in the definition of velocity there is a denominator, the number of dollars in circulation. The money printing by the federal reserve is NOT circulating. It is being accumulated by the banks and the top 0.01%
That is because the Fed is just a bank. (oversimplified but not far from the truth). QE fills the bank reserves of private banks so those lend out more money. It's only when consumers, companies or the government borrow money that the money actually enters the economy. The zero lower bound means that the Fed cannot drag inflation up because the interest rate cannot be negative but we saw the white house borrow money and that created inflation. The US government should do a little bit of stimulus whenever inflation is below the 2% target, that way the Fed won't have to come up with increasingly stupid ideas. Inflation is at its worst when it is unpredictable. If it's low and we don't know why it is bad. If it is high and we don't know why it is bad. If we had exactly 2% inflation, not more, not less, for all eternity, then we wouldn't have to care about it.
If you look at the chart velocity FOLLOWS inflation. Velocity is whether psychologically people prefer to spend or save. The depression was extended longer because although we had come out of the depression, the economy wasn't doing well because everyone wanted to save the money as oppose to spend it. - velocity
You need to look at both money supply and velocity. On a slightly different note,, what's different now from other periods is the massive global supply chain disruptions that covid has caused.
Came here to say this and hope he sees it. If you could please show Velocity vs Money Supply (/QE) Vs Interest Rates and Taxes on top of inflation and then we might get some more useful data. Money supply doesn't equal inflation either, if no one spends it then prices don't go up. If velocity increases but supply diminishes (Interest/taxes/market correction?) than that could be deflationary as well. Note: Rates being low can have a dual effect, when business can carry cheap debt they can keep prices lower and stay in business longer while working thinner margins. Efficiencies and monopolies can also be deflationary just look at Walmart, Amazon, Dollar General etc. It would be nice to be able to graph the data of some of these growing companies in there as well. Great channel, but this vid needs more data to prove velocity insignificant. Especially Velocity + Supply
Yeah, right, COVID caused supply chain distruptions. Please dont spew such nonsense. Its the decisions of polititans, corporations and central banks that caused them. Not a freaking microbe, that was not even isolated lol
@@michaelk1589 You misread the point I was making. I agree that it was a mistake to shut everything down, but it was Covid that lead to governments to make the decision to shut down their economies (more wordy see?), which ultimately has an enormous impact on inflation.
I recently discovered your channel and i am blown away with your depth of knowledge of the fed and monetary policy, and the ease with which you convey your knowledge
still can. hell, for 40 bucks i need two people to carry boxes full of fresh produce. dairy and meats are horrible for humans and the environment... whole grains / legumes / fruits / veg should be the majority of what humans consume.
CPI v velocity shoukd also takr into acxount money supply. Thougjt experiment, I print a trillion and keep it in my garage. Vekocity 0. No inflation will result. Likewise if the Fed increases reserve requirements your depoait at the bank can't make as much loans as it coukd with a lower reserve requirement. The money that needs to be held reduces that money's velocity.
The banks were supposed to be loaning that money out, but their not. Their receiving free counterfeit money[printing] and they are then buying assets with it. It's a COMPLETE corrupt system, where the people at the front get 99% of the funds for free, then use those funds to purchase assets, which causes their value to increase. They are getting 2 for 0, free money & increased value of assets they purchased with that free money. They will then switch their positions when the market turns and short everything. They drag the public into the market and they get the rugged pulled out from under them. The public gets robbed twice. It ends with asset consolidation at the top and the middle class gets wiped out. This method has been used over and over and over and over and it will continue to be used until the nation revolts or collapses from the massive debt that is created every time the system runs another cycle.
Also the real economic output. And surprise suddenly you are at the quantitative theory of money. Which poster maybe should have checked before posting his stupid video.
I always bought into the money velocity idea until today. Great breakdown of the issue. I love your videos, keep them up, and that is a beautiful coffee mug!
I have always had it pounded into my head that money velocity is a MUST for inflation. You have changed my mind....I learned something new tonight. Thanks!
You can also have a decline in real GDP and/or increas in money supply (printing). Which are both the case. You would expect higher inflation when the economy recovers in 2022, because the MONEY VELOCITY will increase.
It’s real easy - you can have inflation (of cpi) while money velocity decreases, if there’s an inflation of the money supply at the same time. You kind of glossed over this point.. The formula you shared at the beginning holds true, and Yogi’s quote, while clever, is meaningless here.
Still curious/worried about a potential future we're heading in; With covid regulations impacting businesses everywhere, velocity dropped. With businesses doing bad, closing entirely, and all sorts of avenues(cafe's, concerts etc) not running like normal the fact that this happened makes sense. A lot of money was printed in the last year. Iirc roughly 25% of all dollars currently in existence were created this year. That probably has a solid impact on velocity. So... what happens when we get to the point where all regulations are lifted? If "natural" velocity picks up and combines with what we currently have, what would the real consequence be? I see talks regarding hyper inflation. How accurate is this worry?
Great job. You are intelligent and knowledgable about economics, but what clearly comes through is the desire to help others by sharing your expertise. Too many influencers are pandering to their own interests and egos, and you stand out by contrast.
The cpi is a collective index. What if you control for the variable of the money supply? Would you then see an association between velocity and inflation?
Great video but high prices is the result of inflation. The velocity is lower during high prices because the amount of money has increased. So more money chasing less goods. Resulting in higher prices. Plus less spending because higher prices consolidate on more needs than wants.
One flaw I see in this argument is whether or not we are comparing seeing expenses paid on non occurring optional hard goods purchasing or on daily needs where sustainable purchases stays the same. For example, people won’t continue to spend money on a deck project because it’s not reoccurring. But they will continue to purchase the same amount of fuel or for groceries to go to work or buy food for their families. One could argue that money velocity is based on needs, not wants and vice versa depending on how people have confidence in the economy. The government realizes this is true so they promote or promise the idea of a good economy to keep people spending. The government makes money off of taxation or in other words from higher numbers with transactions of buying. The moment the government says the economy is bad, then people stop spending. Powell (and other chair persons) states the obvious that they want to sell the economy. No different really than someone scalping tickets for a freak show or bad concert.
Year 1: You buy 10 loafs of bread. Year 2: Your kids only get to eat 5 loafs of bread. In theory there is no difference... In practice you'll rob the bakery at gun point.
