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Strategies & Market Trends : Heinz Blasnik- Views You Can Use
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To: GraceZ who wrote (2313)6/10/2003 12:55:31 PM
From: Perspective  Read Replies (1) of 4905
 
M1 is not a very meaningful measure of money supply, as the proportion of transactions performed in cash is in secular decline.

However, I see your point. If prices in the economy are increasing, the money supply must track the price increases to prevent a contractionary effect.

What I would say, though, is that an unwarranted surge in the money supply (an increase when prices are NOT increasing and real output is NOT increasing, like we've had in the past five years) will have the lagged effect of producing an inflation in the future. Money represents a future claim on goods - it doesn't impact pricing until it is brought to bear on the quantity of goods. So, I think the damage has already been done; it's just up to the market forces to operate to bring those claims to bear upon the supply of goods. Much of the money "printed" went to finance the trade deficit and ended up locked up in foreign reserves. When foreign banks are accumulating dollar reserves, they aren't pressuring demand for goods with them. It is only when they actually want to exchange them for something else that it pressures pricing. In a strong dollar environment, they were not concerned. In the context of a weakening dollar, they may eventually want something in return for their dollar claims.

EDIT: perhaps we need to be more concerned with whether or not the foreign banks (holders of US debt) believe in the power of the Bernanke put. And how could they? Bernanke's thesis is that they will be shafted in order to increase the level of prices domestically. Sounds like a lose-lose to a foreign entity holding US debt: Fed promises a weaker currency and increasing inflation.

BC
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