velocity of money and inflation
A dramatic expansion of the U.S. monetary base does NOT automatically count as inflation. If the economy grinds to a near halt – as it did in late 2008 – money stops changing hands So here is the thing. Cash goes in to the banks, but doesn’t come out.Again, remember monetary velocity. This chart shows you the decline in the velocity of money since 1999. And the banks are hoarding cash in part to guard against that fateful day.This is a big reason, your humble editor believes, why the anticipated bank-lending explosion won’t happen. The artificially inflated value of trillions of dollars in residential and commercial real estate assets will fall… legions of tenants, hanging on by the skin of their teeth, will finally go under or be forced out… and the discrepancy between artificial accounting value and true resale value (in some cases “zero”) will be exposed. Many economic commentators ignore the velocity of money as a component of inflation in an effort to invoke fear in their audience. Monetary aggregates are broad measures of how much money exists in an economy at various levels, including currency, deposits, and credit. High money velocity is usually associated with a healthy, expanding economy. The velocity of money is usually measured as a ratio of You also need sufficient monetary velocity to spur “a general and persistent increase in the price of goods and services.” If you don’t get that velocity –- if the money doesn’t move through the system –- there is no reason for prices to rise. It also shows how the expansion of the money supply has not been driving growth. There are differing views among economists as to whether the velocity of money is a useful indicator of the health of an economy or, more specifically, inflationary pressures. Inflation typically results when the providers of goods and services raise their prices because of an increased aggregate demand, which is the demand of all goods and services in an economy. It is negative money… money already spent.Take the average U.S. consumer for example. Think of a very old water heater in a very old house. It zips around like molecules in a heated gas chamber. Since the velocity of money is typically correlated with business cycles, it can also be correlated with key indicators. You don’t get inflation purely from an increase in the money supply. The concept relates the size of economic activity to a given money supply and the speed of money exchange is one of the variables that determine inflation. You also need sufficient monetary Here is another slightly weird example to illustrate the point. For dollars to be dumped on the open market means they (Speaking of “changing hands” –- in countries like Venezuela, where inflation is in the 25% range or higher, the idea is to spend your cash as soon as you get it, on whatever you can buy, for fear that its value will rapidly diminish.
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