Can Someone Explain Velocity?

[Uncle Emanuel Watkins]

Well the OP seems to have the attitude that if ONLY Austrian economists had a modest grasp of the concept of the velocity of money, then they would see that they are wrong about economics!!

What this article does is debunk the OP and mainstream economists thought process on the velocity of money.

Let me try answering this with the painful truth: The northeastern and midwestern states of the Union tend to utilize Washington
DC as their own personal local government in an attempt at keeping their people and their wealth from heading south, figuratively and literally speaking. In order to succeed at doing this, the Anglos up north have sided with minorities in the south to spend an unimagineable amount of money to continue paying unemployment benefits. This keeps people from having to get a job. This, in turn, keeps people from having to move from those irresponbisle states with a social, unionized agenda, economically speaking, to those more responsible states with a open, free enterprise agenda.

Our economic philosophy is actually "Democratic Republic." The fact that people of European ancestry continue to try to muck it up with foreign economic priniciples is part of the problem. African voo doo might be a better alternative.

 

[r3volution]

Velocity is the speed and direction something is moving in.

Velocity of money is the speed at which money is exchanged. So if no one is spending any money, the velocity is low. If lots of people are spending, the velocity is higher.

yes , "keep it simple stupid" . obviously things can change velocity , that is when things start to get complicated . like taxes , regulation , manipulation , supply ect.. can change the direction or speed of the velocity .

 

[Carson]

Basically if you have a rifle five feet off of the ground, aimed level and fire it at the same time you drop a bullet, they will both hit the ground at the same time.

If you have a low velocity bullet and a high velocity bullet firing at the same time the bullet drops, they still all hit the ground at the same time. The high velocity bullet just covers more distance.

As for how velocity is related to currency...surely you jest.

But if one would insist on such a thing... counterfeiting the money supply sucks the life out of the honest currency in the system. If there ever was any velocity in a dollar it is now hitting a headwind.

I can't imagine crippling peoples ability to produce can do anything but drag things down. Creating goods is growing an economy. Counterfeiting the money supply creates nothing of honest value. It just immorally shifts property rights. Immorally muzzling the voice of the honest dollar. (You Know! The people that really actually know what they are doing!)

I am starting to get a real kick out of people when they talk about inflation being a good thing. I could be wrong but it looks to me like it's averaged 400% over the hundred years of our central banking. Most of that in the last fifty years, what ever you figure it at. If someone in the last hundred years knocked 400% of your teeth out, I'm thinking people might see it different.

But I digress.


digress
[dih-gres, dahy-]   Example Sentences Origin
di·gress
   [dih-gres, dahy-] Show IPA
verb (used without object)
1.
to deviate or wander away from the main topic or purpose in speaking or writing; depart from the principal line of argument, plot, study, etc.
2.
Archaic . to turn aside.

 

[Brian4Liberty]

distance unit/time unit?

 

[pauljmccain]

I'm not sure if the OP was answered...

It's the speed at which money changes hands. Nothing more, in basic definition.

EDIT: I see that it was, on the 6th? post. Not sure what you guys are bickering about, but in the end, velocity is a pretty useless economic measure.

 

[oyarde]

Velocity is the speed and direction something is moving in.

Velocity of money is the speed at which money is exchanged. So if no one is spending any money, the velocity is low. If lots of people are spending, the velocity is higher.

Take 1921 as a good example of that , very little money was minted at the mints except dollars , no real need for it due to the economy , but at least it was real money. Up to , probably around 1934 , you could kind of gatherhowthe economy was , by money minted ...

 

[Knighted]

eg If the velocity doubles, then yes money will be spent twice as much...but it will also be sold twice as often. Thus somewhat of a canceling effect occurs. Inflation occurs when an economy spends more money than it acquires or when commodities become more scarce (which will result in bidding up their price).

I'm not totally buying this, and I think I disagree with Mises on this. If we think of it purely from a supply/demand perspective, it makes sense that a higher monetary velocity will produce price inflation. To illustrate this, suppose we focus on just two participants in an economy, say a baker selling bread and a farmer selling corn. The frequency of their transactions -will- have an effect on price. Suppose the baker sells his bread for $10 and the farmer sells his corn for $10. Each of them has only a limited supply of their goods, say 10 pieces of corn and 10 pieces of bread. Consider two scenarios - low velocity and high velocity:

Low Velocity (low number of transactions): The baker sells just one loaf of his bread to the farmer for $10. The baker then takes the farmer's $10 and buys one ear of the farmer's corn for $10.

