Keen Answers Krugman
March 28th, 2012
I think Steve handles it admirably, and admirably briefly, so in this case I’ll simply point you over there.
On bank lending’s creating deposits and Paul Krugman’s response | Credit Writedowns.
Cross-posted at Angry Bear.
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.”
@JKH It’s basically an empirical statement, isn’t it? I have no idea if it’s true.
“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.
@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.
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.â€?
MV = PY if M is medium of exchange and V is not assumed to be constant.
@JKH
@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?)
@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?
@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.
@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.
@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.
@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.