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The Fed's Reckless Experiment (and the BoE's!)


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This is  good article from an econ professor: 

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The quantity theory of money, the view that the money supply is the key determinant of inflation, is dead, or today’s mainstream economists tell us. The Federal Reserve is now engaged in a policy that will either put the nail in the quantity theory’s coffin or restore it to the textbooks. Sadly, if the theory is alive and wins out, the economy is in for a very rough ride.

The theory has had a long history of evidence in its support. In earlier times new gold discoveries, the source for old-fashioned money, produced inflation. Years later, in the early 1970s, Milton Friedman warned President Richard Nixon about expanding the money supply. His advice fell on deaf ears, and Nixon proceeded to pressure Arthur Burns, then chair of the Federal Reserve, to “goose” the money supply.

A horrendous decade of inflation followed as the Fed feebly applied its policy tools to avoid recession. Despite this, two recessions occurred, and the inflation rate worsened throughout the decade. It took Paul Volcker in 1980 to really slam on the money-supply brakes to get the inflation under control. Interest rates soared; the economy dropped into a serious recession, but inflation’s back was finally broken.

After the inflation of the 1970s, economic thinking about monetary policy gradually started to change partly due to financial innovations such as money market mutual funds, which made identifying what counted as money unclear. The Fed shifted to setting interest rates as its preferred policy tool to manage national spending and inflation. Interest in measuring and watching the money supply waned.

The relatively low and stable inflation rate over the last four decades has given support for the Fed’s decision to focus on interest-rate manipulation. However, if we look at money-supply growth over the same period, using a traditional measure of money called M2, we observe that the money supply also grew at a modest and steady rate. Quantity theorists could claim that this supports their position. 

So who is right? The Fed’s latest policies should put the issue to rest. But this may be a very costly experiment.

In the 49 days ending June 8, the money supply (M2) has increased by $1,018.6 billion. To put this into perspective, the money supply grew by $921 billion in all of 2019. The Fed is “goosing” the money supply at rates previously thought foolhardy by any quantity theorist worth their salt. When will the wait for evidence in the experiment end? Milton Friedman would have said to give it six months to a year or even more. The lags are long and variable, he noted.

The Fed has taken a recession caused by a government-forced shutdown and applied its traditional demand-management tools to stimulate employment. This amounts to beating a dead horse. As the shutdown eases, employment will recover, as the early evidence suggests. The Fed’s wild purchase of financial assets, the cause of the exploding money supply, is great for financial markets in the short term, but its effect on employment is likely to be negligible if labor supply restrictions persist. Rather, if the Fed’s experiment reignites inflation, we can expect a long and difficult path forward. 

There is still time for the Fed to reverse course, throttle back the money printing press, and hold down inflation. But this is a presidential election year, and cooling the financial market boom would not sit well in certain government circles. On June 10, Chairman Jerome Powell announced that the Fed would do “whatever we can for whatever it takes” to support the economy. Reversal may be a long time coming. 

Is the quantity theory dead? Did the Fed go too far for too long? Stay tuned.

Burton Abrams is professor emeritus of economics, University of Delaware; research fellow at The Independent Institute; and author of The Terrible 10: A Century of Economic Folly. 
 


https://thehill.com/opinion/finance/504702-the-feds-reckless-experiment

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The problem is that inflation has already been rampant since the 2009 QE policies and zero interest rates, and even before that as interest rates trended down. But they don't measure it correctly.

These days humans have unbelievable capacity to produce and distribute goods. We can easily meet demand with supply, meaning no inflation in this basket. Probably deflation in the absence of monetary stimulus. For example, the percentage share of our wages that goes on food is far, far lower today than 30 years ago.

But what about measuring it in a different way. What about the ability of todays 30 year old to acquire the same living standards and levels of wealth as a 30 years old 30 years ago? No chance. Houses have inflated way above their ability to afford the same standard and price/earnings on stocks are sky high too. By the time todays 30 year olds are 60 they will be poorer on average than todays 60 year olds. This is true inflation.

