Oscar García Muñoz, follow it on other blogs here .
Dusting economics textbooks
One of the first lessons you learn economics at the University is the monetarist equation. Summarized in M x V = P x Q
This equation relates the output (Q), prices (P) and money supply (M)-the money in the market, through the so-called velocity of money (V). This last factor was constant for the monetarists and explain the price increases when relaxing the monetary and fiscal policy: more money in circulation meant more inflation.
However, the current situation seems to belie this equation and bring it closer to the Keynesian approach, advocating the changing nature of the V. The latest data from the European Union economy indicate that the low inflation at a good pace and the economy is in recession. In addition, the European Central Bank data show that the monetary expansion (the so-called M3) is slowing, but European governments have pumped enough money into the financial system. Therefore, there should be more money supply.
Perhaps the solution lies in V. The equation can be squared only if the velocity of money is minimal. So where's the money? The answer would be in the monetary base multiplier. That is, the money being injected into the system is multiplied through credit. The tap is closed. The financial system is accumulating funds to cover the defaults. Here is the destroyer of the money pit: in the default and the loss of value of assets, whether they be depreciated shares or houses for sale for several months without a buyer.
Perhaps this is a graphical way to see the process of creative destruction of Schumpeter . So far, it seems that there is only destruction. However, dust economics textbooks is good to remember the most basic things in front of more substantial explanations.
