Comment by mattnewton | Hacker News Reader

Comment by mattnewton | Hacker News Reader

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Disclaimer, I am not an economist and don't know what I am talking about.

But, the birds eye view formula from my macro classes is MV = PY, where M is the money supply, v the velocity of money, P prices, Y real GDP.

GDP is usually going up, we have more people (and we hope they are each more productive). So that means that either the money supply or velocity must go up, or prices go down (deflation). Velocity is fickle and probably interrelated with consumer expectations around P (if you think things are going deflate for one thing, you might wait longer to make a purchase hoping to pay less in nominal terms, and this has the effect of shrinking MV even more relative to PY).

Since V is hard to control directly, in practice M has to increase regularly to prevent deflation. What we saw with the pandemic was large decreases in V and unexpectedly small decreases in Y. The fed increased M and it absorbed this differential. My understanding though is that the inflation doomers think the drop in V was transitory and now we'll see a sudden spike in all that money being unlocked and circulating

I assume that inflation (CPI) can be reflected by the increase of money supply only when people can't find a way to transfer the money to somewhere inflation-proof and can only spend it on consumer goods. That's absolutely not the case in modern days. Look at the housing price, that's where the money's gone.

Basically that’s my understanding. Anywhere you stick the money with low velocity will have the same effect on the left hand side of the equation to absorb increases in money supply. You’re right that people pick durable assets like houses to put it in, but it would have a similar effect on the velocity of the money supply if they buried cash in garbage bags for 15 years en-mass. People don’t do that because they expect reasonable and small inflation; you could imagine if that expectation went away though (either expecting deflation or very high inflation) how the money supply lever could stop being effective.

Through the velocity lense, the fact that QE and stimulus checks have very different inflation effects also becomes apparent- if you give a check to someone living paycheck to paycheck, they will spend it in their local community nearly immediately and it will be passed around quite a bit before getting locked into an asset price somewhere. If you edit the banks accounts at the fed or have the fed buy assets though, it seems to go quickly into asset prices where it sits for years before leaking into the economy as a whole, with a much much lower velocity. So $1 there != $1 here in terms of increasing prices.

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