Comment by smallnamespace | Hacker News Reader

Comment by smallnamespace | Hacker News Reader

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This is a sort of facile answer, since there are a lot of details to prove, but in short, because monetary policy over the long run should not have any effect on the real rate of return r and economy-wide growth rate g, which is what the book's argument hinges on.

The two big differences between the gold-backed system before the 70s and afterwards are:

- We picked fixed pegs to gold, meaning exchange rates were fixed and not floating as they are now

- Fixed exchange rates + free flow of capital is incompatible with being able to exercise monetary policy (banks can't print money since it needs to backed by gold) [1]

But it doesn't matter whether central banks exercise monetary policy or not!

Let's say a central bank today decides to print money. In the short run, that stimulates the economy, but in the long run it will lead to large rises in both nominal rates and inflation expectations, which cancel out (since real return = nominal return - inflation). The long run real rate of return is unaffected, as is the GDP growth rate.[2]

[1] https://en.wikipedia.org/wiki/Impossible_trinity

[2] http://www.frbsf.org/education/teacher-resources/us-monetary...

Some people believe central banks are essentially printing money right now (since 2008, so for nearly a decade). Why has inflation not picked up?

'Long run' in economist-speak means multiple decades, generally.

But to answer your question directly, it's because the financial crisis and the massive deleveraging it caused effectively sucked a lot of money from the world economies. In the absence of QE we would've seen a painful, grinding deflation like Japan went through during the 90s.

Central banks can print money to increase the monetary base, but that's directly offset by 1) the large destruction of financial value during the crisis and 2) the fact that people are just taking that money and sitting on it. The net effect is less leverage in the system and not much effective change in liquidity.

Note that less leverage is a good thing in this case -- it makes banks less likely to go bankrupt, and makes a repeat of the '08 crisis much less likely.

http://www.investopedia.com/articles/investing/022615/why-di...

On that topic (contemporary monetary policy), I've found "the end of alchemy" by Mervyn King fairly interesting and accessible.

But ohh, it HAS!!! You are just looking in the wrong place... Basically it happens all over the world, what is called 'carry trade'... All the money being printed in Japan in the last 30 years has been creating inflation in a lot of the underdeveloped countries in the world, just not in Japan... The World economy is so interconnected nowadays that most policies of the past doesn't work anymore as Central Bankers would expect. Keynesian Ben Bernanke's helicopter isn't creating inflation nor growth...

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