“… inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output,” according to Milton Friedman. The part about inflation being a monetary phenomenon has been quoted often, but the part about money growth relative to output is equally important.km91 wrote: ↑Tue Jan 18, 2022 5:02 pm The Fed does not conduct monetary policy by influencing the "money supply." It targets a policy Fed funds rate which it achieves through a number of mechanisms. 1) It pays an interest rate on reserves held at the Fed by institutions which acts as a floor on short term interest rates, 2) it charges an interest rate on it's lender of last resort "discount window" which acts as an upper bound on short term interest, and 3) when the Fed funds rate strays from this target range, it buys or sells securities in overnight money markets to maintain its target policy rate. When the Fed performs asset purchases like QE it does not "print" USD, it creates bank reserves and bank reserves can't be used to purchase groceries or new cars so it's hard to claim that asset purchases, which are the closest thing the Fed does to "controlling the money supply", are inflationary. The Fed's asset purchases are simply an asset swap, where one form of US Government liability, Treasuries, are exchanged for another form, reserves. The Fed is not creating new money and providing it into the real economy when it conducts monetary policy, its just performing a financial transaction with offsetting assets and liabilities. We've seen central banks across the world try to spur on inflation for the better part of two decades with no success. Europe has had QE and negative policy rates for 10 years now and inflation has been anemic. Now we're finally seeing inflation after a global pandemic disrupted supply chains and governments provided stimulus directly into the real economy.
In the simplest case, if the Federal Reserve (or another country’s central bank) prints money and distributes it somehow to its populace, the results will be inflationary. In today’s economy, the printing is virtual through electronic transactions, but the result remains that consumers and businesses and governments have more dollars in their bank accounts.
One key issue that inflation forecasters must wrestle with is the magnitude of money growth versus the change in productive capacity. Although definitions of money are not as clearcut as they once were, the raw figures are stark. Money (M2 definition) increased by 13% in the past 12 months. The Congressional Budget Office’s projections of real potential GDP, or output capacity, run just under two percent. Whether the figures are perfect is irrelevant when money growth is so much greater than output growth. That has to be inflationary.
https://www.forbes.com/sites/billconerl ... 119f953fba