Generally speaking, if money is growing faster than nominal GDP, that excess money tends to find its way to other uses such as investment in stocks, commodities and other financial assets.
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"Real" interest rates are high in Japan, even though the nominal cost of money is almost zilch.
The nominal cost of money went up and up, and so did prices.
If a central bank creates too much credit, the nominal cost of money eventually rises and investment patterns are skewed.
But, as the 1970s and early 1980s agonizingly demonstrated, increasing the nominal cost of money does not necessarily undo the debauching of the dollar.
But does money supply directly boost nominal income, or does nominal income affect velocity and the demand for money?
But, suppose that you choked down on nominal demand by pulling money out of the economy.
Alternatively, the Fed could leave the monetary base alone, and allow prices to restore the balance between base money and nominal GDP.
Given a constant money supply, nominal wage rates fall, but real wage rates rise because total output has gone up.
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If there is a slowdown in the turnover of money--say, a 5% decline--the impact on nominal GDP growth is no different than if the money supply itself shrinks by 5%.
With inflation expectations that exceed the nominal interest paid on saving accounts, money market funds, and Treasuries, real returns are negative.
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Additionally, the nominal amounts of interest being paid by money market accounts cannot be ruled out as contributing to the shift out of cash.
The act of central bank money printing temporarily drives down nominal interest rates, while at the same time creating inflation and lowering the intrinsic value of the currency that is printed.
This is intellectually dishonest, as the value in money does not come from its nominal value but rather from its purchasing power.
Debts (and in many cases interest payments) are fixed in money terms, so the faster nominal incomes grow, the smaller the burden of debt becomes.
The possibly sharp increase in nominal interest rates would tend to reduce demand for base money.
By pegging nominal interest rates at artificially low levels, the Fed is penalizing millions of people who have their assets in saving accounts or money market funds and are getting near zero nominal returns.
Depending on the deal and the cost of the vehicle, many buyers will find taking the discounted financing (if their credit rating is sufficient to qualify) will save more money over the long term than taking a nominal cash rebate.
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Paying interest on excess reserves will initially sterilize the new high-powered money, without much impact on bank lending and nominal incomes, let alone real GDP growth.
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They point out that money supply growth ran 2.4 percent faster than nominal GDP growth during this period, when it had run below nominal GDP growth in 1959-69, 1969-79, and 1979-95, as would be expected with velocity increasing due to technological advance.
The market is pegging 30-year inflation at a slightly higher 2.0 percent rate, which is the spread between long-term 30-year Treasury nominal bonds and 30-year TIPS. Federal Reserve policy to increase the money supply has not led to inflation during this recovery because the demand for money has been lower than in other recoveries when inflation did occur.
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In theory, a discretionary central bank could limit the quantity of money and achieve long-run price stability by controlling the growth of nominal final demand.
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But Germany's Postbank can transfer money almost anywhere in the world within two working days for only a nominal fee, and at no cost to the recipient (if there is a postal- banking system in the receiving country).
The quantity theory of money holds that the money supply, multiplied by the rate at which it circulates (called velocity), equals nominal income.
Meanwhile, if Fed policy does lead to growth in nominal income, it will be because inflation will start to rear its ugly head, not because printing money will spur production.
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Instead, I looked at how much money each would collect in revenues and how much it would spend in 2014 and in 2023, in nominal dollars and as a share of the Gross Domestic Product.
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