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So, as I was saying about inflation

For a decade and more I’ve been saying that QE was fine until. It’s the until that matters.

The money equation is MV=PQ, this is definitional. The amount of money, times the number of times we use money, equals the price of things we use money for times the number of times we use money for things. It’s not possible to argue with that.

So, if V falls dramatically we can have lots more M without having P rising. Indeed, wed might actually want to engineer that in order not to have deflation and thus a depression.

OK, So we print lots more M and go spend it, happy days. But that all works until V turns. And only until V turns. Once it does, and MV starts rising, then we get the inflation.

M can also be thought of (not wholly accurately, but well enough) as base money, M0, MV as broad money, or M3, maybe M4.

Hmm, OK. And yes, I know this is from the US but the UK will be roughly the same, in directions at least. V has been recovering.

The thing I’ve been telling you all these years was true. Expanaind ghe money supply, QE, doesn;t cause inflation while V is falling. But once V starts rising again you’ve got to sell those bonds back into the market – reverse QE – so as to kill off the increase in M and thus the inflation.

This description isn’t right but it is useful.

20 thoughts on “So, as I was saying about inflation”

  1. Doesn’t look like there’s any planned contraction in Broad Money to reverse the inflationary damage.

  2. Bloke in the Fourth Reich

    So when the time comes, the money printer calls in those trillions of printed money over the space of a few months.

    Yeah, right. The money printing only happened because various bank chiefs didn’t want a recession on their watch. Neither do the current lot.

    Also doing that isn’t far worse than letting things run their course, is it? Not at all.

    QE is the new Keynesianism. Only step 1 of 2 steps ever happens.

  3. I did have a bit of understanding (not much, I admit) by trying to explain to a bunch of retired civil servants (to whom money is no object and, quite frankly old boy, a tad tedious and who don’t think inflation exists) how you’d have to re-invent the rules of Monopoly if the Banker decided to give himself £20,000 at the start rather than play by the rules.

  4. That it turns out that way may well be true, yes…..

    Always this. Consider the real outcomes of fancy plans meeting humans, not just the fancy plans.

    See also socialism and (yes, *yawn*) carbon tax.

  5. Bloke in North Dorset

    “Why the hump in M4ex 2018/19?”

    Preparations for “No Deal” Brexit? The treasury and BoE were at the centre of a lot of Project Fear projections, perhaps they believed their own Remain PR?

  6. Do you have a good practical definition of V and how it can be measured ? Or is it only obvious in retrospect ?

  7. That’s the point isn’t it, Tim? It’s all great handwaving. But in the real world, using it never produces the results expected. You could say the entire history of governments trying to manage the economy is a history of failure. The harder they try & manage it, the less they succeed. The odd periods of economic success are when they grubby fingers out of it.
    Macro-economics is just a branch of astrology.

  8. It’s like the Net Zero nonsense. Pretty well all the tech it depends on was developed to answer the needs of the electronics revolution. High capacity rechargeable batteries, the new magnets, photo optics. Inevitably, the applications in power generation & transport would have been exploited. When they were economical to exploit. All governments have done is pushed it, long before it got to that point.
    My guess, is that we’ll end up exactly where we would have done anyway. Without wasting all that effort & resources. And without wasting them, we would have got there quicker.

  9. Whenever you see the word “economy”, a good sanity check is to substitute “weather”. Managing the weather. Running the weather. Directing the weather. The entire history of governments trying to manage the weather… etc.

  10. Bloke in the Fourth Reich


    Your substitution doesn’t work, because most people believe the government can manage the weather. It just means the government forcing other people to give things up.

  11. I thought we exploded MV = PQ when we discovered you can’t actually measure V, it’s derived from that equation and the three ‘knowns’. So-called knowns, because they are not easy to measure either. So what’s the velocity of money. I put it on the table and it just sits there. I watch it in my bank account and it disappears when I blink.

    Money printing, or excess credit washing around the economy, causes inflation. No fatuous fake equation is necessary. No economists need to cut the argument into micron-thick slices in order to justify their continued status. Anyone who doesn’t agree has an agenda to support.

  12. So many things wrong with this article that I don’t know where to start.

    First, the MV=PQ money equation fails to distinguish between GDP and non-GDP transactions. So sometimes velocity tells you one thing, sometimes it tells you something else. Or a little of this and some of that. Not much use without extra information.

    OK, So we print lots more M and go spend it, happy days.

    Not necessarily… you know.. non-GDP transactions like money borrowed for asset purchases. This increases the money supply, but because it doesn’t affect GDP, velocity falls as it must by arithmetical necessity. I’ll let Richard Werner weigh in here (he uses the older MV=PT money equation):

    Solving the enigma of the ‘velocity decline’

    The problems arising from the implicit assumption that nominal GDP (that
    is, PY) can be used to represent total transaction values (PT) are obvious.
    GDP transactions are a subset of all transactions. The mainstream quantity
    equation (2) that uses income or GDP to represent transactions will thus
    only be reliable in time periods when the value of non-GDP transactions,
    such as asset transactions, remains constant (thus dropping out when con-
    sidering flows). However, when their value rises, this will cause GDP to be
    an unreliable proxy for the value of all transactions. In those time periods
    we must expect the traditional quantity equation, MV = PY, to give the
    appearance of a fall in the velocity V, as money is used for transactions other
    than nominal GDP (PY). This explains why in many countries with asset
    price booms economists puzzled over an apparent ‘velocity decline’, a
    ‘breakdown of the money demand function’ or a ‘mystery of missing
    money’ — issues that severely hampered the monetarist approach to mone-
    tarv nolicv implementation

    We need a better money equation than MV=PQ.

  13. Further to my comment, a question was asked of Steve Randy Waldman who writes a blog titled “interfluidity”.

    Question: …it is not clear to me that it is well understood why inflation sometimes can be seen in consumer goods and sometimes is manifested in “asset price inflation”. Do you have any ideas on this mechanism? I know some people deny there is such a thing as “asset price inflation”. Do you have a theoretical basis for your ideas in this area?

    Answer: I have a very simple answer to this question: Follow the money. Whether an economy generates asset price inflation or consumer price inflation depends on the details of to whom cash flows. In particular, cash flows to the relatively wealthy lead to asset price inflation, while cash-flows to the relatively poor lead to consumer price inflation.

    More at the link:

  14. This is like a doctor treating pneumonia by giving aspirin for the headache. What happened with QE is that all the money went straight into the markets, primarily the stockex and housing. House prices rocketed, the exchange indices climbed sky-high even as the yields plunged. About one per cent of one per cent went into machine tools and factories and all those other things that actually grow an economy. Selling bonds back into the market is the aspirin. Getting the money back out of stocks and housing is the antibiotic.

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