Quote from: Peter R on March 20, 2014, 03:59:18 PM

The quantity theory of money states that

   M V = P Q, (1)

where M = money supply, V = money velocity, P = price level, Q = real output (goods, service, etc). I think the vast majority of economists agree with this equation, although their opinion may differ on how it should be used.

It is common to associate a growing economy with growing real output, Q (i.e., more goods being produced, more services being used, etc.). If you re-arrange Eq. (1) to solve for real output, Q, you get

   Q = M V / P .

So real output, Q, can grow three different ways (or more properly, it has 3 degrees of freedom):

   1. Money supply, M, can increase (what you said).
   2. Money velocity, V, can increase (e.g., an increase in the rate that bitcoin-days are destroyed)
   3. Price level, P, can decrease (the feared deflationary spiral).

What I wrote above can be understood as fact. Now let's talk mythology. (Myths can be useful as they align peoples' views, permitting communication from a common frame of reference. However, it is important to question from time-to-time whether our shared myths are still useful).

Presently, we operate under a myth that "deflation is bad." This means that if we want to increase real output, Q, we must rule out Option #3:

   1. Money supply, M, can increase.
   2. Money velocity, V, can increase.
   ~~3. Price level, P, can decrease.~~ NOT ALLOWED DUE TO OUR SHARED MYTHS

According to our mythology, we must choose #1 or #2. So the Fed lowers interest rates to encourage spending (increase V) and buys assets to increase its balance sheet (increase M).

I would argue that focusing on #1 and #2 tend to increase output, but the increase is mostly garbage output, not real and useful output. Manipulating #1 and #2 cause us to exploit our natural resources at a faster rate but provides less real and useful output than if the economy was left to its own devices, also leaving less resources available for our children. But this is a subject for another longer post.