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Comment by secabeen | Hacker News Reader

One of the angles that I haven't seen discussed yet is that an increase in the money supply is a reasonable response to a significant decrease in the velocity of money. With stores closed, services shuttered and experiences unavailable, people are holding onto money longer, and it's changing hands less. If money is changing hands less (lower velocity) you need more money in the system to enable the same amount of commerce.

Once the economy starts back up again, the fed could reduce the money supply in line with the increasing velocity.

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Money velocity has fallen during the pandemic, but not significantly. Money velocity has been gradually falling anyway for quite a while. Goods purchases are off the charts right now, there aren't enough ships to haul the goods in and aren't enough ports for the ships to offload in.

https://fredblog.stlouisfed.org/?s=velocity

Absolutely! Countering the deflationary pressures to keep price levels stable (and fixed contracts reasonable), would be another way of looking at it, I think. They're doing their job!

The question is, politically, can they be so responsible in contracting the money supply thereafter? Hopefully!

Also how will it extract the money already created from circulation? I find that extremely implausible.

The fed doesn't gift money to anyone. To decrease money supply, all they have to do is reduce the amounts of reserves available to banks and sell back the bonds they have been buying feverishly and wait for any remaining loans to come due.

Now the government can gift money, but they must either use tax revenues and/or borrow by selling treasury bills - which can be to the public or the fed can buy them - but in either case, they must be paid back.

"the fed could reduce the money supply"

What is your proposed mechanism for this?

On the other hand, inflation is great for shafting the labor class, so at least we're going to put most of the pain on the people who are least capable of retaliating against the government; and they'll blame the rich anyways.

I believe the idea is to raise interest rates so people will hoard more money reducing the supply in circulation.

That won't reduce the supply, it will slow the expansion of supply, unless bankruptcies go into a chain reaction.

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