GDP, Inflation, QE

back in oct 2012, i have written in this blog about velocity of money while many readers may still struggle on the abstract meaning of it, now in this particular writing, i will visualize it with more clarity but it might not sound right to economists.

some readers should have heard of my arguments and explanation at dinner or lunches and may not need to read further, but you can pass it on to your friends.

gdp stands for gross domestic product, thus it is something serviced or produced less intermediary costs. a more simple way is price x quantity produced/serviced [we will use the term produce hereafter].

so why is money printing so important to usa?

P x Q, what if quantity drops faster than price rises, then you have an economic contraction. a simple example if P=10, Q=100, price goes up 20%, quantity drops 20%, most of you would think that it should even out, it doesnt 12*80=960 which is smaller than 1000 by 4%.

usa is using money printing to fend off the sharp drop in quantity since 2008, prices must rise faster than quantity drops to maintain parity not to mention if you want growth. in the above case, it takes 25% increase in price to get even.

in the us, they have the mentality to lower the cost of debt by not paying for interest, paying back with far less value 10 years down the road. if you know rule of 72/i where i is compound interest rate, value will double in 10 years with i=7 and 7 years with i=10.

why is there no inflation according to measure - because the inflation is focused in food and fuel only, other items are discretionary and would be forced out of the daily budget of layman. if there is no/low demand for say jeans the quantity will drop sharply and any price increase cannot offset the drop in gdp. other factors such as robust economy, a young population which contributes to the high inflation of the 80s just are not there. in fact the aging population and the weak economy contributed to the low inflation environment [of items other than food and fuel].

every time price increases for food and fuel, it squeezes other sectors, the drop in quantity requires faster price increases to get even. this is one reason you see such urgent QE even it is so close to us election.

this is why you see china's economy is not as robust, it could become weaker without intervention. aud is another indicatior of slow chinese economy ahead.

recent oil prices pointed to stagnant or falling demand, but the drop in supply from Saudi subsequently jack up prices, gold also signal very little inflation ahead. cad is a precursor indicator of gold and oil prices, it is also getting nowhere.

go through the thinking above if you want to know the macro view of the global economy.