Mario Draghi today promised to do whatever it takes to fix the euro. ”Believe me, it will be enough.” I don’t know why anyone would believe him, but that is not the point of this article.
There is a Monetarist premise that is accepted almost universally today: the value of a unit of currency is inversely proportional to the money supply. If the money supply goes up, this view argues that the value of the currency must go down. And vice versa. There is only one problem with this idea.
It is wrong.
The euro has been falling against the US dollar for over a year and the most recent leg down began in earnest in May. It has not been falling due to expanding money supply. It has been falling due to increasing market awareness that defaults are coming–reflected in collapsing bond prices not only in Greece but in Spain and Italy now.
And this brings us to Draghi’s statement today. He was not promising to decrease the money supply! All of the “tools” in his “arsenal” are tools to increase the money supply. Basically, he can print and lend (i.e. print money and lend it).
Today, he reiterated his means and intent to expand the money supply. And the euro went up +1.6%.
Something to make one go think in the night …
The problem with the monetarist approach is that it is very static .
Value would relate directly to both the stock and flow via the stocks to flow ratio.
And the flow (velocity) is non-linear and not easily measured with mainstream numbers.
Yes but is it true that the FED has just got a new keyboard with a triple zero key? Ha.
“It has been falling due to increasing market awareness that defaults are coming”
So… the euro has been falling because of market awareness of the poor quality of euro denominated debt? Why not just say it?
I also point out that your Gold Standard Institute adheres to this ‘monetarist’ premise when it comes to gold, that it is the stock v flows that determines the value of gold. How is this not a quantity argument?
Seems contradictory to say that the ‘monetarist’ premise is wrong when applied to credit, which is true enough, but IS the case when applied to the only thing that will extinguish all debt, the only thing that is money – gold.
JR: The Monetarists say that a unit of currency is inversely proportional to the stocks of currency (they don’t seem to differentiate between stocks and flows).
The GSI position is that the value of a unit of gold is *NOT* inversely proportional to the quantity. With gold, it is more like a constant. This is the only explanation for why we continue to accumulate gold inventories (stocks) without a crash of the price. For every other commodity, the price would crash and this would cause consumption to rise and production to fall until the price rose again.