Does Monetarism matter?
Discussion
I'm not an economist, something that is about to become abundantly clear no doubt, but like many people I've been trying to understand the origins and nature of inflation. Like many people I paid close attention to the Federal Reserves views on inflation:
Now Milton Friedman famously claimed that inflation is always and everywhere a monetary phenomenon. Later he clarified that he was referring to episodes of persistent inflation. In the short run, supply shocks can impact the price level.
We to give some consideration to the notion of a supply shock but when you look at commodities markets and the BLS CPI data most of what's now driving inflation is domestic (e.g. shelter, insurance, medical goods, food etc.) which have actually increased or persisted post-pandemic. It doesn't look like a shock anymore.
So is Milton being vindicated on his Monetarist view or will Powell have the last laugh with transitory inflation?
Jerome Powell Federal Reserve Chair in 2021 said:
Well, when you and I studied economics a million years ago, M2 and monetary aggregates generally seemed to have a relationship to economic growth…that classic relationship between monetary aggregates and economic growth and the size of the economy, it just no longer holds… so something we have to unlearn, I guess.
However, when I look up the data, something interesting has/is happening within M2 over the last year and a half in that the velocity of money is increasing again and the volume is falling.Now Milton Friedman famously claimed that inflation is always and everywhere a monetary phenomenon. Later he clarified that he was referring to episodes of persistent inflation. In the short run, supply shocks can impact the price level.
We to give some consideration to the notion of a supply shock but when you look at commodities markets and the BLS CPI data most of what's now driving inflation is domestic (e.g. shelter, insurance, medical goods, food etc.) which have actually increased or persisted post-pandemic. It doesn't look like a shock anymore.
So is Milton being vindicated on his Monetarist view or will Powell have the last laugh with transitory inflation?
Edited by speedy_thrills on Friday 1st September 18:51
The pandemic response was a classic example of a governmental funding crisis being met through money printing and then followed by inflation soaring. Previous such incidences have usually been at a time of total war, and that was the sort of level of economic shock delivered by lockdown.
The inflationary surge in the western world was preceded by a surge in the money supply. The increase in the broad money supply hitting a peak of 15% year on year a long way prior to the peak of inflation.
This was foretold by Economists who knew what they are doing, such as the then BOE Chief Economist, and was entirely unsurprising.
Where it becomes confused is politics trumping economics. Lockdown was seen as essential by the governing class, and it had to be paid for, so the consequences were not acknowledged.
The positive news is that broad money growth has plummeted and is now approaching zero.
The inflationary surge in the western world was preceded by a surge in the money supply. The increase in the broad money supply hitting a peak of 15% year on year a long way prior to the peak of inflation.
This was foretold by Economists who knew what they are doing, such as the then BOE Chief Economist, and was entirely unsurprising.
Where it becomes confused is politics trumping economics. Lockdown was seen as essential by the governing class, and it had to be paid for, so the consequences were not acknowledged.
The positive news is that broad money growth has plummeted and is now approaching zero.
Agree with JL above...
However, what I don't understand is why the BeO continuously raises interest rates. It only seems to hit those that can least afford it, leading to potential house repossessions etc. The powers that be seem hell bent on causing a recession - how can raising the unemployment rate be in anyway helpful??
However, what I don't understand is why the BeO continuously raises interest rates. It only seems to hit those that can least afford it, leading to potential house repossessions etc. The powers that be seem hell bent on causing a recession - how can raising the unemployment rate be in anyway helpful??
Biker 1 said:
Agree with JL above...
However, what I don't understand is why the BeO continuously raises interest rates. It only seems to hit those that can least afford it, leading to potential house repossessions etc. The powers that be seem hell bent on causing a recession - how can raising the unemployment rate be in anyway helpful??
There are really no other leavers it has. You could put restrictions on consumption directly (rationing) but that's not likely to be appealing in consumerist society and would be much more complex than rasing irates.However, what I don't understand is why the BeO continuously raises interest rates. It only seems to hit those that can least afford it, leading to potential house repossessions etc. The powers that be seem hell bent on causing a recession - how can raising the unemployment rate be in anyway helpful??
Inflation is broadly its own cure the problem we face is the pain was brought about by actions we might not have been in favour of.
Biker 1 said:
Agree with JL above...
However, what I don't understand is why the BeO continuously raises interest rates. It only seems to hit those that can least afford it, leading to potential house repossessions etc. The powers that be seem hell bent on causing a recession - how can raising the unemployment rate be in anyway helpful??
mild recessions are good as they end businesses that are not truly viable and help expose fraud in the system. un-employment results but the idea is that those that are made un-employed then find new jobs inside the parts of the economy that are more efficient or viable, some will need to retrain and reskill.However, what I don't understand is why the BeO continuously raises interest rates. It only seems to hit those that can least afford it, leading to potential house repossessions etc. The powers that be seem hell bent on causing a recession - how can raising the unemployment rate be in anyway helpful??
