Mostly for aficionados of the finer points of economics and its history. From John Stuart Mill’s Principles:
If we assume the quantity of goods on sale, and the number of times those goods are resold, to be fixed quantities, the value of money will depend upon its quantity, together with the average number of times that each piece changes hands in the process . The whole of the goods sold (counting each resale of the same goods as so much added to the goods) have been exchanged for the whole of the money, multiplied by the number of purchases made on the average by each piece. Consequently, the amount of goods and of transactions being the same, the value of money is inversely as its quantity multiplied by what is called the rapidity of circulation. And the quantity of money in circulation [M] is equal to the money value of all the goods sold [PQ], divided by the number which expresses the rapidity of circulation [V]. (Mill [1848] 1871: 494 – letters in parentheses inserted into the text)
As an equation:
M = PQ/V
Or as more commonly stated:
MV = PQ
Following that para are a number of considerations that help make additional sense of the point and also make it more comprehensible in relation to the operation of an economy.
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That’s stupid.
It isn’t ever a fixed quantity.
M = amount of money in a bucket of money
P = no. of politicians
V = average velocity of a politician towards a bucket of money
Q = quantity of votes they risk losing by taking the bucket of money
This post encompasses simultaneously the two stupidest fields in human endeavour: economics and libertarianism.
Since the GFC, it’s really hard to know what M actually is, given how much the balance sheets of the central banks have expanded.
So this evolved into:
MV=PT
where:
M=Money Supply
V=Velocity of Circulation
P=Average Price Level
T=Volume of Transactions of Goods and Services
What happens when people start buying shitloads of stuff with various cryptos?
Sinc writes another paper about how crypto is the future.
Dogs
M is what it’s always been and will continue to be irrespective of their balance sheets’ size.
An interesting theory put out there by BTC spruikers: it may be undergoing it’s own “Nixon Shock”.
To what? With cards like TenX and CoinJar, you can use crypto like cash. I’m not sure there will be any change fundamentally different to the bank deposit base shrinking and also stabilising monetary growth, deflated by output growth.
I can’t help that you love government gibs and you are a low achiever.
Arky
#3142127, posted on August 27, 2019 at 6:09 pm
This post encompasses simultaneously the two stupidest fields in human endeavour: economics and libertarianism.
Arky – add the third stupidest – doing up old cars to original condition.
You shoulda made up a spaceframe with a big blown V8 and grafted the panels onto it.
How’s that going? I’ve only been on here a bit occasionally for the last few months – working – so I’ve missed any updates.
I agree though – if economics was any good, the world’s economy would be going great.
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I would achieve more but it would cut into my rest.
Put simply, if you increase the quantity of money (M) buy just printing the stuff, then ipso facto you inflate the value of products (PQ).
See Venezuela, Zimbabwe et al.
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Noooooooooooooo.
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You ignored V.
There has to be a panic factor of people wanting rid of money for goods.
Get back on the car stuff. Great to watch.
No.
Wrong.
I have mixed V up with T?
Stop being a prick and define V, Dot.
The velocity of money. You were correct. It is the measure of transactions made.
I think you mixed up Q and T, BTW.
What is the Velocity of Money
The velocity of money is the rate at which money is exchanged in an economy. It is the number of times that money moves from one transaction to another. It also refers to how much a unit of currency is used in a given period of time. Simply put, it’s the rate at which people spend money. The velocity of money is usually measured as a ratio of gross national product (GNP) to a country’s total supply of money.
– Investopedia.
Here you go. Steve Kates would be interested in this.
Wow! Look how long he’s spent in classrooms.
And what does this “perfesser” have to say?
Yeah yeah, we see where you’re going you commie bastard.
https://www.thenewneo.com/2019/08/24/a-sample-of-utopian-leftist-thought-today-part-ii-richard-d-wolff-and-the-ice-cream-cones/
I need to think further on this.
The comments under this article are interesting, I think.
That’s not how equations work. There are things called constants.
