Don’t try this at home, at least not without a dismal scientist as a chaperone. But if you could only read one paragraph about monetary policy (I know, I know), here’s a possibility to consider. It comes courtesy of Scott Sumner’s The Money Illusion. I’m reasonably sure that excerpting the following and trying to pass it off as a silver bullet for understanding, defining or otherwise explaining the fundamental laws of monetary policy is hopelessly misguided. Still, it’s hard not to admire one economist’s view of how the ebb and flow of money supply influences prices and market preferences (even if my editing runs the risk of running off the literary road into reductio ad absurdum). Enough…judge for yourself. For unexpurgated context, here’s the full essay. Meantime, here’s the laconic excerpt…
I want you to imagine that everyone understands and believes in the QTM. Imagine you live in a country where a typical 3 bedroom ranch house sells for $200,000. Also assume the money supply has been stable for years. Now the Fed suddenly doubles the money supply. What will happen to the price of that house? Keynesians will say “nothing”; prices are sticky. If they are right, I plan to buy up as many houses as I can, right after the money supply doubles. And then sell them again when the house prices double later on. But I actually think it more likely that the sellers will also understand this implication of the doubled money supply, and won’t hand me a $200,000 profit on a silver platter. They’ll immediately demand higher prices. The Keynesians are right that in the real world many prices rise more slowly, but in any case they do eventually rise.