 

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1 minute ago, dugsbody said:

But what about measuring it in a different way. What about the ability of todays 30 year old to acquire the same living standards and levels of wealth as a 30 years old 30 years ago? No chance. Houses have inflated way above their ability to afford the same standard and price/earnings on stocks are sky high too. By the time todays 30 year olds are 60 they will be poorer on average than todays 60 year olds. This is true inflation.

 

Purchasing power dug, you're 100% correct.  We're all poorer now compared to back then although I think  technology and global trade has prolonged the current system. I'm not sure if it will last another 30 years though..

 

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inflation is driven by adding more financial wealth to the private sector, when the economy has not grown proportionately.

It doesn't really matter, in zirpworld, whether that wealth is in the form of new base money or in the form of government debt. What happens when the government issues a new 100 million of government debt? Assume that the existing stock of government debt plus base money (e.g. all public sector liabilities) is 10000 million, just for the sake of argument.

  1. The private sector gives the government 100 million pounds to buy the debt. Now private sector NET wealth is 10000M-100M (cash paid)+100M (new debt owned. Not net change in private sector net wealth.
  2. Now the government spends that 100 M it borrowed on projects, welfare, whatever. That spending returns the 100M back to the private sector.
  3. Private sector net wealth is now 10100M, because the private sector holds both the new debt AND the 100M it paid for it.

So it is issuance of government debt that drives inflation, whether that debt is money printed by the BoE or bills issued by HMG.

You might think that HMG debt cannot be fractionally reserved to create money, but actually it can and is since government debt is used as collateral to facilitate lending and borrowing both in the private sector and with the BoE via reverse repo.

The major factor pushing HPI is the growth in government debt of all forms, there is little point in obsessing over one form of money printing (QE) and ignoring the other (bond issuance).

 

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2 hours ago, dugsbody said:

The problem is that inflation has already been rampant since the 2009 QE policies and zero interest rates, and even before that as interest rates trended down. But they don't measure it correctly.

These days humans have unbelievable capacity to produce and distribute goods. We can easily meet demand with supply, meaning no inflation in this basket. Probably deflation in the absence of monetary stimulus. For example, the percentage share of our wages that goes on food is far, far lower today than 30 years ago.

But what about measuring it in a different way. What about the ability of todays 30 year old to acquire the same living standards and levels of wealth as a 30 years old 30 years ago? No chance. Houses have inflated way above their ability to afford the same standard and price/earnings on stocks are sky high too. By the time todays 30 year olds are 60 they will be poorer on average than todays 60 year olds. This is true inflation.

 

don't confuse inequality with inflation.

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2 hours ago, dugsbody said:

The problem is that inflation has already been rampant since the 2009 QE policies and zero interest rates, and even before that as interest rates trended down. But they don't measure it correctly.

These days humans have unbelievable capacity to produce and distribute goods. We can easily meet demand with supply, meaning no inflation in this basket. Probably deflation in the absence of monetary stimulus. For example, the percentage share of our wages that goes on food is far, far lower today than 30 years ago.

But what about measuring it in a different way. What about the ability of todays 30 year old to acquire the same living standards and levels of wealth as a 30 years old 30 years ago? No chance. Houses have inflated way above their ability to afford the same standard and price/earnings on stocks are sky high too. By the time todays 30 year olds are 60 they will be poorer on average than todays 60 year olds. This is true inflation.

 

Look at it another way,

Nobody cares if people are poor or lack wealth.

The UK collectively, will house people, we dont like to see poor kids on the street.

However, in the UK people lack gratitude, in India or Africa, people are left to it.

Stop asking others for wealth, figure it out yourself.

Edited by Speed1987
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1 hour ago, scepticus said:

don't confuse inequality with inflation.

I don't think I am.

I'm choosing to measure inflation differently to how people want me to measure it. I will never have access to the same standard of living as a person 30 (or even 20, probably 10) years my senior all else being equal. The things that would allow me to live the same standard have inflated beyond my reach. I can't acquire the same house. Building wealth is slower. I will be far poorer than the equivalent me who was born 30 years earlier, who is now 60.

That, to me, is inflation. I don't care that I can buy a new mobile phone each year or food costs less when the things I prioritise in life are beyond my reach, a good house in a desirable location near good schools and work, time, early retirement.