I hope it does, I have been waiting for crash for so long. Finally I could start investing in things (other than precious metals) again once asset prices come back from the moon to reality
But if people aren't spending, doesn't that decrease the price of things? For instance, if I am selling bread for 10$ but everyone is hoarding money than I would be inclined to sell it for 9$. When people hoard money, it's like lower money velocity isnt it? I'm not posting this for a debate, it's a legit question. I too believe inflation is coming.
I don't know if American's are capable of saving. Even if we are the question most are asking is why save money in a bank when it is being devoured year over year with inflation. The banks do not give you a big enough return to keep your money with them. Many of us are see the writing on the wall. The dollar is in for a massive crash at some point and this is why many are investing their cash in crypto and rental properties.
What about the monetary base? It’s increasing so velocity goes “down” but it’s fabricated. A “real nonsense” causality. With that taken into account, the velocity goes up, as suggested.
The velocity decreased due to the increased amount of Money sitting around and the actual transactions staying more or less equal. See also recently: Supply chain shocks.
You need to measure the change of CPI, not the absolute CPI value. Not to mention it is possible for money velocity to respond to CPI, which means velocity of money is the late indicator. This also make sense because if things get more expensive, people buy less stuff, which cause velocity of money to reduce LATER.
When things get more expensive, people then buy what they need to buy or buy cheaper substitutes, but they spend all their money. There are no savings when the fear of inflation kicks in. Velocity = Nominal GDP / money supply. Nominal GDP also includes inflation (P * Real GDP). So, if there is a large degree of inflation, velocity goes through the roof and causes higher inflation!
@@pjdelucala this only happen if people believe there are going to have increasing inflation, if people believe inflation is not going any higher, people will not rush to buy things.
@@Petethecoolguy True. Velocity is an emotional variable. It usually stays within a range because people are calm. Once people start panicking about inflation, velocity ramps it up.
Velocity has a major impact when there is a lack of confidence in the purchasing power of the currency. The USD has not had this totally yet. Try these charts for Weimar Germany.
Velocity is calculated as inflation divided by money supply expansion (all things equal). For 1, all things are never equal over time, yet still you can follow the formula to get an estimate. But if inflation is reported inaccurately, which it is, and money supply is reported inaccurately, which it extremely is (Fed said they couldn’t accurately determine the money supply decades ago, plus all these new bank reserves skew the data), then the accuracy of the calculation isn’t that good, especially in the short run. In the long run, you can get a relative picture of what’s happening
Inflation is eating buying power, hence the slow decline in money velocity. Thanks for keeping it simple and clear, “money velocity” is a sham and almost always an excuse to explain any gap in results.
Cannot find anything on credit card purchases being included in M2V. From the given equation they are not. Feel like I am missing something here. If you reverse interpolate fed data on CC usage it sort of inversely tracks M2V
They’re in the numerator. P*T is GDP. Money changes hands with every purchase you make which contributes to GDP. M2 is the money available for you to settle that debt as it transfers from your account to CC provider.
I don't think the argument is that lowering money velocity stops all inflation, but that it slows it. That if more money enters circulation and money velocity decreases, then the inflation would be mitigated. Inflation stays steady. It doesn't get out of control.
Let's get something straight here. Prices can rise because of EITHER rising velocity OR rising money supply. You don't need both. Spending a lot more money, even at a slower rate, can still cause inflation, as can spending the same supply of money at a faster rate. The key point to keep in mind is that RIGHT NOW (we don't live in the 1940s or 1970s) velocity is falling AND bank lending (which is how new money is created, not by bond selling or QE swaps inside the banking system -- and Lynn is totally wrong that bank reserves "leak" out of the banking system into the real economy, it's just not so), so as I was saying, velocity is still falling AND no net new money is being created, or extremely little. We do have a rise in M2 from borrowing money from outside of M2 sources and funneling it into the bank accounts of consumers who have been slow to spend it all, but once that load is shot, it's over, and the increased debt still has to be serviced. This is why covid related price rises are not sustainable, that and the fact that wages are rising much less than prices. (If wages don't rise, consumers can't raise their spending for very long.) So higher prices are a head fake. This is not the great reflation. Instead, this sucker is goin' down hard.
I know F.A. Hayek had a quote about how the quantity theory of money has to have a glimmer of truth to it, but also that Milton Friedman's literal interpretation of the quantity theory, in reference to his model of monetarism, was deeply misguided
Friedman's equation is correct but wholly inadequate. He was, like Hayek but even more so than, sympathetic to the Georgist argument on taxation but he missed how land speculation fuelled by private debt issuance was the main cause of endogenous inflation. www.cooperative-individualism.org/tholstrup-knud_land-tax-and-inflation-1979.htm
Money velocity correlates to the demand side of the inflation equation. What we are experiencing is supply side inflation which can only be corrected by increasing supply…usually requires more investment. We have woefully underinvested in energy production over the last ten years. This is driving our current supply side inflation issue. Interest rate increases reduce the propensity for consumer spending … however consumers are not willing to stop eating or driving to work or heating their homes…hence the current policy to increase rates will not have the desired effect. Actually dropping interest rates for building energy production would help!!!
The issue is calculating M accurately. That is not possible due to the fact that M today is not simple, it is very diverse that it is not reflected in current calculations. Therefore, we can not establish a relationship between M and V. In case anyone is wondering why M is hard to calculate, look at the different types of money has been engineered by commercial banks, and how much of it is calculated. The majority of it does not reach the real economy (intermediation). Finally, a simple look at Z1 report will show that the Fed can not control M nor can influence it in a meaningful way.
@Jw Nl if you've got any left over, sure! Some PMs to have on hand should it get real bad too. Even if it doesn't it'll probably bring decent ROI anyway!
Inflation is related to supply and demand. The case of the bread price rise that cost twice is caused by the amount of M2 money in circulation and not the velocity. The creation of artificial growth expanding the emission of debt without enough production is the culprit. The rise of commodities prices, the minimum wage at 15 dollars, and used cars twice prices is an indicator of the loss of purchasing power of the dollar caused by the excess of M2 supply. In other words, there is no enough supply in the current production scheme to cover the demand for goods so prices ramp up.
Its naïve to look at points on a chart and draw a conclusion without considering other factors like environment; was the economy expanding, contracting, in the middle of a war or pandemic, was it sunny, rainy, mood of the people, etc. So I don't think we looked at it from every angle imo.
