Velocity Is Endogenous
A phrase that is opaque and important enough to stop any economic argument.
After living through a year of rising prices and stagnant to falling employment Republicans have discovered the threat of stagflation which, in their world is not caused by high deficits and lax monetary policy per se but by high deficits and lax monetary policy implemented by Democratic administrations.
Wonks Anonymous own comments on the past year's stagflation can be found here.
If you have accepted Ayn Rand as your personal savior all of your flaws becomes virtues and all of you crimes are noble acts.
The theory behind the current Republican fear of inflation is basic monetarism - dumbed down several levels so as to rob it of all scientific content. The money supply is rising dramatically, they assert, and therefore we should expect prices to rise.
The long run relationship of the money supply to potential output can be described in a simple equation:
Our friends on the right assume that we are at potential output - which I will let pass for now. They also assume that velocity is fixed. People are just as eager to turn dollars into goods as they were at this time last year.
Which is just not true as any reader who has been following the bank bailout can inform you. The Fed and the Treasury have been driving armored cars full of dollars up to banks and unloading them - getting blighted assets in return. Banks have been holding on to the dollars. The velocity of these particular dollars is zero as is the velocity of the expanding pad in Wonks Anonymous own checking account.
Overall money does not get around much anymore. Some of us accumulate it as a precaution against job loss. Others are holding on to it to see how low prices will get.
And, if velocity is dropping, increases in the supply of money may just be enough to sustain prices. Velocity is internally determined and depends of people's expectations for future economic activity. In times of severe economic collapse velocity drops. We don't need to worry about inflation just now.
After living through a year of rising prices and stagnant to falling employment Republicans have discovered the threat of stagflation which, in their world is not caused by high deficits and lax monetary policy per se but by high deficits and lax monetary policy implemented by Democratic administrations.
Wonks Anonymous own comments on the past year's stagflation can be found here.
If you have accepted Ayn Rand as your personal savior all of your flaws becomes virtues and all of you crimes are noble acts.
The theory behind the current Republican fear of inflation is basic monetarism - dumbed down several levels so as to rob it of all scientific content. The money supply is rising dramatically, they assert, and therefore we should expect prices to rise.
The long run relationship of the money supply to potential output can be described in a simple equation:
Money x velocity = price level x Quantity of potential outputVelocity is the speed at which money circulates, the number of times a dollar is used to make a purchase in a given period of time. If we are at potential output and velocity is fixed then increases in the money supply can only lead to one thing - rising prices.
Our friends on the right assume that we are at potential output - which I will let pass for now. They also assume that velocity is fixed. People are just as eager to turn dollars into goods as they were at this time last year.
Which is just not true as any reader who has been following the bank bailout can inform you. The Fed and the Treasury have been driving armored cars full of dollars up to banks and unloading them - getting blighted assets in return. Banks have been holding on to the dollars. The velocity of these particular dollars is zero as is the velocity of the expanding pad in Wonks Anonymous own checking account.
Overall money does not get around much anymore. Some of us accumulate it as a precaution against job loss. Others are holding on to it to see how low prices will get.
And, if velocity is dropping, increases in the supply of money may just be enough to sustain prices. Velocity is internally determined and depends of people's expectations for future economic activity. In times of severe economic collapse velocity drops. We don't need to worry about inflation just now.
Comments