money produces low velocity but loose money as a reaction to low velocity.

jkhdigital 6y ago
All this talk of velocity... starting to think we’ve reached terminal velocity for the consumption-based economy. That is, loose money is truly “pushing on a string” for advanced economies.

swixi 6y ago

> Money in band account that is not used is just a number. As Fed puts more money into the economy, the velocity of money decreases as the money is used less. https://fred.stlouisfed.org/series/M2V https://fred.stlouisfed.org/series/M2V A couple questions because I don't understand this very well. Do we have an idea how much is actually sitting in a bank account vs being put into the market? And, if people put money into stocks and park it there, wouldn't the velocity still be much lower than it usually is (when people are spending more on goods and services)? My interpretation of what's being shown here is that a large amount of newly "printed" money has gone into the stock market, thereby inflating asset prices. I don't see how low velocity refutes that.

ItsMonkk 6y ago
You can't just put it into the market. There are two sides to every transaction. You give money, they give stock, they get money, you get stock. When more money enters the economy than stuff is created, the price that the person willing to sell/price you are willing to buy that stock for goes up.
- jkhdigital 6y ago
  Thank you for saying this, because it is incredibly easy to overlook. However, we must also remember that dollars are effectively debt—banks create them by loaning money. So while it is true that dollars cannot be “parked” in assets since there are two sides to every transaction, if the seller goes on to pay down debt with the proceeds then the money in circulation will decrease.
  - epr 6y ago
    > However, we must also remember that dollars are effectively debt They are debt in the most literal sense possible. They are listed as liabilities in the fed's balance sheet. The "note" in "Federal Reserve Note" written on every dollar bill is referring to the legal definition. It's a promise to pay.
- swixi 6y ago

JMTQp8lwXL 6y ago

> Money supply does not determine the prices as we have learned over last two decades. I don't think we can just accept this as fact, based on two decades evidence. The Phillips curve held for much longer for two decades, until it didn't. 2 decades of verified observation cannot be extrapolated into an infinite future.

jkhdigital 6y ago
Especially when there is also centuries of past evidence that conflicts with this assertion

eloff 6y ago

I find the "Internet economics" argument more compelling than your argument that "Money supply does not determine the prices". It's intuitive. You increase the amount of money chasing assets, asset prices go up. It's not affecting the price of milk or electronics. But look at land, housing, tuition, medical, stocks, bonds, and gold.

nabla9 6y ago
I know. That's the tragedy if internet economics. It's incredibly natural and intuitive and wrong.
- eloff 6y ago
  Its not your job to convince me, but you've been unsuccessful at it. I care what the truth is, not for any particular side, so I should be easier to convince than many. Why would increasing monetary supply not cause inflation? I'm aware there is a group in macroeconomics that believes that, but I think they're crazy. Do you have anything to support your position?
  - gamegoblin 6y ago
    It's not just the money supply, but the "velocity of money" [1] that matters. If the Fed prints 1 trillion dollars and gives it to me, but I keep it in my basement and never spend it, why would inflation be expected? The velocity of that money is zero, hence its impact on prices is zero. Inflation rises relative to the money supply multiplied by the velocity of money. [1] https://en.wikipedia.org/wiki/Velocity_of_money https://en.wikipedia.org/wiki/Velocity_of_money
    - geitir 6y ago
      But now you have 1 trillion dollars so my money is deflated at your whim to use it
    - eloff 6y ago
      And if that money is used to purchase financial instruments, say bonds, from investment banks and hedge funds, those funds then have money to put into other bonds or stocks, both of which have risen spectacularly in price. The velocity of money may still be low in this case, but asset inflation happened. It may be that the money hasn't trickled out into the real world in large enough quantities to cause inflation yet.

cft 6y ago

CPI is determined by M1V , i.e. velocity of M1. Since M1 is already out there, we just have to wait for the V. For now it's parked in the inflated stocks. Most importantly, without high M1, high M1V is not possible.

nabla9 6y ago
That's kind of thinking takes quantity theory of money too seriously (axiomatically). Instead of looking if that has been true, you just assume that it must be true.
- jkhdigital 6y ago
  Except that fiat money can be analyzed axiomatically, because it is essentially just numbers in a balanced double-entry ledger. The difficult part is in translating theorems into practical knowledge about the economy, but just because this is difficult doesn’t mean that the axiomatic approach is wrong.
  - nabla9 6y ago
    > Except that fiat money can be analyzed axiomatically Not in a meaningful way. (meaningful = related to real economy). If you just look at the numbers in a silly accountant fashion, and population doubles, analysis is meaningless. You need want to keep money relatively stable (say 2% inflation) you need to keep adding money to match changes in demand or factors of production.
dragonwriter 6y ago
> Since M1 is already out there, we just have to wait for the V M1 can change day to day without change of the monetary base by behavior changes, and the Fed can reduce monetary base pulling down on M1 through open market policies. M1 is already out there means little, because it's not fixed. > Most importantly, without high M1, high M1V is not possible False. There’s no hard limit on V, so you can arbitrarily high “M1V” with any M1.
- 6y ago

dragonwriter 6y ago

> Federal Reserve can increase and decrease effective money supply as it pleases It can adjust monetary base as it pleases, effective money supply of the type measured by M1 and M2 relies on market behavior which the Fed can't control as well as monetary base, which it can.

jkhdigital 6y ago

On a time scale of decades, you’re absolutely right—the money supply can have very little effect on prices of consumer goods. But... things change. Sometimes abruptly.