[nevereasonfroma]

Scott Sumner likes Mishkin's Economics of Money, Banking, and Financial Markets. If you're in USA, looks like you can get the 7th edition for around $10.

* https://www.themoneyillusion.com/the-league-of-monetary-cran...

* https://www.themoneyillusion.com/mishkins-revealing-omission...

His blog is great. Mainstream, orthodox macroeconomics. Well written, useful, and entertaining. Read the whole thing, in chronological order:

* https://www.themoneyillusion.com/page/932/

I graduated with a B average in economics, so I can't address this head on, but here's my understanding of the mainstream perspective:

1. Never reason from a price change: Prices go up, therefore people buy less? To the contrary, this begs the question of, why did prices go up? The causation is backwards: demand goes up, and then prices respond.

2. For example: "Low interest rates are generally a sign that money has been tight, as in Japan; high interest rates, that money has been easy." -Milton Friedman. The demand for money goes up (for whatever reason), the fed responds by increasing the supply of money, then interest rates fall.

3. Interest rates and inflation are nominal, thus don't impact relative prices (ie price discovery). Deflation/hyperinflation do have real effects though.

4. High/low, easy/tight is relative to market expectations. Successfully targeting the interest rate (or NGDP/aggregate demand) isn't market "stimulation" but keeping things on track, in a do no harm manner. And deviating does harm (ie business cycles).

5. Mainstream macro says money is neutral in the long run, non neutral in the short run. This might be what you're looking for: the effect of short term non neutrality of money on relative prices across the overall economy.

So, if the downward pressure on DCF denominators is an economy wide phenomenon (ie inflation), then it's still the same say top 10% of businesses that survive. The missing link for me is: what's pushing up the value of inefficient businesses more than efficient businesses (or apples)? What distorts prices specifically and systematically in favor of inefficient businesses, vs. against or randomly/unpredictably?

Now, let me go off the rails a bit re: wealth inequality. I think it's mostly just technology. There's just more and more stuff every year, and that sort of accretion, mix and stir with meritocracy, kleptocracy, plain old statistical randomness, network effects, what-have-you, lead to not just more wealth inequality, but inequality in general, and really just more overall diversity.

The space of possibilities is just expanding at an incredible rate, together with the population, so there's a lot more room. And, I think it's natural for the distribution of people to be diffuse across the space. And, more people across a wider space, it's harder to consolidate, especially upward (eg Mao moved us in the wrong direction). Markets + technology do bring up the floor (hunger, shelter, etc), but we're still a ways off from the floor or the ceiling hitting our biological limits, ie post scarcity a la Iain M Banks' The Culture.

[imtringued]

>5. Mainstream macro says money is neutral in the long run, non neutral in the short run. This might be what you're looking for: the effect of short term non neutrality of money on relative prices across the overall economy.

That's only true if you accept war and revolution to be a mechanism for reaching equilibrium over the long run.

[nevereasonfroma]

Interesting! I don't see the connection between money neutrality, long run equilibrium, and war & revolution. What's the story here?

[vladimirralev]

I know this is the mainstream, but all of this reads like total nonsense to me.

1. Price changes carry important information too. What if demand stays the same but price still goes up? It could there is too much money, or supply is constrained or a new tax was imposed in the chain, or something was banned or the market is simply inefficient.

2. Low rates are sign that money has been tight? Maybe in a world where rates are determined by a market, but right now the rates are whatever the Fed commands. If the Fed wasn't suppressing rates, all rates would be much higher. Further the demand for money is always infinite. Ask anybody on the street if they demand more money and 100% will say yes. Why doesn't the Fed increase the money supply for the random Joe on the street, but does so to cover unsustainable liquidity commitments made by banks?

3. Interest rates certainly drive relative prices as they widen and shrink the gaps between those on fixed income and everybody else. As such the different cohorts evolve different utility functions and preferences. For example certain asset prices can go higher than the price of food from interest alone.

4. Both inflation and NGDP are broad aggregates that clump together the top 1% with the rest with no regard of inequality, climate change, social unrest. It's easy to slip into a mode where the top 1% does extremely well while 99% are left behind and rioting, all satisfying the inflation or NGDP target. A mockery of a feudal economy in a way. And this is where we are heading.

5. We can prove this one as being false. Money neutrality has never been demonstrated in the long term. In fact most forms of money ended up guided by politics, hyper-inflated the supply, was banned, price-controlled or otherwise collapsed due to some inevitable populist political decision.

It's pretty funny how the Fed keeps telling us they look long term, inflation is transitory and markets will work it out in a few years without intervening. But when the repo market crashed they didn't wait "for the market to work itself out", they rewrote their whole rulebook and launched support facilities the same day.

By now it's clear they are making it up as they go and they are just dominating the system with increasingly excessive interventions into a self-exciting oscillation. The Fed increasingly need to resort to breaking the law to achieve their goals. The Fed is only allowed to buy government-guaranteed assets with the full faith that they will be repaid with taxes. They are not supposed to buy mortgages, ETFs, junk bonds, muni bonds. They've had these discussions in the past and determined it's against the federal reserve act. There is no doubt that the authors of the act never intended for this to be possible and the states wouldn't have even signed on the act if it was presented to them in such form.

