What is the Velocity of Money

velocity of money

Velocity of Money

Dec 20, 2022

Velocity of Money chart

The above chart indicates that without constant money infusions, no long-term economy exists. A healthy economy has an upward-trending VM. The steep decline started after the Fed’s massive intervention in 2009. Since then, the trend has been negative; believe it or not, this is one of the best measures of real inflation (in a world that does not operate on “hard” money principles). A rising VM is usually associated with higher prices, but in this case, higher prices are generally warranted as a rising VM indicates that the economy is improving.

The velocity of Money from Feb 2009

Velocity of Money 2009 chart

If you look at the above chart, the economy has been sick since 2009, indicating that no matter what the Fed states, it will continue to juice the economy with money. They will intervene occasionally to create the illusion that they are doing the right thing. One can also then argue that almost every inflationary move since 2009 has been artificially created, as there has been no uptick in the VM.

The velocity of money from 1970 to 1982

Velocity of Money 1970 - 1982 chart

Now, look at the velocity of money during the inflationary period that started in the 70s and ended in the 80s. VM was rising. Yet since the advent of the internet (when it went mainstream roughly in the mid’ 90s), one could argue that inflation based on the VM formula has been declining. One could also say that all the inflationary events had a specific trigger behind them, for example, limiting the supply of critical goods, disrupting supply chains, and using psyops to create the illusion that you need to buy now or lose big tomorrow.

The Tulip mania occurred when hard money principles were quite strong. If one knows how to use MP effectively, one could lay the groundwork to create inflationary forces in any market segment.

This is the danger of having large amounts of money; you can manipulate the trend by artificially using these massive amounts to create or destroy demand.

Overview of the Velocity of Money

The velocity of money refers to the speed at which money changes hands in the economy. A high velocity of money means that money is being spent quickly, while a low velocity of money means that money is being saved and spent slowly. While a high velocity of money can indicate a healthy economy, it can also pose significant dangers.

One of the primary dangers of a rising velocity of money is that it can lead to inflation. As money changes hands more quickly, demand for goods and services increases, increasing prices. This can create a self-reinforcing cycle where prices continue to rise, leading to further increases in the velocity of money and inflation.

Another danger of a rising velocity of money is that it can exacerbate economic bubbles. When money is being spent quickly, it can create an artificial demand for assets such as stocks and real estate. This can lead to price bubbles that eventually burst, causing significant economic damage.

Additionally, a rising velocity of money can create financial instability. When money is being spent quickly, it can be difficult for policymakers to manage the economy effectively. Interest rate hikes may not slow the economy, and fiscal policy may be less effective at stimulating growth.

In summary, while a rising velocity of money can be a sign of a healthy economy, it can also pose significant dangers. Investors should be aware of the risks associated with a high velocity of money and consider diversifying their portfolios to mitigate them.

References on the dangers of a rising VM

  1. “The Dangers of a High Velocity of Money” by Investopedia: https://www.investopedia.com/terms/v/velocity.asp
  2. “The Velocity of Money and Its Effect on the Economy” by The Balance: https://www.thebalance.com/what-is-the-velocity-of-money-3306106
  3. “Why High Velocity of Money Is Bad for Investors” by The Motley Fool: https://www.fool.com/investing/general/2015/05/22/why-high-velocity-of-money-is-bad-for-investors.aspx
  4. “The Velocity of Money and Its Relation to Inflation” by The Balance: https://www.thebalance.com/the-velocity-of-money-and-its-relation-to-inflation-416111
  5. “Why the Velocity of Money Matters” by Forbes: https://www.forbes.com/sites/steveblumenthal/2021/01/12/why-the-velocity-of-money-matters/?sh=15a42c4f335d
  6. “The Velocity of Money: A Key Indicator to Watch” by Charles Schwab: https://www.schwab.com/resource-center/insights/content/velocity-of-money-a-key-indicator-to-watch

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