From Keith Weiner, C.E.O. of Monetary Metals
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The Quantity Theory of Money is Dead Wrong
However, there is a more subtle zero-sum view about money. According to the Quantity Theory of Money, a rising money supply causes rising prices, and rising prices are caused exclusively by a rising money supply (I have written extensively about nonmonetary forces driving up prices: mandatory useless ingredients, lockdown whiplash, green energy restrictions, trade war and tariffs, and actual war in Ukraine. For a complete review of this analysis, download our Gold Outlook Report 2022).
Prices have certainly been on a tear recently. The Consumer Price Index is over 8% for the first time in a very long time. So, what is the Fed to do about it, what central plan should it impose?
The Quantity Theory holds that, to control inflation, the Federal Reserve should reduce the quantity of dollars, or at least reduce the rate of increase. It is supposed do this by hiking interest rates (it has hiked twice so far this year). At higher interest rates, the theory holds that there should be less new borrowing. Thus, the rate of new money coming into the economy is reduced. And inflation is supposed to be mitigated.
According to this theory, there is a tradeoff between unemployment and inflation. So, in order for consumers to get more for their money, workers need to be laid off.
But less borrowing, of course, means lower production. This logic commits a similar error as the above idea of harming producers. Only, the target here is the workers who produce the goods. To state the contradiction explicitly: fewer workers, producing less goods, will cause lower prices.
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