2 ms·

Huh. So if I understand correctly, if we halved the money supply tomorrow, the price of everything would stay the same?

by VirusNewbie 2y ago

kelseyfrog 2y ago
How would you halve the money supply?
- VirusNewbie 2y ago
  it's a thought exercise. I'm asking if you think that would the consequences be?
  - hgomersall 2y ago
    Between 2008 and 2020 M2 pretty much doubled and prices barely moved anywhere. This was intentional policy for the purpose of increasing inflation which stayed doggedly around zero. What does this tell us? Pretty much nothing because money supply is a useless measure. What would happen if we halved it? Dunno, but to achieve that, stuff has to happen, and depending on that stuff, you might get price changes. I expect if the gov engaged in QT to achieve it, very little would happen.
  - VirusNewbie 2y ago
    >Between 2008 and 2020 M2 pretty much doubled and prices barely moved anywhere Except Real estate prices more than doubled. Also the Dow went from ~11k to 32k . So almost triple.
    - hgomersall 2y ago
      And yet the price of a cabbage stayed exactly the same. Oh, we also had close to zero interest rates, might that have something to do with peoples' appetite for higher mortgages and shares over bonds?
      - VirusNewbie 2y ago
        >Oh, we also had close to zero interest rates, might that have something to do with YES! YES! YOU ARE CORRECT, THAT'S MY POINT. Lowering the interest rates is how you EXPAND THE MONEY SUPPLY.
        hgomersall 2y ago
        But that doesn't suggest that the critical variable is money supply. It just suggests there's a correlation. There are plenty of ways of increasing the money supply that does nothing at all. Pursuade the fed to give me a trillion trillion dollars and I'll show you by not spending it (though I might spend a few mil for keeping it safe, but that's not going to do much).
        VirusNewbie 2y ago
        If you literally buried the money then yes, you are correct but in effect that is basically destroying it. But what would you do to not spend it? Put it in the bank? Buy bonds?
        hgomersall 2y ago
        The point is that lots of monetary operations are consumption neutral, including buying bonds. The only thing that actually matters from a price perspective is when a real resource gets consumed. People having more money can push the price of real goods up for sure, but the marginal propensity to consume by individuals goes down with higher relative wealth. There's another very important effect which is the spending on things that matter induces taxation (employment taxes to deliver the thing, sales taxes etc). This is a geometric series reducing the money supply on every transaction of real goods. What matters is the flow, not the stock. https://new-wayland.com/blog/structural-deficits-are-deflationary/ https://new-wayland.com/blog/structural-deficits-are-deflati...
  - kelseyfrog 2y ago
    I don't think the thought exercise can exist in our reality then. Our reality requires a receipt for money supply to be halved.

Huh. So if I understand correctly, if we halved the money supply tomorrow, the price of everything would stay the same?

kelseyfrog 2y ago

How would you halve the money supply?

VirusNewbie 2y ago
it's a thought exercise. I'm asking if you think that would the consequences be?
- hgomersall 2y ago
  Between 2008 and 2020 M2 pretty much doubled and prices barely moved anywhere. This was intentional policy for the purpose of increasing inflation which stayed doggedly around zero. What does this tell us? Pretty much nothing because money supply is a useless measure. What would happen if we halved it? Dunno, but to achieve that, stuff has to happen, and depending on that stuff, you might get price changes. I expect if the gov engaged in QT to achieve it, very little would happen.
- VirusNewbie 2y ago
  >Between 2008 and 2020 M2 pretty much doubled and prices barely moved anywhere Except Real estate prices more than doubled. Also the Dow went from ~11k to 32k . So almost triple.
  - hgomersall 2y ago
    And yet the price of a cabbage stayed exactly the same. Oh, we also had close to zero interest rates, might that have something to do with peoples' appetite for higher mortgages and shares over bonds?
    - VirusNewbie 2y ago
      >Oh, we also had close to zero interest rates, might that have something to do with YES! YES! YOU ARE CORRECT, THAT'S MY POINT. Lowering the interest rates is how you EXPAND THE MONEY SUPPLY.
      - hgomersall 2y ago
        But that doesn't suggest that the critical variable is money supply. It just suggests there's a correlation. There are plenty of ways of increasing the money supply that does nothing at all. Pursuade the fed to give me a trillion trillion dollars and I'll show you by not spending it (though I might spend a few mil for keeping it safe, but that's not going to do much).
        VirusNewbie 2y ago
        If you literally buried the money then yes, you are correct but in effect that is basically destroying it. But what would you do to not spend it? Put it in the bank? Buy bonds?
        hgomersall 2y ago
        The point is that lots of monetary operations are consumption neutral, including buying bonds. The only thing that actually matters from a price perspective is when a real resource gets consumed. People having more money can push the price of real goods up for sure, but the marginal propensity to consume by individuals goes down with higher relative wealth. There's another very important effect which is the spending on things that matter induces taxation (employment taxes to deliver the thing, sales taxes etc). This is a geometric series reducing the money supply on every transaction of real goods. What matters is the flow, not the stock. https://new-wayland.com/blog/structural-deficits-are-deflationary/ https://new-wayland.com/blog/structural-deficits-are-deflati...
- kelseyfrog 2y ago
  I don't think the thought exercise can exist in our reality then. Our reality requires a receipt for money supply to be halved.