Yep. Plus, only taking 1 country’s data into account. Look at more data and there’s clearly a relationship b/w inflation and velocity. Not to mention, it’s just common sense that both velocity and money supply affect inflation
I want to add something to the conversation. I came across data for the MZM Velocity. Look for stlouisfed MZM velocity and you'll find it. MZM is the zero maturity money supply, which as I understand it is basically M2 but excludes anything with a non-zero maturity such as CDs. When comparing MZM Velocity to CPI there seems to be a very strong correlation to my eye and very little correlation with M2 velocity over the same time period. MZM Velocity looks to be a lagging indicator in this case. I made a custom graph comparing these 3 plots. At the stlouisfed it's easy enough to create your own graph with these 3 data sets. So maybe MZM velocity is what we should be looking at, not M2 velocity. Thoughts?
Money velocity is dropping because the average person is going more broke because for years they can’t get any interest from their savings and can only get high interest loans. Now the Federal Reserve is causing people to go further down the hole because inflation is going up from all the dollar creation. All the dollar creation is going to people who already have wealth causing prices to rise and further driving people down the financial hole. Retirees and younger adults without investments are getting particularly devastated. History all over again. This has happened before in post WWI Germany, Venezuela, etc.
The problem is that money velocity is assumed to return to normal levels. It is sitting at 60% lower than where it should be. When wages rise and stimulus continues we'll be back to buying 10 loafs of bread, but now at $20. inflation is dormant right now even though you think you see it. But that's what's terrifying because inflation is just sitting on a launching pad right now waiting for someone to light the fuse.
The price of goods should be related to the money velocity times the supply of money. The reason that money velocity has decreased at the same time that inflation has increased is that the money supply has increased at a faster rate than the money velocity has decreased. If the money supply remained constant, then you would see a positive correlation between velocity and inflation.
Inflation != Higher Prices. Inflation simply means the currency is being devalued by adding additional units in circulation. Thus, higher prices are symptoms. Currently, the additional fiat is circulating in equities markets and different assets, primarily by speculators. When the bubble pops and consumers tomorrow hit today's futures prices, you will see the seriousness of what the fractional reserve bankers have accomplished over the past few years.
Great example! Pay the same for half the goods. We’re seeing this across all packaged goods. Price increases and net product decreases ( cost of a box is 1.00 and now the same box is 1.59 and the size is 30 percent smaller).
Under monetary theory. Money supply * velocity is equal to price * quantity. Your chart only includes 2 variables while assuming the other 2 are constant, which may not necessarily be the case. You have not factored both quantity of goods supplied, nor the money supply within this graph. I’m not saying you’re wrong, but you need more data to complete your argument.
Correlation isn’t causation. There are numerous factors that affect inflation. To say that velocity doesn’t have significant affect on inflation is total BS. A) It’s common sense. Two things affect inflation: money supply and velocity. B) Look at more data than just the U.S. Germany’s hyperinflation kicked in when money velocity shot up. 150 years of 2 pieces of data on only one country (that has changed quite a bit economically and especially monetarily over time might I add) really doesn’t allow you to conclude much anything of statistical significance imo. C’mon, you’re a smart guy. Inflation is affected by velocity and money supply. Yes expanding money supply can beat falling velocity but the argument that we should just ignore velocity is insane and I honestly can’t believe you said this
Or.. the velocity of money is declining because transactions have remained the same but the money supply has rapidly increased (and a lot of it is sitting around in balance sheets doing nothing but providing liquidity)???
the money supplies are increasing rapidly while velocity is at all times low artificially due to the stop of economic activities by lockdowns and public health measures. it's like piling up gun powder, you don't see it's bad now but if velocity rises up suddenly due to the resume of economic activities, that gunpowder will blow up.
What creates inflation is supply constraints of real goods. Not money supply. In the 70s’ it was Oil, due to the Israel boycott by Arab states. The past couple of years has been due to a chip and lumber shortage. Most of the money the Fed creates when it buys treasuries, sits in Banks as “reserves” and never enters into the real economy. Few understand this.
Really, if you consider all the factors in the velocity equation, an expansion in the money supply causes a drop in velocity. The only time an increase in velocity would correlate to inflation is in a static or shrinking money pool. This equation is basically identical to a pressure/flow/velocity equation for fluids. In that world (where I am much more familiar) increasing a pipe size decreases velocity and pressure, but maintains or increases flow volume. Same principle here, and the equation has the same inputs.
Okay, I'm looking at this graph at 2:15 and what I see, first, is that every time CPI is contracting (negative growth, ie, below zero rate of change), velocity is negative, as we would intuitively expect. Second, a see CPI grow weakly as we come out of the Long Deflation, which I suspect is due to changes in monetary policy but I am not familiar with those years in any detail. Velocity was still falling, indicating uncertainty perhaps, or ingrained habits from the long deflation, or a slowdown in productivity, or maybe other factors, but CPI (if it is accurately reconstructed), while growing, was not growing much. Then you get huge spikes in WW1 and WW2 driven by war spending, materials scarcity, and some money printing (literally) in WW1, but falling velocity partly because of uncertainty created by war and partly because of wartime rationing. Consumers had to spend less so government could spend more under "war socialism." This odd state of affairs gravely distorts the stats. After WW1, CPI growth slows sharply and then goes negative as velocity does the same. After WW2, velocity is fairly stable for many years (which fools the Friedmanite monetarists who assumed this was a normal and permanent state of affairs), but CPI growth rate comes down, perhaps because of a reversal in war related purchasing by the government. Of course, the 1970s saw inflation with only a weak increase in velocity, and the causes of that are still debated among economic historians. One theory, endorsed by Jeff Snider, is that increases in borrowing (money creations) and spending in the eurodollar market supplied the additional money to drive prices higher in the 1970s, but that is obviously not happening today because the other major economies are all in the dumps. Then CPI growth declined through 2019, and for most of this period so did velocity. What this tells me is that when government purchases replace consumer purchases, CPI can still rise even when consumer spending habits cause velocity to fall. But I am not convinced that temporary government money transfers to consumers will have the same effect. In fact, I am sure they will not. Thus, I don't think this chart means what Lynn Alden thinks it does.
