[drellberg]

I’m calling on some monetarists on Free Republic:

What happens in all of this to the velocity of money? I recall my undergraduate macroeconomics classes having this equation: MV = PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is real GDP.

My impression from all of the money multiplier stuff is that if lending went down, so would the velocity of money.

I’m not witnessing any massive change in M. So if V changes, does that mean we get deflation? Recession? Or is velocity somehow a constant through all of this?

[gogov]

When you get your answer, please put it in terms those of us that skippped those classes will understand.

[Junior_G]

The velocity of money is still 38mph. That is unchanged by the current bailout.

[screaminsunshine]

You need to add S to your equation. For SCREWED. I am breaking out my Rebel Flag. Might as well go down fighting.

[JLS]

I think the worry is that the flight to quality was becoming or in danger of becoming a big increase in money demand, ie decrease in velocity. This increase in liquidity in the market is likely an attempt too keep velocity from falling so much. [Maintaining confidence in financial markets gives people an incentive not to hoard money.

My worries pre-bill in terms of the quantity identity of exchange would be a slowdown in V with a constant M would lead at least in the short run to a reduction in Q, ie real GDP. Maybe there would be some deflation, ie P down, with this.

My post bill worries if this bill is enacted and signed would be the government has an addition incentive to inflate so possibly M rises more than V falls and this leads to a continuing rise in P, ie inflation.

[monkeyshine]

I’m no expert but I don’t think you can answer the question without more details. Are they going to just fund the banks all at once, or slowly buy debts. The V will depend on how many times Treasury gives money to banks, and how many times banks loan that money back out, and get it redeposited. Remember the same money circulates so the fed gives bank A money, which loans it to homeowner B to buy the house from homeowner C who puts the money into bank D which loans it to homeowner E etc etc... the velocity will depend on how much and how often it circulates over time.

My fears are that the money will 1) be hoarded or 2) be lent to special clients only. I doubt we will see the easy credit we saw in the recent past. So I’m gonna venture a guess that the V will increase slightly from current levels but still remain way below the average over the past 7 years.

[Warlord]

Acceleration is the rate of change in velocity. Whether we get acceleration depends on whether there's any gas left in the tank. My guess is yes. This is America, after all.

[ari-freedom]

I don’t put too much stock in monetarism

‘The use of quantity of money as a target has not been a success.’ He (Milton Friedman) added: ‘I’m not sure I would as of today push it as hard as I once did.’ (Financial Times, 7 June 2003).

[ThePythonicCow]

So if V changes, does that mean we get deflation? Recession?

No real deflation. That only happened in the 1930's, when we were on the gold standard and couldn't print money.

What's happening is that the world's mass of financial paper, the majority of which (100's of trillions) was derivatives based on mortgage backed securities) is deflating -- bubble bursting time. The void is being partially filled by Treasuries, as we set up to go through a recession, and form the base for the next bubble.

[mkjessup]

Considering the already massive intrusion of the federal government into the private sector (Fannie & Freddie, just to name two), I think it possible that prior monetary rules may not even apply anymore. If a government increases it's presence (and resulting influence) in the financial sector, that means the government defines the parameters, either in a subtle manner or perhaps blatantly. As I see it, it's not much different than a typical street con game known as Three Card Monte.

Ironically, with the passing of Paul Newman, all the Wall Street bankers and investors who will benefit from this bailout might well be quoting Fast Eddie Felson this morning, i.e. :

"Money won is twice as sweet as money earned."

There's my two cents anyway.

[Vet_6780]

Money is debt which is being destroyed by paydown and default.

Every dollar of debt destroyed means that 8.65 dollars of money supply are lost due to the reserve ratio.

Things are worsening at a geometric rate.

[Jim Noble]

Here’s something they didn’t teach you: Au=real $$.

[Batrachian]

"What happens in all of this to the velocity of money? I recall my undergraduate macroeconomics classes having this equation: MV = PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is real GDP."

Never mind the math. The oil and bond markets are betting that the dollar does down and inflation goes up if this thing passes.

[L,TOWM]

Inflation. More money will be going after the same amount of goods and services.