The Parallax Brief


Unrepentant Subjectivity on Economics, Politics, Defence, Foreign Policy, and Russia

Crisis Expained: MV=PQ

One of the best ways to understand why fiscal stimulus is of paramount importance if we are to avoid a Great Depression of the Twenty-Tens is that monetary policy has simply run out of room. Interest rates cannot drop below zero, and since the Fed and most major central banks are at, or will soon be at, zero, we need something more if we’re to arrest the decline toward economic oblivion.

A brilliant multi-media presentation from the Guardian (London) provides a hint as to why zero rates are proving ineffective, and ironically, just as the teachings of John Maynard Keynes are reentering the lexicon of politics after a 30 year hiatus, it is an equation beloved of Milton Freidman which provides the key insight.

Click here for the kind layman’s monetary explanation of the crisis I find useful, and why MV=PQ highlights the need for government fiscal intervention.

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