Jesse Eisinger, in a provocative article in today’s New York Times, purportedly summarizes an argument on Fed policy between hedge fund managers and economists. “After several such managers at a recent conference denounced the aggressive money-printing policies of Ben S. Bernanke . . . the economic blogosphere rose up to mock them.”
According to the author, “Many hedge fund managers have been predicting that high inflation and fleeing creditors would send interest rates skyrocketing.” “And they have been wrong. Those silly hedge fund managers. They don’t understand macroeconomics! As Paul Krugman (and many others) have explained, the lack of demand explains why there isn’t any inflation and why interest rates haven’t risen despite all the money-printing. [Underline added.]
I’m not questioning the author’s characterization of the debate. However, I am saying that if he has it right, then I believe both sides are wrong. The hedge fund managers have it wrong because their whole argument is based on a false premise: that the Fed has been printing lots of money. That simply isn’t true as I have argued in recent posts.
As of today, according to the H.6 money stock series release of May 9, M2 growth has been 6.9% over the 12 months ending in March 2013, 5.9% over the past 6 months, and 2 percent over the past 3 months. These relatively low numbers (under the circumstances) must be interpreted alongside the average 3 to 3 ½ percent decline in M2 velocity of recent years. Roughly speaking, the percentage growth in the money supply plus the change in velocity has yielded a 4% growth in total spending and nominal GDP. (Less lately.)
“Despite all the money-printing” underlined at the end of the second paragraph above is fiction. The slowdown in money creation (not printing) has been accompanied by a slowdown in inflation. Today’s CPI showed a decline of 0.5% in April and only a 1.1% increase over the past 12 months. It is high inflation that produces high nominal interest rates.
I have made these arguments many times before, apparently to no avail. My main purpose here is to address the argument, attributed to the economist side of the debate that “the lack of demand explains why there isn’t any inflation and why interest rates haven’t risen despite all the money printing.” If that side believes that there has been excessive money printing and yet we have a lack of demand, logically they must be assuming a plunge in the velocity of money proportional to the explosive money printing. The velocity of money is a reflection of the demand for money. A dramatic drop in its velocity implies a dramatic increase in the public’s desire to hold money balances. There is no evidence of that. The problem is not a dramatic plunge in V; instead it is an only modest growth in M. The public is not hoarding money; the banks are hoarding reserves.