Velocity Wanted: Inflation before Stability

 

We have the monetary inventory equation owing to William Baumol:

Md= (b∙T/ 2i)1/2.

T, for the aggregate monetary expenditures per annum, includes spending for GDP (P∙Y), intermediate goods, production factors, physical assets, human educations, financial instruments and the like.  

Monetary Transmission Mechanism. The essence of fiscal policy or monetary policy is supplying “incremental money” (ΔM) to the private sector. On the other hand, we are very much well aware that the raison d'être of money is in spending.

             As all of us try to get rid of the annoying thing, additional due to monetary policy, as soon as possible, some combination of the following will happen without fail:

1)     More products (ΔC) and fresh assets (ΔI) are created, and an increase in GDP (ΔY) follows.

2)     Prices of some products are raised. Then, the average aggregate price, or the price level, is shifted up (ΔP), which we call inflation.

3)     Prices of some assets, old or new, are lifted. This helps pull the interest rate down (-Δi). In finance, an uplift in the asset price equals a downfall in the interest rate

Swiftness Contest. Basically, there are three possibilities: that is, economic stability, inflation and a reduction in the aggregate interest rate. These are the only ways to restore the validity of the Baumolite equation with the enlarged money stock, that is, M+ ΔM, primarily because the private sector is never legally allowed to “vary” the “money supply by the central bank.”

             Thus, the real question is what tailored to monetary policy will take place in what order, or swiftness contest among the three candidates, Y, P and i.

             The rest of us would choose “inflation” (ΔP/ Δt) because going to the market to buy some products will take place much, way much, sooner than hiring production factors for the purpose production for the purpose of supplying any product to the market. In other words, spending is incomparably easier than “growing the economy for the sake of stability.” By nature, in the first place, demand precedes supply after production; according to Adam Smith, the only purpose of production is consumption.  

             Wonderfully or strangely, the narratives are a whole lot different in Cambridge. First out is the price level because it is assumed to be fixed (ΔP= 0) in the shiny IS-LM model.

             Second out must be the interest rate. Here, we do not mean the “fed fund rate,” as suggested in macroeconomics, but the average rate of interests covering asset markets all across the nation, including NYSE, CBOT, NASDAQ and all the other sorts of financial and physical markets. This rate is even more comprehensive than “the composite of the various rates of interest current for different periods of time, i.e. for debts of different maturities” (J.M. Keynes 1936, p.167 FN). 

             Providentially, the only way out after monetary policy is “macroeconomic stability with no inflation.” In the first place, “economic growth” wouldn’t take any time, or ΔY without Δt. Lo and behold, the Solow growth model without time dimension whatsoever is very powerful in Cambridge.

             Keep the printing press running, and you will hear the shout of victory. My Lord!


The Seekers - When the Stars begin to Fall


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