Saturday, April 17, 2010

Disproof of the Cash-Inventory Equivalency

In attempting to prove mathematically the cash-inventory equivalency, which has been the focus of this blog for awhile now, I've isolated its fatal flaw.

The cash-inventory equivalency states that the prices of all things for sale will self adjust to be exactly equal to the money supply.

Here is the error: in a healthy economy, inventory gravitates toward zero, not the money supply. The better inventory moves, the less inventory in stock, and the faster production can happen, and the better the profits for the producers.

However, money supply still limits production, meaning it limits what can be charged for what is produced. How it does so, and how this new construct can define the value of a dollar, will be discussed in upcoming posts.

So I don't think all is lost, but before moving on this just needed to be said.

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