Just look at the sea of fraud and corruption that was discovered in the last recession and the implosion of Enron (and others) in the recession before that.
M2 money supply was covered in the FT alphaville all the way through 2008. It's a good trove of information on the topic.
Biker 1 said:
Agree with JL above...
However, what I don't understand is why the BeO continuously raises interest rates. It only seems to hit those that can least afford it, leading to potential house repossessions etc. The powers that be seem hell bent on causing a recession - how can raising the unemployment rate be in anyway helpful??
A small recession is a sure fire way to reduce inflation and fairly easy to unwind with rate cuts or other stimulation.However, what I don't understand is why the BeO continuously raises interest rates. It only seems to hit those that can least afford it, leading to potential house repossessions etc. The powers that be seem hell bent on causing a recession - how can raising the unemployment rate be in anyway helpful??
Gecko1978 said:
There are really no other levers it has.
This gets trotted out time and again. Whilst factually correct - they have no other levers - the question remains "why keep pulling the lever?"If you can explain to me what "good" is being done by hiking interest rates to the sky after 15 years of near zero rates I'd like to hear about it.
IMO central banks were nuts to leave rates so low for so long. Their first mistake.
When they started raising rates they said "it's just a short blip if inflation and modest rate rises will see it subside in a few months". Their second mistake.
So inflation didn't subside (no surprises there) and they've gone on hiking rates which, surprise surprise, increases everyone's costs and further stokes inflation. Their third mistake.
The only people benefitting from these interest rates are banks who have massively increased their spread - which is the difference between what they charge borrowers (7%) and what they pay savers 3%). Did they have a 4% spread when rates were 1%? absolutely not.
So don't believe the traditional stuff that gets trotted out every time. This round of interest rate increases is heading in one direction and one direction only - more inflation, increased unemployment and an economy pushed into recession.
Otherwise known as the disaster of "stagflation".
A prerequisite for a "successful" economy is low inflation.
But note that low inflation in itself doesn't lead to success, decent government is also required.
The only cure for inflation is raising interest rates.
To paraphrase Churchill, raising interest rates is the worst way to cure inflation...apart from all the others.
caziques said:
The only cure for inflation is raising interest rates.
Now please explain in plain English how that statement interacts with reality.Then hold it up to the mirror and ask yourself, "How is it we had 15 years of record low interest rates (2008 to 2023) during which inflation remained benign?"
This round of inflation was IMO set off by highly unusual factors,
There's no point taking 20th century medicine for a 21st century disease.
- Putin's war causing energy prices to rocket.
- Green policies causing increased costs across the board.
- Expanding world population putting pressure on food prices, and best of all
- Biofuels - making "green fuel" out of - wait for it, wait for it - "food".
There's no point taking 20th century medicine for a 21st century disease.
To me, and to put it bluntly, countries/economies did fifteen years of partying/economic shenanigans in three years. Governments are bandits and economists are fantasists. In decades to come AI will be able to pinpoint the moment where modern society became uneconomical to run due to overcomplexity and, before that occurred, when the leash on economic rationality was severed.
Panamax said:
caziques said:
The only cure for inflation is raising interest rates.
Now please explain in plain English how that statement interacts with reality.Then hold it up to the mirror and ask yourself, "How is it we had 15 years of record low interest rates (2008 to 2023) during which inflation remained benign?"
Inflation is necessary to encourage investment. Otherwise every saver would happily sit there earning real returns on their capital, without having to put it at risk. This is especially in a low interest rate environment.
And investment is necessary to generate economic growth. Why does growth matter? Since every Western economy (and now China) has a demographic problem of an ageing population, it is necessary to grow GDP. Why? Well, since the population is getting older, the tax base is shrinking. So GDP growth driven by investments is the only way for governments with mature populations to continue providing anything like the standard of social security voters have come to expect in my lifetime.
We have also run out of deflationary "events".
China's production growth has been massively deflationary to the Western World.
Combined with a never to be repeated horde of young former Soviet workers flooding the EU in 2004 onwards.
The boomers all stopping work either recently or very soon is going to be inflationary in itself. Fewer younger workers equals higher wages?
This month's inflation figures will be very interesting as Core Inflation has picked up again slightly in the US I believe, similar to the UK's latest data.
China's production growth has been massively deflationary to the Western World.
Combined with a never to be repeated horde of young former Soviet workers flooding the EU in 2004 onwards.
The boomers all stopping work either recently or very soon is going to be inflationary in itself. Fewer younger workers equals higher wages?
