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scottbeard

Printing Money May Be Slow To Cause Inflation

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MV = PT (the Fisher Equation)

Each variable denotes the following:

M = Money Supply

V = Velocity of Circulation (the number of times money changes hands)

P = Average Price Level

T = Volume of Transactions of Goods and Services

This stems from the "quantity theory of money" which probably many of you will have seen before.

The basic idea is that if an economy wants 10 transactions for £100 to occur, we either need there to be £1,000 in existence, or £500 that is used twice, or £250 that is used 4 times etc.

We are currently seeing deflation in the economy, i.e. P is falling, despite governments trying to inflate away their debts by raising M.

The problem for them is that also V is falling, as people sit on cash, and debt parts of M are also falling as people pay back debt.

So although falls in T have helped them a bit, I presume T is stabilising (e.g. if I go from buying 1 foreign holiday to 0 I can't go lower).

So to get P up either it's got to be full on "printy printy" or - like Japan - their efforts will just be painfully slow or fail.

Not sure which we are headed for - and I know we've had that debate before(!) - but I thought this equation sets out the QE game parameters clearly and mathematically. Agree? Flaws?

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Trouble is............at some point "They" are going to want inflation.

House prices/Stock market............Up

Debt degraded by inflation.

Expect it by 2010.

Mike

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Trouble is............at some point "They" are going to want inflation.

House prices/Stock market............Up

Debt degraded by inflation.

Just as personal debt only deflates if people's incomes rise, government debt only deflates if tax revenues rise.

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