Im clearly late to this party but i do have a question, what would happen to inflation if a large amount of existing money with no velocity over the last say... 40 years was reintroduced to the economy and given velocity again. Context: I look at velocity under a different frame of reference, I look at it on a per physical unit angle. I also look at inflation as a value per unit basis too as more money= decreased value of money= inflation At least that's the basic version of window of reference.
What if you still need 10 breads and size of each bread is the same? In your example end consumer decreased his purchases but you haven't say anything about it. Regards, Artur
I think a fundamental flaw in this rather simple logic is the exclusion of the supply of money. In your bread example, we could say that the supply of money has doubled, as well as the price of bread. If in the second year only half as many loaves are sold, yet prices and the supply of money has doubled, we will see a reduction in money velocity by exactly half.
the amount of money supplies would effect velocity too right? like if you keep printing the velocity is going to be low since it doesnt need to change hands as much
.... and how do they measure velocity over decades? It was money, now they include other things like savings? I think higher prices ‘inflation’ is pushing on velocity
Using # of dollars in circulation as the denominator dilutes velocity as you print. Which makes sense why the general trend of velocity is dropping. # of transactions divided by the # of people in the economy seems like a better indicator. I also may not know what I’m talking about lol
I know right, if you divide something with bigger number the result is always going to be smaller. So what is the point of looking at money velocity if you keep printing money? If the money supply remained same all the time then it would make sense to look at it
In the formula itself money velocity is not just dependent on inflation and sum of transactions, it also is inversely proportional to money supply. I'm a newbie in the world of economics(engineer). Money supply with all the record levels of printing of money has gone up, you reckon that is ultimately going to be the factor that causes hyperinflation, since sum of transactions i.e. real GDP (from whatever little I know) is not going up anytime soon???
Inflation is determined by money supply and velocity. He’s 100% wrong to say velocity doesn’t affect inflation. It’s common sense and many other graphs would show so. Idk if you know this but hyperinflation is 50% inflation a month. We’re a long ways away from that. They’d have to change many laws and give the Fed MMT power to put money into the real economy itself. Personally, I say deflation is still a big threat. I say we get quite decent inflation which shows the economy for what it really is, markets crash and deflation, not hyper-inflation. Do they change the laws to get huge inflation, maybe. The way things are rn, the idea of hyper-inflation is clickbait When considering hyper-inflation, also consider what if the money supply graphs that are going exponential aren’t v accurate. Fed said they couldn’t accurately determine money supply decades ago, and their ability to track it has only gotten harder and worse. Plus, govt money supply data (like govt inflation data) has motives. Many argue the Fed is making the graphs expand quicker than they really are to scare people into spending money quicker so velocity picks up
If M2 expansion does not generate growth, velocity and inflation will stay low. Nominal wage growth still hovering around 3.5%. Prices can rise but only to the level at which buyers still exist which means wages have to rise. Plus, you have to account for post pandemic spending behaviors. Saving and deleveraging, for example, are not productive uses of capital from a growth perspective.
Perhaps money velocity slows or speeds up in response to inflation/deflation. If prices go up, velocity will slow down, as consumers find prices less attractive. If there's deflation, velocity goes up as consumers chase cheaper prices? So perhaps the direction of causality is that opposite of what some people claim?
My opinion is that hyperinflation occurs when people try to buy items with their cash due to the expectation that prices are rising fast. This belief is what causes a runaway train and the behavior of buying is supported by the net rise in price that follows. The current practice of those in power is to subdue commodity prices, this is causing shortages in some things like silver. The reverse repo market with risk free interest rate at the Fed is sucking money out of circulation. This is going to reduce the inflation in the stock market and could impact lending. This could cause a stock market crash and then it could get out of hand with a deflationary event. Time will tell. This is not a bad time to have gotten out of high multiple stocks.
I've been checking the FED velocity chart for some time and it's been trending down for some years - only a minor blip up in one quarter in the past year...on its way back down again though.
This is going to be an interesting channel in the fourth quarter.
This will be an interesting channel in the fourth turning
#4thturning #itscoming
4th quarter. I'm here.
@@davidfrankel9267 Inflation. I'm here.
Bank reserves hella fuck up m2 velocity. The fed has created such a Frankenstein
Means velocity isn’t calculated accurately since bank reserves aren’t in the real economy
@@garretttjordan bingo
There’s an “air lock” surrounding the economy and the massive amounts of capital waiting to be injected.
in the definition of velocity there is a denominator, the number of dollars in circulation. The money printing by the federal reserve is NOT circulating. It is being accumulated by the banks and the top 0.01%
That is because the Fed is just a bank. (oversimplified but not far from the truth). QE fills the bank reserves of private banks so those lend out more money. It's only when consumers, companies or the government borrow money that the money actually enters the economy.
The zero lower bound means that the Fed cannot drag inflation up because the interest rate cannot be negative but we saw the white house borrow money and that created inflation. The US government should do a little bit of stimulus whenever inflation is below the 2% target, that way the Fed won't have to come up with increasingly stupid ideas. Inflation is at its worst when it is unpredictable. If it's low and we don't know why it is bad. If it is high and we don't know why it is bad.
If we had exactly 2% inflation, not more, not less, for all eternity, then we wouldn't have to care about it.
Why then is velocity tanking it?
what about the helicopter money though? all unemployment checks definitely circulate
Right. Only circulating money can generate inflation though.
@@sten260 not a significant percentage of fresh printed money
If you look at the chart velocity FOLLOWS inflation. Velocity is whether psychologically people prefer to spend or save. The depression was extended longer because although we had come out of the depression, the economy wasn't doing well because everyone wanted to save the money as oppose to spend it. - velocity
Fed- Go brrr
Me- immediately buys eth with my stimmy
Yeah there is no velocity.
Same
You need to look at both money supply and velocity. On a slightly different note,, what's different now from other periods is the massive global supply chain disruptions that covid has caused.
Came here to say this and hope he sees it. If you could please show Velocity vs Money Supply (/QE) Vs Interest Rates and Taxes on top of inflation and then we might get some more useful data.
Money supply doesn't equal inflation either, if no one spends it then prices don't go up. If velocity increases but supply diminishes (Interest/taxes/market correction?) than that could be deflationary as well.
Note: Rates being low can have a dual effect, when business can carry cheap debt they can keep prices lower and stay in business longer while working thinner margins. Efficiencies and monopolies can also be deflationary just look at Walmart, Amazon, Dollar General etc. It would be nice to be able to graph the data of some of these growing companies in there as well.
