Posted on 12/04/2021 2:24:50 AM PST by Kaslin
A number of knowledgeable people have written recently on the exploding prices for a number of goods such as energy, food, gasoline, and vehicles. Ryan McMaken of the Mises Insitute and Brad Polombo of FEE, among many others, have laid the blame for this fiasco directly on the leadership of the Federal Reserve, the U.S. central bank. McMaken surmises that as U.S. ports are unloading more goods than in the past, the only explanation must be that prices are rising due to an excess of money circulating. Polombo simply repeats that money printing by the Fed causes inflation
Is the Federal Reserve to blame for surging prices?
There is an old identity known to economists: MV = PT.
M represents the total amount of money in the economy. V is the velocity of money, or the speed with which it moves through the economy. V is best understood as cash balances in banks or in one's possession. Rising cash balances mean a decline in Velocity whereas falling cash balances mean a rise. On the other side of the identity, we have P or the price of goods, and T or total output or production. The stock of money or M multiplied by its Velocity or V equals P or the prices of goods multiplied by T or total production.
Most, when examining the identity, focus on M and P, money and prices, with only scant attention to the most important factor: T or output. McMaken essentially argues that as M or the stock of money rises, P or prices must rise.
(Excerpt) Read more at americanthinker.com ...
have been detrimental to U.S. innovation and production stretching back decades.
Yet the previous 4yrs have been a huge success for us all.
That has been wiped away by this current administration’s attacks and the fed pouring in money at their request.
And printing money by the trillions does not cause inflation either....../s
Read later.
I find it fascinating how economists try desperately to explain human behavior via mathematics and physics formulas. It seem so true, these formulas, until they are manipulated to excess.
The beauty of physics and math is that the process is reproducible. In economics, because of human behaviors, they never will be. Manipulating an entire economy, believing that your financial equations will remain true is horribly nearsighted. Computer modeling of biological systems can be done, and can give estimated outcomes. Computer modeling of human behavior may be possible, until you reach triggers that radically make it unpredictable.
People can get very wealthy predicting normal human behavior, financially speaking. When, a large scale financial institution and government does it, they ultimately will lead to an excess that exceeds normal predictions. That’s not an event I want to experience.
The authors case depends entirely on this theoretical proposition, and here I quote it from the article.
Money is a claim on scarce resources. By ensuring the soundness or profitability of a loan, a cautious banker ensures scarce resources are placed in capable hands. The creation and expenditure of such funds yield a return to the borrower or investor for the effort in turning scarce resources to good use, a return to the banker for loaning out needed funds, and a return to the depositor for maintaining his funds in the bank to permit the loan. The valued effort usually results in a rise in T or output, and by an amount greater than the increase in M or money, bringing lower prices. Some efforts fail, but most succeed.
That theory assumes banks (and others) are not chasing unrealistic dreams, which we know from repeated history (2008 is but one example) is not the case when inflationary bubbles are building.
“Yet, the decision to lend remains with the banker and the decision to borrow remains with the individual, firm, and government.”
Yes but that decision is heavenly influenced by the interest rates. And the more interest rates are manipulated by the fed to go lower (the boom) , the more risk borrowers will take on (simple human nature). That in turn will lead to more failed business and bankruptcies resulting in an economic bust.
It’s the cause of boom and bust economies.
“The beauty of physics and math is that the process is reproducible. In economics, because of human behaviors, they never will be. “
Absolutely! Economics boils down to human psychology. Trying to encapsulate into mathematical formulas is a fools errand.
I think there are few problems with the front-end of the article, but it gets better at the end!
While I wouldn’t jump to excuse the Fed, it should be realized that there is more to the economy than manipulating the money supply. My classes in macro-economics presented monetary and fiscal policy. To that must be added regulatory policy.
Let’s try to consider all three in a simple example. The government, say the Department of Defense, lays in a big order for for jet fuel and other refined petroleum products. That is fiscal policy. The Fed increases the money supply, thereby reducing interest rates which makes it easier to finance the construction of a new refinery. That’s monetary policy. The EPA denies all permits for new refineries - regulatory policy.
As far as the refinery business in concerned, fiscal and monetary policy are both positive. However, it is regulatory policy that stops the creation of a new refinery.
The author understands the harm of regulatory policy, and also the harm that takes place as efficient market activity is crowded out my inefficient government activity.
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