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On Inflation, M2, and the Velocity of Money
We often hear that the central banks printing money in order to keep the stock market inflated and broke countries afloat for just a few days longer is nothing to worry about. The reason we are given, is that even though the central banks are pumping trillions into the economy, inflation isn't an issue. And after all, the velocity of money has actually declined.
That's the message from the "smart" people anyway.
This chart shows that as M2 grows (Red), so does inflation ie: CPI (Green) - yes, this is the government's calculation, we'll leave it there for this chart's purpose. Also of note is the monetary base without the banking ponzi scheme of fractional reserve banking (Blue).
So as you can see, inflation actually follows M2 growth, even as the velocity of money (below) declines. Don't be fooled by those who tell you that printing money isn't causing inflation, because it is doing just that each and every day.
There are those who believe that velocity of money is a product of fast growing inflation (not a cause). Inflation has been rising consistently with the growth in money supply, but the velocity of money has declined. You can imagine what happens once velocity of money actually starts to turn (hint: something ZH has been warning about for years).
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Printing money doesn't cause "inflation", it IS inflation. Rising prices are merely a symptom...
A classic case of causing confusion by altering the meaning of words.
Anyone have statistics from the U.S. Bureau of Engraving and Printing? If we wish to be EXACT about all of this then They are the ONLY ones who can PRINT money.
I agree with your basic statement, which can be readily tested by asking whether inflation causes more money to be printed. (the correct response would be that it doesn't)
There's chalkboard stuff and then there's the real world... in the real world things take on a bit more of a blurr.
We KNOW that there's number-manipulation going on, that it tends to involve the statement of valuation, and that because it's the banks that are doing it it results in direct alteration of credit, and credit "creates" money out of thin air. Only... the banks aren't expanding credit. They're getting more "numbers" (which we tend to call "money"), yet it appears it's going in to a hole (only visible on the books).
All of this can be made more simple (get away from the chalkboard and in to reality) by asking whether something that we tend to "need" (not toys from "wants") is harder or easier to obtain. "Harder" or "easier" being mapped in our economic structure as "less affordable" or "more affordable."
The "classical/chalkboard/textbook" stuff has been pitched out the window. We're operating in a totally different reality now :-() I don't believe that the Genie can be put back in the bottle (without the bottle, and likely all of us, being wiped out in the process).
Most "printed" money today isn't really printed on paper. It is created electronically. Keystroke money. You wouldn't be allowed to have billions of dollars in printed notes anyway. Anything over the reporting threshholds is all electronic.
...and your brilliant statement means WHAT towards the author's story....?
Not a clever one are you...
Buy and hold Phizz.
Its the only defence.
Quinvarius wrote:
If you increase the money supply, velocity always drops.
I can see some logic there, with many more dollars available than there are people to sppend them.
How did velocity increase between 1985 and 2000?
Did the money supply reduce, or is this a more true measure of active trading between people?
Don Levit
What I am saying is that if you double or triple the money supply very fast, as we did, the first outcome in the velocity equation is that velocity is reduced by 1/2 or 2/3.
i always thought this was a useful discussion. yes the credit the fed adds to the system (non money), isn't flowing into the real economy. if velocity starts to pick up then the fed withdraws support. the argument goes thus, money flows like either electricity, or water. (EE grads know this). and money to the Fed is just bytes on a hard drive, or electricity stored for future use. but is it really a store of electricity? electricity is like water when it flows, but unlike water in that it has no volume. economists believe that when the economy does turn up, there will be no need for the Fed to mop up the excess liquidity, they simply adjust the source of the flow.
