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by rndphs
1555 days ago
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The amount of money being circulated absolutely does affect inflation (almost by definition). The Fed interest rate affects the amount of money in circulation because the Fed credit money is simply printed. This printed credit money gets spent and ends up circulating. The lower the interest rate, the easier it is to borrow, the more borrowing gets done, the more money is printed and enters circulation, which leads to inflation. Theoretically, the money needs to be paid back eventually. But as long as the Fed interest rate is below inflation, paying back can always be put off by covering the previous debt with new debt. |
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No, money supply ≠ inflation. E.g., Japan M2:
* https://fred.stlouisfed.org/series/MYAGM2JPM189S
Japan inflation:
* https://fred.stlouisfed.org/series/FPCPITOTLZGJPN
Why do Friedman-esqe Monetarists continue to ignore velocity?
* https://fred.stlouisfed.org/series/M2V
I personally like Cullen Roche's analogy:
> But this is what so much of the money supply represents – money that has been issued and is just sitting around unused. Why is this useful? It’s like calculating your weight changes by counting how much food you have in your refrigerator. No. That’s potential calories consumed and potential weight gain. The amount of food in your fridge tells you little about your future weight changes just like the amount of money in the economy tells us little about the actual price changes in the economy.
* https://www.pragcap.com/three-things-i-think-i-think-i-see-d...
> The Fed interest rate affects the amount of money in circulation because the Fed credit money is simply printed. This printed credit money gets spent and ends up circulating. The lower the interest rate, the easier it is to borrow, the more borrowing gets done, the more money is printed and enters circulation, which leads to inflation.
Things do not work like this. Money gets created through private banks by credit creation, and the only limit on that is the the risk they see in their loans being defaulted on. The Bank of England put out a primer a few years ago:
> The reality of how money is created today differs from the description found in some economics textbooks: Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits. In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money ‘multiplied up’ into more loans and deposits.
* https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...
Roche again from a 2011 paper, "Understanding the Modern Monetary System":
* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1905625
Banks create (hopefully) viable loans first, and then look for reserves after—assuming reserve requirements even exist, as many countries removed them decades ago.