On A Parallel Track

September 30, 2011

Macro-economics is an inexact discipline if we didn’t know that earlier, now we do. The political economy of managing financial crises is even more fraught with uncertainties and unpredictable outcomes. We think we know why the Great Depression was so devastating and why it lasted as long as it did. Banks were allowed to go under; this reduced money supply and credit drastically. Somewhere Irving Fishers identity, MV equals PT, came into play. When money and credit go up, while nominal GDP does go up, the first order impact seems to be always on prices and inflation and then on real economic activity. When money and credit go down, unfortunately the rigidity seems to work the other way.

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