the real issue here is not when velocity turns up. the real issue is what happens when velocity goes to zero. you can abuse the real economy is favor of the asset economy, until the participants in the real economy boycott the currency (through barter and cash hoarding). [the theoretical connundrum, goes thus, when they (the monetary leadership) has freed itself from the burden of physical cash - the obligation to raise capital, and capital is not cash- and the need to have collateral - they print collateral on hard drives - then the cash economy withers and dies, and the real market participants no longer use cash to settle their transactions.. like in the old days you might giv e a doctor a chicken for his services]
when velocity goes to zero, (and there is no way for them to stop it from going to zero except by removing money from the system, real money!!) when the Fed starts burning cash, the game is over, then its inflate or die.
i the meantime there may be fits and starts, the Fed parks money in MM accounts, and they will sweep that up from time to time to adjust the flow, and confuse everyone that maybe something right and good is happening. The Japanese have done this for decades, we are them. except for the blown up nukie power plants.
zero velocity, nothing flows, economic end game.
The faster they print, the faster velocity will sink. You can't look at velocity without understanding how it is computed. When money is being printed this fast, velocity will always go down. It can go negative. But it could only mean they printed too much money. Quantity is used in the computation.
Velocity is just nominal GDP divided by the money supply, or more precisely V(MX) = GDP / MX where MX is either MB (monetary base), M1, M2, MZM, etc. In other words there is a different velocity for every different monetary aggregate measurement.
Velocity can't go negative since both nominal GDP and MX are positive.
You wrote,
"When money is being printed this fast, velocity will always go down. It can go negative."
i think you're confusing hard currency [printing]with the Feds non-currency operations. the fed can add 'collateral' or reserves to the system, if these additional reserves aren't loaned out no new money is printed. the reason M2 is parabolic is [no proof of this, except the Japan analogy] is that they are putting notional cash in MM accounts. remember how non-Treasury derived MM's fell below NAV during the crash, this is a form of immunization, a way of printing money without printing money. it also allows them to make the cramdown on interest rates across the board in all forms of paper, notes and bills. [who would buy a treasury MM if a non-treasury MM was paying a percentage point more? non Treasury MM accounts are now FDIC?]
you are right {by reason of analogy, that printing money (or in this case non money, causes velocity to drop, but removing non money won't influence velocity}, because the money does not get into the economy when its withdrawn. economics is a form of assymetric warfare, the Fed can add all reserves lower money velocity, (which was falling anyway due to economic contraction) but they can't withdraw the reserves and raise velocity because the money was never there...the only solution at that point is to remove hard currency from the system, which is inflationary, but would increase velcolity and economic activity.
MM accounts were only FDIC for 1 year, and that is now strictly illegal. That ship has flown. If you want a Gub'mint guarantee on anything up to 250K, it must be in a real bank. If you want a Gub'mint guarantee on anything over 250K, you must use Treasury Direct.
I am looking strictly at the math used to compute velocity. Money supply is always the denominator in the equation. So when you increase money supply in a very short amount of time, velocity always shrinks because you are dividing a bigger number into one that most likely didn't immediately change.
The flaw in your formula is that you assume that the quantity of money is only what the FED has pumped into the system. Becuase the currency is based on debt, you have to use total debt (M3) as the measurement for quantity of money. The FED has pumped up its balance sheet, but not enough to keep total credit from falling. Total credit (money) has been stagnant or in decline because it is shrinking through pay downs and defaults faster than the FED has been printing. Furthermore, much of the defaults are off the books (due to accounting gimmicks) so it has actually declined more than reported.
No. I am correct. The formula is no secret. It is basic math that dividing by a bigger number yields a smaller answer. There is nothing worth debating.
I'm not disputing your formula, I'm disputing how you came up with one of your variables.
Velocity is not really dropping. There is a lie in the math of velocity. Ever wonder how they even measure it?
If you increase the money supply, using the math they use to calculate velocity, VELOCITY ALWAYS DROPS. That chart of velocity will always look bad because within it is a base assumption that the quantity is not affecting the outcome. All that chart says is that we printed WAY TOO MUCH money. It is a chart of latent inflation, not spending. Every time they go on a printing binge, velocity will drop. It is a completely useless measure when they are dropping money from helicopters.
http://en.wikipedia.org/wiki/Velocity_of_money
Always question the math the government uses.
