Economic Depression is Inevitable
Economics / Economic Depression Jan 15, 2009 - 12:51 AM GMTBy: Brian_Bloom
The simple analysis below demonstrates that – based on current behaviour of the Central Banks and monetary authorities – Economic Depression is inevitable.
In the article which can be accessed via the attached link, (http://www.hoisingtonmgt.com/pdf/HIM2008Q4NP.pdf ) Hoisington states that “nominal GDP …. is equal to the stock of money multiplied by its turnover, or velocity.”
He explains that it is this logic which leads to the conclusion by many economists that a slowing velocity of money can be combated by a rising stock of money – which is why Bernanke is flooding the market with money.
I am not an economist, but even I can see that this conclusion is nonsensical. Velocity of money slows because people, businesses and government in combination are buying fewer goods and services (or buying the same goods and service less frequently).
With this in mind, nominal GDP can also be expressed as: Stock of goods and services X stock turnover X price of goods and services
In terms of this view, for nominal GDP to remain constant, if Stock of goods and services remains constant and stock turnover falls, then prices must rise. If both stock of goods and services and stock turnover fall, then prices must rise substantially.
It follows that raising the stock of “money” in the economy has a ZERO probability of stimulating the growth of real GDP. It may or may not affect nominal GDP – by causing escalating inflation to mask a slowing rate of transactions – but increasing the stock of money is more likely to cause velocity of money to fall further because wages lag prices. For example, at the extreme of the employment spectrum, unemployed people with zero income cannot afford to pay $25 billion for a loaf of bread. That’s why Zimbabwe has 80% unemployment. The economy has become moribund.
As an aside, by driving up prices and, at the same time, driving down interest rates, the authorities are also destroying the ability of Baby Boomers and pensioners to live in retirement. Interest income will fall even as prices are rising – the proverbial “rock and a hard place”
Conclusion
There can be no “monetary” based method of addressing the issue of a slowing velocity of money. The authorities – God bless them – are behaving in a manner which is virtually guaranteed to drive the world economy into a full blown Depression.
The above is not difficult to understand; and it begs the question: Why are the authorities behaving in this manner?
By Brian Bloom
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Copyright © 2009 Brian Bloom - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
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