Occasional X: Clueless economists / Money (CXLXXII)

“M= PY/V or PY = MV? You'd think after decades of extremely sophisticated causal econometrics, the most basic correlation isn't causation of all would not keep resurfacing. Money tracks nominal income in every theory, including FTPL, because central banks supply money passively, and demand is proportional to nominal income.” (John Cochrane) The microbrained representative economist has been weak on macroeconomics in general and the Theory of Money in particular. He has never had any idea of the difference between transaction money and money as a store of value. Let's clarify some basics with the summary in table AXEC237d ⇓. Microfoundations are methodologically false. First, a Paradigm Shift is required. Therefore, the elementary production-consumption economy is given with three macroeconomic axioms in lines 1, 2, 3. Under the initial analytical conditions of market-clearing and budget-balancing, this yields the price P in line 5. The price is the dependent variable here. That's a starting condition. Methodologically, the formula in line 5 replaces the silly Supply-Demand-Equilibrium cross. In the initial state, the price is equal to unit wage costs W/R. The workers get the whole product O. The profit Qm for the business sector is zero. The methodological right approach to start with in Monetary Theory is that transaction money is pure fiat money at the Central Bank. Symmetric fiat money is zero at the beginning and the end of a given period; see line 16. It is periodically created out of nothing and returns to nothing. There's no problem here; money is endogenous. If the wage rate W doubles in line 5, the price doubles, and the average quantity of transaction money M doubles in line 16. It is still zero at the period's beginning and end. If tested, this yields a proportionality between price P and the average quantity of transaction money M. However, this is NOT causality. The common cause is the doubling of the wage rate W. However, empirically this correlation seems to be a strong indication that the Quantity Theory holds. If the real variable employment L is doubled, output O in line 2 and wage income Yw in line 1 double. The market-clearing/budget-balancing price P remains unchanged in line 5. The average quantity of transaction money M doubles in line 16. Now, there is no relationship between the price and the average quantity of transaction money. The Quantity Theory fails. That money is created out of nothing and backed by nothing is NOT the critical point of a fiat money system. The point is whether money is injected (i) on the left side of the business sector's national account in the form of wages, or (ii) on the right side in the form of additional nominal demand, i.e., in the form of deficit spending. The case of deficit-spending/money-creation, i.e., increasing consumptive public debt, is equivalent to bringing counterfeit money into circulation, which in real terms amounts to stealing stuff from WeThePeople. National debt is roughly equal to the financial wealth of WeTheOligarchy. Ultimately, most of WeTheOligarchy's financial wealth is printed by the Central Bank. This is not a 'problem', but the defining characteristic of Capitalism. The problem with the Central Bank is NOT that it creates money out of nothing, but that it creates profit out of nothing. If the Central Bank is only allowed to create transaction money to meet the needs of businesses and households, then fiat money is the most economical solution. The problems arise (i) with sectoral balances, and (ii) with illicit money creation. For the axiomatically correct Monetary Theory, see the working paper ⇒ The Dark-Matter Theory of Fiat Money https://t.co/0QSqFFrVUX

— AXEC (@EgmontHandtke) November 10, 2026