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Money Velocity and Prices

October 21, 2021

MONEY VELOCITY AND PRICES

The yearly growth rate of US AMS jumped to almost 80% by February 2021 (see chart). Given such massive increase in money supply, it is tempting to suggest that this lays the foundation for an explosive increase in the annual growth of prices of goods and services sometime in the future

Some experts are of the view that what matters for increases in the momentum of prices is not just increases in money supply but also the velocity of money – or how fast money circulates. The velocity of AMS fell to 2.4 in June this year from 6.8 in January 2008. On this way of thinking, a decline in money velocity is going to offset the strong increase in money supply. Hence, the effect on the momentum of prices of goods is not going to be that dramatic. What is the rationale behind all this?

Popular view of what velocity is

According to popular thinking, the idea of velocity is straightforward.  It is held that over any interval of time, such as a year, a given amount of money can be used repeatedly to finance people’s purchases of goods and services.

The money one person spends for goods and services at any given moment, can be used later by the recipient of that money to purchase yet other goods and services.  For example, during a year a particular ten-dollar bill used as following: a baker John pays the ten-dollars to a tomato farmer George. The tomato farmer uses the ten-dollar bill to buy potatoes from Bob who uses the ten-dollar bill to buy sugar from Tom. The ten-dollar here served in three transactions. This means that the ten-dollar bill was used three times during the year, its velocity is therefore three.

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A crisis of affordability

September 30, 2021

A crisis of affordability

Western capitalist economies don’t really do shortages.  There are a few stand alone exceptions such as a music festival or a sporting event, where demand so outstrips supply that queues form.  But for the most part – as we saw last week with the eye-watering rise in wholesale gas prices – when something is in short supply the price increases; and when the price increases enough, the queues disappear.

In economics, this is the difference between demand and desire.  I might, for example, desire a new sports car or a country mansion.  But since I do not have anything like the discretionary income to buy these things, I do not contribute to the economic demand for them.  And unless someone is going to offer them for sale at a ridiculously low price, I doubt that we are going to see queues forming any time soon.  As Tom Chivers at UnHerd puts it:

“Over the long run, the market normally solves coordination problems like this, reasonably effectively. If lots of people want some resource, then the people selling that resource realise they can make more money if they raise the price. At the higher price, fewer people are willing to buy it, but the seller makes more money per unit sold. And, in theory, they can keep raising the price until the lost sales start to outweigh the gain per unit.”

When we witness queues piling up outside filling stations across the UK then, we might be correct in assuming that something – or most likely some things – are being done to artificially generate a shortage where none previously existed…

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Interest Rates Need to Tell the Truth

September 7, 2018

INTEREST RATES NEED TO TELL THE TRUTH

In the middle of July 2018, President Donald Trump said in an interview that he was “not happy” with the Federal Reserve nudging up interest rates and threatening economic growth in the United States. At the recent Jackson Hole, Wyoming, meeting of global central bank leaders, the Federal Reserve chair, Jerome (“Jay”) Powell, said the Fed board would continue to act independently of politics and move interest rates up to ensure a stable economy with limited price inflation.

Lost in the exchange was one simple question: should it be the business of any central bank to be targeting or setting interest rates, or should this be the business of the market forces of supply and demand, as with any other price in the economy?

Market Prices Coordinate Supply and Demand

Let’s recall what it is that market-based prices are supposed to do. First, they are meant to bring the two sides of any market into coordinated balance — that is, to bring the buying plans and desires of willing demanders into balance with the producing and selling plans and desires of willing suppliers.

When a price is too high, it means that the amounts of a good that producers are offering on the market are too high for the buyers to be willing and able to purchase all that is being supplied. Facing a surplus of unsold inventories in excess of any planned levels, sellers competitively reduce the price of the good to entice demanders to purchase more.

If the price is too low, it means that the amounts of any good that producers find profitable to offer on the market are less than the quantities that interested and willing buyers would like to purchase. This shortage of a good tends to bring about a competitive bidding up of the price to induce sellers to produce and market more of it.

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Does Subjective Valuation Mean Arbitrary Valuation?

June 5, 2018

DOES SUBJECTIVE VALUATION MEAN ARBITRARY VALUATION?

Why do individuals pay much higher prices for some goods versus other goods? The common reply to this is the law of supply and demand.

However, what is behind this law? To provide an answer to this question economists refer to the law of diminishing marginal utility.

Mainstream economics explains the law of diminishing marginal utility in terms of the satisfaction that one derives from consuming a particular good.

