Over the weekend I did a bit of research into that perennial question: inflation or deflation? That let me to look more closely at velocity of money. Depending on how you measure it (M1, M2, MZM), it seems that velocity of money has been declining pretty steadily since ~2008 (M1), ~1996 (M2), or ~1981 (MZM):

Velocity of M1 Money Stock (M1V)

Velocity of M2 Money Stock (M2V)

Velocity of MZM Money Stock (MZMV)

If (and I do say if) those trends continue, one could argue that deflation is in our future. (The third graph there looks an awful lot like the Japanese experience since ~1991…)

Has anyone here done more detailed research on velocity of money?





Speak your mind

1 Comment so far

  1. Will on April 23, 2013 7:06 pm

    The extremely slow turnover of a massively-expanded money supply causes me to worry how the Fed would (or would they?) summon the political fortitude to suddenly decrease that money supply by a large percentage if said rate of turnover ticked back up to even its historical average, which without tremendously increased output would result in runaway inflation.

    (I picture the velocity of money as an exponent in the inflation equation, with the money supply as its base- the Fed controls the base but the fickle public is responsible for the exponent- the Fed always oh so willing to multiply the base when the exponent drops, sometimes having trouble keeping up as in the last few years = deflation)


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