Jim Schroeder wrote, on Mon, 20 Jan 2003 01:33:53 -0700 >Hi Victor: > >The quantity theory of money is not meant to be held constant >because the equation is made up of variables. What the equation >shows is how these variables affect each other. That is why >they are using letters (or symbols) instead of actual numbers. >It's used to identify a relationship. What I was trying to >demonstrate is that any attempt to cause a decrease in the >overall price level could lead to spiralling deflation. >The logic for this is simple. Why should I buy something today >when I know it's going to be cheaper next week. This means that >decreasing prices will cause decreasing velocity, or in other >words V(P), and this could cause a decrease in output.
However, historically, problems with deflation have involved problems with debt finance by producers. The earning power of their productive equipment declining while the financing requirements do not, therefore they defer further debt-finance of investment, and if they get their hands on a surplus tend to use it to retire debt. You can see the same thing happening in Japan over the later 1990's. Purchase of productive equipment tends to be far more volatile than consumer spending for lots of reasons, including the system-level effect that if most people are deferring purchase of productive equipment, most industries will be operating far from productive capacity, so that the underlying demand for new productive equipment to expand capacity will be reduced. Further, the response by consumers, barring rational expectations, requires them to expect that the deflation will be ongoing, AFTER experiencing the first wave. If they believe that the price reduction is a one-off increase in their purchasing power, there is no reason why they would not react as if "things are cheaper and my income is stable" ... and split the difference between buying more and increasing their propensity to save. If there is no financing crisis among producers because there has been no first-round reduction in their ability to finance their long term debt, it seems at least plausible that their investment could increase in the face of what seems to be a sustainable increase in consumer demand, and a "crisis free deflation" might be achieved. ==^================================================================ This email was sent to: archive@mail-archive.com EASY UNSUBSCRIBE click here: http://topica.com/u/?a84IaC.bcVIgP.YXJjaGl2 Or send an email to: [EMAIL PROTECTED] TOPICA - Start your own email discussion group. FREE! http://www.topica.com/partner/tag02/create/index2.html ==^================================================================