Great channel, but this vid needs more data to prove velocity insignificant. Especially Velocity + Supply
Amen, JMK clearly said growth models depended on stable velocity of money, without that all bets are off.
Governments caused this, nobody with the sniffles shut down the global trade system.
Yeah, right, COVID caused supply chain distruptions. Please dont spew such nonsense. Its the decisions of polititans, corporations and central banks that caused them. Not a freaking microbe, that was not even isolated lol
@@michaelk1589 You misread the point I was making. I agree that it was a mistake to shut everything down, but it was Covid that lead to governments to make the decision to shut down their economies (more wordy see?), which ultimately has an enormous impact on inflation.
I recently discovered your channel and i am blown away with your depth of knowledge of the fed and monetary policy, and the ease with which you convey your knowledge
Add George Gammon to your list
07wrxtr1 thank you
Bro. Your video are amazing. No one on CZcams brake-down these topics as you do..👍👍👍
I remember when 100 dollars would buy so much food you could barely fit it in a car
Me too. 20$ used to get you some groceries now it’ll get you a few items at best
I can still get 52 cookies for $5 from Walmart so we’ve got a little bit of buffer.
Anddd that's real world inflation hell yeah
still can. hell, for 40 bucks i need two people to carry boxes full of fresh produce. dairy and meats are horrible for humans and the environment... whole grains / legumes / fruits / veg should be the majority of what humans consume.
That was before we had cars.
CPI v velocity shoukd also takr into acxount money supply. Thougjt experiment, I print a trillion and keep it in my garage. Vekocity 0. No inflation will result. Likewise if the Fed increases reserve requirements your depoait at the bank can't make as much loans as it coukd with a lower reserve requirement. The money that needs to be held reduces that money's velocity.
The banks were supposed to be loaning that money out, but their not. Their receiving free counterfeit money[printing] and they are then buying assets with it. It's a COMPLETE corrupt system, where the people at the front get 99% of the funds for free, then use those funds to purchase assets, which causes their value to increase. They are getting 2 for 0, free money & increased value of assets they purchased with that free money. They will then switch their positions when the market turns and short everything. They drag the public into the market and they get the rugged pulled out from under them.
The public gets robbed twice. It ends with asset consolidation at the top and the middle class gets wiped out.
This method has been used over and over and over and over and it will continue to be used until the nation revolts or collapses from the massive debt that is created every time the system runs another cycle.
Also the real economic output. And surprise suddenly you are at the quantitative theory of money. Which poster maybe should have checked before posting his stupid video.
Bro, I'm a finance nerd and just found your channel. Great content! Cheers!
Just as decreasing velocity does not necessitate deflation, neither do rising prices necessitate inflation.
Yields are plummeting.
I always bought into the money velocity idea until today. Great breakdown of the issue. I love your videos, keep them up, and that is a beautiful coffee mug!
I have always had it pounded into my head that money velocity is a MUST for inflation. You have changed my mind....I learned something new tonight. Thanks!
Unlearn it as quickly as possible. He's wrong.
@@tylerminix2028 Provide us with proof.
You can also have a decline in real GDP and/or increas in money supply (printing). Which are both the case.
You would expect higher inflation when the economy recovers in 2022, because the MONEY VELOCITY will increase.
Turns out when you "print" enough money to double the money supply there are consequences. Who knew?!?!
It’s real easy - you can have inflation (of cpi) while money velocity decreases, if there’s an inflation of the money supply at the same time. You kind of glossed over this point.. The formula you shared at the beginning holds true, and Yogi’s quote, while clever, is meaningless here.
Yep. And the traditional definition of inflation was in fact an increase in the money supply, NOT rising prices
Also a decline in real GDP (scarcity/less things to spend money on) will increase inflation.
You explain things in a way that is very easy for everyone to understand. Thank you so much for your content!
He is wrong though...
Still curious/worried about a potential future we're heading in; With covid regulations impacting businesses everywhere, velocity dropped. With businesses doing bad, closing entirely, and all sorts of avenues(cafe's, concerts etc) not running like normal the fact that this happened makes sense. A lot of money was printed in the last year. Iirc roughly 25% of all dollars currently in existence were created this year. That probably has a solid impact on velocity.
So... what happens when we get to the point where all regulations are lifted? If "natural" velocity picks up and combines with what we currently have, what would the real consequence be? I see talks regarding hyper inflation. How accurate is this worry?
Great job. You are intelligent and knowledgable about economics, but what clearly comes through is the desire to help others by sharing your expertise. Too many influencers are pandering to their own interests and egos, and you stand out by contrast.
The cpi is a collective index. What if you control for the variable of the money supply? Would you then see an association between velocity and inflation?
Great video but high prices is the result of inflation. The velocity is lower during high prices because the amount of money has increased. So more money chasing less goods. Resulting in higher prices. Plus less spending because higher prices consolidate on more needs than wants.
Is that the intention?
One flaw I see in this argument is whether or not we are comparing seeing expenses paid on non occurring optional hard goods purchasing or on daily needs where sustainable purchases stays the same. For example, people won’t continue to spend money on a deck project because it’s not reoccurring. But they will continue to purchase the same amount of fuel or for groceries to go to work or buy food for their families. One could argue that money velocity is based on needs, not wants and vice versa depending on how people have confidence in the economy. The government realizes this is true so they promote or promise the idea of a good economy to keep people spending. The government makes money off of taxation or in other words from higher numbers with transactions of buying. The moment the government says the economy is bad, then people stop spending. Powell (and other chair persons) states the obvious that they want to sell the economy. No different really than someone scalping tickets for a freak show or bad concert.
Year 1: You buy 10 loafs of bread.
Year 2: Your kids only get to eat 5 loafs of bread.
In theory there is no difference... In practice you'll rob the bakery at gun point.
and each gun will be $40,000
Last year’s riots may not be a one time event.
@@JinKee And worth every penny....
Everyone thinks there will be inflation till a market crash happens…. And believe me I remember it very well in 2008.
I hope it does, I have been waiting for crash for so long. Finally I could start investing in things (other than precious metals) again once asset prices come back from the moon to reality
But if people aren't spending, doesn't that decrease the price of things?
For instance, if I am selling bread for 10$ but everyone is hoarding money than I would be inclined to sell it for 9$.
When people hoard money, it's like lower money velocity isnt it?
