From Lacy Hunt showing that one can not fool mother nature (create wealth from thin air)
Short term interest rates in the US have
fallen to near zero, restraining the central bank’s
ability to lower them further. None of the more
powerful channels of monetary policy, including
money growth, have been responsive to Fed
actions. When the debt overhang is excessive, the
Fed and other central banks cannot control money
and velocity, real long-term interest rates or the
Wicksell Effect. Over the summer, the Wicksell
effect has become more adversarial to economic
growth in the U.S. as nominal GDP growth has
slowed, while the market rate of interest, as
measured by the BAA corporate bond yield, has
risen. Treasury bond yields, in real terms, have
remained stubbornly unchanged since 1990 even
though the nominal bond yield has dropped 600
basis points.
Despite the unprecedented increase in the
Federal Reserve’s balance sheet, growth in M2
over the first nine months of this year fell below
its average rate of growth over the past 115 years,
a time when the growth in the monetary base was
stable and quite modest (Chart 3). In addition,
velocity of money, which is an equal partner to
money in determining nominal GDP, has moved
even further outside the Fed’s control. The drop
in velocity to a six decade low is consistent with
a misallocation of capital and an increase in debt
used for either unproductive or counterproductive
purposes.
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