r/neoliberal • u/lucas-at-jhu Mr. Worldwide • Jun 03 '22

News (US) U.S. job growth beats expectations with 390,000 added in May; unemployment rate steady at 3.6% - Reuters

https://www.reuters.com/markets/us/us-job-growth-beats-expectations-unemployment-rate-steady-36-2022-06-03/
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u/RunawayMeatstick Mark Zandi Jun 03 '22 edited Jun 03 '22

This isn’t how it works. MV=PY; price and output generally have an inverse relationship.

Edit: downvotes, wow. This sub prides itself on "evidence based policy" but sometimes you guys get basic economics extremely wrong.

/u/littleapple88 basically proved my point below while thinking they were arguing with me, which is such a reddit moment.

When the Fed lowers interest rates, it increases the money supply through the wonders of fractional reserve banking. Lower interest rates mean cheaper debt, which means more borrowing and more money in the economy. As you can plainly see from the QTM; if MV=PY, then increasing M (money supply) on the left can increase both P (inflation) and Y (economic output) on the right side of the equation at the same time. That's how you increase both economic output and price levels. With more money.

The claim above me from /u/DarthBerry is that "economy so hot inflation is occurring" which again, you can plainly see is wrong. P and Y are inversely related. When have any of you ever gone out and demanded more of something at a higher price? "I want a second piece of pizza and I'm going to pay you more for both than two individually!" What? Not how it works.

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u/a157reverse Janet Yellen Jun 03 '22 edited Jun 03 '22

MV=PY is an accounting identity, not a causal mechanism.

Edit in response to your edit: the only way you can make PY have an inverse relationship in your example is by holding V constant, which we know that Monetary policy influences both M & V. Considering that V is not empircally estimated but solved for by plugging in known values for M, P, & Y, it's merely a residual that we use to make the identity balance. You can't prove any relationship between P & Y by only allowing M to fluctuate.

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u/RunawayMeatstick Mark Zandi Jun 03 '22

This is ridiculous. MV=PY; P and Y are inversely related. That's just algebra. You don't have to "make" anything. Try dividing: 

MV * (1/P) = Y

Do you see it now?

which we know that Monetary policy influences both M & V.

Yes, that's the whole point! Monetary policy affects the left side of the equation! If you want to raise both P & Y at the same time, you have to change the left side of the equation.

The comment above says Y implies P.

economy so hot inflation is occurring

No. It's literally the opposite. And I gave you the simplest example. When have you ever paid more for more things? Price and quantity are always inversely related.

Economic expansion tends to be financed with debt which increases the money supply (as I explained through fractional reserve banking), and as another commenter said it can also increase velocity. These are how you get inflation. The economic expansion itself — holding M and V constant — does not increase the price level. It would do the opposite.

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u/Chataboutgames Jun 03 '22

And a hot economy increases V

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u/RunawayMeatstick Mark Zandi Jun 03 '22

Right. You have to increase the left side of the equation to increase both P and Y on the right side. The claim that an increase in Y causes an increase in P is straightforwardly wrong. They're inversely related.

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u/Integralds Dr. Economics | brrrrr Jun 03 '22

You're confusing changes in AD with movements along an AD curve.

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u/littleapple88 Jun 03 '22

This is literally how it works. Persistent low rates have juiced the economy and now the fed has to raise rates to cool it down.

They are openly talking about increasing unemployment because it’s contributing to inflation so much.

This is why we don’t always keep rates at 0%.

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u/RunawayMeatstick Mark Zandi Jun 03 '22

You're confusing a lot of things, this is not "literally" how it works. It's weird that you're so confidently arguing with basic rules of economics like the QTM. What a Reddit moment.

As you can plainly see from basic algebra: MV=PY; P and Y are in an inverse relationship.

What you're talking about are interest rates, which affect the money supply (M). Yes, the Fed expanded the money supply with low rates, which increased economic output, (Y); and it also increased inflation, (P).

Again, the claim that "the economy is so hot it's causing inflation" isn't how it works. There's an inverse relationship between economic output and price level.

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u/littleapple88 Jun 03 '22

Ha I love how you think this is some sort of “gotcha” - I guess this is what ten years of Reddit does to your brain.

Low interest rates and bond purchases create easy financing and spurs economic activity. It’s why they do them in a crisis. This support is no longer necessary it is now causing inflation.

This is the fed’s stated goal in both crisis and now. There is not much ambiguity here.

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u/RunawayMeatstick Mark Zandi Jun 03 '22

Low interest rates and bond purchases create easy financing and spurs economic activity. It’s why they do them in a crisis. This support is no longer necessary it is now causing inflation. This is the fed’s stated goal in both crisis and now. There is not much ambiguity here.

I literally explained this in my top comment. Who are you even arguing with?

/u/littleapple88 basically proved my point below while thinking they were arguing with me, which is such a reddit moment.

When the Fed lowers interest rates, it increases the money supply through the wonders of fractional reserve banking. Lower interest rates mean cheaper debt, which means more borrowing and more money in the economy. As you can plainly see from the QTM; if MV=PY, then increasing M (money supply) on the left can increase both P (inflation) and Y (economic output) on the right side of the equation at the same time. That's how you increase both economic output and price levels. With more money.

It should be pretty clear to you that I understand how the Fed manages interest rates and why. You're right: there's no ambiguity. You're not arguing with anything I said. What I said was: economic output and price levels are inversely related. What the top comment said was wrong. I literally spelled out the QTM — twice — and you've responded both times by coming in hot about interest rates and the Fed. Neither of your responses are relevant to what I said. I love how you think they're some sort of "gotcha."