| Letters
to the editor from this week's Chronicle
No. 280 - 9/7/2020 Finally, a return to the MV = PO mentioned back two RNR's. "Monetarists" economists use this equation regularly back to its originator Milton Friedman who coined the term "Helicopter Money" to describe large amounts of money dumped into an economy. He also served as an economic advisor to Ronald Reagan when he became president in the 1980's. Friedman's theory is well accepted, and has stood the test of time in forecasting inflation. So a quick look at it will help understand the impact of our current policy, dumping TRILLIONS of dollars recently into circulation in the fight against the Corona virus. The equation is simple! The "M" represents the amount of money in circulation, while the "V", velocity, represents the number of times that money is spent in a year. Example: If a dollar is spent at a grocery store, then again spent by the grocer to his supplier, and finally helps pay for a new car by that supplier at the end of the year, the "V" is 3. It is easy to see that the total amount of money spent that year would be M x V, or MV = $3000. On the equation's right side, the "P" is the average price level of the goods sold that year. The "O" represents the output of the productive capacity of that economy. It is easy to see that the output level "O" will effect the price "P." A simple example: A total crop failure in a year would create a shortage, and would drive the price "P" significantly higher! Groceries! Friedman reasoned that increased MV on the left side, with more money "M" in circulation, and a stable and high velocity, "V" in a normal economy, means more purchasing power for the goods produced "O." Thus more pressure on prices, the "P!" INFLATION! Now take a look at an application of that equation in our Corona driven economy, and the attempt to combat it. Repeatedly we are told that around $6 TRILLION dollars have been dumped into our economy, by one of several methods, very low interest rates encouraging debt, grants to people, banks and companies, etc. Also a current battle in Congress right now over another proposed $3 TRILLION bailout by the House of Representatives is going on! (At this time remember that it takes 1000 millions to make a billion, and 1000 billions to get one trillion! Our debt? 26 trillion! At one time a MILLION dollars was a lot of money!) What can we expect applying the MV = PO theory and the trillions of dollars dumped in our economy, Friedman's Helicopter money? Huge increases in prices, "P", or INFLATION! That increase is here but quite modest yet! Why? Especially since the "Lock down" has significantly reduced the "O" in our economy! Many factories have reduced or cancelled production for several weeks.. Just last week we were told that car manufacturers are far behind normal production figures because of that lock down. Why then have prices not sky rocketed yet? Simple! Fear of the future and unsettled conditions have driven the spending of money, the "v". the velocity towards zero! In news releases last week we were told that consumers are cutting corners, purchasing older cars when needed rather than new ones, or are holding on to their incomes in one way or another. Sudden interest in valuable metals like gold and silver has driven gold prices to new record highs, and the price of silver jumped suddenly from a base of $17/ounce to a new lever around $27, touching briefly $30! Predictions of $75 to $100 silver and as much as $5000 for gold are frequently found in newsletters, though one bank has claimed silver could drop to $2 an ounce in a depression! Personally, I predict $100/ oz silver IF no depression! Jake Wren
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