Some graphs relating to the monetary theory discussion Some graphs relating to the monetary theory discussion

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Thread: Some graphs relating to the monetary theory discussion

  1. #1
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    Default Some graphs relating to the monetary theory discussion

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    The first attachment shows the growth in the M2 money stock alongside the velocity of money (which is an inverse reflection of the money demand function derived from the quantity theory of money equation). Through QE after the Great Recession, the Fed increased the money supply hugely. Yet, falling velocity / increasing demand for money suggested people and businesses wanted more money/credit. Changes to the monetary framework, namely interest on excess reserves, and (I think) incentives for banks resulting from the new financial regulations kept banks from lending out all of the new extra money that they had in reserves. Additionally, QE was more of an asset swap (i.e. exchanging liquid treasury bills for cash). Arguably, the recovery after '08/'09 could have been better if easy money had actually made its way into the real economy. Now, in response to the COVID shock, the Fed/Treasury are taking action to not make this mistake again. And yes, there is of course Pandora's Box-like inflationary risk... it's a hard risk/reward problem, I guess. We have to hope that US treasury bills being the safe asset of the world (high demand for US debt as an offset to inflation risk) remains the case.

    The second attachment shows how much of the COVID gov spending has simply been saved by people. A lot more than I would have thought. This is probably a big reason why we have not seen real inflation yet.
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    Okay.

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    Quote Originally Posted by KyleL View Post

    The second attachment shows how much of the COVID gov spending has simply been saved by people. A lot more than I would have thought. This is probably a big reason why we have not seen real inflation yet.
    Velocity of money details how quickly a dollar circulates. Itís not that people are saving their money, as much as money is not being spent. Hear me out:

    I get paid on Fridays. I usually take my wife out to dinner on Saturdays. I give the waiter a tip of, say, $20. The waiter goes out after work and has a few beers with my $20 tip. He leaves a small tip for the bartender. The bartender takes the small tip and uses it as part and parcel to buy concert tickets. And so on and so forth.

    When you have everything locked down, and masks are the norm, itís either not pleasurable or apparently legal (in some shitholes) to even go to dinner. The waiter never gets his tip. He canít go to the bar. The bartender canít go to the concert.

    Itís not that people are saving money. Itís that theyíre spending it differently than they were before. Now theyíre buying Playstations, work from home stuff, etc.

    We pumped I donít know how many trillions into the economy but the rate of movement of money has not really accelerated yet. If the American people grow a pair of fucking balls and decide that itís safe to hug their grandchildren again and go to a concert, then you will see the velocity change as those trillions circulate more.

    If youíve been invested in the NASDAQ recently, youíve felt the pain of this recently as I have. The estimate of the economy being back by summer or fall implies the velocity of money is changing. Tech stocks raking in money from the pandemic lockdown, will see slight revenue drops while the ďrecovery sectorĒ (airlines, hotels, etc.,) will see gains.

    The fear is that as those trillions circulate, inflation will go nuts. The Fed will respond by increasing rates.

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    Quote Originally Posted by Frank_B View Post
    Velocity of money details how quickly a dollar circulates. Itís not that people are saving their money, as much as money is not being spent. Hear me out:

    I get paid on Fridays. I usually take my wife out to dinner on Saturdays. I give the waiter a tip of, say, $20. The waiter goes out after work and has a few beers with my $20 tip. He leaves a small tip for the bartender. The bartender takes the small tip and uses it as part and parcel to buy concert tickets. And so on and so forth.

    When you have everything locked down, and masks are the norm, itís either not pleasurable or apparently legal (in some shitholes) to even go to dinner. The waiter never gets his tip. He canít go to the bar. The bartender canít go to the concert.

    Itís not that people are saving money. Itís that theyíre spending it differently than they were before. Now theyíre buying Playstations, work from home stuff, etc.

    We pumped I donít know how many trillions into the economy but the rate of movement of money has not really accelerated yet. If the American people grow a pair of fucking balls and decide that itís safe to hug their grandchildren again and go to a concert, then you will see the velocity change as those trillions circulate more.

    If youíve been invested in the NASDAQ recently, youíve felt the pain of this recently as I have. The estimate of the economy being back by summer or fall implies the velocity of money is changing. Tech stocks raking in money from the pandemic lockdown, will see slight revenue drops while the ďrecovery sectorĒ (airlines, hotels, etc.,) will see gains.

    The fear is that as those trillions circulate, inflation will go nuts. The Fed will respond by increasing rates.
    I don't know if it is simply spending money in different ways. The increase in personal savings relative to GDP could be due to wanting a cushion in these uncertain times and/or simply not needing to spend it (i.e. someone financially comfortable who did not need the stimulus to eat / pay rent).

    Some inflation (> 2%) would be good for the recovery, I think. This is, as we know, what the Fed is shooting for with their new quasi "make-up" policy regime.

    I agree with Rip -- monetary theory is really confusing these days. And the US is especially confusing in terms of modeling inflation risk given we are the exporter of safe assets to the world.

    If one thing can be said for sure, we all need to be more Hayekian.

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    We might just run out of stuff before we get rapid price rises, thus short circuiting the usual way things work.
    The financialisation of the markets has pushed capital out of productive investment into a casino. It now seems they have concluded we don’t actually require production or producers because all that is required is to take all the printed currency, buy back the stocks and pay everyone a dividend for doing so well. Meanwhile supply chains are collapsing just like we saw during the credit squeeze when banks began to freeze. You can unfuck a bank with a waterfall of liquidity, but a supply chain doesn’t work like that. The banking crisis rippled out of control because of global interconnection of banking debt, I predict the same will happen with supply chains as one impacts the next like dominoes. Once production has all but stalled, the amount of paper clutched in the fist will automatically become worthless and then the velocity will accelerate like a bitch.

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    Inflation is a tool to bring down governments you don't like. It is not something you have to worry about if you are living in the place that brings down governments.

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    Quote Originally Posted by Nockian View Post
    ...I predict the same will happen with supply chains as one impacts the next like dominoes. ...
    I wonder if this is the reason for the limited choice of flavors in the Zero sparkling beverages. Trying times. (Elsewhere, I have indeed abstained from Coke products, as far as I can tell. Fie upon the L200. )

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    Why would velocity increase? The Fed printed it and it went right to Blackrock and right to STONKS. Everyone knows this, when I say everyone I mean everyone who owns stonks. Nobody else knows this of course or else Jay Powell wouldn't be able to walk down the street.

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    Quote Originally Posted by DougBriggs View Post
    Why would velocity increase? The Fed printed it and it went right to Blackrock and right to STONKS. Everyone knows this, when I say everyone I mean everyone who owns stonks. Nobody else knows this of course or else Jay Powell wouldn't be able to walk down the street.
    I generally agree except that itís hard to peg because we donít have a fully operating economy yet. Bars, restaurants, concert arenas, etc., arenít operating yet or are doing so at reduced capacity.

    This is simply a calculus issue: dS/dT, if you will: a change in spending over time.

    What happens when multiple trillions of extra dollars flows faster? And does Jay Powell increase interest rates to curtail it?

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