Velocity Wanted: Insensible Trade-offs in fine
The rest of us find on the shoulders of
Irving Fisher from New Haven and William Baumol from Princeton as follows:
1) Money
is useless for any other purposes than “purchasing.” We hoard it, if ever, in
solid cash or thin-airy demand deposits to utilize as the liquid currency, aka
GAME (for generally accepted medium of exchange), at the time of exchange.
2) Like
any other “People Thinking at the Margin” (to Gregory Mankiw from Cambridge),
the rest of us think at the margin and keep amassing money to the marginal dollar where the benefit of hording equals to the cost.
3) Typically
in Princeton, the collective sum total of individual liquidity preferences in
preparation collectively
for P∙Y
(“nominal GDP”) is found out to be to be: Md=
(b∙ P∙Y/ 2i)1/2.
4) Owing
to Paul Samuelson from Cambridge, the rest of us are very much well aware that
we can individually change the monetary position but cannot collectively.
5) Ergo,
the effects of monetary growth in percentage per annum (m) are like this: 2m= g+ π- Δi/ i+ Δb/ b (all in %PA).
The Genuine Tradeoff. The essence of fiscal and monetary
policy is a purposeful change in the outstanding balance of money stock (M as in M1, M2, M3
and the like) in six weeks or shorter. If so, we may assume away systemic and
structural issues such as a variation all across the nation in the asset
markets (Δi/ i) or the
financial infrastructure (Δb/ b).
Thus,
we have this simplified yet genuine tradeoff: 2m= g+ π. We are to have inflation when the real rate of the
GDP growth is smaller than twice as high as the monetary growth.
Again
as suggested by Irving Fisher, the terms “real” and “nominal” must be used in
conjunction with the rate per annum. There
exogenous to Cambridge “real quantities” are always individual but nowhere
collective; for instance, we as non-macroeconomist never know how “so many” are
three apples plus five oranges.
A Nonsensical Tradeoff. Probably, the most classical
tradeoff in macroeconomics is the so-called “Philipps curve.” To oversimplify,
the curve predicts an inverse relationship between the unemployment ratio (T0) and the inflation rate (T-1).
That’s
simply absurd, period. On the one hand, the unemployment ratio is
cross-sectional across the fully employed (40
hours/ 40 hours) to
the fully unemployed (0/ 40)
as at a certain stationary stocked week. On the other hand, the
inflation rate is “longitudinal” (in somewhat qualified sense) over the cyclically flowing year.
Answer this question: What is the plane (L2∙T0)
relationship between the driving distance (L∙T0) and the driving
speed (L∙T-1)? Well, your guess is as good as mine.
An Heavenly Tradeoff. Ever since the birth of
macroeconomics, we have been having the “Cambridge Quantity” equation; M= k∙I
= k∙P∙Y.
The equation suggests this tradeoff:
m= g+ π
Please
remember before all else that we are talking about the rate per annum. Particularly if you apply the
methodology of Thomas Piketty trained at Cambridge (cf. Capital in the 21st
Century, 2014), m in the place of 2m will lead you in the long run
to the otherworld, home or otherwise.
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