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Friedman was right when he said "inflation is always and everywhere a monetary phenomenon." Assume doodads are $1 today. If tomorrow money supply is doubled, t

by nanis 6y ago

Friedman was right when he said "inflation is always and everywhere a monetary phenomenon." Assume doodads are $1 today. If tomorrow money supply is doubled, they will be $2. A reasonable definition of the intrinsic value of a stock market index is the discounted net present value of all the profit streams of all the firms included in it. If it is 100 today, and the money supply doubles, it will be 200. What good are the returns to your investments? At some points, those returns are to be spent on real stuff. If your returns went up by 100% but the prices of the stuff you spend money on went up by 200%, the returns are not that good, to put it mildly. Over 2020 and continuing in to 2021, governments around the world have chosen to burn GDP, and lower the future growth trajectories of their economies. Ceteris paribus, that would mean the intrinsic value mentioned above will be much lower. Given the expansion in the money supply, asset prices will be inflated (i.e. keep going up despite physical reality). As governments fear asset price crashes, inflationary policies will be their refuge. See stagflation in the 70s and the so-called inflation-unemployment tradeoff. > The theory which has been guiding monetary and financial policy during the last thirty years, and which I contend is largely the product of such a mistaken conception of the proper scientific procedure, consists in the assertion that there exists a simple positive correlation between total employment and the size of the aggregate demand for goods and services; it leads to the belief that we can permanently assure full employment by maintaining total money expenditure at an appropriate level. Among the various theories advanced to account for extensive unemployment, this is probably the only one in support of which strong quantitative evidence can be adduced. I nevertheless regard it as fundamentally false, and to act upon it, as we now experience, as very harmful.[1] [1]: https://www.nobelprize.org/prizes/economic-sciences/1974/hayek/lecture/ https://www.nobelprize.org/prizes/economic-sciences/1974/hay...

ItsMonkk 6y ago
> Assume doodads are $1 today. If tomorrow money supply is doubled, they will be $2. If you double every persons account, yes. If you do it through interest rates, you need to pay attention to the Cantillion Effect. The Cantillion Effect states that money flows from people who have it to things that those people want to buy. If you give money to rich people who have already reached capped consumption, they won't then go out and buy more apples. They will choose to save it(as they know with an ever-growing money supply, if they save it in assets they will have more buying power when they choose to spend it), and therefore investments will rise in price while consumption goods will stay the same price. This is exactly what the fed has done. The more wealth inequality there is, the less the fed has control over inflation.
- jkhdigital 6y ago
  And the more they print, the more wealth inequality there will be... unless they go straight helicopter money (although that would require substantial legislative changes).
  - ItsMonkk 6y ago
    I recently came across this journal article[0]. Basically it outlines how getting off the gold standard leads to where we are today due to a cycle of.. 1. Economy isn't doing as well as we hoped. 2. Central banks lower the interest rates. 3. Households and governments go further into debt now that they can get cheaper loans. 4. We get a boom! Asset prices rise. 5. The boom gradually ends as all available credit has been lent. 6. People start paying off their debt, and the savers who they are paying end up saving more and more. The wealthy don't buy 200x as much food, etc... 7. Economy isn't doing as well as we hoped. One of the key lines in the article... > In words, this implies that if the richest households’ wealth rises by 10%, the interest rate has to come down by 32 basis points [0] https://scholar.harvard.edu/straub/publications/indebted-demand https://scholar.harvard.edu/straub/publications/indebted-dem...

by nanis 6y ago

ItsMonkk 6y ago

> Assume doodads are $1 today. If tomorrow money supply is doubled, they will be $2. If you double every persons account, yes. If you do it through interest rates, you need to pay attention to the Cantillion Effect. The Cantillion Effect states that money flows from people who have it to things that those people want to buy. If you give money to rich people who have already reached capped consumption, they won't then go out and buy more apples. They will choose to save it(as they know with an ever-growing money supply, if they save it in assets they will have more buying power when they choose to spend it), and therefore investments will rise in price while consumption goods will stay the same price. This is exactly what the fed has done. The more wealth inequality there is, the less the fed has control over inflation.

jkhdigital 6y ago
And the more they print, the more wealth inequality there will be... unless they go straight helicopter money (although that would require substantial legislative changes).
- ItsMonkk 6y ago
  I recently came across this journal article[0]. Basically it outlines how getting off the gold standard leads to where we are today due to a cycle of.. 1. Economy isn't doing as well as we hoped. 2. Central banks lower the interest rates. 3. Households and governments go further into debt now that they can get cheaper loans. 4. We get a boom! Asset prices rise. 5. The boom gradually ends as all available credit has been lent. 6. People start paying off their debt, and the savers who they are paying end up saving more and more. The wealthy don't buy 200x as much food, etc... 7. Economy isn't doing as well as we hoped. One of the key lines in the article... > In words, this implies that if the richest households’ wealth rises by 10%, the interest rate has to come down by 32 basis points [0] https://scholar.harvard.edu/straub/publications/indebted-demand https://scholar.harvard.edu/straub/publications/indebted-dem...