Do you think the speed at which money flows remains the same? Fisher's equations generally assume that the velocity of money flow is constant, But the rate at which we find money flows in financial activity does not seem to be constant, Money flows at different rates throughout the economy, So I wrote a new formula for the flow of money to explain the 2008 financial crisis. Do you think it makes sense?
V=m1/m2/t,
Where m1 is the amount of currency outflow (inflow) of an individual or company, m2 is the asset of an individual or company, and time t.
The formula means that the speed of money that flows through a company or a certain consumer is the expenditure or income of money divided by the assets of that consumer. For example, if you have $10,000 this year and you spend $8,000, then the money you spend is flowing at 0.8 a year. The 2008 financial crisis was an imbalance in the speed of money flows, money moving too fast in financial institutions, So much so that the capital chain breaks there (because the people who bought a house can't pay back, and the lender's money can't flow as fast as the financial institutions)
Money in the economy is not static, it is flowing. Banks and financial institutions flowed so fast, and in 2008, these banks desperately lent money to people who bought houses, That means money flows out of the bank quickly, but the people who borrowed money don't earn enough to pay the loan on time, They pay back the money more slowly than the bank borrowing money. When they reach the critical point, the bank's money can not be provided to the depositors in time, thus causing a bank run. Just like the water flow, some of the water pipe is too big, the water flow is too fast, and the water flow rupture is equivalent to the rupture of Bank of America in 2008. Therefore, the 2008 financial crisis in the United States was caused by the unbalanced rate of money flow. The flow of money was broken and the capital chain was broken. The solution was for the central bank to release water and inject money into the banking system. Of course, getting the Fed to inject money is not the best way to solve the problem, just what has to be done when there is already a financial crisis. Until then, the government should try to keep the rate of money flow balanced, so that the speed of bank loans is roughly equal to the income of those who buy a house, or "equilibrium", so that the flow of money will not break and prevent financial crisis
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Some time ago I wrote a formula for the speed of money flow, but I now feel that that formula is logically unreasonable, I think there's another very simple formula, so simple to upset me. Can you see that this formula is reasonable? Did anyone mention it before? Using human individuals or companies as "nodes", the flow rate of money flowing into this node is:
V=M/t
M is Money flowing out of or into the bank (assuming this "node" is the bank)
The formula means the amount of money flowing into or out of a company or individual at some time. For example, if a bank loans $10 million in a day, then the flow rate of the loan is:
V=10000000/day
A person's monthly salary is $1,000, so the speed of his salary flow is:
V=1000/month
The rate of money flow is calculated as the amount of money flowing in or out of the "node" per unit of time. If a bank, excluding reserves, it has $100 million, in a month, it lent $10 million to the customer who bought a house, assuming 10 people, 1 million each. If each of the ten customers pays $10,000 a month, the total is $100,000. Ignoring interest, there is still $9.9 million, and $9.9 million needs to be made up from other sources. If this bank, someone withdraw 90 million dollars a month,Then its $100 million is just enough.（(Regardless of bank profits and employee salaries) If the first 10 customers who borrow money to buy a house have a person who did not repay that month, then obviously, the bank's working capital is a problem, because some depositors can't get any cash.
Here, propose a "node monetary equilibrium", I don't know if this "equilibrium" has been proposed.
Set at both ends of the node, the inflow and outflow of money are respectively Mg and Mx , the node has money stock is Mc, and the time period is t, then:
Mx/t=(Mg+Mc)/t
Because the time period is the same, so:
Mx=Mg+Mc
Here, Mc is the currency, not including the fixed assets of the node, such as excluding his house, car, etc.（"Node" refers to the individual, company, bank and other subjects that "flow through" the currency.）
The formula means that the money that flows out of the node is equal to the currency that the node originally has and the currency that flows in. For example, if someone had $800 and received a $200 tip, then he had $1,000, and then he bought an iPhone for $1,000.
This is the equilibrium condition of extreme. In fact, there are three cases of the relationship between these three currencies, besides the one above, there are two:
Mx>Mg+Mc
This situation means that the amount of money out from the node is greater than the sum of the original amount of money and the subsequent income of the node. In this case, for example, when the bank borrows too much money and the borrower cannot keep up with the repayment. This condition is equivalent to a human blood loss.
There is also the most common condition:
Mx
The Fischer equation alone is not a useful approach to study modern financial crises. This requires much more complex approaches that also cover the creation of innovative financial products in the run-up to the 2008 financial crisis. There are countless articles on this problem on the internet, see e.g.
https://www.researchgate.net/publication/270007792_Financial_Markets_and_the_Global_Debt_Crisis_Toward_a_New_Architecture_for_A_More_Reliable_Financial_Sector
https://www.researchgate.net/publication/274060279_Risk_Taking_Principal_Agent_Problems_and_Breakdown_of_Corporate_Social_Responsibility_CSR_How_to_Reestablish_Safe-Assets_and_Capital_Funding_for_Social_Security
Hans-Georg Petersen
Thank you, his equation seems somewhat outdated, but my equation is different from Fisher's equation.
