Yes. First, you've omitted the other components of PQ -- exchange without money and exchange for credits -- which remove the certainty of any particular direct relationship between money and prices. Given a sufficient disparity between the money needed for commerce and the quantity available will increase or decrease the significance of the alternative exchange methods. Second, velocity of all the forms of money are independent of anything but the behavior of people with money.
Price is an outcome, not a cause of money velocity nor the rate of exchanges by other means That is, while a seller can offer things at any price he desires it is only the buyer that can complete the sale. Thus the buyers choice to buy or not may affect, but does not force, a seller to maintain or change his price.
Prices are always relative to the desire of sellers for something other than what they have. Likewise, sellers of money set their price in terms of the goods and services they want in preference to the money they have. Just as an increase in the supply of particular goods and services tend to reduce the asking price in terms of money, an increase in the supply of money and its alternatives will tend to decrease the amount of goods and services any particular amount of money can buy and vice versa for decreases in either supply. However, because of the flexibility of increases or decreases in the other choices for exchange only the tendency is predictable, not the actual outcome of changes in the money supply which means if at first you fail to accomplish a general price change you desire, keep changing the money quantity until you do. You can't say the same thing about money velocity from price changes.
Jim Schroeder
VP Alberta Social Credit Party, Fundraising and Financewww.socialcredit.com
"Life can only be understood backwards, but it must be lived forwards."
Soren Aabye Kierkegaard (1813-1855)
----- Original Message -----From: [EMAIL PROTECTED]To: Social CreditSent: Saturday, January 18, 2003 9:55 PMSubject: Re: [SOCIAL CREDIT][EMAIL PROTECTED] wrote:
Let M=money, V=velocity, or circulation, P=aggregate prices, Q=outputThe quantity theory of money states:M*V=P*QOn the surface, there appears to be no problem because a decrease in velocity is offset by a decrease in price; thus leaving output (Q) the same.However; this is a recursive function in that velocity (circulation) is a function of price. So the function looks as follows:M*V(P)=P*QSo, a decrease in prices causes a decrease in velocity, which either causes another decrease in prices, or a decrease in output. Just as you can have spiralling inflation because of the functional relationship between prices and velocity, you can have spiralling deflation because of this relationship.Am I missing something in my analysis?You're missing the same thing that most miss. The equation of exchange is not complete as written.First is the MV componenet: it should actually be SUM[M(x)V(x)]; x= 1 to n. That is, M comes in various forms -- cash, bank deposits, etc. -- and each component of cash has a different velocity. Small change is likely the slowest moving in the it may on average only make one or two exchanges a month; paper currency would be next and make perhaps four of five exchanges a month while bank deposits may exchange every few days. [Guesses all, not actually measured.] Second is the use of substitutes for money; predominantly bank credit. These will likely exchange even more frequently than bank deposits. Thrid comes exchanges without money, primarily barter. The equation then becomes PQ = {Sum[M(x)V(x)], x=1 to n} + {Exchanges for credits} - {exchanges without money} The causality is from M to P with perturbations from changes in the use of money in its various forms and exchanges for credits and exchanges without money. -- -- jbod
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-- jbod
Tax Privilege, Not People
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Come visit and see a new economic perspective --
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