Look: I am eager to learn stuff I don't know--which requires actively courting and posting smart disagreement.

But as you will understand, I don't like to post things that mischaracterize and are aimed to mislead.

-- Brad Delong

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Wednesday, March 9, 2011

David Beckworth Explains . . .

. . . Money Supply, Velocity, Multiplier, resulting GDP and the current Weakness in Nominal Spending.

And, at no extra charge, shows why QE has not worked.

Good stuff.  Here's  a meaty morsel.  But don't settle for a snack when a banquet is available.    Check it out here.

The monetary base is simply the stock of money assets directly created by the Fed.   The money multiplier shows to what extent the monetary base is supporting expansion of  other  more commonly used money assets like checking, saving, and money market accounts.  If the monetary base is not supporting an  expansion of these other money assets it is because there is an elevated demand for the monetary base and vice versa.  The money multiplier, therefore, is an indicator of the demand for the monetary base. Velocity shows how often the more commonly used money assets like checking, saving, and money accounts are used in transactions.  The lower the velocity the less these money assets are being used for spending and vice versa. Velocity, then, is an indicator of the demand for these broader measures of money assets which we call the money supply. 



nanute said...

Read the post, thought of you immediately, and there you were, the lone comment. While David's post argues why QE has not worked, it doesn't imply that he thinks the policy is wrong. If you read his link to the National Review article, he makes the case, rather convincingly, why QE is necessary. And, you have been right all along with regard to the Multiplier effect.

Jazzbumpa said...

I agree - the policy isn't wrong, per se. In fact, since it's increased the base, it has countered the drop in multiplier.

But the net is - it's not accomplishing anything. Or at least not enough. To solve a problem, you have to identify and attack the root cause. IMNSHO, that is banks sitting on piles of cash instead of doing banking, and businesses sitting on piles of cash instead of doing business. Paying interest on excess reserves is part of the problem.

There is plenty of liquidity, but it is misallocated into weird synthetic derivatives that skim value out of economies and contribute nothing back.

We have deficient and defective policies of taxation and regulation that not only permit, but encourage, aid and abet these actions.

Cheers, (I guess)