Such marginal changes to a single equation can't even come close to capturing the changes and dynamics in modern financial systems.
In the link I posted, the laws of economic activity can be described as "programs", not as mathematical equations. Programs are everywhere, there are economic activities programs, there are psychological programs, computer programs are just one of them.
The basic answer to this most interesting question would seem to be "No". The basic underlying truth that at any point in time the quantity of money in an economy (M, M1, M2, M3, etc) is constantly varying is an indication of this. Money being what it is, i.e. basically a tool for transactions, and transactions always being inextricably linked to the whims, needs, mores, etc of so many individuals and organisations and governments themselves (these also being considered in the context of their "government-autthorised-money issuers (i.e. central banmks or currency boards), well all of these together present the clearest indication of the next-to-impossible-to-measure reality of the quantity of money in an economy. So, in reality, we are always making what may be described as spurious calculation of both quantity and velocity of money. You are right to view Fisher's equation as a sort of "photo-at-a-specific- point-in-time" representation (attempt) of money....money is never static....simplty because the human person is in reality never ever really "static.
Dr. John Consiglio
Dept of Banking and Finance,
The University of Malta.
J.A. Consiglio
Does money flow at the same rate in all parts of the economy? For example, do bank loans and workers' income see money flow just as quickly?
J.A. Consiglio
Fisher's formula seems to refer to the macro monetary speed of the whole economy, which is general, but I think the speed of monetary flow is different in each part of the economy.
I read several books on the complex science, and by summarizing them, I found that they actually proposed a tool to describe the complex science: the program. Of course, the method these books are computer program simulation, but I think here they are wrong, not computer program simulation, but the law of complex science is "program," just is program, not a computer program. Economics is a complex science, so its law should be described by the word "program".
Contrary to popular thinking the velocity of money doesn’t have a life of its own. It is not an independent entity and hence it can’t cause anything. The apparent simplicity of the equation of exchange and its consequent widespread acceptance by mainstream economists has been instrumental in the erroneous assessments of the true state of the economy.
Citation from: https://mises.org/wire/money-supply-and-velocity-money
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=No.
Contrary to most experts, including Bernanke, the more aggressive the Fed's policies are, the worse the economy is going to be. If all that is required to revive the economy is pushing more money, then all third-world economies would be very wealthy by now.
Frank Shostak
Duan Xian Xiang This quote shall complete my contribution.
Stephen I. Ternyik
But my formula is not Fisher's formula. My formula means: the ratio of how much assets to how much money are spent in a certain period of time. I copied the speed formula of the fluid.
Stephen I. Ternyik
For example, if I make $5,000 a month, I have $10,000 in assets, speed is 5,000 / 10,000 = 0.5. This is to compare the speed of money inflows(outflows) in or out of a person or a company (such as a commercial bank). The variable was designed to calculate the outflow of commercial banks, Count this up because I think the 2008 financial crisis was because banks were lending too fast, But the lender's income can not keep up with this speed, thus not paying back the money, causing the financial crisis
Stephen I. Ternyik
Injecting money is certainly not a good idea, because it can cause stagflation. However, when the financial crisis has already occurred, injecting capital is an effective way, although there are sequelae. What I advocate is that without a financial crisis, we often check the speed of bank loans, with the income of borrowers, to prevent the two speeds from falling too far, Prevent the two speeds from falling too far apart. So I wrote this formula.
Velocity = Value of transactions / supply of money
This expression can be summarized as
V = P*T/M
Where V stands for velocity, P stands for average prices, T stands for volume of transactions and M stands for the supply of money.
This expression can be further rearranged by multiplying both sides of the equation by M. This in turn will give the famous equation of exchange
M*V = P*T
This equation states that money times velocity equals the value of transactions. Many economists employ GDP instead of P*T thereby concluding that
M*V = GDP = P*(real GDP)
The equation of exchange appears to offer a wealth of information regarding the state of the economy.
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According to popular thinking the idea of velocity is straightforward. It is held that over any interval of time, such as a year, a given amount of money can be used again and again to finance people's purchases of goods and services. The money one person spends for goods and services at any given moment can be used later by the recipient of that money to purchase yet other goods and services.
Citations from: https://mises.org/wire/money-supply-and-velocity-money
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My argumentation , dear Duan Xian Xiang , is from the viewpoint of
https://www.investopedia.com/articles/economics/09/austrian-school-of-economics.asp
Stephen I. Ternyik
My formula is a new one, which I created myself, and Fisher's formula is another. And I don't think the rate of money circulating calculated by his formula will explain the financial crisis.
Emmanuel V Murray
I changed the definition of the goods flow speed formula, not the definition of the Fisher formula,
Wishing you further success, Duan Xian Xiang , but consider the following :
Money however, cannot change hands without its owner's decision. Implying that it is individuals demand versus supply that determines the value of money.
