comment reply to george selgin

W Raftshol says:
October 1st, 2012 4:58 pm

The effect of below market interest rates since just after Volcker has brought the velocity to near one. The reason all the printing and spending produces no inflation is because there is no velocity. Velocity is demand for money.

Even were the Fed to abandon ZIRP, velocity would remain low for decades. If the FED were to do something extreme such as raise the fed funds rate to 8%, it would be 2016 before the velocity increased to a non-robust level of 2.

Perhaps the only immediate fix would be Gisellian stamp money with a negative interest rate of say 12% per year. People would use it to pay off their debts. Students would dump it on loan creditors. Credit card debtors would pay off their cards. Meanwhile, this high velocity currency would consume the national debt as stamp revenues poured into the US Treasury.

Velocity would be restored. The Fed would be no more.

  • George Selgin says:
    October 1st, 2012 9:42 pm

    “Velocity is demand for money.” No: real money demand = y/V; an increase in V is consequently equivalent, holding y constant, to a decline in the demand for real money balances.

    Nor has M2 velocity quite fallen to 1 yet–though it is closer than ever.

    And on what grounds can you, or anyone else, conclude that V will “remain low for decades,” or that the Fed (note that, as it isn’t an acronym, all caps are inappropriate) would be inclined to raise the funds rate to a whopping 8% unless spending had revived enough to call for such a dramatic increase?

    Finally, the idea of provoking inflation so as to “consume the national debt”–and of thereby effectively swindling a very large number of people out of their hard-earned savings–hardly sounds like my idea of responsible monetary policy. Nor would it mean that “the Fed would be no more.”

W Raftshol says:
October 3rd, 2012 12:28 am

Forgive me if I am mistaken, but I believe that y/V = m = money supply. Demand for money is y/m = V .

I don’t know why you say that negative interest stamp money would provoke inflation. To the contrary, the stamp revenues would pay off the public debt. For example, if the US Treasury simply printed up $1 T in stamp money (without borrowing anything from the Fed), with a negative 12% interest rate, and simply mailed it to student loan debtors, the circulation of this currency would in 100 months retire $1 T of the existing $16 T of national debt.
It would be austerity with liquidity. Real growth would be tremendous due to the high velocity of this money, as

r = V(1-u) where u = PV/FV

Of course, the Fed would have to go as otherwise Congress would spend another $10 T in that 100 months.

Irving Fisher, after his fall, was a proponent of stamp money and was very grateful to Silvio Gesell for teaching him about velocity.

George Selgin asked:  And on what grounds can you, or anyone else, conclude that V will “remain low for decades,” or that the Fed (note that, as it isn’t an acronym, all caps are inappropriate) would be inclined to raise the funds rate to a whopping 8% unless spending had revived enough to call for such a dramatic increase?
To reply  more fully to your comment –
 And on what grounds can you, or anyone else, conclude that V will “remain low for decades,” or that the Fed (note that, as it isn’t an acronym, all caps are inappropriate) would be inclined to raise the funds rate to a whopping 8% unless spending had revived enough to call for such a dramatic increase?
– requires a small amount of explanation, to wit:
The Quantity Theory Of  Money (QTOM) equation is
pQ = mV
Taking logs on both sides and differentiating w/r to t
p’/p +Q’/Q = m’/m + V’/V
In a Say’s Law economy, the above is a tautology.
m’/m is percentage growth of money by interest accrual.  m’/m = i,  the interest rate;
Q’/Q is real growth = r ;
p’/p  is the percentage change of price level, also known as inflation/deflation;
When i = r , the economy is in a state of equilibrium where  m’/m = Q’/Q , i.e. percentage growth of money is equal to the percentage growth of salable goods and services brought to market.  If  i ≠ r for some reason,  then  i – r = p’/p .  Whether or not the economy is in equilibrium, however, the normal state of affairs is that
V’/V = 0  , which is to say that V is a constant, or at least varies much more slowly than the other variables.  At any rate, V’/V = 0 is unaffected by disequilibrium between i and r.
For a non-Say’s Law economy however, the situation is quite different.  Here,  m’/m =  i + g, where g is the amount of money growth due to printing and spending money absent any production of salable goods.
Regrouping QTOM one can write
m’/m = p’/p + Q’/Q – V’/V  where in light of the foregoing
i + g = p’/p + r – V’/V   and since  i = p’/p + r
g = -V’/V
Thus,  counterfeit money destroys Velocity.
Q.E.D
T0 answer you specifically on the point  – And on what grounds can you, or anyone else, conclude that V will “remain low for decades,”,   – I make theses observations;
  • The inflation rate has averaged 4.5% since 1940
  • During this entire period of time,  except when Volcker spiked the fed funds rate to 18% and velocity shot up from a moribund 2 to over 3.6, the economy has been bleeding velocity.  With Reagan, the bleeding resumed.
  • Unless the fed funds rate is immediately and sharply raised, the economy will die.  Even if it is suddenly raised, it will take more than a decade to revive the economy.
  • Public debt is now at $16 T.  Until a means of repaying this debt is found, money will be printed to service it.

When V < 1 , hyperinflation will ensue.

For plots of the variables from my computer model, visit   http://committeetorecallcarllevin.com/comment-reply-to-george/  Please be patient, I’m posting them as fast as I can.

2 responses

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