I'm not posting this for a debate, it's a legit question. I too believe inflation is coming.
I don't know if American's are capable of saving. Even if we are the question most are asking is why save money in a bank when it is being devoured year over year with inflation. The banks do not give you a big enough return to keep your money with them. Many of us are see the writing on the wall. The dollar is in for a massive crash at some point and this is why many are investing their cash in crypto and rental properties.
What about the monetary base? It’s increasing so velocity goes “down” but it’s fabricated. A “real nonsense” causality. With that taken into account, the velocity goes up, as suggested.
Loved the bread analogy!
+1 for yogisms, most underrated quotes of all time
The velocity decreased due to the increased amount of Money sitting around and the actual transactions staying more or less equal.
See also recently: Supply chain shocks.
Thanks for saving me the bother of saying the same thing.
You always explain this technical stuff so clearly. Makes sense to me now!
You need to measure the change of CPI, not the absolute CPI value.
Not to mention it is possible for money velocity to respond to CPI, which means velocity of money is the late indicator. This also make sense because if things get more expensive, people buy less stuff, which cause velocity of money to reduce LATER.
When things get more expensive, people then buy what they need to buy or buy cheaper substitutes, but they spend all their money. There are no savings when the fear of inflation kicks in. Velocity = Nominal GDP / money supply. Nominal GDP also includes inflation (P * Real GDP). So, if there is a large degree of inflation, velocity goes through the roof and causes higher inflation!
@@pjdelucala this only happen if people believe there are going to have increasing inflation, if people believe inflation is not going any higher, people will not rush to buy things.
@@Petethecoolguy True. Velocity is an emotional variable. It usually stays within a range because people are calm. Once people start panicking about inflation, velocity ramps it up.
Hello Joe,
You explain things the best of anyone - you are clear, concise and comprehensive.
Where did you learn all of this stuff?
Thanks bro. You know it takes a good brain to simplify things in the manner you do. Thanks.
I like the bread example
Except the price doubled and the velocity halved.. from 10 to 5.
Velocity has a major impact when there is a lack of confidence in the purchasing power of the currency. The USD has not had this totally yet. Try these charts for Weimar Germany.
Where are the velocity numbers being calculated ? What agency and what factors in this equation? Banks are not holding onto UBI now being distributed.
Velocity is calculated as inflation divided by money supply expansion (all things equal).
For 1, all things are never equal over time, yet still you can follow the formula to get an estimate. But if inflation is reported inaccurately, which it is, and money supply is reported inaccurately, which it extremely is (Fed said they couldn’t accurately determine the money supply decades ago, plus all these new bank reserves skew the data), then the accuracy of the calculation isn’t that good, especially in the short run. In the long run, you can get a relative picture of what’s happening
Great presentation. Numbers don’t lie.
Deflation is the bigger worry!
Great video valid points
Inflation is eating buying power, hence the slow decline in money velocity. Thanks for keeping it simple and clear, “money velocity” is a sham and almost always an excuse to explain any gap in results.
Cannot find anything on credit card purchases being included in M2V. From the given equation they are not. Feel like I am missing something here. If you reverse interpolate fed data on CC usage it sort of inversely tracks M2V
They’re in the numerator. P*T is GDP. Money changes hands with every purchase you make which contributes to GDP. M2 is the money available for you to settle that debt as it transfers from your account to CC provider.
Would the correlation between Money Velocity and Inflation be any different if we separate Wall St from Main St and Pennsylvania Ave?
I don't think the argument is that lowering money velocity stops all inflation, but that it slows it. That if more money enters circulation and money velocity decreases, then the inflation would be mitigated. Inflation stays steady. It doesn't get out of control.
Good stuff as usual Joe, much appreciated
Let's get something straight here. Prices can rise because of EITHER rising velocity OR rising money supply. You don't need both. Spending a lot more money, even at a slower rate, can still cause inflation, as can spending the same supply of money at a faster rate. The key point to keep in mind is that RIGHT NOW (we don't live in the 1940s or 1970s) velocity is falling AND bank lending (which is how new money is created, not by bond selling or QE swaps inside the banking system -- and Lynn is totally wrong that bank reserves "leak" out of the banking system into the real economy, it's just not so), so as I was saying, velocity is still falling AND no net new money is being created, or extremely little.
We do have a rise in M2 from borrowing money from outside of M2 sources and funneling it into the bank accounts of consumers who have been slow to spend it all, but once that load is shot, it's over, and the increased debt still has to be serviced. This is why covid related price rises are not sustainable, that and the fact that wages are rising much less than prices. (If wages don't rise, consumers can't raise their spending for very long.) So higher prices are a head fake. This is not the great reflation. Instead, this sucker is goin' down hard.
READY… Let’s dive in !!!!! 😃
I think it’s more a lagging indicator than anything and is a sign of things to come
I know F.A. Hayek had a quote about how the quantity theory of money has to have a glimmer of truth to it, but also that Milton Friedman's literal interpretation of the quantity theory, in reference to his model of monetarism, was deeply misguided
Friedman's equation is correct but wholly inadequate. He was, like Hayek but even more so than, sympathetic to the Georgist argument on taxation but he missed how land speculation fuelled by private debt issuance was the main cause of endogenous inflation.
www.cooperative-individualism.org/tholstrup-knud_land-tax-and-inflation-1979.htm
This is an eye opener
Thanks for the education and analysis! :)
Money velocity correlates to the demand side of the inflation equation. What we are experiencing is supply side inflation which can only be corrected by increasing supply…usually requires more investment. We have woefully underinvested in energy production over the last ten years. This is driving our current supply side inflation issue. Interest rate increases reduce the propensity for consumer spending … however consumers are not willing to stop eating or driving to work or heating their homes…hence the current policy to increase rates will not have the desired effect. Actually dropping interest rates for building energy production would help!!!
The issue is calculating M accurately. That is not possible due to the fact that M today is not simple, it is very diverse that it is not reflected in current calculations. Therefore, we can not establish a relationship between M and V. In case anyone is wondering why M is hard to calculate, look at the different types of money has been engineered by commercial banks, and how much of it is calculated. The majority of it does not reach the real economy (intermediation). Finally, a simple look at Z1 report will show that the Fed can not control M nor can influence it in a meaningful way.
I agree, we are the best.
The only thing I'm spending money on right now is food and gasoline. Nothing else!