[imtringued]

>2. Ask anybody on the street if they demand more money and 100% will say yes. Why doesn't the Fed increase the money supply for the random Joe on the street, but does so to cover unsustainable liquidity commitments made by banks?

The unsettling answer is that you would lose your job if they didn't do that and I don't mean because the chaos a bank collapse causes. No, I just mean that the money in circulation would dry up so fast, your employer won't have any money to pay you.

>4. A mockery of a feudal economy in a way. And this is where we are heading.

It's a feudal economy from the start, it's just that early on, most of the money is circulating in the hands of workers and once it stops it has to be borrowed from those that take it out of circulation.

>5. We can prove this one as being false. Money neutrality has never been demonstrated in the long term. In fact most forms of money ended up guided by politics, hyper-inflated the supply, was banned, price-controlled or otherwise collapsed due to some inevitable populist political decision.

Thanks, you are absolutely right. The problem, however, aren't the politicians, they have inherited a system designed to collapse on its own. It shouldn't be possible to take money out of circulation. Hyperinflation is effectively a problem of forced indebtedness. If the politicians had the option of refusing debt they would have taken it a long time ago.

As I said before, cash guarantees you a 0% yield on your investment, therefore money can be taken out of circulation with no loss to yourself but huge losses to people who are dependent on circulating money. They (including politicians) need the circulating money now, so they accept loan conditions that are not compatible with current market conditions.

The system will collapse one day, so why not let it collapse a few years later? It's only logical. Meanwhile anyone who wants interest rates to go up wants the system to collapse earlier than necessary.

>It's pretty funny how the Fed keeps telling us they look long term, inflation is transitory and markets will work it out in a few years without intervening. But when the repo market crashed they didn't wait "for the market to work itself out", they rewrote their whole rulebook and launched support facilities the same day.

As I already said, that money too will be taken out of circulation one day.

>By now it's clear they are making it up as they go and they are just dominating the system with increasingly excessive interventions into a self-exciting oscillation.

If you think the Fed is intervening, why are you not complaining about the people taking money out of circulation that force the Fed to do stupid things? Why does that not count as massive market intervention? If you had a 6% annual tax on cash the interest rate would have dropped to 0% in 2000 and the money supply wouldn't have to grow as much.

[vladimirralev]

The only reason for people to take money out of circulation is because nobody managed to convince them to spend or invest in something worthy. If the economy can't produce enough worthy money sinks, that is a structural problem with regulation, entrepreneur skills/education and general business UX.

Printing money doesn't fix any of these issues, the only thing money printing does is force the money into the overcrowded money sinks (AAPL) and scams (NFTs). And I am willing to argue this makes the problem worse, because talent is now wasted into supporting scams or the best talent is retiring on passive income from money printing instead of finding new ways to convince investors and consumers to spend productively.

[nevereasonfroma]

Fair enough hahaha. I do think there's some room for common ground here.

1. Yes, absolutely. It would be due to a change in supply. Price controls, taxes, regulation, etc affect the price only insomuch as they affect supply and demand. It's a matter of definition: it's just as true in a market economy as it is in a non-market economy, or under market failure. Whether it's a useful framework is a different matter!

2a. So, interest rates are indeed determined by the market, with respect to open market operations right? The Fed buys and sells with a target in mind, but they certainly can, as you point out, fail to hit their target.

2b. This was a bit of unfortunate jargon: demand for "money" specifically means cash/cash equivalents relative to other assets like stocks/gold/real estate. It's not referring to wealth, although I do think the desire there isn't infinite: biological limits/post scarcity.

2c. And "demand" for money refers to the whole of the demand curve (and shifts in the whole of the curve). That is, how much of your portfolio do you want to hold in cash/equivalents at a given interest rate?

2d. Fed open market operations do target the whole of the economy: it's a ham fisted approach. Inflation affects groceries and gas, just as much as bank liquidity and such.

3. So, relative price change isn't inflation by definition, and market expectations of the interest rate path are priced in. Of course, there are plenty of relative price changes alongside inflation, but there's a lot more to the economy beyond open market operations. The Fed isn't able to specifically target say apples over oranges, hence ham fisted.

4. Sure, broad aggregates like NGDP don't include inequality or climate change, but that's a good thing because the Fed's job is limited to keeping aggregate demand (NGDP) on track. Of course there's a lot more to the economy, but that's beyond the realm of Fed open market operations. That is, I don't think the Fed is the right place to look for solutions.

5a. So money neutrality only says: a permanent 1 time increase to the money supply doesn't affect real GDP.

5b. Again, more jargon: "long run" is however long it takes for thing(s) to adjust (whatever it is: wages, rates, output, etc), and "short run" is just short of that. So as a unit of time, it depends on the good as well as real world conditions. The short run can go forever, market failure maybe. The short run can be zero, when things go according to market expectations and everything's already been priced in.

Sorry, a lot of that's non sequitur. But that's my point: I think the mainstream is a coherent and useful story, but it's not relevant in this context, hence total nonsense. To the extent that there's an upward trend in inefficient businesses or 'rich get richer, poor get poorer', I don't see how open market operations can be the culprit.

But yeah, I don't necessarily disagree with your overall impression of the Fed hahaha.