ghariton wrote:That means that the velocity of money is very low. (I apologize to tidal and mudLark for using monetary theory/Friedman-like concepts.)
What are you talking about?
I have made the case many times here and for quite some time that the increase in the money supply does not have to lead to price increases - in fact I didn't think it would much in the current circumstances - and that the mechanism for this would be a slowdown in velocity. (There's also a lot of slack in productive capacity, so I think P might be the last variable to respond to an increase in M in current circumstances...)
If anything, it's Friedman that tends to argue the opposite. That the relation between prices and money supply tends to be close and stable, that we could fight deflation by dropping money out of helicopters, yadda, yadda. Sheesh.
I certainly understand that money supply CAN cause an increase in prices. I just don't see it happening much under present conditions.
And anyone who looks at what has played out here - quantitative easing, zero interest, etc. - without any traction has to find it unnerving.
In any event, formulas like MV = PQ are stolen from analogues in the physical sciences by economists cum physicist wannabes. But it's abundantly clear why economics is a social science, and as such, you can fairly precisely say why it is different from the physical sciences. First, there are no conservation laws in economics. Second, there are no true experiments, at least in macroeconomics. Third, there are no unchanging underlying relationships between economic quantities. Economic relationships evolve in (largely) unpredictable ways.
Given that — no conservation laws, no experiments, and a constantly moving target — the real wonder is that economists can sometimes say something useful… But's it's about all we can hope for at present...
Fwiw, John Quiggin is speaking at the Rotman School of Management early next month... John Quiggin on The Role Played by Discredited Economic Ideas in the Meltdown, Nov 10 at Rotman... John Quiggin, Hinkley Visiting Professor, Johns Hopkins University; Australian Research Council Federation Fellow and Professor of Economics, University of Queensland... “The Role Played by Discredited Economic Ideas in the Meltdown And Which Ideas Need to Be Killed to Prevent Future Crises" ... takes the reader through the origins, consequences, and implosion of a system of ideas whose time has come and gone. These beliefs--that deregulation had conquered the financial cycle, that markets were always the best judge of value, that policies designed to benefit the rich made everyone better off--brought us to the brink of disaster once before, and their persistent hold on many threatens to do so again. Because these ideas will never die unless there is an alternative, Zombie Economics also looks ahead at what could replace market liberalism, arguing that a simple return to traditional Keynesian economics and the politics of the welfare state will not be enough--either to kill dead ideas, or prevent future crises
The future is bright for jellyfish, caulerpa taxifolia, dinoflagellates and prokaryotes... rust never sleeps... the dude abides... the stupid, it burns. (http://bit.ly/LXZsXd)