In his testimony with Congress on Wednesday, Federal Reserve Chairman Jerome Powell said that historically, changes in the money supply level have not affected levels in inflation.
In response to a questions posed by Congressman Warren Davidson about whether “M2 [money supply] going up by 25% in one year” is going to “diminish the value of the U.S. dollar,” Powell responded, “there was a time when monetary policy aggregates were important determinants of inflation and that has not been the case for a long time.”
Printing money primarily leads to economic growth…in the western world. When central banks are not controlled by the dictator of a country you get a lot of growth and some inflation in the mix. This is well known.
You can fault Powell but he is doing an excellent job. That you are do not know how printing money works says something about how limited your faulting Powell is.
**One of the underlying factors is that the transmission mechanism of the monetary policy has been cut off by the non-performing loans and excessive debt issues. These factors are obstructing growth in money supply and impeding the Japanese economy from overcoming the deflation. **
So I agree growing the money supply should be inflationary, yet there are other inputs that can stop that from happening. Otherwise, Japan would be the nation with the most inflation of all.
Maybe inflation also requires that aggregate demand rises? And maybe it’s hard to have aggregate demand rise while your population is declining (as Japan’s is)?
And that trade deficit is almost a requirement for being a reserve currency of choice for the world. And yes, it gives us certain “benefits”, like exporting inflation. A benefit many in the world says we’ve abused. They are probably correct about that.
Let me add:
Why, after the Fed helicoptered $$$$$ into the US economy in 2009-2010, did the US not experience the predicted inflation?
The US went with TBTF, TARP, “make it rain”… Etc, the EU went with austerity (IIRC?).
The US Fed chose QE.
Then we, the US, had 13 years of very low inflation, and the longest Bull in recorded history.
Inspite of $B$B$B of 2009QE.
Now, we got 2020 COVID QE, and in 2022, an inflation spike.
What is the difference between 2009 and 2020 process of QE?
Is 2009 similar to 1990 Japanese QE?
Does M2, money actually circulating around the Proles pockets and bank accounts explain why 2020QE caused inflation while TBTF QE with most of the helicoptered $$ staying in the TBTF (ie not circulated) did not?
Is the Japanese QE $$ not going into Japanese M2?
ralph is definitely not an economist.
What Is M2?
M2 is the U.S. Federal Reserve’s estimate of the total money supply including all of the cash people have on hand plus all of the money deposited in checking accounts, savings accounts, and other short-term saving vehicles such as certificates of deposit (CDs).
I’m pretty sure that is exactly why. Recent monetary stimulus went into people’s pockets (at a time, frankly, when people needed it), and they spent it. On the other hand, people weren’t losing jobs and houses at the rates seen during 2008/9 either, when the money only went to the TBTF.
Job creation is high, unemployment is low, wages are up. Yes, inflation is high, but it is coming down. People are not out of work. People are not losing homes. I see this as a WIN.
That is about what I am thinking. As long as the money is kept out of the hands of the Proles who would spend it buying stuff, there is no inflation. Hoover up the printed money by selling massive amounts of government bonds. Hoover up more by paying banks to deposit cash, rather than let the banks lend it to the Proles, who would spend it. Sticks in my mind I saw this strategy referred to as “sanitizing” or “sterilizing” or some such thing. Of course, this strategy leads to the conclusion that, to control inflation, all one has to do is squeeze the Proles harder.
You might have answered your own question. All those helicoptered $$$ were spent on stocks rather than products. There was an aging Boomer generation suddenly realizing they needed to invest for retirement coinciding with stock trading going retail. What inflated was the stock market.
The S&P P/E ratio has increased quite a bit in the past decade. That suggests that a lot of money that would normally have been spent on household goods instead went into shares of Apple and Amazon.
That may have been true for the last 40 years but it will soon be the opposite. We can also export deflationary forces and have the reserve currency.
As for Japan, she had deflationary pressures because of the prior amount of inflation and then sitting so close to China’s economies of scale as that built out in manufacturing.
I’ve been pondering this statement. Is Powell a barefaced liar or does he actually believe this? Was Milton Friedman wrong? There is a scenario that absolves the first of lying and the second of error. Milton Friedman said:
Inflation is always and everywhere a monetary phenomenon, in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.
If money is, as I believe, an accounting system that tracks the production of value then the money supply would always match the amount of value available for sale. If money can be artificially inflated by printing more of it and people have access to this money to spend then inflation would be inevitable and money and value would no longer correlate. The accounting would be fraudulent.
The above would be true based on classical economics but that’s not how the world works. It’s more complicated than that, it’s a complex system that evolves. One important evolution was fractional reserve banking which created money without creating value in the traditional sense. By making money available to industry (investment) it accelerates progress. By making money available for spending it creates inflation. But this is a self correcting system, as money is withdrawn it goes into reverse but some benefits remain.
When the government bailed out the failed, fraudulent banking system in 2008-9 it also controlled the destination of the newly created money. Banks didn’t use it to make fractional reserve loans to the public but deposited it with the government. Money that does not flow freely is not real money. It’s an accounting hack to square the books.
The problem with Milton Friedman’s pronouncement is that it was made in the assumption of free markets. Instead of saying “Inflation is always and everywhere a monetary phenomenon” he should have qualified the statement, “In free markets, inflation is always and everywhere…”
If I’m not mistaken, Milton Friedman correlated with neoliberalism. Things are much less liberal now, much more dogmatic.
I believe Friedman also believed that the velocity of money was more or less constant which I believe was reflected in his research but didn’t turn out to be the case from the 90’s onwards, especially dropping after the 2008 financial crisis which might explain why flooding the markets with cash didn’t translate directly into inflation. But mentioned elsewhere, I believe a lot of it was exported or also drove the market. A lot of foreign home prices increased during that time.
