"A good example is in a recession, the stock of money may rise 5%, however, people will be making fewer transactions and therefore the velocity of circulation will fall. This explains why quantitative easing (increasing the money supply) did not cause inflation between 2009 and 2016." [0]
The article I link below contains 3 more examples:
[0] https://www.economicshelp.org/blog/111/inflation/money-suppl...
"We now live in a different economic universe than we did before the crash. Falling unemployment no longer drives up wages. Printing money no longer causes inflation."
He is stating that we are in a different universe, with the clear implication being that the following items, which he does not qualify, are the new reality.
If the valuations of housing and stocks rise, this isn't inflation: If I owned them then I can sell these and buy more consumables than before, not less.
Replace A with "printing money" and B with "increased inflation."
Increasing the money supply has caused massive inflation; the price of gold isn't where it is because the colour yellow is in fashion. Asset prices are out of control.
Gold hit a peak about eight years ago, and before that, while it was going up in kind of an apparent smooth exponential curve, there wasn't any significant blip from the financial crisis, 9/11, or anything else. Is there even a generally accepted explanation for this behavior? If post-crisis spending is blamed, how did the market for gold "know" for years in advance?
I put it to you that the value of gold is not really rising at a real rate of 6% per annum. That is better than the US economy! It is much more likely that QE caused asset price inflation. Silver probably doesn't get treated so much as an asset because storing it is so much harder than gold.
It hasn't. It grew (a lot), then fell, then grew (more reasonably) again.
This is not the kind of shapes you are supposed to see when talking about inflation. Using “mean growth” is meaningless in that context.
It is a fact that there is a big real gap between the pre-QE price and the post-QE price. You can hand-wave and claim that because the chart is the wrong shape it doesn't count - and argument which I obviously am going to reject. But even accepting that, are you really comfortable saying that these commodities are securing real value increases? I'm a mining engineer and it isn't because it is getting 3-6% per annum harder to mine commodities each year in real terms. If you don't like 2005 pick any year prior to the financial crisis; gold is mysteriously outperforming the inflation.
Quacks like a duck. QE probably went in to asset prices.
But sharp drop isn't an option, hence my argument.
> It is a fact that there is a big real gap between the pre-QE price and the post-QE price.
Sigh! The graphs show that there is no such “gap”.
> But even accepting that, are you really comfortable saying that these commodities are securing real value increases? I'm a mining engineer and it isn't because it is getting 3-6% per annum harder to mine commodities each year in real terms.
If course it's not tied to any real value, that's never been my argument. The initial point was: “increase in the money supply by QE didn't cause the prices (including asset prices) to rise”. And you even agree with that when you say this.
> If you don't like 2005 pick any year prior to the financial crisis; gold is mysteriously outperforming the inflation
(And BTW gold is rising again in 2019, while there has been no QE policy in years in the US).
Obviously it is an option; it just happened with gold.
> Sigh! The graphs show that there is no such “gap”.
Price was $15,000/kg in US dollars and is now cruising pretty easily above $40,000/kg US. You can sigh and pretend not to see it all you like but you are still ignoring pretty clear evidence of about 8% nominal growth/6% real growth annually in a shiny rock.
I'll admit to being quite impressed that you can look at a 260% price change upwards and say it doesn't count as a price increase because you think the chart is the wrong shape.
> And you even agree with that when you say this.
No I don't. QE is the most likely factor causing these unreasonable 'real' increases in asset prices that are very well illustrated in the gold price. The idea that gold is getting more valuable in real terms is foolish, so the fact it is showing such outrageous gains in real prices since pre-QE is strong evidence that actual inflation in assets is higher than 2%.
> (And BTW gold is rising again in 2019, while there has been no QE policy in years in the US).
Actually they just got going again. A forward-looking analyst might reasonably guess that there is a lot of money about to hit the markets.
It's not an option in case of an inflation mechanism. If it was inflation, it wouldn't drop like this. That's the signature of speculation which is something totally different.
> Price was $15,000/kg in US dollars and is now cruising pretty easily above $40,000/kg US. You can sigh and pretend not to see it all you like but you are still ignoring pretty clear evidence of about 8% nominal growth/6% real growth in a shiny rock.
There is no gap on the graph, nor there is a 8% annual growth. But as you keep ignoring the shape of the curve and keep acting as if it didn't exist, I'm uninterested in pushing this discussion forward.
How do you get from $15,000 to $40,000 without annualised growth? I'm intrigued.
