http://blogs.forbes.com/johntharvey/2011/05/14/money-growth-does-not-cause-inflation/
He starts with Mv=Py, where M is money supply, v is velocity of money, P is average price, y is quantity of production.
He then says that increasing M may not increase P, for several reasons.
1. It may increase y instead. "Take for example y. One need only look out the window to see that it is not currently at the full-employment and therefore maximum level...there is no reason that this [=increase in M] could not lead to the rise in y... as those spending their “excess money balances” actually cause entrepreneurs to raise output to meet the new demand...This is, of course, the goal of the government deficit spending that so many economically-ignorant people are trying to stop right now."
2. There may be a corresponding decrease in v. "As one would expect, it [=v] tends to decline in recessions when people do, in fact, want to hold more cash".
3. He then argues that it is impossible to increase M, ever! He assumes, with Milton Friedman, that increase in M means an increase of the supply of money over the demand for money. [Esuric. I think you agree with that also]. But how can you supply more money unless someone demands it, i.e. is willing to trade it for something. In his own words:
But perhaps the real nail in the coffin of the “money growth==>inflation” view is this: the phenomenon that Milton Friedman identifies as key to the whole process, i.e., the excess of the money supply over money demand, cannot happen in real life. ..How is it that the Federal Reserve increases the money supply? Remember that Friedman used a helicopter–indeed, he had to, for there was no other way to make the example work. This wasn’t just a simplifying device, it was critical, for it allowed the central bank to raise the money supply despite the wishes of the public.
However, that can’t happen in the real world because the actual mechanisms available are Fed purchases of government debt from the public, Fed loans to banks through the discount window, or Fed adjustment of reserve requirements so that the banks can make more loans from the same volume of deposits.
All of these can raise M, but, not a single solitary one of them can occur without the conscious and voluntary cooperation of a private sector agent. You cannot force anyone to sell a Treasury Bill in exchange for new cash; you cannot force a private bank to accept a loan from the Fed; and private banks cannot force their customers to accept loans.
Supplying money is like supplying haircuts: you can’t do it unless a corresponding demand exists.
Would appreciate any comments on any or all of those 3 points.
My humble blog
It's easy to refute an argument if you first misrepresent it. William Keizer
If it is a simple q asked out of genuine curiosity, here's the answer.
EDIT: Oops, it's been a long day. The article is about Milton Freidman's theory of inflation, which I do not subscribe to in the first place for other reasons. I was curious if the article had detected some basic blunder Freidman had made which I knew nothing about.
Smiling Dave: If it is a simple q asked out of genuine curiosity, here's the answer. I will present the sequence of events in a timeline: 9 AM: Smiling Dave reads the John Harvey article. It raises doubts in his mind. Could the author be right? Dave is for the nonce undecided. 10 AM: Dave posts the gist of the article, expressing no opinion, and asks for comments. Comments could be pro or con. 11 AM: Esuric refutes the article. Dave is convinced of its flaws, reverts to his original position. 12 AM: Onebornfree asks for Daves opinion. Dave gives it.
If it is a simple q asked out of genuine curiosity, here's the answer. I will present the sequence of events in a timeline:
9 AM: Smiling Dave reads the John Harvey article. It raises doubts in his mind. Could the author be right? Dave is for the nonce undecided.
10 AM: Dave posts the gist of the article, expressing no opinion, and asks for comments. Comments could be pro or con.
11 AM: Esuric refutes the article. Dave is convinced of its flaws, reverts to his original position.
12 AM: Onebornfree asks for Daves opinion. Dave gives it.
I see. I asked because I could not understand why you would reference an article like that [while already being aware of the fact that you have previously disagreed with similar conclusions made by others that "increasing M may not increase P" ].
I guessed that either you were somehow now less sure of your previous position [for whatever reason], or perhaps that you were simply looking for some sort of "feel good" psychological validation of what you already "knew" via another member agreeing that that the author was talking out of his rear end and you were therefor merely engaged in publicly laughing at the authors "ridiculous" conclusions [i.e "hanging him out to dry"]. But I was not sure which, if any, of those two applied, that's all.
For what its worth, although I disagree with his reasons, personally I agree with the authors' conclusion ["increasing M may not increase P"] , although as I already hinted, I think that "increasing M may or may not increase P" is a slight improvement.
I also believe that that conclusion [ "increasing M may or may not increase P"] is fully consistent with Austrian monetary theory- at least as far as Von Mises' "The Theory of Money and Credit" goes.
Regards, onebornfree
For more information about onebornfree, please see profile.[ i.e. click on forum name "onebornfree"].
I don't have the book in front of me, but isn't this Irving Fisher's equation of exchange? If this is the case, then he's using a formula which I recall Rothbard (perhaps Mises?) identified as a fallacy since it was based on the assumption that an exchange between two goods sets their value as being equal. If all this this is true, then wouldn't the analysis presented by the economist in this article be flawed at best and completely wrong at worst?
Rcder,
Yes. I found it in MES. Mises also has a criticism of it [without writing out the equation] here
Rcder: He starts with Mv=Py, where M is money supply, v is velocity of money, P is average price, y is quantity of production. I don't have the book in front of me, but isn't this Irving Fisher's equation of exchange? If this is the case, then he's using a formula which I recall Rothbard (perhaps Mises?) identified as a fallacy since it was based on the assumption that an exchange between two goods sets their value as being equal. If all this this is true, then wouldn't the analysis presented by the economist in this article be flawed at best and completely wrong at worst?
Surely the question is, in the real world, can a person be right in their actual conclusions yet wrong in the reasoning used and reasons given to reach those conclusions?
Regards, onebornfree.