Why the Quantity of Money Theory is DEAD Wrong

Money Theory

COMMENT: Bill Gross says you are wrong and helicopter money is coming and the Fed should print trillions to buy government bonds. Any comments?

REPLY:Gross is not making a forecast without self-interest. Gross’ “helicopter money” calls for the Federal Reserve and U.S. Treasury to engage in another round of quantitative easing (QE) by printing trillions of dollars to buy government bonds. This is his Hail Mary play intended to boost the economy. How will that stimulate the economy? He runs Janus’ bond fund. It will only bail him out of losses on bonds.

Printing money to create “stimulation” is a fallacy. It has never worked. The theory of the quantity of money increasing or decreasing is pure nonsense. This typical one-dimensional thought process is incapable of understanding complexity.

Fed Velocity of Money May 1 2016


The missing element is the velocity of money. If people hoard money without spending, then increasing the quantity of money will fail to produce inflation. Creating inflation, such as what Japan saw one month before raising the sales tax, demands that people see the price of goods rising so they spend the money faster because they fear it will cost them more tomorrow. Why did Roosevelt confiscate gold and devalue the dollar? People were hoarding money. There was such a shortage of money, more than 200 cities began to issue their own money known today as Depression Scrip.

This idea of “helicopter money” is rather pathetic and fails to dive deep into how the economy functions. Irrespective of the quantity of money, the velocity of money is what always distinguishes deflation from inflation. You could increase the money supply and nothing would happen. Alternatively, you could leave the money supply unchanged and people would suddenly lose confidence in government, causing the velocity to increase thereby producing inflation. This is not an opinion. This is the simple evidence that emerges from correlating everything.

Above is the Fed’s latest chart on the Velocity of Money. It peaked with the Economic Confidence Model high in 1998. Despite the increase in money supply, the velocity has been declining. First, we have seen pervasive tax increases reducing the disposable income so people have less to spend as government consumes everything. Then, you have price deflation thanks to the internet. Countless stores have closed because they cannot compete with the internet. That reduces jobs and we have over 60% of the people graduating college who cannot find jobs in the field they obtained a degree. Bernie’s idea that education should be free will be a disaster for it will will only subsidize a system which is failing to begin with like Obamacare. What the Clinton’s did to students should be reversed. Students should be allowed to declare bankruptcy on student loans like any other debtor. We have to undo this mess created by subsidizing education which has become pointless.

Clearly, you are trapped in your one-dimensional world within this theory of the quantity of money. There is more to everything than this simplistic reduction of how the world functions to a single cause and effect. You have good days and bad days, but are they always due to the same exact cause? All this talk about “helicopter money” means nothing. Inflation only emerges when people DO NOT HOARD cash and spent it faster because they fear it will buy less tomorrow. There is ZERO evidence such a fear has emerged with QE at any stage. It is pure sophistry. They are hoarding money because they fear the future, not inflation.

Welcome to the world of complexity. It takes just a bit more thought and unbiased investigation to see how things really work. If you really want to stimulate the economy, stop bailing out bondholders and bankers and REDUCE taxes to create jobs and raise the disposable net income of the middle class. They use to call Reaganomics “trickle down” economics. Sorry, that was the correct way. This is real “trickle down” where the “helicopter money” only helps bankers and bondholders and nobody else.

Princeton Economics International became the largest global advisory firm in the world with over $3 trillion under contract for advisory work for one reason. A Swiss banker explained it to me. He said everyone used us because we did not care if the dollar went up or down. I am a trader. I can make money in either direction. I refused money management roles of equity funds when I would be prohibited from flipping everything into a short. Long-only positions were stupid and dangerous to me.

So stop trying to prove me wrong and take a fresh look at the evidence. If you do, you might learn something that saves your family’s future. It’s your choice. There is just more to this game than one cause and effect. It’s called complexity. The Quantity of Money Theory does not work. It all centers around what the public is doing – saving for a rainy day, or spending as fast as it comes in because it will buy less tomorrow.

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