1. catdynamics
  2. the velocity of money

the velocity of money

By catdynamics on March 20, 2009.

here is something that ought to keep you awake screaming in terror

From St Louis Fed (pdf)

i-3470fe577a3a00cc548be2dabe7a5469-page12.jpg

click to embiggen

Aargh!

h/t CR

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So, to put it another way, GDP and the amount of 'actual' money are approaching equivalence, instead of GDP being several times the amount of money available?

And if so, so what?

(honest questions, I promise!)

When velocity drops, people are hoarding cash. Sooner or later that cash will come out of the mattress and be spent, and that eventual rise in velocity is equivalent to an increase in supply. Inflation is therefore basically inevitable. Meanwhile, we have something worse: lack of demand=deflation.

it effectively measures the activity in the economy
as the velocity drops, money is not changing hands

or to quote, it is an expression of people's preference for holding or spending cash

people are not spending
this is what the fed are looking at and panicking
the change in the derivative in later part of '08 is a measure of the credit crunch

hence this week's decision to print a trillion dollars
cause if v=GDP/M and v is theoretically constant, then increasing M will cause an increase in GDP... right?

of course is v is declining and continues to decline then you're screwed