02-21-2020, 04:27 PM
** 21-Feb-2020 World View: Velocity of money
That's an interesting analysis. You're right about the formula,
though there's an extra factor: "Inflation rate X GDP = Money supply X
velocity". It's the fall in velocity that explains why inflation has
remained low.
With regard to the size of the money supply, we don't live in 1800s,
when the only kind of money was printed money, or even in the 1600s,
when the only kind of money was gold coins and tulip certificates.
In 2008, the Bank of International Settlements said that there are
over $1 quadrillion ($1,000 trillion) worth of credit derivatives and
other structured finance securities in the portfolios of financial
institutions around the world.
Money created through debt is just as real as the money "printed" by
the US government. If your $50K home increases in value during a real
estate bubble to $500K, and you refinance your home and borrow $400K
against your home, then you can spend that money on cars, groceries,
sex, or whatever you want. It's the same money.
So the size of the money supply has actually been falling
substantially since 2008, and central banks "printing" money has not
really added to the money supply at all, but instead has replaced the
money in the money supply that disappeared as the bubble collapsed.
The only real point I was making was that a major crisis can change
generational behavior permanently, whether it's a financial crisis or
a coronavirus crisis.
richard5za Wrote:> John, I was an economics major but that was in 1968 so perhaps I
> am an economics liability rather than a reliable source of
> information. However we learned that GDP = Money supply X velocity
> of money. (No doubt the 2020 version is more sophisticated) So I
> suspect that the decline in velocity is at least partly due to the
> monetary authorities pumping more and more money into the
> system.
That's an interesting analysis. You're right about the formula,
though there's an extra factor: "Inflation rate X GDP = Money supply X
velocity". It's the fall in velocity that explains why inflation has
remained low.
With regard to the size of the money supply, we don't live in 1800s,
when the only kind of money was printed money, or even in the 1600s,
when the only kind of money was gold coins and tulip certificates.
In 2008, the Bank of International Settlements said that there are
over $1 quadrillion ($1,000 trillion) worth of credit derivatives and
other structured finance securities in the portfolios of financial
institutions around the world.
Money created through debt is just as real as the money "printed" by
the US government. If your $50K home increases in value during a real
estate bubble to $500K, and you refinance your home and borrow $400K
against your home, then you can spend that money on cars, groceries,
sex, or whatever you want. It's the same money.
So the size of the money supply has actually been falling
substantially since 2008, and central banks "printing" money has not
really added to the money supply at all, but instead has replaced the
money in the money supply that disappeared as the bubble collapsed.
The only real point I was making was that a major crisis can change
generational behavior permanently, whether it's a financial crisis or
a coronavirus crisis.
