Misconceptions about Money and Velocity
Admittedly I'm probably going to venture a bit out of my league in addressing the Equation of Exchange theory, but I'm going to give it a shot.
If money is a commodity and it's supply results in inflation (according to Rothbard), why are we experiencing deflationary pressures?
You're predicting strong deflationary pressures, right? But Money supply has increased dramatically, yet we're not seeing inflation. If anything, it's the opposite.
But I can understand the concept of the velocity of multiple exchanges, using mutually agreed upon stores of value, equating to a gross domestic product.
But let's suppose that we hypothetically eliminate all financial exchanges/transactions and just measure the amount of cash. Without velocity of exchanges being involved, is it not required to measure GDP as the available supply of money?
Example.. Say there's $5 Trillion on deposit and everyone suddenly demanded cash to hoard and never made another exchange for a different good or service. Would not GDP then forever be $5 Trillion until people recommenced exchanging commodity for commodity, therefore re-establishing exchange value?
Now.. what if some of that money supply is stored as gold, or any other non-consumable commodity and is never exchanged again once obtained?
Or is it possible that money supply that is stored and is never exchanged loses it's value because it's rate of exchange no longer be quantified via a barter transaction (monetary commodity for other good/service), therefore achieving price discovery for both commodities?
Admittedly the scenario is absurd, but it calls into question traditional GDP theory, as well as Rothgard's Gross Private Product (GPP) and Private Product Remaining (PPR) theories.
Thus, it's possible that all the theories need to be revisited?
I know.. rather presumptuous of me to suggest such an idea.
But Rothgard asserts that GPP is all economic exchange minus economic activity involving government funding. And if suddenly all private economic activity halts and people sit on their cash, then would not GPP equate to available money supply being hoarded?
Hawk |
