Keen Answers Krugman

  1. JKH
    March 28th, 2012 at 17:20 | #1

    This is a very good sentence:

    “The endogenous increase in the stock of money caused by the banking sector creating new money is a far larger determinant of changes in aggregate demand than changes in the velocity of an unchanging stock of money.”

  2. March 29th, 2012 at 08:40 | #2

    @JKH It’s basically an empirical statement, isn’t it? I have no idea if it’s true.

  3. Paul
    March 29th, 2012 at 10:17 | #3

    “This is a very good sentence:”

    Why? That short statement would seem like common sense but it doesn’t address the inherent dangers of credit expansion.

  4. JKH
    March 30th, 2012 at 04:43 | #4

    @Asymptosis

    I guess there’s a self referencing problem with it because he defines aggregate demand in terms of incremental debt in the first place. That definition seems a bit mushy to me anyway. And there’s a further measurement problem in comparing debt increases with velocity increases. And it no doubt varies between short term and long term. So measurement overall is problematic. But it is an interesting sentence at least.

  5. Fed Up
    March 30th, 2012 at 10:51 | #5

    How about “The capital multiplier increase in the stock of medium of exchange (currency plus demand deposits) caused by the banking sector creating new demand deposits is a far larger determinant of changes in aggregate demand (although the new demand deposits could be used for financial asset speculation) than changes in the velocity of an unchanging stock of medium of exchange.”?

    MV = PY if M is medium of exchange and V is not assumed to be constant.

    @JKH

  6. March 30th, 2012 at 11:41 | #6

    @Fed Up

    Your first para seems good.

    “MV = PY if M is medium of exchange and V is not assumed to be constant.”

    Doesn’t this ignore leakage into prices of financial assets? In theory couldn’t all the new money from lending go there, with no effect on volume of real-goods purchases — even second-hand via the wealth effect? (“All” just in theory; in fact, very large portions of it?)

  7. Fed Up
    March 30th, 2012 at 12:33 | #7

    @Asymptosis

    “Doesn’t this ignore leakage into prices of financial assets?”

    I don’t think so.

    100 * 1 = PY

    100 of new demand deposits (medium of exchange) is created from debt so that M = 200. All of it (the new 100) goes into financial assets. V drops.

    200 * .5 = the same PY

    Sound good?

  8. March 30th, 2012 at 12:44 | #8

    @Fed Up

    But PY is price and quantity of real goods. It could remain unchanged even while V remains constant and M increases, because all the new M goes into higher financial asset prices.

  9. Fed Up
    March 30th, 2012 at 13:42 | #9

    @Asymptosis

    “because all the new M goes into higher financial asset prices.” Maybe I’m not thinking about V correctly, but if all the new M goes into financial assets (not spent so the velocity is zero of the new 100), why wouldn’t V for the overall M (the 200) decline?

    (100 * 1) of the old M plus (100 * 0) of the new M = 200 * .5 of the overall M

    Simply, M doubles, V halves.

  10. March 31st, 2012 at 09:17 | #10

    @Fed Up

    But why should V decline? If M increases and it all goes to financial assets, the other three terms could remain unchanged.

    So MV≠PY.

  11. Fed Up
    March 31st, 2012 at 14:49 | #11

    @Asymptosis

    “If M increases and it all goes to financial assets, the other three terms could remain unchanged.”

    I don’t believe that is possible. If M doubles and PY stays the same then V needs to halve?sp?. If M doubles and V stays the same then PY needs to double.

    Either I don’t understand V or the laws of math are trying to be violated.

  1. March 29th, 2012 at 08:22 | #1
  2. March 30th, 2012 at 09:22 | #2