Money is a Veil

First flaw of QTM is that it says money is a veil. But in reality the quantity theory is a veil over money. Money is all important but if we start thinking that money is not important then we can’t understand anything about economy. If money is short then there will be unemployment and if amount of money in economy is larger than what is needed then it may or may not lead to inflation. According to Friedman there should be some optimal level of money in the economy. Now the production of money is free of cost and if money is scarce in the economy then it will generate rents as interest is the rent on use of money. One important thing is that as money is freely producible so it should not have any rents so interest should be zero. If there is interest then it means that money is in short supply and it leads to implication that people who has money can earn money from that. But money should be freely available so people can’t earn money on money. This is what actually Keynes said that interest rate should be lower and it will lead to the destruction of rentier class. This is deliberately hidden in all economic theories ad leads to deception and fraud. Old economists, like Keynes, said that there are two types of production. One is that a person has money and purchase any land or home and rent it out to earn money on it. So, that person is earning money just because of ownership of land but not providing any service to society. And same thing is true for stock market as well. Lot of economists said that people should not earn the money unless they provide any service to society but just owning money or being wealthy is not a service to society. When money is in short supply then wealthy people can take advantage of scarcity of money. Other type of production is to manufacture goods and sell it in market from which other people can have benefit and such production is very useful for economy as it produce for people and also create employment in the economy.

According to the standard QTM, if there is shortfall in quantity then it will fix itself and prices will be reduced but this is not true as shortfall in quantity leads to unemployment and this persist for long time. Another point is that Keynesian theory is not tight to fixing the prices as when money falls then price deflation can occur but it can fail to solve the problem. What is needed is the real wage should fall in order for there to be an increase in output as production will increase due to fall in real wage. Suppose there is general deflation and price/wage ratio remains the same and real wage will remain high at disequilibrium level then again there will not be solution to problem.

In Great Depression the Debt-Deflation cycle occurred which was pointed out by Fisher and later by Mian and Sufi. As some proverb say that ‘people who don’t learn from history are doomed to repeat it. For 50 years after Great Depression, people followed the lessons of history and then they forgot and everything went back to pre-Keynesian economics and Great Financial Crisis happened and reasons were almost same as of Great Depression. Before the Great Depression stock market was booming so everybody wanted to buy stocks and it was encouraged by the people who were wealthy. People were not only investing the money they had but they were also borrowing money to invest in stock market. When the stock market crashed there was lot of debt burden on the people which they had borrowed, gambled with and lost. In Great Depression money supply was contracted by 30% which cause the prices/wages to go down. People who had huge loan couldn’t pay it back due to lower wages and they had to save more and more to repay their debt and it lead to lower consumption and lower aggregate demand. It is vicious cycle as due to decrease in aggregate demand firms will start producing less and lay-off the workers and due to unemployment the aggregate demand fell more. It is famous Paradox of Thrift. The idea was that if prices/wages go down then things will be cheaper and people will demand more but actually what happened in Debt-Deflation cycle was that price/wages goes down and people demand less because their debt is higher. Same is the thesis of Mian and Sufi that due to increase in real value of debt people couldn’t demand more and it was contrary to the standard mechanism. Similar thing was happened in Global Financial Crisis. Because of Debt-Deflation cycle the deflation didn’t bring the economy back in equilibrium as it supposed according to QTM. So, instead of going towards the equilibrium the economy will go away from the equilibrium level. It means instead of solving the problem the price deflation may make problem even worse.