** 02-Feb-2020 World View: Velocity of Money
I had an e-mail discussion with someone who is predicting inflation
from the coronavirus problem. I pointed out that people have been
predicting hyperinflation for 20 years, and it never happens because
of plummeting velocity of money that economists are too stupid to
understand. I pointed him to the St Louis Fed graph that I set up
several years ago on the St Louis Fed web site:
https://fred.stlouisfed.org/graph/?cate ... _id=366117
The issue is that it's Macroeconomics 1.01 that inflation is almost
impossible while velocity of money is falling, because the inflation
rate is proportional to the velocity of money.
So this morning I was browsing some other St. Louis Fed pages,
and I came across the following:
> M2 velocity and inflation
> Posted on August 21, 2014
> It is quite common to see arguments that if M2 velocity (the
> nominal GDP/M2 ratio) is low, it must be that inflation is
> high. While M2 velocity is currently at historical lows, inflation
> is clearly not high. Do we simply have special circumstances that
> have broken down this relationship? Is there such a relationship
> in the first place?
>
https://fredblog.stlouisfed.org/2014/08 ... n=fredblog
The blog goes on analyze the situation and to find that these
"arguments" turn out to be wrong. This is why I call economists
stupid. Of course, he has it backwards -- if velocity is low, then
inflation must be low.
What's really incredible is that this blog post appeared almost six
years ago, and it's still there! Is there nobody at the St. Louis Fed
who even understands what the velocity of money is, and what its
significance is?
Well, I did find another blog post that appeared about a week later.
It gives the actual formula and what it means:
> What Does Money Velocity Tell Us about Low Inflation in the U.S.?
> Monday, September 1, 2014
> MV = PQ ...
> According to this view, inflation in the U.S. should have been
> about 31 percent per year between 2008 and 2013, when the money
> supply grew at an average pace of 33 percent per year and output
> grew at an average pace just below 2 percent. Why, then, has
> inflation remained persistently low (below 2 percent) during this
> period?
>
https://www.stlouisfed.org/on-the-econo ... -in-the-us
I don't know if this was meant as a correction to the previous blog
post, but they appeared on different blogs, so it's possible
they weren't.
The graph that I created on the St Louis web site (URL shown above)
several years ago, pastes together two different series, one for
old data and one for new data. The graph also updates itself
automatically as time goes on.
Here's the screen shot that I posted in 2017:
- Velocity of money, 1919 to 2017 (St. Louis Fed Fred Graph
#366117)
The annotations are, of course, mine.
I keep pointing out that most people today are unable to understand
computations using fourth-grade percentages, and that's why they're
completely baffled by what's happening in Iran. So now it's apparent
that economists don't understand elementary things like the velocity
of money. This is what happens when SAT scores have been falling for
decades, and colleges today teach nothing but women's studies and
sociology.
This ties in with the idiotic Socialist proposals being made today.
The proposals are being made by people too stupid to understand even
second grade math, and the so-called "experts" who describe them
didn't actually learn economics, but are taught from the Marx's
Capitalist Manifesto, which is completely useless except to make
Socialism proposals to idiots.