For instance, an individual may derive vast satisfaction from consuming one cone of ice cream.

However, the satisfaction he will derive from consuming a second cone might also be big but not as big as the satisfaction derived from the first cone.

The satisfaction from the consumption of a third cone is likely to diminish further, and so on.[1]

From this, mainstream economics concludes that the more of any good we consume in a given period, the less satisfaction, or utility, we derive out of each additional, or marginal, unit.

It is also established that because the marginal utility of a good declines as we consume more and more of it, the price that we are willing to pay per unit of the good also declines.

Utility in this way of thinking is presented as a certain quantity that increases at a diminishing rate as one consumes more of a particular good. Utility is regarded as a feeling of satisfaction or enjoyment derived from buying or using goods and services.

According to the mainstream way of thinking, an individual’s utility scale is wired in his head. This scale determines for the individual whether he will purchase a particular good. The valuation scale is given and there is no explanation on how it was established.

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Fed Warns Inflation Has Arrived: Philadelphia, New York Fed Prices Paid Soar

February 15, 2018

Fed Warns Inflation Has Arrived: Philadelphia, New York Fed Prices Paid Soar

Just in case the economic data appeared to be coming in as too hot in recent days, today’s two key regional Fed manufacturing indicators sent conflicting signals, with the New York Fed survey sliding from 17.70 to 13.1, and missing expectations of 17.50, while the Philadelphia Fed rose from 22.2 to 25.8, beating exp. of a dip to 21.6

The commentary from both regional Feds was optimistic, although NY conceded a slowdown in January:

Business activity continued to expand in New York State, according to firms responding to the February 2018 Empire State Manufacturing Survey. The headline general business conditions index fell five points to 13.1, suggesting a somewhat slower pace of growth than in January.

The New York internals, however, were good, especially when it comes to labor: number of employees rose to 10.9 vs 3.8, while work hours rose to 4.6 vs 0.8. Meanwhile, inventory fell to 4.9 vs 13.8. Unlike current conditions, optimism rose with six-month general business conditions up to 50.5 vs 48.6. A potential bottleneck was noted in future delivery times at a record high in Feb, up from 10.9 to 15.3

The Philly Fed meanwhile was stronger across the board:

Results from the Manufacturing Business Outlook Survey suggest that the region’s manufacturing sector continues to expand in February. The indexes for general activity, new orders, and employment were all positive this month and increased from their readings last month. Price increases for inputs were more widespread this month, according to the respondents. The survey’s future indexes, reflecting expectations for the next six months, suggest continued optimism.

Here, too, the internals were strong:

  • New orders rose to 24.5 vs 10.1
  • Employment rose to 25.2 vs 16.8
  • Unfilled orders rose to 14.5 vs -1.8
  • Shipments fell to 15.5 vs 30.3
  • Delivery time fell to 4.5 vs 6.1

There were some declines:

  • Inventories fell to -0.9 vs 9.4
  • Prices received fell to 23.9 vs 25.1
  • Average workweek fell to 13.7 vs 16.7

…click on the above link to read the rest of the article…

Supply and Demand in the Gold and Silver Futures Markets

July 28, 2015

Supply and Demand in the Gold and Silver Futures Markets

This article establishes that the price of gold and silver in the futures markets in which cash is the predominant means of settlement is inconsistent with the conditions of supply and demand in the actual physical or current market where physical bullion is bought and sold as opposed to transactions in uncovered paper claims to bullion in the futures markets. The supply of bullion in the futures markets is increased by printing uncovered contracts representing claims to gold. This artificial, indeed fraudulent, increase in the supply of paper bullion contracts drives down the price in the futures market despite high demand for bullion in the physical market and constrained supply. We will demonstrate with economic analysis and empirical evidence that the bear market in bullion is an artificial creation.

The law of supply and demand is the basis of economics. Yet the price of gold and silver in the Comex futures market, where paper contracts representing 100 troy ounces of gold or 5,000 ounces of silver are traded, is inconsistent with the actual supply and demand conditions in the physical market for bullion. For four years the price of bullion has been falling in the futures market despite rising demand for possession of the physical metal and supply constraints.

We begin with a review of basics. The vertical axis measures price. The horizontal axis measures quantity. Demand curves slope down to the right, the quantity demanded increasing as price falls. Supply curves slope upward to the right, the quantity supplied rising with price. The intersection of supply with demand determines price. (Graph 1)

Supply and Demand Graph 1

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Olduvai IV: Courage
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Olduvai II: Exodus
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