Brad DeLong strays dangerously close to mentioning M*V

As most of you know, I have become obsessed with NGDP.  A number of other bloggers such as Bill Woolsey, David Beckworth and Josh Hendrickson have also emphasized the role of falling NGDP in the current recession.  But NGDP is a variable that you don’t see liberals discuss very often.  David had a famous post last year that showed just how sharply NGDP had fallen below trend since mid-2008.  Paul Krugman agreed that the graph was suggestive, but warned that talking about NGDP could lead people to consider some dangerous ideas, such as the quantity equation of exchange:

Here’s my problem. Underlying the focus on nominal demand or GDP is some notion that there’s a quantity equation:


where M is the money supply, V the velocity of money, P the price level, Y real GDP. And of course this always holds true, by definition. But the temptation is to take it as a causal relationship “” to say that real GDP fell because nominal GDP fell, and that this in turn was caused by either a fall in M or a fall in V; and furthermore that any such decline is a failure of monetary policy, because the central bank should have either prevented the fall in M or increased M enough to offset the fall in V.

Thus I was surprised to see not one but two liberal bloggers (Brad DeLong and Matt Yglesias) give big play to the same sort of graph that Beckworth and Woolsey often display on their blogs.  Let’s hope Brad can avoid the temptation to start talking about M and V.

PS.  Just so I am not misunderstood, there is no “point” to this post.  I agree with the two posts, and don’t have any objections to anything they said.  I’m glad to see more people paying attention to NGDP.  If it becomes a more widely discussed variable then severe nominal shocks such as 2008-09 will be easier for people to identify.  Right now these shocks are obscured by the focus on (flawed) inflation estimates.  As I pointed out in my previous post, inflation is a variable that central banks hide behind when it suits their purposes.  Yglesias also has a recent post on the ECB, which is presiding over an even more dreadful collapse in NGDP.