Tuesday, June 6, 2017

Let us deal with the velocity/price equation

 From a Brad post.
Md = PY/Vwhere M is the quantity of money demanded, P is the price level, Y is the level of production, and V is the velocity of money—the value of transactions that having $1 in the bank or in cash as money can support, in the sense of manufacturing the needed trust so that the transactions will go through.
Price I am changing to cost, as I have no theory on a third party called profit. Price is the amount of empty space needed in the delivery channel to accommodate our demand jitter.  Y, the level of production, gives the total of items sent down the chain, so their product gives the total cost of spare inventory  space. Velocity is the rank of the distribution graph.

So, the distribution graph contracts, as Brad shows because velocity changes, the distribution graph rank has dropped. So what about interest charges? Well, the interest (payments and collections) are set so that the probability of shortages or overflow is about the same along the chain.  And that is the theory.

Interest charges have to be set ex post since buyers and sellers do not have complete observability of the tradebook (or market conditions).  Hence, since ex post is a requirement, there is no such thing as a monetary stimulus. So the idea of the Fed changing the rates to be off equilibrium in the future will not work, it only introduces term structure error as the Fed is required to bet time.

What about this entropy thing?

Use the complement, redundancy.  The currency bank sets interest in and out so as to remove as much redundancy in delivery as it was contracted to do.  The 'contracted to do' part is required to eliminate the three party trades that Ben calls discretion.  Once we understand the allowable bounds pon probability of inventory failure, then all parties can bet the S&L distribution (with asynchronous adjustable interest charges). If you decide to accept Ben's discretion rule, the system gets jammed, as it is now. The Fed has no inside  information.  If it did, it would be off equilibrium, so plotting with government is a horrible idea, it just jams the Fed queues; it causes everyone to await the  government decisions.  And that is what we have now, the economy is awaiting the government to figure out the 2.4T is has on loan..

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