reply on: The Money Supply Continues its Biggest Collapse Since the Great Depression \ stacker news ~econ

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525 sats \ 1 reply \ @Voldemort 7 Dec 2023 freebie \ on: The Money Supply Continues its Biggest Collapse Since the Great Depression econ

If you believe MV = PY (M = circulating money, V = velocity of money, P = price level, and Y = income/gdp), then prices would necessarily come down if Y is unchanged.

Using MV = PY, it is very easy to see the inflation. Y (GDP) went dow, M (M2) went up, P (inflation) skyrocketed. I will never understand policy makers. I immediately messaged my friends about inflation when I heard the government was going to send checks to people during COVID.

Anyway, It is entirely possible that the reduction in M2 will lead to a price decrease. Alternatively, it could lead to reduction in GDP or a combination of both. Gas has already come down. If P comes down, I would expect it to be seen in leisure goods like hotels and durable goods like cars/appliances first.

https://m.stacker.news/7201

0 sats \ 0 replies \ @Undisciplined OP 8 Dec 2023

Good point about price heterogeneity. My family mostly buys recession stuff anyway, so our consumption bundle isn't likely to see major price declines even if "the price level" comes down.

As an aside, I don't believe MV = PY, because I don't think most of the variables are conceptually well defined. However, one of my favorite sayings is "All models are wrong, but some models are useful." and I do think that can be a useful model.