Quantitative Easing: A Source of Confusion

Understanding Quantitative Easing and Modern Monetary Theory

There has been a lot of confusion and misinformation surrounding the concept of Quantitative Easing (QE) and its implications. This confusion has led some academic economists, who lack real-world trading experience, to propose Modern Monetary Theory (MMT) as a solution. However, it’s clear that many people do not truly understand the effects of increasing the quantity of money, especially in the context of massive government debt.

One of the key figures in the history of the Quantity Theory of Money is Sir Thomas Gresham, who served as the English Crown’s representative on the Amsterdam exchange. Gresham observed that when Henry VIII debased the currency to repay loans, people were unwilling to lend money to England. This led to the idea that “bad money drives out good money,” highlighting the impact of debased currency on economic transactions.

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These theories, which later influenced Austrian Economics, were developed in a time when there was no market for posting sovereign debt as collateral. As a result, economic models have evolved over time, but many academics still struggle to understand the perspective of traders who operate in real-time markets.

While Gresham focused on the impact of debasing money on currency values, John Law, also a trader on the Amsterdam Bourse floor, pioneered the theory of Supply and Demand. Together, these two self-taught economists observed how market dynamics shifted based on real-world trading experiences.

Another notable self-taught economist who made significant contributions to economic theory was David Ricardo. Ricardo, who started his career as a trader at a young age, made a fortune in the London Stock Exchange before delving into economic discourse. His work on the Theory of Comparative Advantage and Rent reshaped economic thought and highlighted the importance of exploiting a nation’s strengths for global trade.

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When it comes to QE, it’s important to note that it does not increase the supply of money but rather represents a maturity swap. The total money supply today includes debt, unlike the pre-19th century, leading to the emergence of Modern Monetary Theory. This theory assumes that printing money without repercussions is feasible, failing to acknowledge the complexities of debt-backed economies.

In conclusion, understanding the history of monetary theory and the evolution of economic thought can provide valuable insights into current economic policies and practices. By learning from the experiences of past economists and traders, we can develop a more nuanced understanding of the global economy and make informed decisions for the future.

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