EDIT Just pointing out, the averaging I'm doing its reducing the relative inflationary impact of QE on asset prices because I'm including a lot of time to today where there was no QE.
With a 25% annual increase while no QE was running (2005-2008), a 75% annual increase with QE(2009-2012), a 0% increase with no-QE (2012) followed by a 30% drop when QE3 was launched! (sept 2012), then a little decline during the whole QE3 and which continued after QE3 was stopped (Q4 2014) until 2016, then again some fluctuation in an upward trend.
If you see a temporal correlation between QE and the price of gold, I can do nothing for you as you are blinded by your ideological convictions.
Good day.
I haven't read this particular article, but I've read elsewhere that traditional tools used by central banks to increase inflation are being observed to empirically no longer work. I understand many of these techniques are analogous to "printing money" in a controlled way. That points to failures in their models of the economy and of inflation.
I also think I've read that at least some of the reason for this may be higher than expected levels monopoly-type powers active in the economy that conspire to keep prices and wages, and therefore inflation, down. My recollection is hazier on this part.
Edit: this might be the article I was thinking of:
Are Superstar Firms and Amazon Effects Reshaping the Economy?: The biggest companies may be influencing things like inflation and wage growth, possibly at the expense of central bankers’ power to do so.
https://www.nytimes.com/2018/08/25/upshot/big-corporations-i...
> Two of the most important economic facts of the last few decades are that more industries are being dominated by a handful of extraordinarily successful companies and that wages, inflation and growth have remained stubbornly low.
> Many of the world’s most powerful economic policymakers are now taking seriously the possibility that the first of those facts is a cause of the second — and that the growing concentration of corporate power has confounded the efforts of central banks to keep economies healthy.
> Mainstream economists are discussing questions like whether “monopsony” — the outsize power of a few consolidated employers — is part of the problem of low wage growth. They are looking at whether the “superstar firms” that dominate many leading industries are responsible for sluggish investment spending. And they’re exploring whether there is an “Amazon Effect” in which fast-changing pricing algorithms by the online retailer and its rivals mean bigger swings in inflation.
There are circumstances where printing money does increase inflation.... and circumstances where it does not:
> When short-term interest rates reach zero, further monetary easing becomes difficult and may require unconventional monetary policy, such as large-scale asset purchases (quantitative easing).
* https://www.brookings.edu/blog/ben-bernanke/2017/04/12/how-b...
* https://en.wikipedia.org/wiki/Zero_lower_bound
It should be noted that central banks are not omnipotent: they do have some influence, but they do not have all the influence. When governments enact austerity, which depresses demand and economic activity, thus reducing inflationary tendencies, they are working at cross-purposes to the central banks.
After the Great Recession we saw central bankers cut rates, but governments cut spending, thus the two cancelling each other out to a certain extent.
Just need to look at what's going on in Venezuela, right now.
Increased supply of anything lowers it's value.
Network goods? Are telephones more valuable when more people have them? Road networks?
Just pointing out that many things in economics are not so obvious.
You're right that you need to cite things that go against the orthodoxy. At least to have sane debates. But of course he could have cited the current money printing era, where if you believe the official figures there's not a lot of inflation anywhere in the west. I'm not so confident in the figures, but that's at least some evidence that printing a load of money doesn't cause inflation.
Unless I'm grossly missing something.
In a phone network, there are a few different tipping points where the _ubiquity_ adds additional value. At a certain point, having a phone is worthwhile because everyone you could possibly want to talk to also has one. (this is also why I still have an account on Facebook).
The same can be said of a currency network. It becomes more valuable the more people you can exchange it with. People using US dollars outside the US gain value from knowing they have a trusted "stable third party" currency, and at the same time US dollars become more value to citizens of the US because they can now use that currency for purchases in that other country.
Having 20 phones with one owner is practically worthless, even though the network capacity is theoretically high. Distributing those phones among twenty people is what generates the real value. But you can't really distribute 20 phones equally among 200 people.
You need sufficient saturation of currency for its distribution to be of any real value, because you need enough quantity to be able to use it to do its job as a holder of arbitrary value exchange.
I just don't get why that necessarily has anything to do with supply itself. It has to do with the distribution, and as a result, the quality or utility of the network.
As you said, one person having 20 phones is off dubious value, but 20 additional people with phones might increase the network's quality.
The supply (20) is independent of the resulting quality/saturation/useful node count.
