JKH likes this line in Keen’s response to Krugman:
The endogenous increase in the stock of money caused by the banking sector creating new money is a far larger determinant of changes in aggregate demand than changes in the velocity of an unchanging stock of money.
It struck me as an empirical question: how do those changes compare in magnitude? I didn’t know offhand.
Let’s start with MZM (money of zero maturity, the broadest definition of money), and GDP:
If money supply was unchanged — no new net lending/borrowing — but the musical chairs/logrolling game sped up so money turnover increased by 5%, because people were more optimistic — ready to take chances, consume now while worrying less about later, invest in new housing and productive capacity, etc. (“animal spirits”) — that would add $.7 trillion to aggregate demand. (5% is quite a GDP jump given no new net lending…)
Now lets look at annual net borrowing/lending — annual change in debt outstanding for households and nonfinancial firms:
Plus $1.6 trillion, to minus $.4 trillion. We’re looking at magnitudes far beyond what we could reasonably expect from pure animal-spirit-driven velocity changes.
Now it’s true that much of that lending/retiring might not translate directly into purchases/production/consumption of real goods. Much of it might (does) leak into changes in financial asset prices. (Keen is keenly aware of this. It’s pure Fisher/Minsky.) Yes, that portion could affect real-good transaction volumes via a second-order wealth effect, but the magnitude of that effect is unclear.
But it seems from the magnitudes that Keen’s statement is probably correct: changes in borrowing and de-borrowing have a lot more potential effect on aggregate demand, at least, than changes in velocity.
* Note that this does not include spending on intermediate goods — those that are turned into final goods within the accounting period — or used stuff. Adding these into total spending when calculating velocity might yield interesting insights. See Nick Rowe, Macroeconomics and the Celestial Emporium of Benevolent Knowledge.
Cross-posted at Asymptosis.