@Jw Nl if you've got any left over, sure! Some PMs to have on hand should it get real bad too. Even if it doesn't it'll probably bring decent ROI anyway!
@@identifiesas65.wheresmyche95
What is a PM?
@@kedabro1957 precious metal
Inflation is related to supply and demand. The case of the bread price rise that cost twice is caused by the amount of M2 money in circulation and not the velocity. The creation of artificial growth expanding the emission of debt without enough production is the culprit. The rise of commodities prices, the minimum wage at 15 dollars, and used cars twice prices is an indicator of the loss of purchasing power of the dollar caused by the excess of M2 supply. In other words, there is no enough supply in the current production scheme to cover the demand for goods so prices ramp up.
Its naïve to look at points on a chart and draw a conclusion without considering other factors like environment; was the economy expanding, contracting, in the middle of a war or pandemic, was it sunny, rainy, mood of the people, etc. So I don't think we looked at it from every angle imo.
Yep. Plus, only taking 1 country’s data into account. Look at more data and there’s clearly a relationship b/w inflation and velocity. Not to mention, it’s just common sense that both velocity and money supply affect inflation
I want to add something to the conversation. I came across data for the MZM Velocity. Look for stlouisfed MZM velocity and you'll find it.
MZM is the zero maturity money supply, which as I understand it is basically M2 but excludes anything with a non-zero maturity such as CDs. When comparing MZM Velocity to CPI there seems to be a very strong correlation to my eye and very little correlation with M2 velocity over the same time period. MZM Velocity looks to be a lagging indicator in this case.
I made a custom graph comparing these 3 plots. At the stlouisfed it's easy enough to create your own graph with these 3 data sets.
So maybe MZM velocity is what we should be looking at, not M2 velocity. Thoughts?
Money velocity is dropping because the average person is going more broke because for years they can’t get any interest from their savings and can only get high interest loans. Now the Federal Reserve is causing people to go further down the hole because inflation is going up from all the dollar creation. All the dollar creation is going to people who already have wealth causing prices to rise and further driving people down the financial hole. Retirees and younger adults without investments are getting particularly devastated. History all over again. This has happened before in post WWI Germany, Venezuela, etc.
The problem is that money velocity is assumed to return to normal levels. It is sitting at 60% lower than where it should be. When wages rise and stimulus continues we'll be back to buying 10 loafs of bread, but now at $20. inflation is dormant right now even though you think you see it. But that's what's terrifying because inflation is just sitting on a launching pad right now waiting for someone to light the fuse.
The price of goods should be related to the money velocity times the supply of money. The reason that money velocity has decreased at the same time that inflation has increased is that the money supply has increased at a faster rate than the money velocity has decreased. If the money supply remained constant, then you would see a positive correlation between velocity and inflation.
inflation is here
and it will only get worse.
What about the correlation between (V x M2) to CPI ??? Use the same equation but replace M2 with M1. Then replace M1 with M3M.
Inflation != Higher Prices.
Inflation simply means the currency is being devalued by adding additional units in circulation. Thus, higher prices are symptoms. Currently, the additional fiat is circulating in equities markets and different assets, primarily by speculators. When the bubble pops and consumers tomorrow hit today's futures prices, you will see the seriousness of what the fractional reserve bankers have accomplished over the past few years.
Awesome the more I watch the more our money system makes sense thanks Joe 🤙
Glad to hear that Nick
@@HeresyFinancial yessir keep it up
No direct correlation doesn't mean it has no effect on inflation. Multiple influences make the whole thing difficult to entangle.
Great example! Pay the same for half the goods. We’re seeing this across all packaged goods. Price increases and net product decreases ( cost of a box is 1.00 and now the same box is 1.59 and the size is 30 percent smaller).
Yea but how much higher would the price have to go, without a change in your income, for you to decide against the box of cereal?
You called it
Also supply has to be accounted for
Under monetary theory. Money supply * velocity is equal to price * quantity. Your chart only includes 2 variables while assuming the other 2 are constant, which may not necessarily be the case. You have not factored both quantity of goods supplied, nor the money supply within this graph. I’m not saying you’re wrong, but you need more data to complete your argument.
Correlation isn’t causation. There are numerous factors that affect inflation. To say that velocity doesn’t have significant affect on inflation is total BS. A) It’s common sense. Two things affect inflation: money supply and velocity. B) Look at more data than just the U.S. Germany’s hyperinflation kicked in when money velocity shot up. 150 years of 2 pieces of data on only one country (that has changed quite a bit economically and especially monetarily over time might I add) really doesn’t allow you to conclude much anything of statistical significance imo.
C’mon, you’re a smart guy. Inflation is affected by velocity and money supply. Yes expanding money supply can beat falling velocity but the argument that we should just ignore velocity is insane and I honestly can’t believe you said this
Or.. the velocity of money is declining because transactions have remained the same but the money supply has rapidly increased (and a lot of it is sitting around in balance sheets doing nothing but providing liquidity)???
the money supplies are increasing rapidly while velocity is at all times low artificially due to the stop of economic activities by lockdowns and public health measures. it's like piling up gun powder, you don't see it's bad now but if velocity rises up suddenly due to the resume of economic activities, that gunpowder will blow up.
when ' money speed or velocity goes toward zero and Inflation goes up , we call this phenomenon : STAG -flation ..... very simple
What creates inflation is supply constraints of real goods. Not money supply. In the 70s’ it was Oil, due to the Israel boycott by Arab states. The past couple of years has been due to a chip and lumber shortage. Most of the money the Fed creates when it buys treasuries, sits in Banks as “reserves” and never enters into the real economy.
Few understand this.
Now I know why I'm losing weight, I'm not making enough "bread".
LOL
Really, if you consider all the factors in the velocity equation, an expansion in the money supply causes a drop in velocity. The only time an increase in velocity would correlate to inflation is in a static or shrinking money pool. This equation is basically identical to a pressure/flow/velocity equation for fluids. In that world (where I am much more familiar) increasing a pipe size decreases velocity and pressure, but maintains or increases flow volume. Same principle here, and the equation has the same inputs.
Good point tbf
very well explained. appreciate the work.
Okay, I'm looking at this graph at 2:15 and what I see, first, is that every time CPI is contracting (negative growth, ie, below zero rate of change), velocity is negative, as we would intuitively expect.