High velocity (high number of transactions): The baker and farmer make the exact same transaction - which is essentially one loaf of bread for one ear of corn, but they do this many times - say 8 times. At the end of their transactions, even though the money supply hasn't increased any (since they simply exchanged the same $10 back and forth), the baker is left with 2 loafs of bread remaining while the farmer also has 2 ears of corn remaining. The money supply hasn't increased any - both the farmer and baker still only have their original $10 to spend. But the money in their economy is now chasing a fewer number of goods due to a higher monetary velocity. And when the same amount of money is chasing fewer goods, the result will be price inflation.

 

[Liberty's Landing]

I was put in the same position as the OP the other night. I was told that all this talk about ending the Fed and gold-backed currency ignored the positive effect of velocity. He said that somehow, as the velocity increased, added wealth was added to the economy. $100 spent 10 times became $1000. That means more revenue for the government via taxation, and that it also countered inflation, or at least benefited the economy more than any negative effect of inflation. He said that the stimulus would have worked if more money had been pumped in. As a side note, the guy who told me this considers himself a conservative, and only recently came upon this opinion after an economics class in college, not suprisingly.

I can see how velocity benefits government as each transaction is taxed. And in my bones, I don't feel that merely moving money through an economy creates wealth, but I can't put it into words. Doesn't the 'new' money need to represent production somewhere? Much like gold that is mined from the earth?

 

[Steven Douglas]

I'm not totally buying this, and I think I disagree with Mises on this. If we think of it purely from a supply/demand perspective, it makes sense that a higher monetary velocity will produce price inflation. To illustrate this, suppose we focus on just two participants in an economy, say a baker selling bread and a farmer selling corn. The frequency of their transactions -will- have an effect on price. Suppose the baker sells his bread for $10 and the farmer sells his corn for $10. Each of them has only a limited supply of their goods, say 10 pieces of corn and 10 pieces of bread. Consider two scenarios - low velocity and high velocity:

Low Velocity (low number of transactions): The baker sells just one loaf of his bread to the farmer for $10. The baker then takes the farmer's $10 and buys one ear of the farmer's corn for $10.

High velocity (high number of transactions): The baker and farmer make the exact same transaction - which is essentially one loaf of bread for one ear of corn, but they do this many times - say 8 times. At the end of their transactions, even though the money supply hasn't increased any (since they simply exchanged the same $10 back and forth), the baker is left with 2 loafs of bread remaining while the farmer also has 2 ears of corn remaining. The money supply hasn't increased any - both the farmer and baker still only have their original $10 to spend. But the money in their economy is now chasing a fewer number of goods due to a higher monetary velocity. And when the same amount of money is chasing fewer goods, the result will be price inflation.

I'm not sure why it's even controversial, as simple supply and demand curves and daily life experiences of both buyers and sellers prove it out.

In economics, supply is defined as the amount of a given thing a seller is willing to sell at a given price, which ALWAYS includes a time component for any given supply curve. This is seen with grocery stores and clearance prices, as prices that are reduced for whatever didn't sell within a reasonable period of time. Those lower prices in turn affect demand, as just about every consumer knows firsthand. I don't NEED more sirloin or broccoli, but as long as they're on sale, I may stock up. Price is fundamentally about what the market will bear, and the frequency of transactions (specific velocity of quantities of a given thing sold within a given period of time) does affect price. If EVERYTHING sells, not only are no clearance prices offered, but it also serves as a signal to the seller that THE PRICE IS TOO LOW. And you can fully expect the price to rise as a result. If too little of the same thing sells within that same given time period, clearance prices will be offered at some point, and it will be a signal to the seller that THE PRICE IS TOO HIGH. As long as there is still a profit margin to be had, the item will continue to be stocked, but at a lower price.

So I'm with you. It doesn't matter whether Mises got that one wrong, or if his thoughts were just incomplete. Velocity is still very much a worthless measure, because it's an overgeneralized aggregate jumbling that makes no magnitude and direction distinctions, which makes it appear as a zero sum game. However, drill down to specifics and it becomes obvious that SPECIFIC velocity changes do affect price -- assuming the direction of the velocity component (increase or decrease) is toward YOUR PREFERRED item.

If the Fed reduces interest rates, and the government steps in with Fannie and Freddy to make normal taxpayers liable and on the hook for other people's loans and purchases, then the velocity (magnitude and direction) of debt money will accelerate toward everyone in that particular supply chain -- starting with the banks. And THAT VELOCITY toward THAT particular good will drive prices UP. Likewise with government guaranteed student loans. More people bidding up prices, the cost of education goes up for everyone, and not just those who take on no loans, but try to pay out of savings, or as they go. The price accelerates as a result of increased velocity in the direction of THAT particular service.