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PeakTrader:

Some people underestimate the value of the Fed. Before the Fed, per capita real GDP growth averaged 1.38% a year from 1814-1912, and after the Fed, it averaged 2.16% per year from 1914-2012. Of course, there are other factors that contributed to faster growth, including fiscal policy and the establishment of the minimum wage. Also, it should be noted, large economies tend to grow more slowly than small economies.

In the equation MV = PT, if M and P are constant, then V = T, i.e. V, the velocity of money, or the number of times money is exchanged, equals T, the number of transactions, or the quantity of goods exchanged. T can be represented by real GDP.

The goal of monetary policy is to keep actual GDP close to potential GDP, which smooths-out business cycles creating sustainable growth, which is optimal growth. The fact that there are monetary tightening and easing cycles, to close output gaps, are attempts to smooth-out T in the short-run. V and T fluctuate in the short-run, which require adjustments in M to stabilize P and smooth-out T. For example, if people decide to hoard money, then V and T will fall (in the short-run). So, M needs to rise (higher than a constant growth rate).

Changes in fiscal policy can change the velocity of money. However, in the long run, V and T are constant. So, M equals P.

Moreover, there are positive and negative shocks to the system in the short-run that require adjustments in the money supply, e.g. in recent years, technology (at the height of the Information Revolution), Y2K, 9-11, oil shocks (or commodities in general), the creative-destruction process (mostly from 2000-02), the financial crisis, etc..

When the Fed targets prices, output fluctuates little. When the Fed targets output, prices fluctuate a lot, which leads to instability. I suspect, if the Fed targeted the money supply, that would also lead to instability, because of shifts in the foreign exchange market or changes in the velocity of money in the short-run. However, the money supply determines prices in the long-run.

The Fed doesn’t micromanage the economy, e.g. to determine winners and losers or redistribute wealth. It creates or destroys money, to smooth out business cycles.

Before the Fed, there were many periods of economic booms and busts.

List of recessions in the United States – Wikipedia

Recessions in the Industrial Revolution – 1871-1914

Period – Percent Decline of Business Activity

1873-79 – 33.6%
1882-85 – 32.8%
1887-88 – 14.6%
1890-91 – 22.1%
1893-94 – 37.3%
1895-97 – 25.2%
1899-00 – 15.5%
1902-04 – 16.2%
1907-08 – 29.2%
1910-12 – 14.7%
1913-14 – 25.9%

Recessions in the Information Revolution – 1982-2007

Period – Percent of Contraction

1990-91 – 1.4%
2001 – 0.3%

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Linus says:

MV = PT.

Then V=PT/M, or V=(P/M)T

Assuming that M and P are constant and equal to “a” (a = P/M )

Then V=aT.

Now if you wanted to know about the rate of change of V as a function of T, then you would take the first derivative of “aT”. What you end up with is not that V = T, but rather that the rate of change of V is equal to the rate of change of T. Quite a different thing.

Its been a while, and my understanding may be rusty, but I think that is how it works.

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Jerry says:

You are almost right Linnus. The only correction to what you said is at the end. If you take the derivative of aT, you get “a” times the derivative of T, so that the rate of change of V is equal to “a” times the rate of change of V.

You are correct that it does not say V = T.

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PeakTrader:

Linus, I’m showing the equation has some usefulness in determining real GDP or MV / P = T and nominal GDP or M = PT / V.

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You may want to see this link from Rutgers University (at bottom of page):

http://ctaar.rutgers.edu/gag/NOTES/macnotes7.html

In Fisher’s Quantity Theory, if the money supply changes, the price level must change by the same percentage. This is so because

V and T are fixed, with respect to the money supply.

MV = PT where V and T are constant means that

[Change in P]/P = [Change in M]/M

In this model, changes in the money supply have no effect on the volume of transactions or velocity. In fact, changes in the money supply have no effect on anything except the price level.

Increasing the money supply can only cause higher prices.

Fishers variable T, which does not change in the short run, is represented in modern economics by “natural” or potential real GDP.

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Jerry and Linus, you haven’t contradicted any of my math and economics. Yet, your responses indicate you believe you did.

I don’t disagree with the rate of change. It’s unnecessary, because the equality still holds, which you seem to disagree:

I stated before:

In the equation MV = PT, if M and P are constant, then V = T, i.e. V, the velocity of money, or the number of times money is exchanged, equals T, the number of transactions, or the quantity of goods exchanged.

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Jerry says:

Oh, PT. In one of your comments above (the long one) you said that T fluctuates in the short term. Now you are saying that it does not change in the short term.

Not only have you not clarified your earlier math errors, now you are changing what one of the variables does in the short term.

Why should we believe anything you are saying?

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PeakTrader:

Jerry, that’s untrue, and I made no math errors.

Moreover, T fluctuates in the short-run, not in the long-run.

T is potential output in the long-run and actual output in the short-run.

In the long run, potential output = actual output, not necessarily in the short-run.

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T representing “natural” or potential real GDP doesn’t change in the short-run.

T representing actual real GDP changes in the short-run.

Potential real GDP = actual real GDP in the long-run, not necessarily in the short-run.

See the difference?

Also, I may add, PT is nominal GDP.

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Also, I may add, there are many math shortcuts in economics. I just happened to know beforehand V = T, which you both stated is incorrect, even after doing some math.

Moreover, in using real numbers, estimates are made. For example, what’s 231 / 7? You can do it in your head:

7 X 10 = 70, then 70 X 3 = 210 (10 X 3 = 30), with 21 left over, and then 21 / 7 happens to be 3.

So, the answer is 33.

Normally, I would go directly to 7 X 30 = 210. However, there are several ways.

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Jerry says: “Given:
MV = PT
and M and P are constant.

Prove that V = T.”

MV = PT, or V = PT / M

In the long run, M = P. So, V = T.

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If M doubles, P doubles.

For example, MV = PT is 1000 * 5 = 1 * 5000

If M doubles, then 2000 * 5 = 2 * 5000. So, P doubles.

So, V, the velocity of money, or the number of times money is exchanged, equals T, the number of transactions, or the quantity of goods exchanged. Real GDP is unchanged.

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http://angrybearblog.com/2014/04/open-thread-april-4-2014.html#comments

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The U.S. is the only superpower and has a world empire to defend, somewhat similar to the Roman empire, which lasted hundreds of years.

The American empire will also likely last hundreds of years. This depression is only a “soft-patch.”

Nero followed Claudius, like Obama followed Bush. The Roman Empire lasted for hundreds of years even after Nero.

After the Roman Empire fell, there was a thousand years of economic stagnation, called the “Dark Ages.”

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Why shouldn’t the affluent have more say in government? Without them, the economy, along with government (including budget deficits) would be much smaller.

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Daniel, do you actually understand what other people write? Be happy you have a ride, particularly, if you’re a “free rider.”

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Some people here believe the private sector should pay tribute to the government for allowing it to succeed. This is a case where it does work both ways. Also, it should be noted, government is paid well, and many in government are affluent.

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