On the nature of money:
I've been hunting for a decent analogy for the nature of money and interest rates, to explain our present quagmire. It finally hit me today.
Consider the economy to be composed of people trying to move around, and their sole mode of transit is the bus. Each leg of travel is the equivalent of an economic transaction. The busses are money. If there aren't enough busses (money) in the economy, lines will begin forming at the bus stops, and people won't be able to engage in as many transactions (travel legs) as they desire. Economic output is below potential. However, if you have enough busses, no lines form, and economic output hits its potential. No matter how many more busses you add after you've got enough busses, though, you can't increase the economic output any further. The busses are merely wasted because nothing changes that would cause participants to engage in additional transactions.
I think this is an excellent way of thinking about money, as a carrier for transactions. While the Fed can apply the brakes by limiting its supply, once the supply is ample, further increases result in no incremental gains.
BC |