Second, a see CPI grow weakly as we come out of the Long Deflation, which I suspect is due to changes in monetary policy but I am not familiar with those years in any detail. Velocity was still falling, indicating uncertainty perhaps, or ingrained habits from the long deflation, or a slowdown in productivity, or maybe other factors, but CPI (if it is accurately reconstructed), while growing, was not growing much.
Then you get huge spikes in WW1 and WW2 driven by war spending, materials scarcity, and some money printing (literally) in WW1, but falling velocity partly because of uncertainty created by war and partly because of wartime rationing. Consumers had to spend less so government could spend more under "war socialism." This odd state of affairs gravely distorts the stats. After WW1, CPI growth slows sharply and then goes negative as velocity does the same. After WW2, velocity is fairly stable for many years (which fools the Friedmanite monetarists who assumed this was a normal and permanent state of affairs), but CPI growth rate comes down, perhaps because of a reversal in war related purchasing by the government.
Of course, the 1970s saw inflation with only a weak increase in velocity, and the causes of that are still debated among economic historians. One theory, endorsed by Jeff Snider, is that increases in borrowing (money creations) and spending in the eurodollar market supplied the additional money to drive prices higher in the 1970s, but that is obviously not happening today because the other major economies are all in the dumps.
Then CPI growth declined through 2019, and for most of this period so did velocity. What this tells me is that when government purchases replace consumer purchases, CPI can still rise even when consumer spending habits cause velocity to fall. But I am not convinced that temporary government money transfers to consumers will have the same effect. In fact, I am sure they will not. Thus, I don't think this chart means what Lynn Alden thinks it does.
Im clearly late to this party but i do have a question, what would happen to inflation if a large amount of existing money with no velocity over the last say... 40 years was reintroduced to the economy and given velocity again.
Context:
I look at velocity under a different frame of reference,
I look at it on a per physical unit angle.
I also look at inflation as a value per unit basis too as more money= decreased value of money= inflation
At least that's the basic version of window of reference.
Cheers JB! 🍻
someone needs to forward this to J.B.
What if you still need 10 breads and size of each bread is the same? In your example end consumer decreased his purchases but you haven't say anything about it. Regards, Artur
if there is only 5 bread available and you need 10 then you can't have 10. like what is confusing here?
I think a fundamental flaw in this rather simple logic is the exclusion of the supply of money.
In your bread example, we could say that the supply of money has doubled, as well as the price of bread.
If in the second year only half as many loaves are sold, yet prices and the supply of money has doubled, we will see a reduction in money velocity by exactly half.
Poignant topic, sir
the amount of money supplies would effect velocity too right? like if you keep printing the velocity is going to be low since it doesnt need to change hands as much
.... and how do they measure velocity over decades? It was money, now they include other things like savings?
I think higher prices ‘inflation’ is pushing on velocity
Yogi Berra - the greatest Zen Master baseball has produced. Always has some wisdom to offer in difficult times.
Money velocity record lows, but equities at record highs means a disaster is coming fundamentally.
Brilliant stuff!
Should cripto transactions be considered for T?
Yeah answer keep printing money that for sure will work.
Using # of dollars in circulation as the denominator dilutes velocity as you print. Which makes sense why the general trend of velocity is dropping. # of transactions divided by the # of people in the economy seems like a better indicator. I also may not know what I’m talking about lol
No, I think if you pour gasoline on a fire it get worse. ??
I know right, if you divide something with bigger number the result is always going to be smaller. So what is the point of looking at money velocity if you keep printing money? If the money supply remained same all the time then it would make sense to look at it
There’s a great discussion about this between Di Martini booth and Lacey Hunt
Buy locally produced goods and food, help your own.
Think about the formula. Velocity is dropping because the money supply has increased so the denominator grew.
In the formula itself money velocity is not just dependent on inflation and sum of transactions, it also is inversely proportional to money supply. I'm a newbie in the world of economics(engineer). Money supply with all the record levels of printing of money has gone up, you reckon that is ultimately going to be the factor that causes hyperinflation, since sum of transactions i.e. real GDP (from whatever little I know) is not going up anytime soon???
Inflation is determined by money supply and velocity. He’s 100% wrong to say velocity doesn’t affect inflation. It’s common sense and many other graphs would show so.
Idk if you know this but hyperinflation is 50% inflation a month. We’re a long ways away from that. They’d have to change many laws and give the Fed MMT power to put money into the real economy itself.
Personally, I say deflation is still a big threat. I say we get quite decent inflation which shows the economy for what it really is, markets crash and deflation, not hyper-inflation. Do they change the laws to get huge inflation, maybe. The way things are rn, the idea of hyper-inflation is clickbait
When considering hyper-inflation, also consider what if the money supply graphs that are going exponential aren’t v accurate. Fed said they couldn’t accurately determine money supply decades ago, and their ability to track it has only gotten harder and worse. Plus, govt money supply data (like govt inflation data) has motives. Many argue the Fed is making the graphs expand quicker than they really are to scare people into spending money quicker so velocity picks up
If M2 expansion does not generate growth, velocity and inflation will stay low. Nominal wage growth still hovering around 3.5%. Prices can rise but only to the level at which buyers still exist which means wages have to rise. Plus, you have to account for post pandemic spending behaviors. Saving and deleveraging, for example, are not productive uses of capital from a growth perspective.
people who think that printing more money into circulation causes economic growth are delusional.
I wonder what the charts look like if you account for increase in money supply. I wonder if there's a correlation than.
Perhaps money velocity slows or speeds up in response to inflation/deflation. If prices go up, velocity will slow down, as consumers find prices less attractive. If there's deflation, velocity goes up as consumers chase cheaper prices? So perhaps the direction of causality is that opposite of what some people claim?
My opinion is that hyperinflation occurs when people try to buy items with their cash due to the expectation that prices are rising fast. This belief is what causes a runaway train and the behavior of buying is supported by the net rise in price that follows. The current practice of those in power is to subdue commodity prices, this is causing shortages in some things like silver. The reverse repo market with risk free interest rate at the Fed is sucking money out of circulation. This is going to reduce the inflation in the stock market and could impact lending. This could cause a stock market crash and then it could get out of hand with a deflationary event. Time will tell. This is not a bad time to have gotten out of high multiple stocks.
They have to have cash first which means wages have to rise.
I've been checking the FED velocity chart for some time and it's been trending down for some years - only a minor blip up in one quarter in the past year...on its way back down again though.