October 1st, 2012 4:58 pm
The effect of below market interest rates since just after Volcker has brought the velocity to near one. The reason all the printing and spending produces no inflation is because there is no velocity. Velocity is demand for money.
Even were the Fed to abandon ZIRP, velocity would remain low for decades. If the FED were to do something extreme such as raise the fed funds rate to 8%, it would be 2016 before the velocity increased to a non-robust level of 2.
Perhaps the only immediate fix would be Gisellian stamp money with a negative interest rate of say 12% per year. People would use it to pay off their debts. Students would dump it on loan creditors. Credit card debtors would pay off their cards. Meanwhile, this high velocity currency would consume the national debt as stamp revenues poured into the US Treasury.
Velocity would be restored. The Fed would be no more.
George Selgin says:
October 1st, 2012 9:42 pm
“Velocity is demand for money.” No: real money demand = y/V; an increase in V is consequently equivalent, holding y constant, to a decline in the demand for real money balances.
Nor has M2 velocity quite fallen to 1 yet–though it is closer than ever.
And on what grounds can you, or anyone else, conclude that V will “remain low for decades,” or that the Fed (note that, as it isn’t an acronym, all caps are inappropriate) would be inclined to raise the funds rate to a whopping 8% unless spending had revived enough to call for such a dramatic increase?
Finally, the idea of provoking inflation so as to “consume the national debt”–and of thereby effectively swindling a very large number of people out of their hard-earned savings–hardly sounds like my idea of responsible monetary policy. Nor would it mean that “the Fed would be no more.”
Forgive me if I am mistaken, but I believe that y/V = m = money supply. Demand for money is y/m = V .
I don’t know why you say that negative interest stamp money would provoke inflation. To the contrary, the stamp revenues would pay off the public debt. For example, if the US Treasury simply printed up $1 T in stamp money (without borrowing anything from the Fed), with a negative 12% interest rate, and simply mailed it to student loan debtors, the circulation of this currency would in 100 months retire $1 T of the existing $16 T of national debt.
It would be austerity with liquidity. Real growth would be tremendous due to the high velocity of this money, as
r = V(1-u) where u = PV/FV
Of course, the Fed would have to go as otherwise Congress would spend another $10 T in that 100 months.
Irving Fisher, after his fall, was a proponent of stamp money and was very grateful to Silvio Gesell for teaching him about velocity.
- The inflation rate has averaged 4.5% since 1940
- During this entire period of time, except when Volcker spiked the fed funds rate to 18% and velocity shot up from a moribund 2 to over 3.6, the economy has been bleeding velocity. With Reagan, the bleeding resumed.
- Unless the fed funds rate is immediately and sharply raised, the economy will die. Even if it is suddenly raised, it will take more than a decade to revive the economy.
- Public debt is now at $16 T. Until a means of repaying this debt is found, money will be printed to service it.
When V < 1 , hyperinflation will ensue.