Jan - thanks for the post. Again, I'm not an economist, so I cannot speak on the money supply issue from any position of expertise.
However, my understanding is that as the money supply increases, real interest rates decline. Let's think about it from a real-world situation. Let's say I have 1 credit card, no cash in my wallet and $1000 in the bank. And let's say I want to spend $1000. I have two options. I can use my credit card or I can withdraw the money from the bank. If I use my credit card, I have to pay interest to the credit card company for the money - if I withdraw, the money is free.
Now multiply this scenario by millions of people, and it equates to a declining demand for borrowing money - which puts pressure on borrowing institutions to lower interest rates. Now consider what happens after the millineum passes, there is no crisis - and there is a lot of money in the system - money that has been obtained for free (without borrowing). What are people going to do with the money? Well, they could go back and put it in the bank - or they could spend it, and further fuel the economy.
I believe that Banks tend to only maintain a certain percentage of cash reserves - so if the money supply increases and banks don't alter their cash reserves, then the extra money tends to stay in the economy. With more money in the economy, interest rates go down, and people spend more - and when people spend more, business tend to raise prices - which equals inflation.
This is all interesting in light of the fact that the Fed has recently been raising interest rates in an attempt to slow the economy. One could argue that an increase in the money supply might negate the recent interest rate rises that the Fed has instituted.
I don't believe you can alter the money supply without it having an economic impact. The money supply was altered in response to the Asian economic crises - and this had an impact.
Again, I'm not an economist, so I may be talking out of my ear. If someone knows enough about this to tear apart my arguments and tell me where my reasoning above is wrong - I welcome you to do so.
Thanks,
-Eric |
