A paper of scientific weight drew my attention recently. Authored by N.D Van Egmond and B.J.M. De Vries and titled “Dynamics of a sustainable financial-economic system” this study dedicates all the effort in explaining economic processes as parts of a technical machinery. A lot of good founded correlations and formulas explain a system of fixed interdepencies in a technology intensive production system. However there is no connection analyzed between the decision making in the physical economy regarding production/consumption levels and the money flows between the banking sector and the real economy.
At PAGE 11 the equation “p.Y = M.v” (which translates to GDP = Available Money * Money Velocity ) is intentionally discarded as “there are serious doubts about its validity (Werner 2012)”.
This is a major error because it leaves the money flows between banks and the real economy out of the economic analysis.
Well, dear Van Egmond and De Vries, this is why you will never correctly forecast a “crisis” .
Let’s put the afore mentioned formula in a more simpe notation:
GDP = M2 * V
GDP = Gross Domestic Product
M2 = the available money in the physical economy (outside the financial sector)
V = money velocity.
The validity of this formula is never commented in the mainstream media, but it is proved by the practice of the ECB. In the second half of 2014 the ECB started with the effectuation of the TLTRO programme. It injected € 0.4 trillion in a Eurozone economy of € 10 trillion GDP and a money velocity of 1.64. In theory this € 0.4 trillon injection could have resulted in a GDP growth of € 0.656 trillion (6.56% growth for a €10 trillion GDP), calculated as follows: 0.4 * 1,64 = 0.656. Due to other factors as debt repayments, due interest and fees payable to the banks, the result was a growth between 1% and 2% in the Eurozone GDP.
No conformist economist, no mainstream media confront the efficacy of the TLTRO. They always mention the utterly destructive ECB QE as the “benefactor” of this recent GDP development in the Eurozone.
And when another “crisis” will hit, they will lament again: “NO ONE SAW THIS COMING” !!!