23 The Enhanced Quantity Equation

In the last chapter we have derived a phenomenological formula for the monetary velocity, which satisfies the empirical values and the conservation law. Now we have to formulate this relationship, however, something universal. The continuity equation can be studied analytically, as we have shown that the quantity equation of the economies

    (23.1)

satisfies the usual conservation laws in field theory. However, the quantity equation in this simple form is of little use. Because the velocity of circulation would be directly Y/K=V, so only the inverse of the capital coefficient. This would mean that the orbital velocity in about a sloping hyperbola, as would correspond to about 1/t, and would constantly go to zero. This is true but, at best, very roughly, since the statistics also has the typical U-shaped course⁴⁴.

Correctly, of course, we must look at various monetary velocities and price levels of different trading volumes and the associated amounts of money, because in its simplest form the quantity equation shows up only economic means. And just the different effect of various currents produce the U-shaped profile of the mean value of V. We have achieved this in the previous formulas by having used the basic equations of special field theory to derive the formula V in which the effects of two trade flows, namely the commercial banking business and the banks own business, are contained already implicit:

    in contrast to   

Mean values are marked in the broad with a hat. The values without a hat are the ones , which in principle can be determined as pure data, even if the practical work for it can be very high. Thus, the amended quantity equation is:

    (23.2)

in which must be i and j not equal⁴⁵ in general. Strictly speaking, one would thus have to compute over the entire economic range⁴⁶, considering all specific price levels and the associated cash flows without any exception⁴⁷. The continuity equation then could be written complete as. For an analytical study, we have to take the sources and sinks that are suitable to the most important groups. The special problem lies in the importance of investment banking, whose share of the banking business as time increases sharply and eventually predominates. This fact has to be mentioned at least in a moderately advanced form of balance equation:

    (23.4)

with and     (23.5),

i.e., we split both the capital stock and the trading volume into their specific parts of its real economy and its investment shares. We can slightly reduce the number of unknowns, by exploiting of the relative proportion of the real business at the left side. On the right side we can assume that the average price of a financial product differ by a factorfrom the average price of goods in the real economy. So that we can write

    (23.6).

It follows after some algebra for the real price level of the expression:

with     (23.7).

In particular, there is now given in the normal state forand (ie higher importance of GDP and moderate prices of financial products) the usual situation that the real price level is

    (23.8)

and therefore in pre-crisis times

    (23.9)

this is actually an effect of the real economy. But in the later stageand(ie high importance of the banking self-business and high prices of financial products) we come to the strange situation that the real price level

    (23.10)

then the price-level is mainly dependent on .the investment activity in the banking self.-business. This means that the prices of goods and services then is determined not by their trading volumes and related supply and demand, but by trading capital. Thus the accumulated capital needs (of the real economy plus the return requirements of the financial economy) determines the real price level. This affect is mainly deflationary, because gets high in this situation. This results from the fact, that the entire economy is then in a shortage of potential returns, and so one has to use every possibility. to get any returns on investment. In the last stage finallyandholds (ie, high importance of the banking self-business, but now junk prices of financial products), and here we get the curious situation that the real price level

    (23.11)

is determined by the cash flows of investment banking but the real trade volumes of the real economy. Since at the end of development very high monetary flowsfaces low and even declining real trade volume, that may lead then to a harsh increase in real price levels. At the latest with the onset of refusal⁴⁸ one trade, while simultaneously urging the owners of capital for real valuable assets, so here threatens a hyperinflation.