Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Quantum AI Stocks Investing Priority - 26th Jan 22
Is Everyone Going To Be Right About This Stocks Bear Market?- 26th Jan 22
Stock Market Glass Half Empty or Half Full? - 26th Jan 22
Stock Market Quoted As Saying 'The Reports Of My Demise Are Greatly Exaggerated' - 26th Jan 22
The Synthetic Dividend Option To Generate Profits - 26th Jan 22
The Beginner's Guide to Credit Repair - 26th Jan 22
AI Tech Stocks State Going into the CRASH and Capitalising on the Metaverse - 25th Jan 22
Stock Market Relief Rally, Maybe? - 25th Jan 22
Why Gold’s Latest Rally Is Nothing to Get Excited About - 25th Jan 22
Gold Slides and Rebounds in 2022 - 25th Jan 22
Gold; a stellar picture - 25th Jan 22
CATHY WOOD ARK GARBAGE ARK Funds Heading for 90% STOCK CRASH! - 22nd Jan 22
Gold Is the Belle of the Ball. Will Its Dance Turn Bearish? - 22nd Jan 22
Best Neighborhoods to Buy Real Estate in San Diego - 22nd Jan 22
Stock Market January PANIC AI Tech Stocks Buying Opp - Trend Forecast 2022 - 21st Jan 21
How to Get Rich in the MetaVerse - 20th Jan 21
Should you Buy Payment Disruptor Stocks in 2022? - 20th Jan 21
2022 the Year of Smart devices, Electric Vehicles, and AI Startups - 20th Jan 21
Oil Markets More Animated by Geopolitics, Supply, and Demand - 20th Jan 21
WARNING - AI STOCK MARKET CRASH / BEAR SWITCH TRIGGERED! - 19th Jan 22
Fake It Till You Make It: Will Silver’s Motto Work on Gold? - 19th Jan 22
Crude Oil Smashing Stocks - 19th Jan 22
US Stagflation: The Global Risk of 2022 - 19th Jan 22
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

The Great Myth of Money Velocity

Economics / Economic Theory Jun 13, 2014 - 02:15 PM GMT

By: Dr_Jeff_Lewis

Economics

The missing variable in the great monetary equation is money velocity. We hear it over and over again, "There is no money velocity." And therefore, inflation cannot be a problem and is not. 

Yet, there is a great divergence between the conventional financial media and the public who goes to the supermarket. The financial media swallows whole the official artifice that inflation is near-zero while ‘J.Q. Public’ sees his/her grocery costs, health insurance, etc. rising by leaps and bounds.


Banks are not loaning, money growth is declining, and demographic headwinds are the predominant forces. 

The third central bank in U.S. history is bound and determined to get its inflation. 

And like those that went before, it will get its hyperinflation via the secondary economy it has created from toxic intervention. 

The quantity theory of money states that there is a direct relationship between the quantity of money in an economy and the level of prices of goods and services sold. 

If the amount of money in an economy doubles, price levels also double, causing inflation (the percentage rate at which the level of prices is rising in an economy). The consumer therefore pays twice as much for the same amount of the good or service.

P = M * V / Q

Where the variables are:
P = Price level
M = Money supply
V = Velocity of money, how many times money turns over in a year
Q = Real GNP 

In hyperinflation the money supply is going up, the velocity of money is going up, and the real GNP is going down - all at the same time.  It is a triple whammy that drives prices up really fast.

One of the problems with this equation is that it doesn't measure potential velocity. Nor does it measure the exchange of money that happens in the gray or under the table economy. 

Velocity's cousin (the money supply) is an even more nebulous concept. No one knows the true definition, which should come as no real surprise in a system that is completely free of anchor or fiat. 

Money velocity is an incomplete concept at best. 

Very simply, it's the rate in which money is exchanged between parties in an economy or monetary system. 

Critics believe that the equation ignores the psychological effects in terms of valuating a currency. For example, the incremental addition to the money supply has disproportionate effects on price. In other words, it is not simply a non-linear relationship. 

Hazlitt believed that it is the sum of individuals' value of the currency that determines the velocity of money. And von Mises took this one step further by noting that the measurement has no bearing on purchasing power because it looks at the issue from the perspective of the entire system.

Money is changing hands quickly, but it's a hidden transfer mechanism. 

The rise of equities causes another expansion in velocity, as shares and dividends act as yet another source of transfer mechanism. 

The internet has created a gray market mechanism. Transfers are happening, whether by Craigslist or Bitcoin. Cash is moving through the underground economy. 

The welfare state adds to this. 

Much of the working class has been indirectly encouraged to stay at home. To take cash payment or any opportunity off the grid to keep the guaranteed monthly checks coming. 

And the Fed faces a same dilemma.

Sure, it can manipulate interest rates and equity prices. That works out in the interest of the elites. But there is a natural limit and unpredictable reaction to intervention.

Of course, admitting to direct intervention of monetary assets is a dangerous game. 

It is a massive unregulated world. Not only would already steady demand surge, but it would morph into a violent uprising. 

A secondary economy is developing. It’s underground; and yet is has been here all along. 

Government transfer payments + other government dollars being handed out are not included in wages.

So even if wage growth is flat - there is still velocity. 

A flood of cash - social security checks, food stamps, student loans, and automobile loans are some of the big ones. 

There are more people working "off the books" so they can keep their food stamps and unemployment "compensation". 

It used to be people worked off the books to avoid paying taxes - now they must do it to keep their welfare. 

Fixation on money velocity serves only in the aftermath. Those who constantly point out this measure as proof that inflation is not alive and well are misguided. Confidence is much like bankruptcy - its loss happens slowly, then all at once.  

For more articles like this, and/or for a breath of fresh silver market reality amidst the stench of denial and technically meaningless short term price obsessed madness, check out http://www.silver-coin-investor.com

By Dr. Jeff Lewis

    Dr. Jeffrey Lewis, in addition to running a busy medical practice, is the editor of Silver-Coin-Investor.com

    Copyright © 2014 Dr. Jeff Lewis- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Dr. Jeff Lewis Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in