Velocity of money formula: What is it?

Velocity of Money

Investopedia defines the velocity of money in the following manner: Economies that exhibit a higher velocity of money relative to others tend to be more developed. The velocity of money is also known to fluctuate with business cycles. When an economy is in an expansion, consumers and businesses tend to more readily spend money, causing the velocity of money to increase. When an economy is contracting, consumers and businesses are usually more reluctant to spend, and the velocity of money is lower.

Since the velocity of money is typically correlated with business cycles, it can also be correlated with key indicators. Therefore, the velocity of money will usually rise with GDP and inflation. Alternatively, it is usually expected to fall when key economic indicators like GDP and inflation are falling in a contracting economy https://cutt.ly/kQ8wc3B

This is what the Fed has to say on the topic

Let’s start off with the velocity of money formula

MV = PQ

In this equation:

M stands for money.

V stands for the velocity of money (or the rate at which people spend money).

P stands for the general price level.

Q stands for the quantity of goods and services produced.

Based on this equation (velocity of money formula) holding the money velocity constant, if the money supply (M) increases at a faster rate than real economic output (Q), the price level (P) must increase to make up the difference. According to this view, inflation in the U.S. should have been about 31 percent per year between 2008 and 2013, when the money supply grew at an average pace of 33 percent per year and output grew at an average pace just below 2 percent. Why, then, has inflation remained persistently low (below 2 percent) during this period?

 

Declining Velocity Of Money

Now that we have covered velocity of money formula, lets look at what happens when VM starts to decline.

The issue has to do with the velocity of money, which has never been constant, as can be seen in the figure below. If for some reason the money velocity declines rapidly during an expansionary monetary policy period, it can offset the increase in money supply and even lead to deflation instead of inflation.

The velocity of money can be calculated as the ratio of nominal gross domestic product (GDP) to the money supply (V=PQ/M), which can be used to gauge the economy’s strength or people’s willingness to spend money. When there are more transactions being made throughout the economy, velocity increases, and the economy is likely to expand. The opposite is also true: Money velocity decreases when fewer transactions are being made; therefore, the economy is likely to shrink. https://cutt.ly/XQ8w2Bg

current velocity of M2 money stock

This is one of the reasons we called this the fake economic recovery from day one. Look at the velocity of money; is it rising? It looks like it dropped to new lows before flattening out. So, what is going on? Perhaps the market is already pricing in the destructive power of A.I. Dangerous to the old way of doing business and to many industries that are still stuck in the stone age, (especially) large banks, law firms, many of today’s mega-corporations, and the worst offender of all big government,

Let’s zoom in

velocity of M2 money stock

Option 2: It could be signalling that this so-called economic boom will go up in smoke without a very accommodative Fed. As we hinted, Forever Q.E. is here to stay forever or until a new monetary system is launched. Still, A.I. will be in charge when that happens, and there will be a whole new world order. This new world order will not be what the current NWO members expected or envisioned. However, that discussion is beyond the scope of this publication.

One thing is all but sure; the human workforce will be a lot different just 60 months from today. A.I. and Robots will replace a vast swath of the workforce. And this just came out from Tesla.

Tesla CEO Elon Musk said the company expects to build a humanoid robot with artificial intelligence next year that would complete simple physical tasks most workers detest. Musk unveiled the concept for the “Tesla Bot” Thursday during its “A.I. Day,” which the company streamed on its website. Musk said the bipedal gadget is meant to “navigate through a world built for humans.”

Tesla is arguably the world’s biggest robotics company because our cars are like semi-sentient robots on wheels,” Musk said. “In the future, physical work will be a choice. If you want to do it, you can. But you won’t need to do it.” https://cutt.ly/GQ8rPCy

The moment business owners can replace the many mediocre workers they are forced to hire, they will gleefully replace them with robots. And Tesla is not the only company attempting to build affordable robots.

The velocity of the monetary base2 was at 4.4, its slowest pace on record. This means that every dollar in the monetary base was spent only 4.4 times in the economy during the past year, down from 17.2 just prior to the recession. This implies that the unprecedented monetary base increase driven by the Fed’s large money injections through its large-scale asset purchase programs has failed to cause at least a one-for-one proportional increase in nominal GDP. Thus, it is precisely the sharp decline in velocity that has offset the sharp increase in money supply, leading to almost no change in nominal GDP (either P or Q).

Indeed, during the prerecession period, for every 1 percentage point decrease in 10-year Treasury note interest rates, the velocity of the monetary base decreased 0.17 points, based on a linear regression model of the velocity onto interest rates. Since 10-year interest rates declined by about 0.5 percentage points between 2008 and 2013, the velocity of the monetary base should have decreased by about 0.085 points. But the actual velocity has gone down by 5.85 points, 69 times larger than predicted. This happened because the nominal interest rate on short-term bonds has declined essentially to zero, and, in this case, the best form of risk-free liquid asset is no longer the short-term government bonds, but money.

