Thursday, October 1, 2015

Lesson Monetary Keynesianism

There are strident writers on the right out there that are adamantly against money printing because it causes inflation.  They may be right but they are wrong about it.  The argument goes like this.  Money printing is a dilution of your purchasing power.  It is only math.  If you have $400 and there are 8 units your money is worth $400/8 = $50 in purchasing power.  If you print money to increase the money supply to $500 your price goes up to $62.50 - $500/8 = $62.50, which is a decrease in your purchasing power immediately.

But there has not been inflation.  Since there isn’t inflation, the strident have changed the definition of inflation from prices rising to money supply rising.  This is like saying pouring more water into a tumbler means that there is more water in the tumbler.

They do not take into consideration velocity, or turn over, of money.  That is their error.  And it is the error of the FRB and all those Ivy League economists that rule over us. (Actually those elites know all about it).

This is the formula.

M*V = P*T

M = the money supply
V = the velocity of money
P = price
T= (transactional) units

$400 * 2 = $100 * 8
$800 = $800

Now using algebra change the formula to solve for P.

P = M * V
           T

$100 = $400 * 2     >>>   $100 = $800
                 8                                      8

Now add $100 of money printing

$125 = $500 * 2   >>>   $125 = $1000
                   8                                   8

Sure enough, the price of the 8 things goes up.  This is what the strident are talking about.  But it didn’t happen.   Inflation didn’t happen.  Their problem is that when money is printed not everything stays the same.  In fact, velocity, the turnover of money, reduces.

Now here is a shocking revelation.  If you can increase the production of those 8 units to 10 units and everything else is the same you get a drop in price.

M = the money supply
V = the velocity of money
P = price
T= (transactional) units

P = M * V
           T

P = $400 *2
           10

$80 = $800
             10

Shocking.  But that is supply side economics that liberals loath.  Liberals don’t want to stimulate production because that would help businesses and if you do that some people will benefit more than other people.  Liberals want to control demand in order to attempt to make everybody equal with that means.

And demand siders believe inflation is good.  So we get Monetary Keynesianism as a national monetary policy.  Creating more and more money supply to increase prices as show in the first example.

But we didn’t get inflation.  See posts http://bit.ly/1M3Ye5Z and
http://bit.ly/1L6YHIb

Here is what happens when money velocity declines.

M = the money supply
V = the velocity of money
P = price
T= (transactional) units

P = M * V
           T

P = $400 x 1.50
               8

$75 = $600
               8


DEFLATION!  NO INCREASE IN PRODUCTION.  NO INCREASE IN MONEY SUPPLY WHICH MEANS NO INCREASE IN DEMAND AT THE LOWER PRICES.

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