Velocity Wanted: Effective Ways to Stability 03
By definition and as implied by Adam
Smith, Economy flows (T-1) goods and services from production (T-1)
to consumption (T-1). In between is commerce, or “trade after
specialization.” By design or by chance, la
main invisible of the market has two moving hands (T-1), that
is, the “demanding” and the “supplying.”
On
the sidewalk of the economy, Finance balances
(T0), or puts in equilibrium, between two petrified hands (T0);
the credit side (liabilities, or “sold assets”, T0) and the debit (assets,
or “bought assets,” T0).
Owing
to conventional wisdom, incidentally, we are never crying (T-1) over
the split (T0) milk. While history is stuck (T0), the economy
keeps flowing with efficiency (M∙U∙T-1
by definition). For instance, “labor productivity” is defined to be the utile output
(M∙U),
or “good” as sometimes called, per hour (T-1) of working.
To
paraphrase, demanding and supplying are activities over the period, while balance and equilibrium are between two dead
stocks of a moment. Probably in the
first place, “equilibrium” depicts the “stationary state” of the balance scale.
What is Not Inflation.
We mean with the term "inflation" an over-time change of the price level. Such a
change is not the same as a high level (L-1) of price as in the
AS-AD model. Somehow, the price level does not even “vary” in the IS-LM model.
At any rate, we need the time dimension (T-1) legitimately to define inflation.
In
a similar vein, there are no such things as “cost-push inflation” and “fear-dragged
deflation.” You are right, we mean what happened circa the supply-chain disruptions
in 1970s (oil shocks), the demand-chain breakdowns in the late 2000s (“the Great
Recession”) and the double-chain turmoil in the early 2020s (pandemic to demand
and geopolitical conflicts to supply). In any of the cases, there was a
one-time shock to the velocity of money: with the money stock constant (ΔM=
0), there was a sudden upshift of the velocity (V↑) to the price
level (P↑).
By
definition, a variation in the price level, ΔP
without /Δt,
due to an “outside shock” as above is not inflation. A single hike in the price level is by naming no
more than an episodic event (T0). Rather shortly than lengthily
after the shock, the business will return as usual at a different price level.
Monetarist Manifesto.
“Inflation (π)
is always and everywhere a monetary phenomenon (ΔM or
m more precisely).” See We
Told You So: π+ g = 2m + Δi/ i– Δb/ b!
In a Downturn or in Recession. The
first key to stability (+ g)
on the left, is “supply of money” (ΔM) on the right. The second key is timely supply
(Δt)
on the right. The rest of us would never waste time (Δt)
in “digging a ditch just to refill it.” We know for sure that the time (t< 125 years) is the first
key currency of all.
In
the shadow of timely supply of money m=
ΔM/ (M∙Δt),
the other terms on the right of equation work as helping hands to a limited extent.
The following ways would contribute to stabilization with minimal inflation of
the economy.
Reduction of Financial Transactions Costs.
In the aftermath of a financial-markets crash, the fear factor, or “risk premium” in finance jargon, tends to
snow-ball. If the government at large calms down the economy and earns “consumer
confidence” back, the efficiency of monetary policy for stabilizing the economy
will be greatly enhanced: g= 2m– π– Δb/ b≒
2m– π. “Nothing to fear but fear itself,” after all.
Reduction
of Commercial Transaction Costs. Everything else being equal, the
higher the growth rate, the lower the inflation rate: g+ π≒ 2m. Put it different, the government
can reduce the commercial transaction costs in various ways for the purpose of
promoting growth. Most everywhere, “the rule of law” F.A. Hayek talked about and
“policy predictability” many columnists suggest will certainly help.
Reduction
of Industrial Transaction Costs. We can think of three categories
how to reduce such costs Ronald Coase talked about. First, the government promotes
efficiency in the factor rental markets including the “job market.” Second
would be to help firms enhance intrafirm and interfirm operational efficiencies:
There are so many value chains and supply chains in each industry. Third might
be to help firms expediently migrate among industries: The economy consists of
so many industries.
The Balance Scale
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