Salient to Investors:

The Market Flash writes:

  • The Quantity Theory of Money is under fire in academia because changes in technology and innovations by financial institutions have rendered the theory a less than complete view of the world – with important implications for investors from a macro point of view.
  • The Fed has been increasing High Powered Money for a long time by buying Treasuries and Mortgage-backed securities with money that did not previously exist. The Fed has increased its Assets to over three trillion dollars from less than one trillion before 2008.
  • Singh and Stella found that the “textbook presentations” have shown real problems since the financial crisis of 2008. They say the reason we have not seen inflation was not just because money velocity was dropping but also because the influence of the legacy banks like Citibank, Bank of America, JPMorgan, etc., is less important to money creation than it used to be. They say a larger number of financial institutions create money now and that good collateral serves more the role of the constraint on the money supply than the older High Powered Money.
  • Advances in technology have made paper money less important, increased the velocity of money, added surrogates for money like SPDR Gold Shares, iShares Silver Trust, and bitcoin, and has led to people holding their money in more places than just a bank checking and savings account.
  • Avoid bonds because even if Fed money printing does not cause inflation, the Fed withdrawing QE of $85 billion a month will cause interest rates to rise.
  • Have yet to find a causality between the Fed printing money and a rising stock market.
  • The ability of the Fed to create money is not a free lunch because if reserve currency status were ever to be lost, there would be a long period where the former reserve currency is repatriated to the issuing country, causing economic dislocation – this happened to the UK when the British Pound lost reserve currency status in the 1930’s and 1940’s.

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A generation of economists and students of macroeconomics were taught that the Quantity Theory of Money described the relationship between money and prices in the economy. The primary equation for the Quantity Theory of money is: