Monetary policy is not related to interest rates, but rather to supply money

Trump and Powell are not alone. Today, central bankers are organizing monetary policy on the interest rate during the night specified on the reserves offered by central banks. In fact, almost every central bank describes its position on monetary policy in terms of policy price. Therefore, it is not surprising that most bankers, markets, economists and financial journalists adopt the opinion that monetary policy revolves around the prices of central banks policy. For this reason, the markets are awaiting modest breathing before each decision of the central bank’s policy price.

Why obsession with interest rates? One of the reasons depends on the fact that during the past thirty years or so, the total economic models are new Kenisee extensions for dynamic indiscriminate balance models (DSGE). This places interest rates in the forefront and the center. Armed with these models, economists and central bankers believe that monetary policy has an impact on the economy through changes in central bank policy rates.

But this is not what grammar tells us, who adopt the theory of money. Unlike the new macroeconomic models, Kenisia, which excludes funds, the theory of money is stated that national income or nominal GDP is determined primarily through large money movements, and not through changes in interest rates.

As it turns out, the data speaks loudly and support the theory of money. They do not support Neo-Keynesian models that focus on changes in interest rates. In fact, the links between changes in politics and changes in real and nominal economic activity are much worse than those between change rates in the amount of funds and the nominal GDP. Three modern main episodes support this conclusion.

Japan’s case

First, let’s look at the case of Japan between 1996 and 2019. Throughout this period, the Japan Bank policy (BOJ) has remained at small levels, with an average of 0.125 %. As a result, most economists concluded that the monetary policy in Japan was “very easy”. But the cash, who focused on the growth of wide money for anemia (M2) by only 2.8 % per year, concluded that monetary policy is “narrow”. Which camp was right?

The average inflation in Japan was 0.2 % per year in the period 1996-2019. It is clear that criticism was right. By focusing on the price of the BOJ policy overnight and ignoring the monetary supply, most of the prevailing economists have offended the diagnosis of monetary policy in Japan.

The United States between 2010 and 2019

Second, let’s look in the United States between 2010 and 2019. During most of this contract, the FBI’s funds were 0.25 %. In addition, the Federal Reserve participated in three rings of quantitative dilution (QE). Many concluded that this is “very easy” critical conditions. And they warned that inflation would lead. In fact, the wide cash growth (M2) remained low and stable at 5.8 % per year. As a result, inflation remained low, as it was only 1.8 % average annually between 2010 and 2019. As was the case with Japan, interest rates turned into a very misleading indicator of monetary policy position. The growth in the width of the money was a much better evidence of economic activity and inflation than the FBI.

Epidemic

Third, let’s look at the United States again

This time, we will examine the Covid Time (2020-2024). Initially, interest rates were reduced to 0.25 %, where it remained between March 2020 and March 2022. In addition, the Federal Reserve has made wide purchases. Since this political mix did not cause inflation in the period 2010-2019, the unanimity of the Keynesian economists expect the same results as before. By ignoring the growth of funds, they predicted in 2020 and early 2021 that inflation would remain low. In fact, some quinzine predicted an outright shrinkage. The shrinkage workers argued that the locks were leading to a “weak width”, and that slow income growth was “total weakness”, and that unemployment, which amounted to 14.8 % in April 2020, would remain high.

On the contrary, the monetary economists focused on the explosion of the growth of broad money (M2), which reached an average of 17.3 % annually between March 2020 and March 2022. As a result, they expected, early in April 2020, that there would be significant inflation.

As it turned out, the criticism was right again. From the spring of 2021, inflation increased, with a peak in the United States 9.1 % in June 2022, and an average of 7.0 % year on an annual basis between April 2021 and December 2022.

Why is criticism constantly correcting?

In each of the main cases we provide, the quantum theory of money led to the right expectations, while Keynesian theories, which are based on interest rates, have resulted in misleading signs. Why?

The reason is that the prices of the central bank’s policy are a misleading mechanism for guidance and forecasting the economy cycle is that the interest rates are, in large part, the symptoms of previous money growth, and not necessarily money growth engines in the future. Changes in the amount of money, on the other hand, for fuel directly, and thus properly indicate the direction of spending and inflation.

When the amount of money increases significantly and for the duration of the period, one of the first effects is that interest rates decrease. But after six to nine months, commercial spending and consumer accelerate, and the demand for credit begins to increase. As a result, interest rates are paid. If the growth of money continues, inflation is followed – usually after a year or so – interest rates rise beyond that.

Therefore, the first effect of the fastest money growth is low interest rates, but this is only a temporary effect. The second and most durable effect is the high interest rates. This is what happened in the United States during the 2020-2024 period.

On the contrary, the first and unfortunate effect of money growth is slower is the high interest rates. The second and most durable effect is low interest rates. This is what happened in Japan between the mid -nineties and 2019.

By ignoring the theory of money and employing the macroeconomic models of Keinais, central bankers are often baked. They believe that by managing policy prices, they control monetary policy when they actually interact with changes in the amount of money that occurred in a previous period.

For example, the Federal Reserve refused to raise prices in 2020 or 2021, stressing that inflation was “temporary”. The Federal Reserve reluctantly began to raise prices in mid-2012. But the creation of the extra money designed by the Federal Reserve in 2020-2021 generated an inflation of its peak at 9.1 % annually and forced the FBI to raise prices to 5.5 %. If the Federal Reserve refrains from allowing an increase in the width of the money in 2020-2021, there will be no high decline rates, as it is clear from the experience of China and Switzerland, countries that did not allow the growth of excess funds during the Covid’s pandemic.

The Holy Monetary Policy cup It is money, not interest rates.

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