In the less than rigorous study of economics that I’ve done in my spare time, I have often come across discussions of velocity of money, and also the money multiplier which is a consequence of fractional banking, but I’ve never seen them combined into something like the “General Theory of Money”.

Until recently. I came across an article by Van R. Hoisington and Lacy H. Hunt, Ph.D. about Fed monetary policy and balance sheet expansion as it relates to the current situation in the US, which in nutshell is liquidity trap, and can we fix deflation and does that mean we will we get inflation(or bubbles, or currency crisis, or interest rate spike, since I believe we have more choices nowadays). But the excerpt here is the first time I’ve seen someone come up with an equation that integrates both variables and allows you to solve for GDP if you can figure out what to plug into the variables. I’ve heard velocity of money is pretty easy to get and I’ve seen Fed charts of that one. But money multiplier I believe is a little tougher. Then they both seem subject to possible time lag error.

So here it goes. Maybe this is old news to everyone else.
==================================
Aggregate demand (AD) is planned expenditures for GDP. As defined by the equation of exchange, GDP equals M2 multiplied by the velocity of money (V). M2 equals the monetary base (MB) multiplied by the money multiplier (m). Professors Brunner and Meltzer proved that m is determined by the currency, time, and Treasury deposit ratios, as well as the excess reserve ratio. The money multiplier moves inversely with the currency, Treasury deposit ratios, and excess reserve ratios and positively with the time deposit ratio. For example, if those ratios rise on balance, then m will decline. By algebraic substitution AD(GDP) = MB*V*m. In our present case, the massive increase in the Fed’s balance sheet has created a sharp surge in excess reserves, and thus m has fallen.
===========================================

So is there any chance they can actually know the necessary variables?

Houhui and Rene, I am not sure the CIC has much firepower to support domestic stock prices. I need to check my old notes, but I think there RMB funding has been fully invested and much of their cash consists of dollars, which they cannot easily sell to the PBoC for domestic use. I would guess that the authorities have other, more flexible ways to support the market.

Simon, Makin’s report is a very interesting one but in my conversations with several much smarter people than me it seems that there may or may not be less here than meets the eye. That is not to say that there aren’t big problems with the data, and certainly there are many cases of disbursements being counted as growth before those disbursements have been economically justified, but from what I understand the jury is still out on his main claims about the inflation of GDP numbers by loan disbursements. I will try to dig up more.

Could not agree more. All we know about macroeconomic data is that whatever is published is rarely useful for policy, and the data used for policy are usually only avaibale with a lag (and difficulty). Then there are sampling and methodological problems, and the more informal or non-cash an economy is the worse tha data.

However the Chinese measure of CDP based on income continues to fascinate me, because of its low and declining employment share. Because of the prevalence of profits in state/state related firms (and the accounting for rural income -an inherently iffy affair in most developing countries and with China’s army of migrant workers whose pay may well be directly or indirectly “non employment”??) The division may be entirely wrong, but still, it is a statistic that is freely available and one would expect a party with a class conflict background to me at least technically careful with such a Dickensian measure. When I was young, the IMF was considered a capitalist tool. This year it took the IMF’s country assessment to criticize this strange development. Sometimes I wonder what the spin doctors in China are trying to achieve. It sould not be too hard to show a slightly less greedy division between the party and the people.

Early-warning signals for critical transitions

Complex dynamical systems, ranging from ecosystems to financial markets and the climate, can have tipping points at which a sudden shift to a contrasting dynamical regime may occur. Although predicting such critical points before they are reached is extremely difficult, work in different scientific fields is now suggesting the existence of generic early-warning signals that may indicate for a wide class of systems if a critical threshold is approaching.

http://www.nature.com/nature/journal/v461/n7260/abs/nature08227.html

I had missed this essay.

That suggests confirmation of my casual source.

Thats dot.com and Enron accounting and evaluation and in Western economies has always resulted in a crash. It also almost assures a sub “1″ money multiplier of the stimulus amount.