Thursday, December 13, 2012

Money velocity

Here are a couple of interesting charts of the decline in interest rates over the last 30years and the decline in the velocity of money over the same time frame. I was under the impression that the lack of velocity of money was a recent problem. I guess not.

I suppose that it makes sense that as inflation declines the velocity of money declines due to the lack of urgency to buy things. If you can wait there is a chance they will be cheaper.  Not that things have gotten cheaper over 30 years. In dollar terms the prices are up bigtime, we have created a lot of  money but in inflation adjusted terms things are cheap..... Hmmmm.

So would raising interest rates stimulate the velocity of money. Or does it take actual inflation to speed up the turnover? I thought that inflation was always and everywhere a monetary phenomenon? Isn't that what the free market, laisse faire guys from Chicago university say all the time?

So if we have a problem of not enough inflation at the present time what will get it going? I think one of the common trends over this timeframe has been the rise of Asia, and China in particular. And having their currencies pegged to the U.S. dollar/world reserve currency has artificially kept the US dollar elevated.

The latest and persistent US Fed effort to debase the US$ will have the continued effect of pushing inflation in the Asian and Emerging market economies. They will HAVE to eventually abandon the peg to the dollar and let it sink to it's natural level. And when that happens the velocity of money will rise.... And China will go from an exporter of deflation to an exporter of inflation.

 Look at these charts. Money velocity follows interest rates down. You would think that low interest rates would stimulate turnover.... We have been fighting a losing battle!


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