3 ms·

Have we not printed 1-3 trillion dollars in the last two years? Like, a substantial proportion of all circulating dollars? How does that not immediately devalue

Have we not printed 1-3 trillion dollars in the last two years? Like, a substantial proportion of all circulating dollars? How does that not immediately devalue the dollar?

mattnewton 5y ago
Disclaimer, I am not an economist and don't know what I am talking about. But, the birds eye view formula from my macro classes is MV = PY, where M is the money supply, v the velocity of money, P prices, Y real GDP. GDP is usually going up, we have more people (and we hope they are each more productive). So that means that either the money supply or velocity must go up, or prices go down (deflation). Velocity is fickle and probably interrelated with consumer expectations around P (if you think things are going deflate for one thing, you might wait longer to make a purchase hoping to pay less in nominal terms, and this has the effect of shrinking MV even more relative to PY). Since V is hard to control directly, in practice M has to increase regularly to prevent deflation. What we saw with the pandemic was large decreases in V and unexpectedly small decreases in Y. The fed increased M and it absorbed this differential. My understanding though is that the inflation doomers think the drop in V was transitory and now we'll see a sudden spike in all that money being unlocked and circulating
- typ 5y ago
  I assume that inflation (CPI) can be reflected by the increase of money supply only when people can't find a way to transfer the money to somewhere inflation-proof and can only spend it on consumer goods. That's absolutely not the case in modern days. Look at the housing price, that's where the money's gone.
  - mattnewton 5y ago
    Basically that’s my understanding. Anywhere you stick the money with low velocity will have the same effect on the left hand side of the equation to absorb increases in money supply. You’re right that people pick durable assets like houses to put it in, but it would have a similar effect on the velocity of the money supply if they buried cash in garbage bags for 15 years en-mass. People don’t do that because they expect reasonable and small inflation; you could imagine if that expectation went away though (either expecting deflation or very high inflation) how the money supply lever could stop being effective. Through the velocity lense, the fact that QE and stimulus checks have very different inflation effects also becomes apparent- if you give a check to someone living paycheck to paycheck, they will spend it in their local community nearly immediately and it will be passed around quite a bit before getting locked into an asset price somewhere. If you edit the banks accounts at the fed or have the fed buy assets though, it seems to go quickly into asset prices where it sits for years before leaking into the economy as a whole, with a much much lower velocity. So $1 there != $1 here in terms of increasing prices.
deleted 5y ago
[deleted]
incrudible 5y ago
First of all, the monetary base is only a small share of money supply - most of that is debt. Secondly, printing those dollars does immediately devalue the dollar, just not to the degree you might expect. The average American has no savings, they will not immediately renegotiate their wages upon the news that this money has been created. Therefore, their opinion about the value of the dollar has little impact. They have no dollars to sell for other things, they spend just as they used to, demand stays the same, prices are stable if not for supply issues. Stimulus checks are an exception to this, but we did see price increases in anticipation of that spending. Those who manage wealth on the other hand already know that dollars are trash, now they are just a little bit trashier. They do not hold large dollar positions in the first place, instead they buy up all sorts of assets - stocks, bonds and real estate. This inflates prices and depresses interest rates, increasing paper wealth and encouraging cheap borrowing - exactly what the government wants. In other words, massive inflation has existed for years, it just does not affect every part of your life equally. If you are in the market for a house, your purchasing power as a worker has been completely annihilated. If you are in the market for a hamburger, you are fine.
ncallaway 5y ago
I was responding to a claim that the recent proposals for new spending made it inevitable. Past spending isn’t relevant to the claim I was responding to.

Have we not printed 1-3 trillion dollars in the last two years? Like, a substantial proportion of all circulating dollars? How does that not immediately devalue the dollar?

mattnewton 5y ago

Disclaimer, I am not an economist and don't know what I am talking about. But, the birds eye view formula from my macro classes is MV = PY, where M is the money supply, v the velocity of money, P prices, Y real GDP. GDP is usually going up, we have more people (and we hope they are each more productive). So that means that either the money supply or velocity must go up, or prices go down (deflation). Velocity is fickle and probably interrelated with consumer expectations around P (if you think things are going deflate for one thing, you might wait longer to make a purchase hoping to pay less in nominal terms, and this has the effect of shrinking MV even more relative to PY). Since V is hard to control directly, in practice M has to increase regularly to prevent deflation. What we saw with the pandemic was large decreases in V and unexpectedly small decreases in Y. The fed increased M and it absorbed this differential. My understanding though is that the inflation doomers think the drop in V was transitory and now we'll see a sudden spike in all that money being unlocked and circulating

typ 5y ago
I assume that inflation (CPI) can be reflected by the increase of money supply only when people can't find a way to transfer the money to somewhere inflation-proof and can only spend it on consumer goods. That's absolutely not the case in modern days. Look at the housing price, that's where the money's gone.
- mattnewton 5y ago
  Basically that’s my understanding. Anywhere you stick the money with low velocity will have the same effect on the left hand side of the equation to absorb increases in money supply. You’re right that people pick durable assets like houses to put it in, but it would have a similar effect on the velocity of the money supply if they buried cash in garbage bags for 15 years en-mass. People don’t do that because they expect reasonable and small inflation; you could imagine if that expectation went away though (either expecting deflation or very high inflation) how the money supply lever could stop being effective. Through the velocity lense, the fact that QE and stimulus checks have very different inflation effects also becomes apparent- if you give a check to someone living paycheck to paycheck, they will spend it in their local community nearly immediately and it will be passed around quite a bit before getting locked into an asset price somewhere. If you edit the banks accounts at the fed or have the fed buy assets though, it seems to go quickly into asset prices where it sits for years before leaking into the economy as a whole, with a much much lower velocity. So $1 there != $1 here in terms of increasing prices.

deleted 5y ago

[deleted]

incrudible 5y ago

First of all, the monetary base is only a small share of money supply - most of that is debt. Secondly, printing those dollars does immediately devalue the dollar, just not to the degree you might expect. The average American has no savings, they will not immediately renegotiate their wages upon the news that this money has been created. Therefore, their opinion about the value of the dollar has little impact. They have no dollars to sell for other things, they spend just as they used to, demand stays the same, prices are stable if not for supply issues. Stimulus checks are an exception to this, but we did see price increases in anticipation of that spending. Those who manage wealth on the other hand already know that dollars are trash, now they are just a little bit trashier. They do not hold large dollar positions in the first place, instead they buy up all sorts of assets - stocks, bonds and real estate. This inflates prices and depresses interest rates, increasing paper wealth and encouraging cheap borrowing - exactly what the government wants. In other words, massive inflation has existed for years, it just does not affect every part of your life equally. If you are in the market for a house, your purchasing power as a worker has been completely annihilated. If you are in the market for a hamburger, you are fine.

ncallaway 5y ago

I was responding to a claim that the recent proposals for new spending made it inevitable. Past spending isn’t relevant to the claim I was responding to.