There doesn’t have to be an increase or decrease in the velocity of money. Just print ink on paper and inject into the economy, get inflation.
But this does have knock on effects (positive feedback loop).
The effect is that of INCREASING the velocity of money. People tend to spend ASAP when inflation is high.
Therefore……if you increase M artificially, you also inevitably increase V after inflation has already appeared, making it a double whammy on PQ.
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That seems to be the point in debate. Whether it is valid to assume that the V and the T are constant.
Baa Humbug, don’t get an identity confused with an equation. The MV=PT is an identity and therefore is always and everywhere true but tells nothing about behavioural relationships.
No no, they don’t have to be constants Arky. But for the sake of answering the question “what happens if governments just print money?”, the equation says inflation must result. It’s a given.
As far as V is concerned, think of it this way. If people horde their money under a mattress (slow V), then traders need to coax them into spending that money. Usually some sort of offers and or discounts. DEFLATION.
If however people are spending like drunken sailors (fast V) as happens during a gold rush, then traders KNOW they’ll get more for their goods and services. They raise prices…inflation.
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That sounds right to me.
Also that there would be a lag effect.
I still think the driving force for all of it is demographics.
And in a lot of ways predetermined by very long term changes in populations on a generational basis.
You may think that a central bank doing x or y has some effect on prices, but I put it to you that the decisions they make are from a limited number of possible actions in response to demographically driven changes and are therefore mostly inevitable.
V is related to the demand for money. M is the (in our case, central bank determined) supply of money. Butbthere is nothing in the identity that illuminates us on how M or V is determined. And whether P (ie average price) exists is another matter. The concept of an average price makes about as much sense as a global average temperature.
A low (high) V represents an increase (decrease) in the demand for money. Because money affects virtually every market, an increase in demand for money, corresponds to a relative decrease in demand for all other transactions. Also, ‘transactions’ should.include assets as well as goods and services.
Yes, desire to save versus borrow changes throughout your lifetime. But using the broad definition of transactions, an increase in the money supply, which lowers the price of money (interest rates), leads people to rid themselves of that excess supply of money. We see people borrowing more to buy goods, services and assets, companies pay out more dividends, etc.
It is all much easier to understand if you think about demand for, and supply of, money rather than macroeconomic voodoo aggregates, like velocity or the average price. That is the point Mises was making.
In essence, my suggestion is to think about monetary economics in terms of real, tangible, observable quantities, like interest rates, the supply of money, quantities and prices of goods/services/assets bought and sold.
Velocity of circulation and the average price are abstract at best
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Interesting.
Thank you Pugilist.
My money has a velocity (V) of c
And that speed is constant. V = c
(c = speed of light)
Velocity certainly can vary. There is no reason to assume it is constant. The volatility of velocity is why monetarism before inflation targeting *failed*. It only targeted Q, roughly speaking.
PS
Good explanations Pgulist.
PPS
Arky
You are on the right path. You’re also figuring this out on your own and I reckon you’re getting it. This is a big compliment because heaps of people do not understand this at all.
My pleasure Arky. I should add that the definition of ‘money’ vs ‘assets’ is a real complication. As an example, in my view, Bitcoin and other cryptocurrencies are essentially ‘money’ but the ATO defines it as an asset. That means you have pay capital gains tax on the change in value, which is a deliberate attempt to invalidate its use as money and keep us all using fiat currency. And when I say currency, I mean an ever increasing share of our balances spent through electronic payment systems.
Money is, ‘the most sought after commodity’. What is money can only ever be defined at a static point in time. It might/can change dynamically.
Agreed Frank. And there can be more than one type of money present in an economy. Of course, governments as monopoly issuers of a currency will always try to force out alternatives. Forcing citizens to pay their taxes in their own monopoly issued currency is the bedrock of so-called ‘modern’ monetary theory
Thanks Frank.
How did JS Mill go at the races?
That of course would assume a recession or a crisis.
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On a related topic.
