How I learned to stop worrying and love central bankers (part 2)

I kicked up a bit of trouble for myself with Friday’s email…

It was supposed to be a friendly, reflective stroll through the garden of economic theory.

Canary Wharf, London

I kicked up a bit of trouble for myself with Friday’s email

It was supposed to be a friendly, reflective stroll through the garden of economic theory.

But Agora’s Ben Traynor didn’t see it that way. He’s challenged me to a “fight” (or, a full-on debate with notes and a referee and a meeting room and everything).

Oh, it’s on…

That’s happening next week. Someone’s bringing a tape recorder. If it doesn’t descend into weeping and ugly name-calling, I’ll publish some of it.

(By the way, you should go back and take a look at Friday’s email if you haven’t seen it yet, because today I want to develop those ideas a bit further.)

When I sat down to write last Friday I had a simple enough idea: explain why you’re not concerned about a bubble in stocks.

But the story got away from me. The “a bit of background” section stretched to twice the length of a normal Penny Sleuth. I didn’t even get to the part where I explain how the idea fits into the markets!

That’s the plan for today.

A quick recap

On Friday I wrote about one of the big “schools of thought” when it comes to the economy and central banking: monetarism. Monetarism is the school of thought that makes most sense to me.

I said that monetarists think that the money supply is very very important. In our current system, the central banks are in charge of the money supply. They adjust it up and down using “monetary policy”, which is the umbrella term for all the tools central bankers have at their disposal. Examples include changing interest rates, QE, and promises to act in the future such as the Bank of England’s “forward guidance” policy.

I think sometimes those different central bank policies get a bit muddled. The important thing to remember is that they’re all variations of central banks’ one big trick: growing or shrinking the money supply.

Central banks shrink the money supply when they want the economy to “cool down”, to prevent inflation. And they increase the money supply when they want the economy to “heat up”, to stimulate growth and employment.

And like I said, monetarists (like me) think the money supply is very important. We think that when the central bank changes a country’s money supply, the economy responds very strongly.

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This is sort of a new idea. In the past, the mainstream economists thought that the money supply was very important when it came to stopping the economy from overheating (ie, inflation). But they thought it wasn’t great at “heating the economy up” (ie, fixing unemployment and recessions).

Luckily for economics nerds (if not for the ordinary people of the world), the years since 2009 have given us loads of interesting data on how economies respond to changes in the money supply.

Four of the biggest economies on the planet – the UK, the US, the eurozone and Japan – have tried out different monetary policies in response to the recession, at different times. So we got a perfect chance to see how well the theories fit the evidence.

… and it must be said, the monetarists come out pretty well! The countries that increased their money supply the earliest grew soonest. The countries that increased their money supplies the most grew most dramatically. And the countries that cut their money supply crashed their economy.

How this matters to your money

Very interesting stuff for investing nerds like myself.


Well, this is a big idea for investors! It tells you important things about when is the best time to invest in the stock market. And it helps you make sense of the big debates in the world of finance in economics.

In a future issue I’ll explain how it fits into the market for tiny companies (good news, I promise). But I’m running out of space today. So for now, I’d just like to offer this modest takeaway.

Today the homepage is dedicated to the big decision in the world of central banking: should the US raise rates when it meets in a week’s time?

A lot of people are arguing that the Fed owes it to savers to raise interest rates (ie shrink the money supply, ie cool off the economy). But not many monetarists are among those calling for a rise in rates.

The European Central bank has been about the least aggressive central bank when it comes to increasing the money supply to stimulate the economy. In 2011, the European Central Bank raised rates in order to “help savers”… and as a result the European economy crashed. (Sweden did the exact same thing a year or two later, with the same results.) Savers get burned along with everyone else when the economy crashes.

My two cents is this: the Fed has a lot of power over the US economy. Raising rates now could send the US back into recession, like happened in Europe. There is no inflation. There is slack in the US economy. There is no good reason to raise rates, and a decent chance of a recession if it does.

Don’t do it, Janet!

Introducing the Penny Share Letter

You might not be aware of this, but Penny Sleuth is only part of my job. When I’m not sleuthing I write a subscription investment newsletter, tipping the most exciting small companies on the market.

I’ve alluded to The Penny Share Letter a couple of times here in Penny Sleuth. But at the time, it wasn’t ready to show you.

Well, you guessed it – it’s ready! I’m really pleased with it. So if you’re interested in taking the next step, and actually getting invested in the smallest companies on the market, you should take a look. Click here to read all about The Penny Share Letter.

Best wishes,

Sean Keyes

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