The velocity in this case, or how fast money changes hands, is the result of individuals exercising their demands. This in turn means that the so called velocity cannot have any input in the setting of the purchasing power of money for it is not an independent entity.
Furthermore as we have seen, velocity is always P*T divided into money M ie P*T/M.
On this Rothbard wrote (Man, Economy, and State p 735)
But it is absurd to dignify any quantity with a place in an equation unless it can be defined independently of the other terms in the equation.
Since V is P*T/M it follows that the equation of exchange is reduced to
M*(P*T)/M = P*T, which is reduced to P*T = P*T, and this is not a very interesting truism. It is like stating that $10=$10 and this tautology conveys no new knowledge of economic facts.
Citation from: https://mises.org/wire/money-supply-and-velocity-money
https://www.investopedia.com/terms/m/murray-n-rothbard.asp
Have commented on your preprint and given my reader response Duan Xian Xiang !
Stephen I. Ternyik
The faster the money flows, the more money becomes. There is only that much money printed on paper（Physical money）, but if it flows faster, more people can have it, which means more money. So, if the financial crisis occurs at this time, because the money flow stops or slows down, it is equivalent to less money, so some people's money is gone, can not be withdrawn from the bank.
The most important thing to remember is that inflation is not an act of God, that inflation is not a catastrophe of the elements or a disease that comes like the plague. Inflation is a policy.
Ludwig Von Mises (2006). “Economic Policy: Thoughts for Today and Tomorrow”, p.72, Ludwig von Mises Institute
There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.
Ludwig Von Mises (1963). “Human action: a treatise on economics”
Some more economic thoughts for you Duan Xian Xiang
Success: stephen
Fisher's equation is MV=PT, and its derivation is credited to an American, Professor Irving Fisher. It states that the money supply (M) multiplied by the velocity of circulation (V) is equal to the number of transactions involving money payments (T) times the average price of each transaction (P).
This was stated in a 1909 article and since then transaction methods have changed radically introducing uncertainties, which if taken cumulatively, result in the destabilization of the notion of concrete values regarding the velocity determinant quantities
Dionysia G. Panagoulia
My formula is a new one, which I created myself, and Fisher's formula is another. And I don't think the rate of money circulating calculated by his formula will explain the financial crisis.
Dionysia G. Panagoulia
Fisher's money flow speed is the same for the whole economy, But my formula is the exact rate of flow in different parts of the economy, and the two are different. Because I think, in different parts of the economy, the rate of money flow is different.
1. By explaining the financial crisis solely by the velocity of money implies that a regulatory approach on the velocity will solve all problems, which is unfounded. It may be a contributing factor but then its extent of contribution must be validated by risk/hazard studies regarding destabilization.
2. You are quite right, but the velocity in Fisher's equation depends on an average quantity (P), and by implication, V is averaged, which places a restriction on its interpretation.
Dionysia G. Panagoulia
I don't know if the velocity of money is the only determinant, but it should be a key factor. In 2008, if America's banks don't crazy lend money to people who buy houses, the financial crisis should not happen. But using the speed of money circulation to explain the Great Depression of 1929 is not quite accurate. Because the Great Depression of 1929 was that the United States produced too many goods, but not so much consumption. Although this can also be seen as too much money flowing to production, it seems to be deliberately explained.
The recent fiscal crisis and high inflation of Sri Lanka is a lesson to the world if Fiscal policy is not handled well.
I think the cause of the financial crisis is actually known by many people, especially by the banks themselves, but they didn't pay any attention to it. The mistake that Bank of America made in 2008 was not timely check the income of people who borrowed to buy a house, that is, not check the speed of their currency flows. If the Bank of America had sent someone out to investigate the income of home buyers, But they don't go to the front line investigation, the reason for this crisis is so simple, but they don't care.
Imilarly, the Great Depression of 1929 was caused by more money invested in production than for consumption (the stock market was hot, the money in the stock market was invested in production, and the money was supposed to be spent) for the same time. Then, of course, no one bought the production. It's really simple, but they don't care.
The simple answer to the question is a loud NO.
Even the word flow, in itself, carries the connotation of slow, fast, controlled, free, and whatever other adjective may be applied to a commodity - money in our case - which is:
- Plentiful,
- Existing in various forms (fiat money, bank money, etc, and now also crypto),
- Handled by different people in different ways (hoarded, saved, spent, invested, etc),
etc, etc.
All of this clearly shows that money flows, and circulation, in any economy are anything but constant. Even the numerical outcomes (M, M1, M2, M3, etc) that the various measuring measures produce from time to time, these clearly show that velocity and circulation of money is anything but constant over any time, and in any country.
Dr. John Consiglio
Dept of Banking & Finance,
The University of Malta.
I myself think the above formula is wrong, so I changed it to V=M / t
https://www.investopedia.com/insights/what-is-the-quantity-theory-of-money/
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