Mish's Global Economic Trend Analysis Message Board

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Strategies & Market Trends : Mish's Global Economic Trend Analysis

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To: mishedlo who wrote (96375)	4/12/2009 12:49:33 PM
From: Hawkmoon	Read Replies (2) of 116555

Good article/analysis Mish!! One can choose to say in strict Austrian terms there is no deflation because money supply is rising. However, the money supply theory falls flat on its impractical face when it comes to accurately explaining what is happening in the real world. The inflation model simply does not fit. Conditions one would expect to see during inflation, stagflation, hyperinflation, and disinflation are nowhere to be found. The US shows 16 symptoms of deflation for the simple reason deflation is at hand. But let me add one point, if I may. Quantitative theories of money supply are all well and good, but as you pointed out, it's not just the amount, but whether that money is used or hoarded. That means the velocity of money is a vitally important factor to include in the analysis. Inflation cannot truly be predicted without applying the following equation of exchange: MV = PQ en.wikipedia.org en.wikipedia.org If the velocity of economic transactions drops off precipitously (as seems to be what's occurring) and money is changing hands fewer and fewer times, then it would require more monetary quantity to keep the equation balanced. Thus, when we see all of those charts referring to the amount of liquidity being injected, it has to be compared and contrasted against the decrease in velocity. I agree with your forecast of deflation, at least until such a point where the demand side of the equation (employment/wages/debt servicing) reaches a stabilizing level. Right now the Fed/Treasury are pushing on a string when they should be creating demand via productivity enhancing technologies and training. Hawk

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