To HN: Is there a body of economic theory or a good text that separates inflation of the base currency from some other term that captures its relative value to other currencies?
Currency inflation measures the value of currency relative to... everything. Inflation is a fall in the value of currency.
Why do you want a special term for e.g. the dollar falling by 8% at the same time that the british pound also falls by 8% (in which case the value of one currency relative to the other doesn't change)?
Sometimes "debasing" is used to describe the deliberate attempts to devalue money, either by printing more money, or, in earlier times, actually decreasing the amount of precious metals in favor of base metals in minted coins.
There's not really a term for deliberate attempts to increase the value of the currency (as this is a policy goal not really pursued by modern central banks, as deflation is considered to be bad). Demurrage is a related concept, but rarely used in this sense.
Just printing money does not mean inflation is a result. For inflation to occur you also need money velocity.
What the FED has done is print a whole lot of money, but that money has largely stayed within the big banks and wall street.
Not as much has moved to the real economy because money velocity is low. Though inflation has picked up in the last few years. https://fred.stlouisfed.org/series/M2V
Can u justify your first scentence? In my head (did not study Econ) x is all the actual economic value in a country and it’s divided by the money supply. You increase the money supply in a fixed moment (print money) that ratio changes and stuff is worth less or costs more (inflation). So yea please explain how simply printing money doesn’t cause inflation
Imagine I hijack a treasury printing press and print myself $10 trillion every year, but I just shove it all in a storage unit and never touch it. That won’t affect prices at all.
If I understood him correctly: if the money never actually moves, that is, enters the economy properly, then it’d have no effect on it. ie a savings account (to you, personally) is the same as never having received the money in the first place, until the day its spent. If you never spend it, then it may as well not existed.
In the same fashion, the printing of money has no effect if no one ever sees it. The more people who deal with it, the larger an effect it will have
Your statement is headed in the right direction, but misses some important subtleties. Money in the bank, even if you never spend it, can have velocity because the bank can use that deposit money for fractional reserve lending. Also, and very importantly, velocity has a multiplier effect, so small changes can be more important than one might intuitively expect. If you dramatically increase money supply, but velocity dramatically decreases, depending on the relative amounts of both, you may have inflation or deflation. In other words, both aspects supply and velocity are important.
This ties into the infamous parable of the Greek hotelier, where you can see that it is the movement of money that has the greatest impact on the economy:
It is a slow day in a little Greek village. The rain is beating down and the streets are deserted. Times are tough, everybody is in debt, and everybody lives on credit. On this particular day a rich German tourist is driving through the village, stops at the local hotel and lays a €100 note on the desk, telling the hotel owner he wants to inspect the rooms upstairs in order to pick one to spend the night. The owner gives him some keys and, as soon as the visitor has walked upstairs, the hotelier grabs the €100 note and runs next door to pay his debt to the butcher. The butcher takes the €100 note and runs down the street to repay his debt to the pig farmer. The pig farmer takes the €100 note and heads off to pay his bill at the supplier of feed and fuel. The guy at the Farmers' Co-op takes the €100 note and runs to pay his drinks bill at the taverna. The publican slips the money along to the local prostitute drinking at the bar, who has also been facing hard times and has had to offer him "services" on credit. The hooker then rushes to the hotel and pays off her room bill to the hotel owner with the €100 note. The hotel proprietor then places the €100 note back on the counter so the rich traveler will not suspect anything. At that moment the traveler comes down the stairs, picks up the €100 note, states that the rooms are not satisfactory, pockets the money, and leaves town.
No one produced anything. No one earned anything. However, the whole village is now out of debt and looking to the future with a lot more optimism.
Imagine this scenario: if the fed prints $2T, and credits that amount in the accounts of the world wealthiest, it has no impact on inflation, as long as these wealthiest people don't chase assets.
Imagine you are in an empty room with a digital screen on the wall. The screen says 76°F. Over the next few days, you feel the temperature drop and rise over time, and the value on the screen always changes accordingly. You know that the real temperature and the value on the display are related, but you do not know whether the display is a thermostat or a thermometer.
Fed rate effects are difficult to measure for the same reason that the thermometer/thermostat problem exists. You cannot disambiguate cause from effect when monetary policy is used as a control system.
That is a case of correlation is not causation, and it's essentially one of the biggest problems faced by macroeconomists and policymakers alike (alongside... many other fields, of course). Unfortunately there's no way to determine causality without extensive experimentation, and more unfortunately monetary and fiscal policy do not allow for the same playgrounds that other fields have access to. We know certain policies work, but for those what's then missing is to what extent.
No, because a change on that display either precedes a change in temperature or lags behind one. A thermometer would strictly be the latter. That you have no control over it does not change the nature of what it is.
Generate heat by profusely working out (jumping jacks, running circles, shadow boxing, dancing). If the temperature goes up, you know its a thermometer.
