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In discussions with the ever thoughtful HBL (which I now think stands for “♥s Bank Liabilities”), he asked where in H.4 data we would see bank bond liabilities increasing in response to an increase in CB bond acquisitions. And the answer is that you may not see it.
The other set of fallacies, of which I fear the influence, arises out of a crude economic doctrine commonly known as the Quantity Theory of Money. Rising output and rising incomes will suffer a set-back sooner or later if the quantity of money is rigidly fixed. Some people seem to infer from this that output and income can be raised by increasing the quantity of money. But this is like trying to get fat by buying a larger belt. In the United States to-day your belt is plenty big enough for your belly. It is a most misleading thing to stress the quantity of money, which is only a limiting factor, rather than the volume of expenditure, which is the operative factor.
– J.M. Keyes, Open Letter to President Roosevelt, 1937
Here is the simplest argument for non-neutrality of money I can think of. It is actually an argument for the non-neutrality of price inflation, but it’s hard to think of changing prices without causing changes in price inflation. One way to do it would be to relabel all prices from the beginning of time until the end of the economic system. That would be a price change that would leave inflation unaffected — but it would be the only one. Continue reading