The Fed does control the money supply, but that is not exactly the same as saying "dollars in circulation". There are various measurements of money supply, M1, M2, M3, etc., each including serviceable "money subsitutes". From that standpoint, it can be considered that if the Fed buys Treasuries that the "money supply" is increased, but it depends on how you are defining it.
The Treasury, without question, operates in tandem with the Fed. However, should there ever come a day that the Fed is "out of bullets", the Treasury can unilaterally increase the ACTUAL supply of cash by monetizing the debt. That is something the Fed can never do.
There are many levers of control within the concept of money flow, but most important, and most overlooked (mainly because changes in M1, or actual cash in circulation, can make analysis difficult) is monetary velocity.
That is, the $1 that I spend today and how quickly it goes from me to the supermarket to the bank, where it is then split and $.90 are loaned out against that one (.90 in loans + .10 reserve) to generate $9 (Keynes' multiplier), etc.
Monetary velocity plays a major role in price determination. If M1 is increased (or any of the M's), and velocity falls by a greater % amount than the increase, there is a net negative effect on prices. That means people are stuffing their mattresses. If it is flat, or barely budges, then there is some inflation. If it rises dramatically with increased supply, there is inflation or possibly hyperinflation.
I have not looked at velocity figures lately, though I know they are usually not reliable. |
