Saturday, May 30, 2009

Money Velocity and government spending

DeLong is at it again, trying to determine the determinants of money velocity.

Money velocity theory ultimately boils down to inventory management and the yield curve measures inventory shortages and gluts at the various term scales. Brad thinks part of our solution is more stimulus. Then Brad believes that, right now, the set of government goods and services are a better balance in terms of inventory management. To the extent that government offers a mix of production to better balance inventory then the higher the multipliers; and visa versa. Increase the government deficit if the inventory chain becomes better managed, decrease the deficit other wise.

Markets have given their first indication that the Obama administration still has their priorities wrong. The market disagrees with Brad. If the Obama administration shows no change, then another stimulus boost sends us to double dip.

1 comment:

AVronko said...

Stumbled across this by accident and just thought I'd point out that the OP was wrong. Not trying to be a jerk, but I'm sick of people resolutely spouting their political opinions as certain predictions of the future and then never being held accountable for their ridiculous statements.

The economic stimulus saved millions of jobs and speed up the recovery by 18 months or more. Total GDP growth over 10 yrs might well be depressed by a few fractions of a percent by the stimulus, but you'd have a hard time convincing people who understand the tradeoff that it wasn't worth it!