Topic: Quantity theory of money and cryptos. (Read 2882 times)

The threat of "GTFO" reminds me a greek proverb: "Peismose o papas kai ekopse ta arxidia tou". LOL !!

Got it. Thanx.

V = "number of times per year".  Q = "amount of equivalent stuff bought per year".
M = "amount of money units" . P = "amount of money units for a unit of equivalent stuff" (also called price).

It balances:

amount of money units x number of times (it is spend) per year =
amount of money units per unit of equivalent stuff x amount of equivalent stuff traded per year

"unit of equivalent stuff" cancels on the right side, and then on both sides one has money units per year.

There's no reason to have money with a stable value.  That's in itself an erroneous concept.  Because the whole point of a sound money doctrine is that the value of money can change, in response to a changing market condition (in essence, the demand for store of value).

The Quantity Theory of Money
https://www.youtube.com/watch?v=S-6SC1o6R8A

The only thing is that you need a consistent set of quantities.  If you do so, then the formula is tautologically true.
You can apply the formula to M0, M1 or M3, but then you have to define the associated quantities V, Q and P consistently.

In as much as the formula is tautological of course, it doesn't predict anything !

Can somebody help me understand MV = PQ dimensionaly ?!

If V is "speed" than it has to be, say,  $ / sec ?? So what cancels time (seconds in this case) !?!

Forget about the central bank mention You are missing the point entirely. The system can be self-regulating but don't get hung up on money supply, or the MV=PQ identity. Instead, focus on rate of money creation. The self-regulation must express itself in terms of creating more blocks when demand for coin is high and vice versa.

I m not talking about a central bank system. I m talking about a self-regulating, homeostatic "living organism" system.

the quantity is a red herring. Historically, people incorrectly believed that commodity money was valuable because it was scarce hence the accounting identity MV = PQ, or money supply x velocity of money = prices of all goods x quantity of all goods. The problem is the velocity measure is so hard to accurately measure that it essentially becomes a plug value to balance the equation - meaning that M may not influence much.
And in fact, M doesn't really matter - to a degree. At any given point in time there is enough money circulating to satisfy all consumption and investment. If the demand for money increases, interest rates rise to adjust the 'price' of money.
**What matters instead, is the RATE OF MONEY CREATION. The more quickly money is created, the less valuable is. It is a function of time. In crypto terms it's a function of block reward and difficulty.
There can be a coin with 21M, or 100M or infinity ultimate coins, but the rate of unit creation will regulate its day to day price. It is cash flows that matter not the stock of money.

So if you want a coin with stable value, create it to regulate the rate of unit formation. Crypto does already to some degree by adjusting the difficulty given more or less hashing power directed at mining it. But that is kind of a blunt tool. A coin that can nimbly adjust block creation to accomodate demand for those coins - i.e. increase them quickly when they are really wanted and used (lots of transactions) and have them trickle out slowly when there is low demand and low transactions. This, rather than a set 10 or 1 minute interval between blocks.

Central banks kind of do this - they regulate the rate of money creation via interest rates and open market operations.

Oh, yes. It is the "E = mc²" of economics. The formula, tells you, how much money you must print.

The formula can be useful to gain some understanding of how some aspects in an economy interact, but it leaves a lot out, and it does not solve anything.
The parameters can not be measured accurately, and as far as I understand they aren't even defined accurately.
It's not like this is the "E = mc²" of economics...

Onkel Paul

This formula solves the problems of inflation and deflation.

This formula exists only academically and it is too simplified, never solve any problem in reality

M means money in circulation. Any money that is put aside as long term saving is not calculated as M. When people start to save money, M in the formula shrink by magnitudes. Another question is which M you are looking at, M0 and M3 are totally different things

V means money flow speed. I could simply transfer the same dollar a million times per second in high-frequency-trading platform, that does not affect anything in economy

Q is GDP, but is Swiss bonds included in Q? In fact lots of today's financial activities are trading foreign capital goods and they are not counted domestically

P is price level. Because Q should include foreign goods, their price are affected by foreign currency exchange rate

I think they mistakenly read "quantum theory" instead of "quantity theory". I know because it also happened to me at first glance. Interesting.

I would say that it is impossible to create a crypto that is NOT based upon the quantity theory of money

The quantity theory of money is an evidence.  It says that the total amount of X coins that has been spend during period T on things, is equal to the total price (in X coins) of stuff that has been bought with X coins, which is tautologically true.

The amount of coins spend is equal to the amount of coins existing (M), times the average number of times they have been spend during time T (which is obviously equal to the amount of spend coins, by definition of the average V).

The amount of stuff bought is equal to the amount of stuff (Q) times its average price (P).

The quantity theory of money is true for any thing that is traded against stuff at a price.

I'm not Varoufakis.

Hi Vaourofakis. What are you going to do on the 28th when Merkel tells you to pay or GTFO¿?

P is going to be determined by a market; what people are willing to trade for the currency.
V is determined by individual choices, whether one decides to spend or save the currency
M is the only thing that the rules of a cryptocurrency  can control, and through the identity of equation, have an effect on Q.

We are witnessing the theory of Bitcoin in real time.

What quantum operations?

To process quantum operations? I dont think you can do it with binary computer.

We don't want the inflation nor the deflation. We want a self-regulatory system. If you know the three parameters V, P and Q you can calculate the money supply:  M = (PQ) / V

I've been proposing this for years to be added to the Bitcoin mining protocol; although not being an economist, I didn't realize it was an actual theory. The problem is collecting the data statistical analysis. I wouldn't base the security on it, but the value could be denoted on the blockchain not as a measure of very manipulated markets, but actual coins in circulation.

Yes, of course it's possible to base a coin off anything.  And now that you mention it I'm sure someone will.  But it only matters if the coin generates real value.

The proposal makes no sense syntactically

QTM says that prices have a proportional relationship to money supply.

You use the formula to estimate the price based on velocity and supply.  Has nothing to do with how a currency is designed. It has to do with informing monetary policy.

So the proposal is something like creating a new crypto which the amount is based on relative amount of fiat money, right? Hmm. Why do we need that? Wouldn't that defeat the purpose and concept of crypto of going against inflation. So if Fiat is printing more money, in effect the value of that crypto is going down as well. It's like building something new on something which is already flawed.

This statement makes no sense.

Its like saying let's make a spaceship based on theory of relativity

Why you need a quantum computer?

You would need a quantum computer for it to be operation, unless you dont have the resources its kinda pointless.

Is it possible to create a crypto based on the equation of the quantity theory of money MV = PQ?