MV = PQ: The Master Equation of Money

The Equation Explained

MV = PQ is the Equation of Exchange, and it’s always true by definition.

• M = Money supply (how many dollars exist)
• V = Velocity (how many times each dollar is spent per year)
• P = Price level (average price of goods)
• Q = Quantity of goods/services (real economic output)

Left side (MV) = Total spending in the economy
Right side (PQ) = Total value of goods/services sold

These must be equal because every dollar spent is a dollar received.

Why This Matters

Scenario 1: Money Printing Without Productivity

Before: M = $10T, V = 2, Q = $20T → P = 1
Fed prints money: M = $15T (+50%)
If Q stays the same: $15T × 2 = P × $20T
Result: P = 1.5 (50% inflation)

Real world: COVID stimulus. Fed printed trillions, output fell (lockdowns), prices soared.

Scenario 2: Productivity Boom

Before: M = $10T, V = 2, P = 1, Q = $20T
Tech increases productivity: Q = $30T (+50%)
If M stays the same: $10T × 2 = P × $30T
Result: P = 0.67 (33% deflation)

Real world: 1990s tech boom. Massive productivity gains kept inflation low despite growth.

Scenario 3: Velocity Collapse

Before: M = $10T, V = 2, P = 1, Q = $20T
Recession, people hoard cash: V = 1 (50% drop)
If M stays the same: $10T × 1 = P × $20T
Result: P = 0.5 (50% deflation)

Real world: 2008 financial crisis. Velocity collapsed, Fed printed to prevent deflation.

Why Can’t We Just Print Money to Get Rich?

Because printing money increases M, not Q.

If you print money without producing more goods:

• MV goes up (more dollars circulating)
• Q stays the same (same amount of stuff)
• Result: P must rise (prices go up)

You can’t print prosperity. Real wealth comes from Q (actual goods/services), not M (paper money).

Historical examples:

• Weimar Germany (1923): Printed money to pay debts → Hyperinflation (1 trillion marks for a loaf of bread)
• Zimbabwe (2008): Printed money for government spending → 89.7 sextillion % inflation
• Venezuela (2018): Printed money to fund programs → 1,000,000% inflation

What Creates Real Wealth?

Increasing Q (Quantity of goods/services):

• Technology (automation, AI, computers)
• Innovation (new products, better processes)
• Education (skilled workers are more productive)
• Capital investment (tools, machinery, infrastructure)
• Trade (specialization and comparative advantage)

Not printing money.

How to Use This

For Understanding Policy

When Fed announces policy, ask:

1. What happens to M? (Are they printing or shrinking money supply?)
2. What happens to V? (Will people spend more or save more?)
3. What happens to Q? (Is the economy growing or shrinking?)
4. Result for P? (Will we get inflation or deflation?)

For Investment Decisions

Scenario	What’s Happening	Investment Strategy
M↑ faster than Q	Money printing, inflation coming	Buy assets (stocks, real estate, Bitcoin)
M↓ or V↓	Money scarce, deflation risk	Hold cash, buy bonds, wait for opportunities
Q↑ faster than M	Productivity boom	Invest in growth stocks, tech
V↑ (spending increases)	Economic recovery	Buy cyclical stocks, commodities

For Personal Finance

When M is growing fast (inflation):

• Don’t hold cash (loses value)
• Own assets (appreciate with inflation)
• Lock in fixed-rate debt (pay back with cheaper dollars)
• Negotiate raises frequently

When V is falling (recession):

• Build cash reserves (cash is king)
• Wait for buying opportunities
• Focus on recession-proof income

Common Misconceptions

”Printing money helps the economy”

❌ Only if V fell or Q can increase. Otherwise just causes inflation.
✅ Printing money redistributes wealth to those who get it first (Cantillon Effect).

”We need inflation for growth”

❌ Growth comes from Q (productivity), not P (higher prices).
✅ Deflation from productivity gains is good (stuff gets cheaper).

”Deflation is always bad”

❌ Depends on the cause. If from productivity (Q↑), it’s great.
✅ If from money scarcity (M↓ or V↓), it’s bad (debt spiral).

”GDP growth = prosperity”

❌ GDP measures PQ. Could be inflation (P↑) not real growth (Q↑).
✅ Must look at real GDP (adjusted for inflation) to see actual Q.

Deep Dive Resources

Want to go deeper?

• Watch M2 money supply →
• Understand velocity trends →
• See who benefits from printing →
• Learn inflation protection →
• Study historical examples →

Books:

• “The Price of Tomorrow” by Jeff Booth (technology creates deflation)
• “When Money Dies” by Adam Fergusson (Weimar hyperinflation)
• “Economics in One Lesson” by Henry Hazlitt (broken window fallacy)

YouTube:

• Lyn Alden (macroeconomics explained simply)
• Jeff Booth (technology vs. money printing)
• Ray Dalio (How the Economic Machine Works)

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Bottom line: You can print money (M), but you can’t print stuff (Q). Real wealth comes from productivity, not printing presses.