Velocity of Money Picks Up: Inflation Coming? Stagflation? How About Deflation?
Velocity of money is defined as (prices * transactions) / (money supply). Economists substitute GDP for (prices * transactions).
This tweet caught my eye today.
Velocity of Money has increased for third quarter in a row after a long steady decline, strong evidence that inflation is heading higher. Given weak economy and tighter monetary policy, based on the data we have today, we are clearly entering a period of #STAGFLATION imho.
I suspect that opinion represents the majority view, but does it make any sense?
Let’s investigate with a series of charts.
Velocity of Money vs. CPI
Velocity of Money vs. CPI (Percent Change From Year Ago)
The above chart is particularly amusing. There are periods of correlation, inverse correlation, and periods of major random meanderings of velocity while the CPI does nothing at all.
Velocity vs GDP
Since 1998, the year-over-year trend in velocity has strongly correlated with the year-over-year trend in GDP. In the stagflationary 1970s Velocity and GDP were often inversely correlated.
Velocity “Magic”, Tax Receipts, and GDP
I have written about velocity several times previously. Please consider some snips from Velocity “Magic”, Tax Receipts, and GDP.
Velocity Magic
Austrian economist, Frank Shostak, took apart conventional wisdom years ago with his column Is Velocity Like Magic?
“The Mainstream View of Velocity
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 again and again 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.
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