I was expecting more historical evidence to support this argument. I’m not saying I have an opinion on whether it’s wrong or right, but I would like to see how the dollar performed during previous rate hikes.
The author doesn't seem to understand that currency moves are based on predicted future rates, not current rates. By time a rate change happens, it is often expected and the currency value rises (or falls) until the change is actually announced, at which point it can paradoxically drop (or climb) due to the market now predicting the next move. The change is said to be "priced in" when this happens. So what actually moves the currency values are the economic indicators upon which the Fed bases its rate decisions, not the rate decisions themselves (unless, of course, a rate decision is announced which is a complete surprise).
The premise of this article does not make sense to me. Why would anyone think as the author does?
Increasing rates is attempt to control price inflation, not to control exchange rates. There is a link but, it's not straight nor is it the most important factor.
You should look at the balance on current account, and export and import price indexes, net investment flows etc.
The supply-siders have been saying this since Reagan was in office.
Jude Wanniski's wrote similar statements in his newsletters and book: "how do you expect to make something more valuable by making it more expensive" (the interest rate being the price of money).
Looking at actual rates, not targets, the overnight target is a blunt instrument that doesn't always follow the target very well. And even when it does, the exchange rate relationship seems to take long vacations.
Art Laffer had similar views IIRC from a paper he did looking at the trade-weak dollar connection.
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[ 2.8 ms ] story [ 71.7 ms ] threadWhy do you want a special term for e.g. the dollar falling by 8% at the same time that the british pound also falls by 8% (in which case the value of one currency relative to the other doesn't change)?
http://www.economicsdiscussion.net/foreign-exchange/theories...
There's not really a term for deliberate attempts to increase the value of the currency (as this is a policy goal not really pursued by modern central banks, as deflation is considered to be bad). Demurrage is a related concept, but rarely used in this sense.
What the FED has done is print a whole lot of money, but that money has largely stayed within the big banks and wall street.
Not as much has moved to the real economy because money velocity is low. Though inflation has picked up in the last few years. https://fred.stlouisfed.org/series/M2V
The intuition is that if you hand me a bunch of cash, and I stash it in my mattress, there is no inflation until I begin to spend it.
In the same fashion, the printing of money has no effect if no one ever sees it. The more people who deal with it, the larger an effect it will have
This ties into the infamous parable of the Greek hotelier, where you can see that it is the movement of money that has the greatest impact on the economy:
It is a slow day in a little Greek village. The rain is beating down and the streets are deserted. Times are tough, everybody is in debt, and everybody lives on credit. On this particular day a rich German tourist is driving through the village, stops at the local hotel and lays a €100 note on the desk, telling the hotel owner he wants to inspect the rooms upstairs in order to pick one to spend the night. The owner gives him some keys and, as soon as the visitor has walked upstairs, the hotelier grabs the €100 note and runs next door to pay his debt to the butcher. The butcher takes the €100 note and runs down the street to repay his debt to the pig farmer. The pig farmer takes the €100 note and heads off to pay his bill at the supplier of feed and fuel. The guy at the Farmers' Co-op takes the €100 note and runs to pay his drinks bill at the taverna. The publican slips the money along to the local prostitute drinking at the bar, who has also been facing hard times and has had to offer him "services" on credit. The hooker then rushes to the hotel and pays off her room bill to the hotel owner with the €100 note. The hotel proprietor then places the €100 note back on the counter so the rich traveler will not suspect anything. At that moment the traveler comes down the stairs, picks up the €100 note, states that the rooms are not satisfactory, pockets the money, and leaves town.
No one produced anything. No one earned anything. However, the whole village is now out of debt and looking to the future with a lot more optimism.
Money velocity is a post-hoc fudge factor to make the Fisher equation work. It's has little empirical value. Other than that, I'm with you.
"Money" is broad; the Fed may have printed a ton of it, but a ton more was destroyed in 2007.
Fed rate effects are difficult to measure for the same reason that the thermometer/thermostat problem exists. You cannot disambiguate cause from effect when monetary policy is used as a control system.
/s
I also think the current state of economics is a complete unknown to everyone who tries to influence it.
Fortunes can be made and lost over things like bitcoin where chaos seems to be the main driver of value.
Interesting times to say the least.
E.g. a September rate hike is expected with a 99.8% probability by the market. For December the probability is 79.8%.
Increasing rates is attempt to control price inflation, not to control exchange rates. There is a link but, it's not straight nor is it the most important factor.
You should look at the balance on current account, and export and import price indexes, net investment flows etc.
Jude Wanniski's wrote similar statements in his newsletters and book: "how do you expect to make something more valuable by making it more expensive" (the interest rate being the price of money).
Looking at actual rates, not targets, the overnight target is a blunt instrument that doesn't always follow the target very well. And even when it does, the exchange rate relationship seems to take long vacations.
Art Laffer had similar views IIRC from a paper he did looking at the trade-weak dollar connection.