## Friday, October 26, 2012

### A rising supply of money does not mean inflation is coming

JK said...

I wrote up a facebook post on this topic yesterday. Anyone want to comment if I made any mistakes, or if I simplifed it too much for my audience of friends that are not regular readers of any branch of economics? (btw, it's meant to be satirical)

THE REASON YOU THINK MONEY CREATION CAUSES INFLATION

Seriously, everybody knows it. Few people study economics, but everyone knows that money creation causes inflation. It’s like, the Earth revolves around the Sun. Duh!

Did you know there is a formal economic equation at the root of the idea that money creation causes inflation?

It’s called the Quantity Theory of Money: MV = PQ

Laypeople, gather round…

M = amount of money

V = how often money is spent

P = the price of stuff

Q = how much stuff is being made

Let’s talk about M. Well, no, let’s not. We’ll come back to it when it matters.

How about V…? Ok, we'll say that how often a dollar bill is spent is the same for every dollar, for every person, at all times, no matter the conditions of the economy. Makes sense to me!

Now, P. …Naaaaa... Let’s bring that up with M.

What of Q? Well, all of us are always working, and we’re all working full time, and we’re working to the greatest of our abilities… some might say 'to the brink of our personal potential', so it’s safe to say that at any given point in time, the economy is at Full Employment and Full Productive Capacity!

Sounds fantastic.

MV = PQ

Hmmm. If V is always the same, and if Q is always the same, then they don’t much really matter, right? Let’s get rid of them!

So… now we’ve got…

M = P …or... the amount of money equals the price of stuff.

Oh ok. I get it ..I get it… so if we increase the amount of money, then prices go up. Of course! It’s so simple. If M goes up, then P goes up. If M goes down, then P goes down.
…..

Folks, THAT is why you believe money creation causes inflation.

Impressive stuff huh?

…..

Bullish_Bear said...

Congratulations!!!

You are smart enough to read Warren Mosler's work and regurgitate it.

geerussell said...

You are smart enough to read Warren Mosler's work and regurgitate it.

If someone said that to me, I would take it as a compliment no matter how they intended it :)

Tom Hickey said...

You are smart enough to read Warren Mosler's work and regurgitate it.

If someone said that to me, I would take it as a compliment no matter how they intended it :)

Would that we were all that smart.

Instead what gets regurgitated is neoliberal and Libertarian talking points, or neoclassical or Austrian talking points — ad infinitum.