The Bank of Japan owns about 50% of the government bond issuance. The ECB, about 30%. I would argue the debt could literally be expunged… eliminated. This would apply more so in Japan, which is a unitary political system.. more so than the EU.
The market has essentially accepted currency issuance which is perpetual in place of debt. The bonds on the BOJ’s account could simply be retired.
The problem, as I see it is that the BOJ’s balance sheet, is well, a balance sheet and it is supposed to balance. If the government retired the debt, which is the asset side, it would have to be replaced with something in order to balance. Perhaps the government could simply issue perpetual bonds at zero interest, or plug the hole with a large equity infusion. I have to really think about this though as I’m not sure.
If the government posts equity in place of the retiring bonds, it wouldn’t impact the markets with a massive infusion of currency as it would never leave the BOJ’s books. It would simply be a book entry.
The point is that the markets have allowed the BOJ to increase the money supply without the action impacting with hyper-inflation because no one believes the BOJ would allow high inflation. This indicates massive.. absolutely massive confidence in the central bank.
And there a people here telling what a sinister thing it is even though markets are perfectly fine with it. Large Western central banks are hugely influential and trusted. It’s really incredible.
Not necessarily. Depends on how large the increase was, how temporary it was and what caused it. Sure, a large, persistent spike would imply a recession. But a sharp change in the demand for money does not just come out of thin air. It has to be caused by something, hence the reason it was often thought of as an intensifying factor but never the direct cause of a downturn.
This is true, but then what happens to liquidity, prices and yields in the bond market?
P, for all intents those bonds are out of the market. Sure, the market expects the equivalent to make its way back, but the adjustment wouldn’t be problematic because those assets wouldn’t have to be repriced. The only problem, as I see it would be that if was a permanent expungement, perhaps the market would not be so agreeable if the CB tried QE later on. People would see the additional increase in the money supply as permanent and not temporary ( which is how QE is looked at/sold now). A permanent increase may not be treated so benignly.
Why money, and not the sum of the total amount of credit extended? Few transactions settle in cash: why is M relevant?
I wonder, was it possible to have a GFC before the markets and derivatives and money an such?
And did the ancient peeps have central banks, and how on earth did they manage their wealth without banks and super funds?
All too confusing.
Also, how did the useless parasites and layabouts who exploit the system now make their fortunes?
For I’m sure they were about even in those times.
I once read a boffin say why not just mint $Trillion coin or two and keep it at the Central Bank vault and voila’, you have your books “balanced.”
They’re piss farting around too much with currencies. Once these blockchain type things take a solid hold (they’re doing a fine job at mo), these dick heads are going to burn everyone.
Last minute question for anyone still lurking.
If the V has increased, you can decrease the M without any reduction to the sum of products P x Q.
Is this equation the macro-economic justification for the ATO’s war on the $100 note?
That is fundamentally true because it is an identity. But it doesn’t help much because V is an unobservable, theoretical construct. You certainly can’t observe it in real time, so you can’t change the money supply quickly enough to bompensate for movements in V. As I outlined earlier, movements in V are a function of other things – essentially anything that affects the demand for money.
I think that is more an attempt to shift more and more transactions into (teachable and therefore more easily taxed) electronic payment systems. It is being done under the pretext of stopping criminal transactions.
Copernicus also became the first person to set forth clearly the “quantity theory of money,” the theory that prices vary directly with the supply of money in the society. He did so 30 years before Azpilcueta Navarrus, and without the stimulus of an inflationary influx of specie from the New World to stimulate his thinking on the subject. Copernicus was still being a theorist par excellence. The causal chain began with debasement, which raised the quantity of the money supply, which in turn raised prices. The supply of money, he pointed out, is the major determinant of prices. “We in our sluggishness,” he maintained, “do not realize that the dearness of everything is the result of the cheapness of money. For prices increase and decrease according to the condition of the money.”
“An excessive quantity of money,” he opined, “should be avoided.”
https://mises.org/library/copernicus-and-quantity-theory-money