"(...) we are
well into the third currency war of the past 100 years. President Obama fired
the first salvo during his 2010 State of the Union address, when he announced
the launch of the National Export Initiative and said the goal was to double
exports over the next five years. The easiest way to do that, of course, is to
cheapen the US dollar. But that is only part of the explanation, Rickards said.
To really understand
what is going on, you have to start with the quantity theory of money, or MV =
PQ. (Quick refresher: PQ = nominal GDP, Q = real GDP, P = inflation/deflation,
M = money supply, and V = velocity of money.) The issue here is that the theory
doesn’t hold up in the real world because velocity — the number of times money
changes hands, or turns over — is not constant. ”Velocity is collapsing,”
Rickards said. “You can think of monetary policy as a desperate race between
increasing money supply and decreasing velocity, and the Fed is printing money
to offset the decline in velocity. . . . So the Fed’s problem is best
understood as one of
trying to bend this velocity curve.”
How exactly does Fed do
this? Through “propaganda” and a mix of “carrots and sticks,” according to
Rickards.
The carrot is negative
real rates, and the stick “is to shock you with inflation.” Here is how it
plays out: the negative real rates incent you to borrow, an inflation shock
makes you want to spend, the ”lending and spending machine” gets going again,
and nominal GDP starts increasing. Then, real GDP gets back to trend and becomes
self-sustaining, and “we all live happily ever after.”"
http://blogs.cfainstitute.org/
http://blogs.cfainstitute.org/
