Monetarist School of Inflation:
By Daniel at 4 May, 2009, 4:57 pm
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Not claiming it’s validity, just trying to get inside Ben’s Head.
Bernanke uses the most rudimentary theories, with the most brilliant misunderstanding (depending on your economic paradigm) that it will turn it and you on its head 
P = M x V / Q
P is for Price.
Bernanke’s view is that if this were to move it is the end of the world. Inflation bad, Deflation worse, blah blah…most agree..
“Achieving and maintaining price stability is the bedrock principle of a sound monetary policy.” -Ben Bernanke
In other words price level stability is the key to: economic growth, prosperity, peace, political stability, cure for cancer, blah blah…
M is for Money Supply
and yes also for Murder. Murdering America, since it has been
increasing at an exponential rate today, that means it is going to raise prices exponentialy if V and Q remain constant.
V is for Velocty
and yes also for Victory, if you are betting on inflation. This is how fast money moves. Ever thrown a 5 dollar bill on the Street of Manhattan and then see how fast its picked up? Did you ever follow the person and see how fast they spent it on Alcohol, and did you follow the Liquor store owner home to see how fast he spends it, or if he just hides it under his mattress? Neither Have I?
But you get the Picture. Thanks to Cisco Systems you can make 150 year old banks collapse cause you no longer need to line up to get your money, you just double click on that computer program called “pull all your money out of US cause the money market broke the buck” and you can potentially bring down American Economy in under 4 hours and bring down the world Economy in under 24 hours. The game was really popular last September, everyone was playing it. Oh and did I tell you Cisco was trying to sell me 10x faster computer networks recently. Thanks John, I make sure we buy it, cause at that speed this thing would have been over on September 15th.
Q is for “Quantity of Real Value”
The “Quantity” part is easy. number of all the stuff that we make.
I know you are thinking Zero, but don’t forget about Quantity of Service,
nor the Quality for that matter as it has at least been going up
Real is inflation adjusted, as oppose to Nominal which is the price in Today’s Dollars. So it’s the Value of an inflation adjusted Quantity? Yeh something like that. Just think Quantity of Supply, production, output, Whichever make more sense, cause its neither of them The more stuff we make, and the more services we provide, the Lower the price? Yes unless you are on Soros Side. That is why it is inversely related to inflation. Meaning if it goes up inflation goes down.
Back to the Equation: P = M x V / Q
What Happened on September 15th?
V became zero. Meaning prices went to zero, where nearly,
anyways it placed extreme pressure on Prices.
Since Bernanke doesn’t control Q, at least not directly, he
did his job and started increasing M to keep Prices stable.
Easy way, low Risk for increasing M is cutting interest Rates,
Once Problem he didn’t have much Room, and he hit zero right away.
The World Economy Collapsed, so Ben and Hank went to the congress and walked away with 700 Billion to save us from “Systemic Risk” and maybe even kill 2 Birds with one Stone since that would that would by definition also increase M. Well that did not quite turn out as planned.
First V kept getting closer to Zero, meaning no matter what you do, you are not going to keep P constant. Thank for what was left of Free Market Capitalism, Q came to the rescue, as companies stopped producing. Keeping P intact. Except V came to such a grinding halt, since it can move much faster than Q. If you are already building a House (Q) it may even be more costly not to complete it, rather than complete it.
So what to do with the 700 Billion. Well in classic theories it doesn’t really matter they could have given it to you, or just flown around in a helicopter and thrown it around, but those would have been either illegal or impractical. There were not much Strings attached, but after all as the Chairman of the Federal Reserve you are only in Charge of Monetary Policy, meaning amount of Money at the Banks. Fiscal Policy which is HOW YOU SPEND THE MONEY, is the Job of Congress. But Congress can’t move that fast, and the Banks are failing, and since it’s all M anyway you do what you are allowed to do. There were really no rules on September 12th at local NY branch of the Fed ran by Geithner. The Fed’s closest friends are its “Primary Dealers” The Biggest and Baddest Bank in the world, who are required to make bids when Treasury holds its Auctions to pay our government. All kinds of crazy stuff went down that night…
Ben was in particular upset about AIG, since they are not a Primary Dealer nor a bank. But Ben is not a Wall Street Guy either, with the best and the brightest sales people in the world there, and Paulson violating his jurisdiction and making M&A decisions, I am surprised he didn’t quit. But I saw Ben in Congress shortly after and he wasn’t the same person. I don’t know anyone who is not fallible….to be continued….
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nice