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And I was correct, d’ye see?

Back when we were all talking about how QE would have some costs in inflation, if it were not reversed. I said that MV=PQ. The money equation. Or, recasting that slightly, M is the narrow money supply and timesd by the velocity of circulation gives us the broad money supply. This is why increasing interest rates reduces inflation, because that reduces V. I also said that V ropped off a cliff in hte financial crisis and that if it upticked again then that’s when we were going to get the inflation. This is the US but illustrates:

OK. And as we can see, V upticked right after lockdown and all that extra QE and guess when inflation started?

Now, here’s someone else trying to explain the same events:

The argument made, based on this chart, is that the growth in central bank, base, narrow or reserve account money (they are, effectively, all the same thing, with all of it being constrained within the Bank of England inter-bank settlement cycle through the central bank reserve accounts) is not related to the growth in commercial bank or broad money, which is what is actually used in the economy in which we all operate. It’s a notable and appropriate suggestion.

Broadbent reinforced the claim by suggesting that the global financial crisis changed the pattern of money creation, but doing so did not result in inflation

The missing word in that being “yet”.

Money supply growth was high. Inflation was not. At the very least, the velocity of circulation of money dropped dramatically. The obvious explanation for that is growing inequality. He did not say so.

Where I do agree with Ben Broadbent is that there is no obvious evidence that QE did in any way result in inflation. I think it is time to dismiss that argument.

Yes, V dropped – not unusual when we’ve a financial crisis and banks falling over – and so we could have more M ithout inflation. But once V recoers then hey presto, there’s the inflation. But that’s the money equation which cannot be true because Friedman used it. Despite MV=PQ being n identity it must be inequality instead, right?

BTW, if it is inequality then if V is rising again then inequality must be falling. Anone seen the ‘Tater claim that yet?

18 thoughts on “And I was correct, d’ye see?”

  1. The obvious explanation for that is growing inequality.
    No mechanism suggested, or even hinted at, and no citation – just pure unadulterated drivel: this bad thing happened because of something I don’t like or understand, so we should try to eliminate it (and blame the Tories for it).

  2. Backwards. We know the size of the money supply. We know the size of the economy. V is what makes that balance.

  3. ” We know the size of the money supply. We know the size of the economy. V is what makes that balance.”

    Which makes it an intellectual fraud, like so much of economics.

    MV=PQ, or so economists say. So we measure M, P and Q, and then whatever those factors have done say that V must have gone up or down to make the equation balance. Its utterly circular, and spurious.

  4. You know, when I asked that question I was hoping that wasn’t the answer. You haven’t got a formula at all except inasmuch as it is a formula to find V, V=PQ/M. But there will always be a number for V which you have no other way to check. In summation, it’s all bollocks.

  5. It’s a definition. The money measured economy is the price of things times the number of things equals the amount of money times the number of times each piece of money is used. QED.

    As to being useful, well, it shoots down Ritchie often enough so there is that.

  6. The thought occurs that V, as a count of transactions – the number of times a pound changes hands per period, is basically a count of decisions made, so related to the information processing rate of all actors in the system, underlying Q.

    What seems to be implied, is that if the processing rate falls behind the flow of information, then weird stuff happens in future iterations of MV=PQ. So, given enough periods, MV=PQ reaches different forms of balance, but entirely new information causes significant shocks to the existing relationship.

    Yeah, that’s about as far as I got.

  7. “It’s a definition. The money measured economy is the price of things times the number of things equals the amount of money times the number of times each piece of money is used. QED.”

    What so in economics you can just invent an equation and not have to prove it empirically?

    What If I state LH=GV, where L is the length of winter, H is the number of households, G is the amount of Gas consumed and V is the propensity to want a warm house? If L goes up, H stays the same and G falls, then of course V must have dropped significantly! Hey I’ve created a completely proved new economic equation. Where’s my Nobel prize?

    Its no wonder economists have a reputation for intellectual dishonesty…..

  8. It’s worse than that Jim. At least in your equation L,H & G are quantities will be known directly. With the economy, they mostly come from proxies.

  9. Yes it’s an identity.

    For it to be useful, M needs to be more or less exogenous (determined by the central bank and/or regulators), and V needs to be stable or at least broadly predictable.

    These things are close enough to true to contribute to Milton Friedman getting the Nobel Prize that to date has eluded Professor Murphy.

  10. I can make any equation work if one of the variables is a rubber number. Can’t learn much from it though. If I wanted, say, the BoE to target V, what would they need to do to control it?

  11. The Meissen Bison

    To control V you could abolish cash and move to a digital currency – well knock me down with a feather that’s precisely what they are planning to do.

  12. “Changing interest rates works by changing V…….”

    How? Whats the actual mechanism, and whats the relationship? Interest rates up by X, V moves by Y, that sort of thing?

    Or is it just more economist hand waving? ‘Of course interest rates affect V, I just said so didn’t I?’

    Economics would be massively improved if it stopped pretending it was maths, with all the equations and graphs, and realised it was a social science instead, ie virtually useless.

  13. The only possible interpretation of any research whatever in the ‘social sciences’ is: some do, some don’t.

    Ernest Rutherford (Baron Rutherford of Nelson) 1871-1937

  14. ““Changing interest rates works by changing V…….””

    So lets see what happened in the real world. According to the chart above V rose steadily from 1990 to mid to late 90s. What did US interest rates do in that period? The went down from about 8% in 1990 to 5-6% by 1996/7. So an inverse relationship it seems. Yet from 2000 to date V has dropped consistently, in line with interest rates that have also dropped to virtually zero prior to the recent rise. So a direct in line relationship there. Yet interest rates were unchanged from 2009 to 2015, and V dropped consistently throughout that period.

    So according to the dismal science, lowering interest rates can cause V to go up or down, and keeping them the same can also cause V to go down.

    Economics, about as scientifically sound as climatology……………

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