If you want the true velocity in year 2000 dollars, you must multiply the current reading by the percentage increase in the money supply since the year 2000. So, a reading of 1.6 becomes a year 2000 equivalent 4. And if you check this chart, you sill see it covers a range of about .5. So the real comparative number is about a full monitor screen above where it is showing.
Then the question would be how you explain the mid-nineties? We saw a rapid expansion of GDP/GNP and the Money Supply during that period, but the Velocity went nearly parabolic. What you are saying does not accurately describe what I am seeing on that chart.
Also, I went and looked at the math, the only thing I see wrong with it is that it doesn't define the sectors involved and it's a purely aggregate measurement. That tells me that they are using it to meter Inflation, rather than basing their Inflation measure on the money supply itself, which is a ridiculous notion.
This would make a great ZH article.
<clapping and nodding> In the wikipedia article you can read at the bottom Ludwig von Mises's criticism - written in a bit stuffy way, as usual - that ties in with the psychological aspect of money.
reminds me the movies where someone inherits one billion but only if they are able to spend ten millions in one day...
it's difficult to force velocity, the same way that your bathtub drain takes time to develop a good flow out, usually with a swirl...
In Summary.
"Don't be fooled by those who tell you that printing money isn't causing inflation, because it is doing just that each and every day."
Explains why my dark chocolate candy is up 100%? Fruits 124%? Cereals...veggies...milk...eggs...and so on....
Loss of consumer purchasing power is painful.
http://www.doctorhousingbubble.com/summer-buying-low-interest-rates-cost...
Pricenton school of economics and finance should be closed if this clown show was a professor there.
You can lead a horse to water...
...but you can't make it think?
....but you cant make it buy GOLD!
There's an article on Yahoo, JUST TODAY, that proposes that PERHAPS all the looming/pending forclosures may have a negative effect on housing prices!!!
DUH, Ya think?
Gold will eventually be THE only resonable safe haven. Once the muppets come to their senses....or, at least see the obvious WHILE it's happening.
Treasuries LOSE you money, EU contracting, China contracting, US unemployment worsening, inflation growing.....gold is NOT just a "commodity".
http://finance.yahoo.com/blogs/daily-ticker/flood-foreclosures-could-cause-home-prices-drop-20-151541166.html;_ylt=ApBvhfYL7y8M8DxWuFCDju8HuodG;_ylu=X3oDMTN0NTZ2cW40BG1pdANTZWN0aW9uIExpc3QEcGtnAzczY2RiZmQ2LWUzNTEtM2RhNC05MWExLWE0NGJjY2RlYTZkOARwb3MDNQRzZWMDTWVkaWFTZWN0aW9uTGlzdAR2ZXIDNDFjNzgxYjAtZTJmZS0xMWUxLWJmMDctYWMxOTBlNTIzNTcy;_ylg=X3oDMTJuaHY1YXJyBGludGwDdXMEbGFuZwNlbi11cwRwc3RhaWQDMDc4MTQ2MDgtMGI1OC0zYTFlLWIwY2MtYjBiODg1MjcwNWM5BHBzdGNhdANuZXdzBHB0A3N0b3J5cGFnZQ--;_ylv=3
Selling naked shorts will only cause the (precious) metal to travel with greater velocity when it is released from the slingshot. Fill up your tank now because the price will be doubling soon
Monetary velocity does not cause price inflation, money creation does.
http://mises.org/daily/918
Maybe both do/can? I'll read more Mises...
I'd like to learn more about this view, as well. It's a new concept to me.
Can anyone suggest proponents worth a listen?
SR - Please also see:
http://mises.org/daily/2916
Thanks
Read it...Thanks very much.
I'll remember that.
The people with money don't keep it in the U.S. anymore. They take it out as fast as the Bernanke prints it.
Romoney has it all in London's and Israel's Banks. Romoney does not even trust the Swiss.