If the message to me is "work harder then" to achieve the same, as it seems to be from @Speed1987 then thank you very much for proving my point. I'm not looking for life coaching thanks, I'm on a thread discussing inflation.

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Everyone, wants a nice house, good location, good schools. That comes at a premium.

Boomers, had cheap housing after the war.

I'm sure if there are no wars or economic catastrophes by 2040, people from Birmingham/Manchester will be complaining that houses are now 500k each.

Why are people assuming they should be entitled to live in, a better area than others or even given the opportunity? 

I hear this self entitled argument on here alot, shoe boxes in London cost £1 million. Its ridiculous blah blah blah. Your discussing an international city with high influence, a city at the pinnacle of capitalism.

If you dont have the ability to generate wealth or understand the game, then I'm afraid that, is natural selection.

sad-arabic-man-begging-money_1187-5952.jpg

Edited by Speed1987
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19 minutes ago, Speed1987 said:

Why are people assuming they should be entitled to live in, a better area than others or even given the opportunity? 

Why do you feel entitled to comment on issues with irrelevant strawmen? This is a thread discussing quantity theory of money and tangentially, inflation. Which I've done.

Go find another thread to spread your life coaching lessons and moral grandstanding. Or are you just trolling random threads to cause irritation and side-track discussions? 

Edited by dugsbody
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25 minutes ago, dugsbody said:

Why do you feel entitled to comment on issues with irrelevant strawmen? This is a thread discussing quantity theory of money and tangentially, inflation. Which I've done.

Go find another thread to spread your life coaching lessons and moral grandstanding. Or are you just trolling random threads to cause irritation and side-track discussions? 

Speedo is one of the pesky new breed of preacher-trolls that has made an appearance in recent months.

They seem to assume that just because they turned themselves into debt slaves for a lifetime in order to buy a house at what is likely to be proven the absolute top in nominal GBP prices for a very long time, they have suddenly earned the status of financial gurus. And they feel compelled to share their immense wisdom with the world at large - probably in an effort to quell their own fears.

They also assume that no other poster ever bought or sold a house before, and that we are all in GBP cash, just blindly waiting to be wiped out by the nexp uptick in HPI.

They haven't been on these boards long enough to know that most old timers here are sitting on large STR funds, mostly held in stocks, gold, chrypto, and ccys other than the pound, and could jump in as cash buyers whenever they wanted.

Let the preacher-trolls squeal, it's all they can do at this stage... :D

 

Edited by Deckard
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31 minutes ago, dugsbody said:

Why do you feel entitled to comment on issues with irrelevant strawmen? This is a thread discussing quantity theory of money and tangentially, inflation. Which I've done.

Go find another thread to spread your life coaching lessons and moral grandstanding. Or are you just trolling random threads to cause irritation and side-track discussions? 

That said, your earlier post, I actually agree with 100%. Inflation ⬆️, interest rates ⬇️. Your spot on, measurements are distorted (that's not sarcasm).

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I think all the problems stem from so many people forgetting the true definition of inflation.  Inflation is not rising prices, rising prices are merely a proxy.  True inflation is declining purchasing power of the currency. 

In the latest decade we have seen incredible drops in the cost of energy through technical innovation, shale turning America from the largest net importer of energy in the world to a net exporter.  Technologies such as wind and solar now meeting and exceeding price parity with conventional fuels.  Incredible efficiency gains in motor transport with vehicles now pushing 70mpg unheard dof 10 years ago. 

However the public has seen almost zero benefit from these gigantic reductions in the cost of energy (and in the cost of all other products that use energy in their manufacture ie all of them).  Such a reduction in cost of energy should have been a gigantic stimulus turbocharging the economy, but what happened? 

The answer is it has all been inflated away through declining purchasing power of the currency.  However we haven't noticed because the price has stayed flat! Instead of turbocharging our economy via lower energy costs and boosted manufacturing all this economic gain has been siphoned off via low interest rates into asset prices and debt bailouts. Its criminal and yet no one in the mainstream seems to care... 

The problem is when the technical innovation driving down prices stops but the money printing continues... Central banks and governments will have a rude reintroduction to the ravages of rampant inflation and they'll now have to deal with it in the face of the greatest recession in modern history... Yay! 

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  • 415 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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