Story Stream
recent articles

Looked at in isolation, and without considering the actual market value of the dollar versus commodities and other currencies, does East St. Louis, IL have a “deflation” problem? There aren’t many dollars circulating there relative to Chicago. Does Chicago conversely have an “inflation” problem?

More realistically, the presence of a lot or a little of what we call “money” is not something that can be planned, nor is it something that an individual, city, state, or country should ever worry about. The only area of focus should be on production. Where’s there’s production there’s always money facilitating the exchange of the production.

To see why, consider East St. Louis and Chicago once again. Does anyone seriously think wise central bankers planned exponentially greater “money supply” in Chicago, or is money a consequence of production? The question answers itself. If booming economic activity were as simple as “gunning” so-called “money supply,” then poverty around the world would have long ago been solved.

Money doesn’t instigate as much as it’s an effect of economic activity. We produce in order to “get,” and money earned by producers facilitates the getting of other goods and services in return for their own labor, products, services, or all three. Money is scarce in East St. Louis because production is. Period. 

Which brings us to a recent opinion piece by Steve Hanke and John Greenwood. The economists argue that the proverbial “bathtub” of dollars in the U.S. is “overflowing.” Per the late father of modern monetarism, Milton Friedman, inflation is “always and everywhere a monetary phenomenon,” and with dollars abundantly circulating stateside, this is allegedly “inflation.” More realistically, it’s a sign the economists increasingly embrace a backwards monetary theory that stubbornly refuses to die. That would be Friedman’s monetarism.

This focus among economists on “money supply” is rooted in an impressive conceit that they know how much or how little “money” should be circulating in any one country. Except that there’s no way of knowing. See above. It’s once again not as though central bankers planned a humongous bathtub of dollars for Chicago, and a petite one for East St. Louis; instead, the level of production in each locale naturally governs how many or how few dollars are there. In other words, Fed attempts to fill the East St. Louis "bathtub" would fail. Over and over again. Money has no purpose absent production. Are countries different than cities? No. 

Implicit in the Hanke/Greenwood notion of too many dollars in the U.S. is that they have some sort of otherworldly ability to divine what production will be, and by extension, knowledge of how many or how few dollars should be circulating to move the production. Except that they don’t know this. Central planning failed in the 20th century precisely because experts could never possibly divine the infinite decisions made by people every millisecond, not to mention the trillions of global commercial arrangements (think supply chains) entered into by billions of workers around the world. Hanke and Greenwood couldn’t plan “money supply” for the same reason that Soviet planners couldn’t plan production. They realistically mirror one another. 

Speaking of global economic activity, there are dollar “bathtubs” in Iran, North Korea and Venezuela too. There are because the dollar is the currency of choice among producers in each country. Precisely because the bolivar, toman and won aren’t trusted mediums of exchange, all three are largely scarce when it comes to actual trade where the dollar is relatively abundant. Again, none of this was planned.

Just the same, it’s evidence of what’s well known: of all the trillions of dollars presently in circulation, over half are circulating outside the United States. Yes, just about every country has a dollar “bathtub,” as do many have yen, Swiss franc, euro, Pound, and yuan “bathtubs.” Central bankers don’t make this so, but production does. No one buys, sells, borrows, or lends with “money” as much as money is the agreement about value that enables producers of labor, goods, and services to get labor, goods, and services in return for what they produce.

Assuming the Fed "drains" the alleged U.S. "bathtub" of dollars, rest assured that what the Fed takes will be made up for by global inflows. The focus on the Fed and "money supply" is so very dated, assuming it ever made sense.

The main thing is that money finds production. Producers want equal value, thus they transact in currencies broadly trusted in the marketplace. The previous truth is telling.

It is because it contradicts the quantity theory of money that Greenwood and Hanke now embrace, and that says soaring "money supply" is a sign of inflation. No, not really. Debased, inflationary money tends toward scarcity precisely because producers don’t trust their ability to attain equal value for their production when using what’s debased to transact. Put more simply, how many readers would accept Argentine pesos for their house over dollars?  

What the above tells us is that reasonably non-inflationary money can be found in abundance wherever there’s production, while collapsing money is always and everywhere scarce. As opposed to a big “bathtub” or “tubs” of dollars signaling devaluation, logic signals the opposite. Rare is the producer willing to accept money for goods that will buy much fewer goods. In other words, we don’t like to be ripped off.

None of this is to say Treasury has been brilliant in its oversight of the dollar. No doubt it would be better if the dollar had a stable, commodity definition. Still, if it did, it’s no insight to say dollars in circulation would skyrocket to reflect even greater global producer trust in the greenback.

Hanke, Greenwood, and other monetarists would yell inflation if so, and they would be incorrect. Some bad ideas just won’t die.  

John Tamny is editor of RealClearMarkets, Vice President at FreedomWorks, and a senior economic adviser to Applied Finance Advisors (www.appliedfinance.com). His new book is titled When Politicians Panicked: The New Coronavirus, Expert Opinion, and a Tragic Lapse of Reason. Other books by Tamny include They're Both Wrong: A Policy Guide for America's Frustrated Independent Thinkers, The End of Work, about the exciting growth of jobs more and more of us love, Who Needs the Fed? and Popular Economics. He can be reached at jtamny@realclearmarkets.com.  

Show comments Hide Comments