Re: @Doctor Syntax
"What's different now is that at 5.25% (the old savings and loan guarantee before the S&L collapse) people didn't FEEL like they were losing money. At 0% interest (or even 0.75%) people both know and feel it."
And THAT Tom13 is the whole point!!!
Economics is not about MV=PQ! It is, in the end, and from the very beginning, all about human perceptions and the behaviours that these give rise to. Mr Worstall's simplification of the equations, valuable as this is, obscures the fact that in the end that all of these equations are simply very simple macro-level proxies for getting our minds around the complexities of human behaviour by abstracting them all up into an Azimovian kindergarten-level psycho-historical model.
There are two types of economists, besides the wrong and also wrong! Those with degrees from our venerated Schools of Applied Mathematics (LSE and so on) and then there are those with degrees from our much maligned Schools of Behavioural Science. The difference between them being that the mathematicians believe they can get their systems of equations right, someday, while the sociologists know that we will never get it right because human perceptions and behaviours are constantly being moulded by present and past experiences melded together with beliefs and hopes for the future.... some of which they are constantly being fed by the mathematical economists.
In the '70's, just as St Milton was making a name for himself, we had already noticed that the basic problem with our models was that the behaviour of people underwent significant shifts across any time-series much longer than 7 years. This meant that long before one could hypothesise from a statistically significant time-series of data as to what should be in the models the reality they were intended to forecast was no longer going to be the reality in which their policy recommendations would be applied.
The longer people FEEL that they should keep their money in their pockets for necessities, and for paying down debts at the old high fixed interest rates and avoid the very high short term credit rates (now exposed for all to clearly see), rather than spending it on 'bling', TV dinners and other unnecessary items they will discover the benefits of a tight domestic financial policy.
Following Mr Worstall's notation Q will respond less and less quickly to rises in M the longer people get habituated to spending what they do not have. Q is anyway sticky upwards because of the logistics of re-stocking a global supply chain, let alone the effect of investment lags or expanding production into currently underutilised capacity. So increases in M will have an increasingly lower propensity to drive Q, and by the same token... ie. that personal demand is readjusting to the side of wisdom, there will not be great pressure on P either. So V will drop as well. This is why this recession is taking so long to recover from this time around and ultimately the reason lies with the fact that is was caused by a failure of trust amongst ordinary people in the financial system itself. You can see Mr Worstall is probably a mathematical economist at heart. Sociologically speaking the classic equation MV=PQ can be written, for the sake of central bankers and the government treasury..
Propensity to QE * (Amount Available i.e. MV) = Propensity to Spend * (Amount Spent i.e PQ)
These equations are not mutually exclusive. MV=PQ says every level of economic activity (PQ) has a requisite level of MV. Happiness is getting to a sustainable level of production and prices and keeping there with some incentives generated through policies suggested by the second and a reliance on the social infrastructure that links them in the real world.
You have probably noticed that we have 4 variables, all of which are independent, all of which influence one another and all of which can and are influenced by the actions of almost every player in the economy.
The bigger you are the more effect your actions will have. The fewer large players, and the fewer large-scale behavioural shifts amongst the smaller players, then the less influential any one player can be. The policy indicators will be much more likely to have the effect you want. It is one of the pre-requisites of a pure market. It is only pure markets that have any hope of being predicted and for their environment to be managed with only small tweaks as needed so that they continue to serve their intended functions.
Intentions which are ostensibly the well-being of us individuals. That a focus upon MV=PQ by all the rich and mighty helps achieve and maintain this goal in any way is merely part of our belief system.
However, the problems we have still despite using the insight it gives us is a GOOD THING! It brings our blind faith into question.
We are resolute in ignoring that we do not have a pure market, anywhere. The central banks have propensity to manipulate M. Service and manufacturing companies at the behest of shareholders have a propensity to raise V through obsolescence and fashions and frippery and misleading advertising and Q is pushed ever upwards by psychological manipulation of consumers. Companies similarly apply great effort to influencing prices both on the supply side and the sales side. Very large companies seek to corner supplies and fence off markets, very large associations of smaller companies do the same thing through the government of their nation state, large associations of nations so the same thing through their trading blocks and their military machines.
Is it any wonder that keeping a dynamically stable and expanding equilibrium between MV and PQ is a circus act achieved by few and only briefly? Perturbations are increasingly large and increasingly frequent as the frequency distribution of corporate (and nation-state) sizes polarises between the ever fewer ever larger ever more powerful and the ever more ever smaller and ever impoverished.
MV=PQ has nearly run its course. These are its death knell. But such is metaphysics we can rely on its resurrection too. Once the power of most large corporation's finally transcends that of nearly all nation-states on the planet the organisation of their market will be a matter of board meetings and management directive.... the ultimate low-risk command structure for risk-averse businesses. MV=PQ will become a true mathematical relationship taught in ever management school to help with regional and local area setting of production goals, consumption opportunities and the volume of IOU processing needed to facilitate our activities.
The Soviets and PRC tried it, and failed. Perhaps Mr Carney will help Euro-USA get it right this time!
Me? I am heading for the hills..... I have got this revolutionary idea I want to work on... its called democracy.
Biting the hand that feeds IT