On the other hand, increased nodes could be seen as a negative. Like the US-Russia hotline. Or Facebook after it opened up to users without college email accounts.
Sometimes supply might affect the quality of a network, and therefore the value of having a node (phone) on that network. But to say supply increases with demand is misleading, to me. Increased quality increases demand, at a rate greater than the rate demand is decreased due to increased supply.
If supply happens to increase quality, then yes supply might dominate the equation such that demand increases as supply increases. But that doesn't mean the fundamental relationship between supply and demand has changed, it's just been minimized for particular cases.
Or maybe I'm just getting confused by transitive semantics.
I haven't seen anyone touch on it in this thread, but I've read opinions where people have blamed companies for hoarding all of the newly available cash, especially for stock buybacks.
If there's any truth to that, it would make sense, since companies can usually get better rates and first dibs at market level loans/ bonds/ etc than small business or individuals.
In the phone analogy, (if we assume there's some value having multiple phones) this would be like a new dialing prefix being released, and companies buying up the numbers hundreds at a time at bulk rate discount, leaving little or no additional numbers for individuals.
So supply was increased, but the businesses hoarding new numbers prevents any quality improvement if the network.
Now let's try applying that to bus networks. The more busses we have on the road, the less they're worth. If we reduce the supply of busses, then busses will be more valuable.
But this ignores the network effects of increasing the supply of something. If we increase the supply of busses, then we also increase the demand for busses and the value of busses through increased ridership. A single bus is worthless, but a fleet of busses is valuable to a community.
The quality of the transportation affects the value. Which in the case of buses, more buses equals a better, more frequent and readily available product. The number of seats isn't the limiting factor. It's just a side effect of somewhat standardized bus sizes.
Am I missing something?
Venezuela is a disaster because its export industries collapsed, and it doesn't have the advantage that western countries have of being an inward investment destination. So all sorts of things have to be imported, and the dollars needed to import them become increasingly scarce.
Printing money is a symptom. If the presses stopped then all that would happen is that paper money would become increasingly scarce as well as worthless.
[0] https://www.oxygenplus.com/blogs/articles/why-oxygen-plus-is...
The monetarist pitch was sexy because it sounded intuitive and elegant, that's why it spread so broadly. But it's worthless. Too bad for elegance and intuitiveness, if the reality doesn't match your model, you must throw it away.
> Increased supply of anything lowers it's value.
It doesn't work this way for money. otherwise,how would you explain that Euro isn't getting cheaper in dollar since 2015 when BCE is injecting billions of Euros on the market while the US has stopped QE for a while?
[1] https://fredblog.stlouisfed.org/2014/08/m2-velocity-and-infl...
Our modern economies have a lot of latent capacity, especially since so much of our economy these days does not have a lot of raw materials involved. More Netflix subscribers don't use much more raw materials to serve them. We are not limited by things like oil and iron anymore, so we don't hit supply issues which cause inflation.
The orthodoxy of "everything is supply and demand" has failed to predict many recent, important macroeconomic phenomenon. On the hand, the heterodox economists that draw from a variety of traditions and ideologies have had a reasonable success rate with predicting some of these important events; yet they are still treated as crackpots.
The reality is orthodox economics is just one theory of politics and the organization of society, which sometimes applies and sometimes doesn't. Treating everything as just "[the] definition of supply and demand" forgoes observing interesting and important phenomenon that seemingly work in opposition to or independent of supply and demand. Ignoring these phenomenon restricts your ability to understand and predict macroeconomic effects, and degrades your legitimacy as a 'science'.
Can you give some examples of these many unpredicted phenomenon?
https://www.nybooks.com/articles/2019/12/05/against-economic...
I like to read the critics, contrarians. Including some I deeply respect but strongly disagree with, like Tyler Cowen.
Keeps me sharp, honest. With myself. Hopefully.
The proper criticism to basic economic laws isn't that they don't control, it's that we systematically underestimate (another measurement error!) our capability of applying them well, both ex post as well as and especially a priori.
The same problem exists in all fields, it's just that many problems are relatively more tractable; solutions may not diverge as quickly, are more tolerant of inaccuracy and imprecision, generally producing more useful results. But at some point your numbers are sufficiently off that your predictions and models produce results widely at odds with reality. Such as all the various crazy and contradictory hypotheses regarding cosmological phenomena; hypotheses which turn on tiny uncertainties regarding various parameters.
