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To: mishedlo who wrote (5704)	7/7/2001 12:27:15 PM
From: Ilaine	Read Replies (1) \| Respond to of 74559

V is part of the monetarist definition of money - the Fisher Equation, MV=PT, where M is the money supply (bills, coins, and demand deposits [checking accounts], so-called "high-powered money"), V is the velocity of money, P is total prices and T is total output. Every dollar in circulation is passed from hand to hand. The dollar you pay me, I pay the grocer, who pays the wholesaler, who pays the trucker, who pays the mechanic, who pays the dentist, round and round and round. The rate of exchange is the velocity of money. In Classical macroeconomic theory, the velocity of money is constant. In real life, it isn't. I believe, although I can't prove, that a decrease in V due to such circumstances as a decrease in spending, an increase in hoarding, business failures, bank failures, exchange rate shocks, and the like, is the "cause" of recessions and depressions, although it may well be simply the result. At any rate, in recessions and depressions, V decreases. By definition, T decreases, too, that's how we define recessions and depressions. economics.utoronto.ca

To: mishedlo who wrote (5704)	7/7/2001 1:06:59 PM
From: Ilaine	Read Replies (1) \| Respond to of 74559

By the way, if you read the article I linked in my last post, please note that when Keynes and other classical economists discuss the quantity theory of money, they talk about the "wish of the consumer to hold cash balances rather than immediately spending or investing that money." Because I own my own business, rather than live in an ivory tower in Cambridge, I think of real world reasons why people don't spend their money - like getting fired and being broke, like maxing out their credit cards and having no more money to spend, like having no customers coming through the door, like not being able to renew your line of credit, like having to compete with Chinese manufacturers who don't have to deal with unions, OSHA, EPA, zoning laws, and all the other aggravations of doing business in the First World. I represented a couple of people who got really screwed by the Savings and Loan debacle in the early 1980's, part way through a major subdivision development, land cleared, roads and sidewalks built, ready for the next tranche to start building houses, and no dice. FSLIC took over the S&L, started winding it up, and the people who were counting on the next tranche on their loan to keep going didn't get it, and went belly up personally, as well as the corporation, because they (and their wives) pledged their own assets in order to get the loan. Tough titty. We tried to sue to get the money (breach of contract, right?) but there's a little known clause in the law that says, "when Uncle Sam decides to change the rules, you're screwed." All the foo-foo talk about "opportunity cost" and "liquidity preference" sounds nice on paper, but I never forget the real world. Maybe the people at the top of the heap "forego" spending due to "liquidity preference", but not the rest of us.