Wednesday, May 30, 2012

Are Market Monetarists Right? Part 2

So M2 velocity fell off a cliff around 2008 and has not recovered; the chart in the previous post demonstrates that. For fun, lets review Fisher's Equation of Exchange that gives us a relationship between the money supply, velocity, the price level, and real income:

                                                                      M * V = P * Y
The left hand side of the equation gives us nominal spending and the right hand side nominal income. Holding everything else constant, a fall in V would give us lower P * Y or lower nominal income, i.e. a recession. To avoid that, we expect the Fed to do what is does best... conduct open market operations to expand the money supply M (in this case we're looking at M2). So how much has the Fed expanded M2 in the face of the decline in V? 

Ummm, pardon me, but does anyone else notice how the M2 money supply seems to have been held rather... stable? I mean, stable along its previous trend path? Given the algebra of M * V = nominal spending, looking at these charts I'm thinking some faster M2 growth to compensate for the fall in V would do wonders for our nominal GDP- and hence real GDP and employment, given our assumptin of wage and price nominal ridgitity... more on this later. 

Are Market Monetarists Right?- Could Stabilization Policy be that Simple? Part 1

I was recently explaining to someone why the large increase in the monetary base has not been inflationary nor is it likely to be inflationary for some time due to the fact that the Fed is not having any trouble finding people banks to hold the extra base at constant prices, when it occured to me I had not actually bothered to check to see how money-demand had faired over the course of the crisis. 

Well, here is the velocity of the M2 money supply ( Milton Friedman's my preferred aggregate). Remember the velocity is the inverse of money demand. 

Yep. That's what I expected to see; a huge plunge in M2 velocity from 2008-2009, not followed by an increase as of yet. Also, notice how recessions are always associated with a fall in velocity...

Sunday, May 6, 2012

Tuesday, May 1, 2012

A Doited German Rules Them all...

Since their monetary policy was sent abroad.

You'd thought I'd forgotten about this. But I haven't. Here's the latest news from disaster ridden Spain, where tight money on the part of the ECB continues to wreak unfathomable havoc. Check it out. 

Europe needs monetary expansion NOW NOW NOW and for the foreseeable future, i.e. until unemployment comes down, real incomes expand, and growth resumes. Full stop. 

But the Boys from Brazil  Frankfurt still see no problem. Nice going Draghi.