Courtesy of Mish.
In an interview with the Daily Bell that just came my way, Antal Fekete writes about Blowing Up Modern Austrian Economics … in a Good Way.
Background on Velocity
To understand the interview discussion, one must first understand velocity. I discussed velocity at length in Will Prices Rise Significantly When Velocity of Money Picks Up?
The simple definition V = GDP/M where V is velocity, M is money supply, and GDP is Gross Domestic Product.
Problems With Velocity
- The first problem is how to measure money supply (Is Money M1, M2, or TMS? Each gives a different measure of velocity).
- The second problem with velocity is that GDP is a pretty nebulous concept given that government spending (no matter how useless) adds to GDP.
- Finally, I do not believe prices can be accurately measured.
Interview Snips
I post snips of the interview below, followed by my own comments. Sometimes I agree, and sometimes disagree with Fekete.
Daily Bell: Please define deflation and disinflation from both a monetary and price standpoint.
Antal Fekete: Deflation is clearly not the same as a falling price level. Technological improvements in production cause a gently falling price level under sound money that is no deflation. Defining deflation as a contraction of the stock of money is plainly wrong. We have a vastly expanding money supply, yet a lot of economists (including myself) hold that we are in the midst of deflation. I prefer the definition of deflation as a pathological slowing in the velocity of money.
Mish: I agree with Fekete that “price deflation” is a natural occurrence based on technology and productivity improvements. I also concur that deflationary forces are huge. However, I disagree with his definition of deflation based on velocity. Given the clear and expanding bubbles in asset prices, I believe we are in a state of inflation. Nonetheless, I do expect another round of credit and asset deflation (my definition of deflation).
Daily Bell: We think monetary deflation over a long period of time is difficult to accomplish in a central bank , money-printing economy. Comments? …