So why did the monetary base increase not cause a proportionate increase in either the general price level or GDP? The answer lies in the private sector’s dramatic increase in their willingness to hoard money instead of spending it. Such an unprecedented increase in money demand has slowed down the velocity of money, as the figure below shows. https://cutt.ly/GQ8rPCy

Based on the Fed’s (own) observations. It could be concluded that our economy is sick or possibly even contracting. Given the dramatic rate at which the velocity of money has been plunging since 1996. Great food for thought!!!!! And here is the kicker, the above article was published in 2014. The velocity of money has dropped from 1.53 in 2014 to 1.12.

CPI 107 year chart

The 107-year chart of the CPI illustrates that it would have to trade past 10 to break its downtrend line, suggesting that inflation might not be something to fret over from a historical perspective.

The key points to focus on are:

The velocity of money continues to fall, which clearly implies that all is not well. In other words, take away the money supply, and this magic cycle of prosperity will go up in smoke. Whatever happens, the Fed will not stop pumping money into this economy. They might hit the brakes on one program, but they will press the pedal to the metal on another. From a much higher vantage point, this development foreshadows the demise of the human workforce.

When talking about inflation, it matters what reference points one is using. Randomly selecting points to match one’s argument amounts to curve fitting. In theory, if one does that, one can make rubbish smell like roses.

Random thoughts on the Velocity of Money

The velocity of money is supposed to rise when GPD rises and economic activity expands. It is also believed to increase when consumers spend more. But it’s not. Perhaps this is why economics has been called the dismal science and why monkeys armed with darts can outperform experts and economists with PhDs.

Einstein viewed quantum entanglement as “spooky action”; perhaps that name should have been reserved for economics. It’s spooky how experts in the field of economics get paid so well when they are almost always wrong.

Other Articles of Interest

stock market crashes in history

Stock Market Crashes in History

A study of the stock market crashes in history reveals one upbeat fact; the ones that lost the most were ...
Read More
stock market crash history

Stock market crash history

An examination of any stock market crash history reveals one stunning fact. Investors that jumped in and bought when panic ...
Read More
Broad Market

Broad Market Review

One has to understand the difference between the forest (broad market outlook) and tree perspective. Too many traders are subscribing ...
Read More
worst 25 year period in stocks

Worst 25 year period in stocks?

No, it's not the worst 25 year period in stocks; it's actually worse. Think almost 50 years, which means a ...
Read More
Russia Update on Ruble Neon Gas and more

Russian Update: Ruble, Neon Gas and more

Russian Update 1: World's Top Performing Currency? The Russian Ruble, now the strongest currency in the World, has been trading ...
Read More
stock market rally

Summer Stock market Rally?

We expected the markets to correct last year, but it was projected/expected to occur in two phases. The sanctions against ...
Read More
Intelligent Investing Strategies

Intelligent Investing Strategies

To win, you have to have a stake in the market; it does not matter whether you are right or ...
Read More
trading volatility

Trading volatility: A whole New Stock Market Game

Trading volatility will keep rising as we are in the battle of the trenches phase. This means the situation will ...
Read More
stock market crash 2022

Stock Market Crash 2022

In addition to the many reasons we have provided in previous updates, two extra factors could lead to a more ...
Read More
Trading Journal

Trading Journal; The invaluable tool for traders

We will start by listing a series of quotes from recent market updates. If you have not kept a trading ...
Read More
Trending markets

Trending markets; Only The Trend is your friend

Trending markets currently favour value stocks and growth stocks that took a beating in 2021. Certain commodities like Palladium and ...
Read More
Stock market experts

Stock market experts know Nothing

Last week’s bullish readings dropped to 22, and this week’s readings stand at 26. Neutral readings continue to trend upwards, ...
Read More
stock market technical analysis

Stock market technical analysis

Stock market technical analysis on its own produces mediocre results. However, when combined with Mass psychology the results are outstanding ...
Read More
market tops

Market tops occur when the masses are in a euphoric state

Even though things are viewed as bad now, these times will be viewed as the good old days in the ...
Read More
lot size

Tactical Investor Lot Size

This was initially posted in the Market Update forum. The current version is being modified to reflect a potential change ...
Read More
Panic Buying

Panic Buying Equates to Fools Paradise

Panic buying can be contrasted with panic selling, in which people sell good in large volumes, driving its price down, ...
Read More
panic selling

Panic Selling: Buy The Fear & Sell The Joy

Many subscribers (mistakenly) assumed that we were stating that the markets were ready to Drop. And they started to close ...
Read More
Velocity of Money

Velocity of money formula: What is it?

Investopedia defines the velocity of money in the following manner: Economies that exhibit a higher velocity of money relative to ...
Read More
Copper Market

Copper Market: what is it signalling today?

The Copper Market tends to bottom and top before the Stock market. Hence examining the copper market can provide valuable ...
Read More
Define Market Sentiment

Define Market Sentiment and is it useful

Let’s define sentiment: an attitude, thought, or judgment prompted by feeling. This is the general definition of sentiment. So, let’s ...
Read More
what is hyperinflation

Hyperinflation

The penguins masquerading as experts on Hyperinflation are full of it, for they fail to understand a specific factor, “velocity ...
Read More