But in economics there are fewer constants and a heck of a lot more free variables for even simple predictions. It's quite literally intractable. That's why people often conceptualize "the market" as a giant calculator. We know the basic principles to the calculator, but at scale nobody can arrive at the solution faster than the giant calculator itself. Anyone telling you they can do so is necessarily lying to you. But in general the only people telling you that are politicians, pundits, and other people with an agenda, though sadly too many of them are also economists.
When we're talking about demand for money, an increase in demand for money means that it is valued more highly than goods or services. The price of money in this context, is ... goods and services. That is, a higher demand for money means a (comparatively) lower demand for goods and services.
Which is to say, a propensity to offer a smaller amount of money for a given unit of goods and services.
An increased demand for money === a decrease in nominal prices. By supply/demand logic.
Actually, that works for anything, like bananas--you'd pay more bananas for the same amount of that paper currency, thus the price in bananas increases.
Because using actual events from history, it's true that printing money may not cause inflation.
When theory fails to describe reality, the failure is in the theory, not reality.
Consider the equation of exchange (https://en.wikipedia.org/wiki/Equation_of_exchange): MV = PQ.
The amount of money (M) can be increased without prices (P) going up so long as either the velocity (V) of money goes down or the economy (Q) becomes larger.
I don't think that's a technicality at all, but rather the norm in an expanding economy. In such a case the supply of money must increase in order to maintain stable prices. More stuff to purchase requires more money to purchase it.
Inflation occurs when the supply of money increases faster than the amount of goods and services available for purchase, or if the money supply remains the same, but the goods and services available somehow decrease (for instance, after a lost war or natural disaster).
Deflation occurs when the supply of goods and services increases faster than the amount of money, or when the supply of money decreases with the goods and services remaining the same.
We've seen a lot of bad inflation in recent history, but it's not often appreciated that deflation can be equally ruinous. The Great Depression is an example of what you get if deflation gets out of hand. The prices for everything from stocks and bonds to apples and wheat plummeted, but it sure didn't lead to a consumer's paradise.
This is a mistake that people almost always make with economics: failing to understand the decision contemporaneously.
By the metrics under which it was conceived, it had the intended effect (although some unfortunate side-effects...as ever).
One pointer would be the term "liquidity trap", e.g. this here as a starter: https://www.investopedia.com/terms/l/liquiditytrap.asp
Japan in particular had this problem for decades.
And I have to point out "printing money does not cause inflation" is exactly what happened in the US and Europe after 2007/8. There was massive QE but no increase in inflation (inflation was actually reduced).
But it was so obviously intuitive for the layperson that it caught rapidly in the opinion, and now it's considered common sense.
[1]: https://fredblog.stlouisfed.org/2014/08/m2-velocity-and-infl...
> Suddenly it seems as if everyone is talking about inflation. Stern opinion pieces warn that hyperinflation is just around the corner. And markets may be heeding these warnings: Interest rates on long-term government bonds are up, with fear of future inflation one possible reason for the interest-rate spike.
> But does the big inflation scare make any sense? Basically, no — with one caveat I’ll get to later. And I suspect that the scare is at least partly about politics rather than economics.
* https://www.nytimes.com/2009/05/29/opinion/29krugman.html
The economic models said that the Fed should have decreased interest rates until they reached -6.7% (i.e., well below zero), but this that was impractical, the next-best thing was flood the market with cash equivalent, and that inflation would not appear:
* https://krugman.blogs.nytimes.com/2009/11/16/the-madness-of-...
> It seemed totally obvious to many people that with the Fed adding to the monetary base at breakneck speed, high inflation just had to be around the corner. That’s what history told us, right?
> Except that those who knew their Hicks declared that this time was different, that in a liquidity trap the rise in the monetary base wouldn’t be inflationary at all (and that the relevant history was from Japan since the 1990s and from the 1930s, which seemed to confirm this claim). And so it proved, as shown by the red marker down at the bottom.
* https://krugman.blogs.nytimes.com/2015/05/17/money-inflation...
> According to mainstream theory, among the characteristics of a liquidity trap are interest rates that are close to zero and changes in the money supply that fail to translate into changes in the price level.[2]
* https://en.wikipedia.org/wiki/Liquidity_trap
The [2] is a 1998 paper by Krugman talking about Japan. So ten years before the Great Recession there were already models on how to think about increasing M2 from other countries' experiences.
It's also worth noting Keynesian economics was 70 years old in 2008. People willingly forgot this stuff to justify other political priorities.