Understanding Money Velocity
Inflation has become the issue of our time. It’s affecting everyone in many ways. Whether we’re talking about food, energy, housing, transportation, clothing, electronics, or cars…prices are way up.
Ever since the Fed started calling inflation “transitory”, I’ve been calling them out on it. While the rise in the inflation rate may stabilize or even fall back, I wouldn’t bet on that happening. Even if it did, I would not expect that to last. The other point is that even if we had real zero inflation at this point, we’re still faced with prices at a new and much higher level. And wages are not keeping up. So this is a problem.
And in my view, odds are good that it’s only going to become an even bigger issue. That’s because Money Velocity has crashed, but it’s unlikely to stay this low for too much longer.
Money Velocity is a simple but very important concept. It’s the rate at which money changes hands in the economy. It indicates the level of demand for money.
A lower money velocity generates deflation, with falling prices. A higher money velocity is naturally the opposite, creating upward pressure on prices, leading to inflation.
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