I’m listening to Peter Schiff’s weekly radio broadcast. A caller just asked Peter why he believes price inflation will go up even though money velocity is low - and will likely remain low.
Peter replied with the typical mainstream answer about how velocity is low due to people deleveraging or people buying gov’t bonds and people see no need to spend their money because prices are falling due to liquidation prices. Peter is Austrian. Why didn’t he just say that money velocity is not the determining factor for prices?.. that the whole Friedman quantity theory MV=PY equation is a falicy?
Would such a claim be too far from the mainstream theory for people to accept? Such a claim would be opening up a big can of worms that would be too much to explain?
Is it taboo or not accepted to try to debunk this theory? Is this theory accepted as religion?
Money velocity is a determining factor and Austrians accept that, though some Austrians prefer to call the opposite of velocity “demand to hold money.” So a higher velocity would be lower “demand to hold.” When people deleverage, they’re essentially money by removing some of it out of circulation. For example, if I’m leveraged up 400:1 in the foreign exchange market and I, along with many other investors, begin to deleverage, the money suppy would begin to shrink. In addition, when foreign nations like China and Japan buy our debt, they are artificially reducing the value of their currencies by selling them and buying the USD, thereby strengthening our currency. Lastly, banks have been increasing their reserve rates, thereby severly tampering any attempts by the Fed to increase the money supply.
wait..I thought velocity was still high even in a deep recession. Prices are deflating and assets are being liquidated, but there is still high economic activity. Prices don’t change spontaneously.