Hi David, it is indeed challenging to get your head around the idea that creating more and more of something (in this case a sovereign currency) won't make it less valuable, after all, it seems like basic supply and demand. It requires understanding a currency is not backed by some finite thing (of course, they used to be under the gold …
Hi David, it is indeed challenging to get your head around the idea that creating more and more of something (in this case a sovereign currency) won't make it less valuable, after all, it seems like basic supply and demand. It requires understanding a currency is not backed by some finite thing (of course, they used to be under the gold standard, but we abandoned that 50 years ago), rather, it represents the cumulative value of all the resources in an economy.
I'm far from an expert in this, but I calculated the US money supply grew at a compounded annual growth rate of 7.5% between 1980-2020, meaning it more than doubled every 10 years. Yet if you chart the value of the US dollar index (DXY) against it, the DXY has effectively gone sideways in a relatively narrow channel, so no debasement (unfortunately I can't include charts otherwise I'd show you).
Similarly, you can run a chart of the US money supply vs inflation over the 20 years to 2021 and rebase them both to 100. In the seven years leading up to the GFC they ran reasonably close, but then post-GFC the money supply took off. By 2021, the money supply was just over 1000 but the CPI is about 150. To me, is showed there is no close relationship between the two at all.
"Similarly, you can run a chart of the US money supply vs inflation over the 20 years to 2021 and rebase them both to 100. In the seven years leading up to the GFC they ran reasonably close, but then post-GFC the money supply took off. By 2021, the money supply was just over 1000 but the CPI is about 150. To me, is showed there is no close relationship between the two at all."
This is what drew my attention to the paucity of classical monetary theory (and my graduate macro econ courses) in its ability to describe and predict reality. I have since read several papers on the disconnect between money supply and inflation. They are, for all intents and purposes, not related.
The only way that increasing interest rates has an impact on inflation is through crushing economic activity mostly at the expense of national wage income. The front lines for the 'fight against inflation' are the lines for the soup kitchen consisting of unemployed workers.
Hi David, it is indeed challenging to get your head around the idea that creating more and more of something (in this case a sovereign currency) won't make it less valuable, after all, it seems like basic supply and demand. It requires understanding a currency is not backed by some finite thing (of course, they used to be under the gold standard, but we abandoned that 50 years ago), rather, it represents the cumulative value of all the resources in an economy.
I'm far from an expert in this, but I calculated the US money supply grew at a compounded annual growth rate of 7.5% between 1980-2020, meaning it more than doubled every 10 years. Yet if you chart the value of the US dollar index (DXY) against it, the DXY has effectively gone sideways in a relatively narrow channel, so no debasement (unfortunately I can't include charts otherwise I'd show you).
Similarly, you can run a chart of the US money supply vs inflation over the 20 years to 2021 and rebase them both to 100. In the seven years leading up to the GFC they ran reasonably close, but then post-GFC the money supply took off. By 2021, the money supply was just over 1000 but the CPI is about 150. To me, is showed there is no close relationship between the two at all.
I hope this helps clarify some things for you.
"Similarly, you can run a chart of the US money supply vs inflation over the 20 years to 2021 and rebase them both to 100. In the seven years leading up to the GFC they ran reasonably close, but then post-GFC the money supply took off. By 2021, the money supply was just over 1000 but the CPI is about 150. To me, is showed there is no close relationship between the two at all."
This is what drew my attention to the paucity of classical monetary theory (and my graduate macro econ courses) in its ability to describe and predict reality. I have since read several papers on the disconnect between money supply and inflation. They are, for all intents and purposes, not related.
The only way that increasing interest rates has an impact on inflation is through crushing economic activity mostly at the expense of national wage income. The front lines for the 'fight against inflation' are the lines for the soup kitchen consisting of unemployed workers.