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Pragmatic Capitalism

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Velocity of Money

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In my question on the Fed’s balance sheet “MachineGhost” brought up the issue of money velocity. I was wondering if anyone has any thoughts on why the velocity of M2 has dropped almost continuously since the second half of the 1990s? Why has it never recovered?

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Posted by John M. Wilkins
Posted on 07/17/2017 6:36 AM
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Velocity is just a ratio. If you double M (which is usually defined incorrectly in the first place) and GDP doesn’t double then V has to get cut in half. It’s just math. But the point is that this doesn’t tell us anything about anything. Doubling the money supply doesn’t necessarily lead to growth. Especially when you define money as reserves. But even if you define money as deposits then the same thing is true. After all, what if I borrow a million dollars and put it in a hole? Or what if I borrow it to buy a business that immediately fails? That’s actually deflationary!

So, the point is that velocity is a silly measure. It doesn’t really tell us the cause since it’s just an ex-post measure of the effects from other things that are happening in the economy.

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Cullen Roche Posted by Cullen Roche
Answered on 07/17/2017 1:05 PM
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    Richard Werner covers this topic extensively in his book “New Paradigm of Macroeconomics” and various papers of his.

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    Posted by Incognito 7
    Answered on 07/18/2017 3:03 AM
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      Posted by Incognito 7
      Answered on 07/18/2017 3:04 AM
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