Velocity of Money

Economically there is a mathematical equation the is meant to describe the relationship between the money supply, the velocity of money, the inflation and the economic output. This may seem a little complex but I will attempt to break it down. The equation is:

MV = PQ

where:
M = money supply
V = velocity of money
P = inflation
Q = economic output

Looking at the equation in mathematical logic, if MP increases then PQ must also increase. To increase MP, either M or P must increase with the other staying the same or the other can decrease by a lesser amount than the other increase. The same logic applies to PQ.

Looking at the economic logic with some current facts. We know that the money supply has increased (money printed by the feds) and the velocity of money has decrease (as shown by the attached chart). So the MV has likely decreased or at the very least stayed the same.

This equates to PQ must also have done the same as MV because the equation states MV = PQ.

Looking at PQ, when know the US’s economic output has fallen due to all the manufacturing job being outsourced and the average worker’s (the middle class who are no longer middle class) disposable income falling. Therefore based on just the equation, inflation must increase.

Now that the mathematics are understood, lets look at things in real life terms. First some definitions. Velocity of money is how fast money flows from hand to hand. If you take your money and save it, this slows the velocity of money and visa versa when you spend the money it increases the velocity. M is a definition given to types of money, M(sub 1) is the most liquid so it more or less is cash. As the subscript goes higher the money is less liquid, so a mortgage is considered money but it is very hard to spend because it has to be converted into cash before it can be spent.

How this affects the economy is the lower the velocity the lower the sales which in turn reduces profit and results in recession or depression. It is a death spiral, when companies have lower profits they layoff people which lowers people buying products which leads to lower sales.

The conclusion is inflation is likely on the horizon and if you want to believe it or not we are likely in a recession if not a mild depression. What should be a concern is if the inflation turns into stagflation, the US will begin looking similar to Venezuela.

Source: zerohedge.com

About the author: outwalking

Life time student

binkley

outwalking I changed my settings to hide my posts....and community and WOW there is alot going on!

10 months ago
binkley

You just hide them from your own view so you can see everyone elses. I post alot so all i see are my posts unless I hide them. They are still visible to everyone else.

10 months ago
binkley

We need a helpful tips post from time to time. The website is so massive and I trimmed it way down.

10 months ago