Thread by @unlearnedhands

Lordy, the quantity theory of money just needs to die already.

On the one hand PQ ~ M is necessarily true, but the way it's presented always implies that it is M that drives P and not the other way around. Wicksell showed that was wrong in 1898 and the case has not improved.

If you never bother to inquire into the mechanism by which M changes, you might believe this; once you discover that M is determined completely by bank loans, and ask what determines the volume of bank credit, it becomes obvious that PQ drives M.

More exactly, the term structure of PQ determines current M: borrowers want more liquidity when they expect to have more liabilities coming to maturity, and in proportion to those expected liabilities.

Bank credit is the tip of a funnel whose wide mouth is commercial credit.

This is what is at the back of the contention that CBs are largely passive and QE is a 'placebo effect' (Mosler): they only correct balance sheet problems caused by bad decisions made by commercial actors and banks about maturity matching. They aren't a prime mover.

CBs do impact the term structure through rate manipulation and can accidentally trigger demand for money that way. But it works backward from how the hard money cranks think it works: rate hikes create liquidity crunches, rate relaxation eases liquidity constraints.

There is a second fallacy that buttresses the inverted causal picture here: conflating purchasing power with exchange value of money, as in the phrase 'the purchasing power of money'. A deadly cliche.

Purchasing power implies *the desire to purchase*. Money not contributing to aggregate demand may as well not exist so far as prices are concerned, whence the 'pushing a rope' dynamic one sees in the example of Japan. Biblical quantities of credit, low inflation.

All of this is a generalized version of the wages-fund theory of labor income levels, with wage rate as P, capital stock as M, and work force size as Q. Long discredited, and yet its big brother shambles on.

It is wrong for exactly the same reasons: confusing the dependent and independent variable (employers enlarge capital stock to meet wage liabilities), neglecting the proportionality between Q and M (more workers make more capital), equivocating consumables with capital, etc.

Anyway, I am really 'bored by, tired of and pissed at' (to invoke Carlin's ghost) the shitty macro takes that continue to creep into my feed despite attempts to shield myself from them, and QTM is at the back of most of them. Wrong, wrong, wrong.

Wicksell knew.

An incidental irony of this is that the Austrian school is one of the main vectors by which this brain disease has propagated, and yet one of its founders (Bohm-Bawerk) provided a key insight as to why it's backward: duration profile of investments determines demand for credit.

Duration is the fundamental thing, whether you want to think of it in terms of 'periods of production' or whatever; prices are always forward-looking.

What drives duration profile, if not monetary policy? That's right: fiscal policy. Especially taxes.

It is always better to pay taxes tomorrow than today. This simple fact and its ramifications accounts for basically all the distortions we see in the direction of long-duration investments, IMO. It's just tax avoidance: we tax on realization instead of on value accrual, QED.

You can't see and understand this as long as you really want to believe the CBs are in charge. They know they aren't. It's the tax code, stupid.