Thursday, March 05, 2009

QE

Today's FT has a useful piece on the theory behind quantitative easing.

MV=PT

M is the quantity of money
V is the speed/velocity at which money flows round the economy
P is the level of prices
T is the number of transactions

If you believe that V is stable, increasing M must push up P or T or both, thereby reflating the economy.

The danger is that if people hoard the extra cash instead of spending it V will plummet, meaning that P and T still fall so deflation continues.

4 Comments:

Blogger kinglear said...

Well for a start V has reduced dramatically ( as you know) not least because banks are taking 5 days to clear a cheque into an account now ( what happened to the 2 day clearing I ask?)
Clearly T has fallen dramatically recently - so maybe with V having fallen and M increased, we might get T back up there.
Or maybe not...
And I don't see the political will to stifle inflation as Volcker did in the 80s in the US.

12:14 pm  
Blogger Welshcakes Limoncello said...

But what's quantitative easing, WW?

11:14 pm  
Blogger Winchester whisperer said...

Yes but deflation is the current problem, KL, not future inflation. Maybe we should be piling into index-linked gilts?

It's printing money, WL.

1:47 pm  
Blogger Winchester whisperer said...

Yes but deflation is the current problem, KL, not future inflation. Maybe we should be piling into index-linked gilts?

It's printing money, WL.

1:47 pm  

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