Money Supply & The Federal Reserve Message Board

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Non-Tech : Money Supply & The Federal Reserve

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To: glenn_a who wrote (330)	8/15/2002 4:59:06 PM
From: UnBelievable	Read Replies (3) of 1379

If The Fed Is Increasing The Money Supply By15 - 18% Per Year But the economy (real goods and services) is only growing at 2% a year, wouldn't that necessarily create an inflationary environment. Neither inflation nor deflation are the problem. What is a problem is unanticipated and unanticipatable changes in the real interest rate. Stability is the goal since that produces the lowest long-term cost of capital. Introducing inflation/delation risk will require that lenders add a risk premium, increasing the cost of capital and therefore decreasing the society’s capital formation, which results in slower than possible economic growth. The main problem with the Fed’s current perspective is that they have a strong bias towards growth and think that by changing the money supply or interest rate they will accomplish a higher rate of growth than otherwise would be the case. Their goal should be to maintain a stable currency (a dollar today is equal to a dollar 10 years from now). When this is done the cost of capital will automatically fall to the lowest possible rate. In fact interests rates will naturally change in a manner which is optimally responsive to the business cycle. They will rise into expansionary periods and fall into contractions. Supply and demand will take care of that. The essence of a capitalist society is the market sets the price. The alternative is some form of centrally managed economy and the junk heap of history is filled with economies that have tried that and failed. The cyclical nature of economic activity cannot be eliminated. Even if the Fed is found not guilty of theft and fraud (IMHO that is a very big if) they are guilty of Grand Hubris. My initial question is a real one though. Are their circumstances where the monetary aggregate is growing much faster than the economy (real goods and services) which will not result in inflation. My own perspective is that thus far the inflation has been primarily in stock prices. But for a number of reasons this is not recognized. First, stocks are not really perceived to be subject to inflation it is not recognized. Second the idea that falling stock prices is inflation on its face sounds ridiculous. It is not though. If a pack of gum used to have 10 sticks and cost .10 and then is reduced 5 sticks and the price is reduced to 6 cents that surely is inflation. A share of stock is not what is being sold. What is being sold is a pack of expected future earnings. At the present time the stock market is acting like a huge sponge absorbing all of the excess dollars. To the extent that those excess dollars are not destroyed before they are allowed to enter the real economy however, we will have rampant inflation.

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