Rapid money supply growth with no consumer price inflation can only really occur within the confines of an asset price bubble, or else, where does the money go?? Interest rates are low at such a time because of the incredible liquidity, and complacency of lenders that they will get an equal amount of purchasing power back.? Perhaps another possibility is when a country?s currency is being used more and more as a shadow currency, like the US in the Third World.? But even that will come home someday.
I wrote this sometime prior to 2003.? But can it be more relevant than today, aside from my comment about being a shadow currency?? Alas, the US Dollar is not a store of value anymore.? It is only a unit of exchange, like trading cigarettes in a prison camp.
The Federal Reserve may pretend that it is the guardian of stability, but it is not so with respect to asset values.? The Fed stays within its mandates: labor unemployment and goods price inflation.? Those are not much affected by Fed policy at present.? But asset values are inflated.
What should we expect of monetary policy?? Additional creation of money or credit should affect the prices of something.? If the Fed does not intend on affecting a price somewhere, what is it up to?? The economy is prices.? What is the Fed if it does not affect prices?? Next press conference, ask Ben what set of prices he is trying to affect.? If he mumbles, as he usually does, you can know that he is without knowledge, or lying.? All monetary policy affects prices, and it is either dishonest or stupid to say otherwise.
That’s all for now.? We are in a rough situation because of errors in government and central bank policy, as well as cultural errors that have favored spending over saving.? Ignore the idiots who talk of the paradox of thrift.? They rely on short-term models which are not relevant in the real economy.? Saving is a good thing, but maybe save in currencies that are not subject to government discretion, like gold.
(Note: I am a math undergrad who never studied economics after the 200-level classes needed for a finance minor. I don’t claim to know enough to make assertions.)
Monetary policy is supposed to be a balance between inflation and stagnant growth – the issue is that I think there is a hidden ditch that was created by the banks leverage.
The fed has been pumping in liquidity, the banks have been increasing reserves and not lending. Isn’t this simply de-leveraging? If the banks don’t re-lever themselves, and use this additional cash to support their still-massive balance sheets in a slightly less precarious position, isn’t that going to support home prices from collapsing back to their “true” values pre-asset bubble, and leave the economy fairly stable?
>>Saving is a good thing, but maybe save in currencies that are not subject to government discretion, like gold.
Gold or a gold miner? Actually my preference in today’s economics is (A) copper – actually the best copper miner I can find (in my view FCX) and (B) A solid company making the pick and axe sold to the miner (JOYG or CAT). Remember who made money in the CA gold rush it was the store keeper selling supplies to the miners. To juice up the return I periodically sell near OTM calls. If I were going to buy either, I would likely sell near OTM puts over and over again and hope it gets put to me.
There is some evidence (http://www.newyorkfed.org/research/staff_reports/sr497.pdf) that the recent bout of quantitative easing has not been inflationary because almost all of the new money is sitting at the Fed in the form of excess reserves.