I have written, or rather started to write three blog posts about MV=PY over the last couple of days (or maybe three attempts at one blog post). One of them is already four Word pages long and the other two are coming close to that length. But they are all not much better than birdcage liner as far as clarity is concerned; and they need to be error-checked. They are coming; or at least one is coming, but until then, here’s some quick points from them.

Looking at MV=PY helps to understand the points that have been my major motivation for blogging over the past few years. Money * Velocity = Price Level * Income/GDP. Although, I think I’d prefer it to be expressed in a different way, like MV=NGDI/NGDP.

MM focus is on stabilizing the sum of PY instead of P to indirectly keep V relatively stable. I am in full agreement, though violently, on the need to be concerned about economic stability. But instead of saying that printing money causes bubbles that should be avoided, I say that the thing that should be avoided for the sake of economic stability is a collapse in V. Stabilizing P just isn’t that economic panacea that price stability hype would lead one to believe.

Thinking about this identity and comparing it to data I have regarding the nature of the 2008 crisis that indirectly shows M in a relatively constant state, it sheds light on why a gold standard probably isn’t such a great idea.

The other thing I notice when thinking about it is that during public debate regarding QE claims that could be expressed like M=P are often present, forgetting that velocity and output have anything at all to with economic outcomes.

MV=PY is simple, but it explains a multitude of macro phenomena simply by demanding that changes in one side of the equation require changes in the other. For instance, if M is constant as velocity is rising, then P and Y change. Perhaps simplicity that helps keep people honest is why it isn’t at the forefront of discussion, and instead is substituted with the Keynesian interest rate model that is more complex, making it easy to tuck inconsistencies in the pockets of complexity. I also do not care that much about interest rates, supposing that their importance is overstated by some degree, kind of like blaming a hot day on the thermometer.

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