Re: The Stock Market thread: BUY! BUY! BUY! Sell, sell, sell...
So again, my question was whether increased money supply should help the stock market...but not necessarily mean we'll have high inflation?
Yes, that is possible, but not over the long-term. I think we've seen it already, by having the excess money targeting certain assets, in this case stocks and bonds. The thing is, that once the economy rebounds from its malaise (government spending had been about 20% of the economy and now it's 25% while GDP has increased around 2%, which indicates weak/flat private sector), you will see that upward pressure on prices across the economy as a whole.
A principle behind macroeconomics that you should understand is something called the Phillips Curve. It's very simple in concept, showing a tradeoff between unemployment and inflation rates. The tradeoff doesn't explicitly state causality, but does demonstrate the relationship that can be used in looking at one variable to predict the other. High unemployment generally means low inflation and vice versa. We've had high unemployment for quite a while now, which is suppressing inflation rates, even with the excess cash floating around, which is why I stated the caveat of U ~6% in my earlier post.
Six percent unemployment (U) was what economists considered the level of "natural" unemployment in the economy. Then during the 90s, it was thought to have gone down to 4% through advancements in technology allowing for better utilization of labor, but that may have been just a reaction to a very strong and unrecognized asset bubble during Chairman Greenspan's tenure with the Fed.
Add to that, when you move to U4 or U5 unemployment (I think either of those two should be the reported rate, not U3 which is used by the government - note: not a recent move and my opinion is not politically motivated at this point in time, definitions below), you would see a much higher rate, something that might make people realize/think we're much close to 1930s employment levels than what seems to get reported.
U1: Percentage of labor force unemployed 15 weeks or longer.
U2: Percentage of labor force who lost jobs or completed temporary work.
U3:
Official unemployment rate per the ILO definition occurs when people are without jobs and they have actively looked for work within the past four weeks.
U4: U3 + "discouraged workers", or those who have stopped looking for work because current economic conditions make them believe that no work is available for them.
U5: U4 + other "marginally attached workers", or "loosely attached workers", or those who "would like" and are able to work, but have not looked for work recently.
U6: U5 + Part-time workers who want to work full-time, but cannot due to economic reasons
ETA: Definitions ripped from Wiki, because they're accurate.
