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This is a false understanding of how the supply and demand for money works. For example, news about QE was positively correlated with long term interest rates.
by cynicalkane 12y ago
This is a false understanding of how the supply and demand for money works. For example, news about QE was positively correlated with long term interest rates. The expectation of an increased future money supply tilted the balance towards the demand side in the present.
Money is fundamentally an intertemporal thing, and we've known since the 1930s that the cute little supply-demand time-slice diagrams in textbooks don't work on the money supply.
Here we see the prices of 10-year bonds falling (=> interest rates rising) with each QE cycle: http://www.pragcap.com/wp-content/uploads/2013/11/arp1.png http://www.pragcap.com/wp-content/uploads/2013/11/arp1.png
- abfan1127 12y agoI'm not sure I follow. The Federal Reserve has manipulated the interest rates and money supply since 1913. The money market demand can't help determine the supply of money since the cost of money is the interest rate. Consumers aren't allowed to see if its worth while to save their money and earn interest rather than spend their money. Businesses can't see if its worth it to focus on current production or invest in infrastructure for future production because of artificial rates.
- sxcurry 12y agoBut the article states exactly the opposite. Rates are determined by the state of the economy, and hence there is no such thing as artificial rates.
- abfan1127 12y agoThe article was written by Ben Bernanke, not exactly the person I'd expect to admit he's been meddling in the money market for years.