This month's inflation figures will be very interesting as Core Inflation has picked up again slightly in the US I believe, similar to the UK's latest data.
caziques said:
A prerequisite for a "successful" economy is low inflation.
But note that low inflation in itself doesn't lead to success, decent government is also required.
The only cure for inflation is raising interest rates.
To paraphrase Churchill, raising interest rates is the worst way to cure inflation...apart from all the others.
It would be pretty easy to raise consumption taxes also though, like VAT, fuel duty, etc. etc., which would also reduce people’s ability to spend.But note that low inflation in itself doesn't lead to success, decent government is also required.
The only cure for inflation is raising interest rates.
To paraphrase Churchill, raising interest rates is the worst way to cure inflation...apart from all the others.
Saweep said:
We have also run out of deflationary "events".
China's production growth has been massively deflationary to the Western World.
Combined with a never to be repeated horde of young former Soviet workers flooding the EU in 2004 onwards.
The boomers all stopping work either recently or very soon is going to be inflationary in itself. Fewer younger workers equals higher wages?
This month's inflation figures will be very interesting as Core Inflation has picked up again slightly in the US I believe, similar to the UK's latest data.
I watched a video on Chinese port haulage this week. A lot of ports at virtual standstill. Even if there was work, the cost of living crisis (no, China is not immune) means truck owners are making nothing.China's production growth has been massively deflationary to the Western World.
Combined with a never to be repeated horde of young former Soviet workers flooding the EU in 2004 onwards.
The boomers all stopping work either recently or very soon is going to be inflationary in itself. Fewer younger workers equals higher wages?
This month's inflation figures will be very interesting as Core Inflation has picked up again slightly in the US I believe, similar to the UK's latest data.
It occurs to me, they are very unlikely to be the only sector struggling with price inflation and, therefore, we have hit the buffers on the great, 20+ year run of “Cheap from China” deflation.
PlywoodPascal said:
caziques said:
A prerequisite for a "successful" economy is low inflation.
But note that low inflation in itself doesn't lead to success, decent government is also required.
The only cure for inflation is raising interest rates.
To paraphrase Churchill, raising interest rates is the worst way to cure inflation...apart from all the others.
It would be pretty easy to raise consumption taxes also though, like VAT, fuel duty, etc. etc., which would also reduce people’s ability to spend.But note that low inflation in itself doesn't lead to success, decent government is also required.
The only cure for inflation is raising interest rates.
To paraphrase Churchill, raising interest rates is the worst way to cure inflation...apart from all the others.
Panamax said:
caziques said:
The only cure for inflation is raising interest rates.
Now please explain in plain English how that statement interacts with reality.Then hold it up to the mirror and ask yourself, "How is it we had 15 years of record low interest rates (2008 to 2023) during which inflation remained benign?"
We have not had price rises because the price to design, make and ship goods has decreased. But instead of seeing prices fall they have been staying level or slowly rising. This is because of Inflation.
We all know that computers or microwave ovens or electronics and other stuff like this should get cheaper and cheaper as we figure out how to make it quicker, easier and better. No one seems to ask why prices have not gone down. Everyone seems to accept this Ball Sheet that prices should stay flat or rise around 2%. Why?
Yes various things have happened in the last year / 2 years or so which have finally pushed things to the limits.
Energy bills assistance
Help to buy
Stamp duty holidays
Furlough payments
Covid loans etc
All this funny money has been printed or inflated and pumped into society. This is all Inflation. And we have to pay for it. And we will be paying for it forever.
Prices have gone up. Even if they can get them to stop going up as quick they will never come back down. They will tell us that steady price rises of around 2% is good and they have beaten Inflation. These prices are now here to stay. We are all getting shafted because they wanted to throw money around like idiots.
I think "monetarism" over complicates things a bit. The big leap is thinking of money as just another economic good. Basically it's supply and demand for money itself. If you print a load more of it then the price goes down relative to oil, houses and anything else you might buy with it.
The rot set in well before 2008. IMO it's built into the system with fiat currency. It was rampant in the 70s and 80s, and just about under control in the 1990s. Since about 2000 it has all fallen apart again, but has been somewhat masked by falling technology prices and cheap labour - either outsourced to the far east or imported via immigration.
So long as politicians can make themselves look good by printing more money they will find some way to do so.
The rot set in well before 2008. IMO it's built into the system with fiat currency. It was rampant in the 70s and 80s, and just about under control in the 1990s. Since about 2000 it has all fallen apart again, but has been somewhat masked by falling technology prices and cheap labour - either outsourced to the far east or imported via immigration.
So long as politicians can make themselves look good by printing more money they will find some way to do so.
Gassing Station | News, Politics & Economics | Top of Page | What's New | My Stuff