trying to understand Money Velocity ?

Discussion in 'Economy' started by Widdekind, Apr 24, 2012.

  1. Widdekind
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    Widdekind Member

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    MV = PQ = GDP [$/time]
    V = GDP / M [1/time]
    = "spending [$/time] per dollar [$]" ("total spending per unit currency")
    easy credit (low interest-rates) incentivizes borrowing "new Money", over (re-)spending existing Money. So, low Velocity "slow" money suggests ready access, to easy credit, i.e. well-developed financial institutions (banking system):
    "Velocity [V] is a useful indicator, of the relative size, of the financial sector, in countries lacking sophisticated capital markets -- particularly when the broad definition of money, M2, is used. The lower the Velocity, the higher the ratio of Money [M] to Gross Domestic Product (GDP), and hence, ceteris paribus, the larger the supply of domestic credit, and the relative size of the financial system" (Fry. The Afghan Economy, p.268).​
    "slow" Money suggests that borrowing new credit has become a first resort, as if currency was "used once, then abandoned". Cp. Say's Law, i.e. people produce Quantities (Q) so as to receive others' spendings as their own income (PQ), so as to spend themselves ("same dollar spent & re-spent", high-V "fast" Money); but, with easy credit, production ("hard work") may dwindle before borrowing ("easy credit") ("one dollar borrowed to spend, another to spend again", low-V "slow" Money).

    If "Money" is distinct from "credit"; then "Demand for [keeping existing] Money" (inversely proportional to V) is distinct from "Demand for [borrowing more] credit" (proportional to interest-rates)...

    Demand for Money = "propensity to hoard circulating money" ("see it, stash it")
    Demand for Credit = "propensity to dis-hoard de-circulated money" ("i'll pay you 30 points, man") and to borrow "new" credit-Money

    Velocity is inversely proportional to the former (money stashed is not respect)
    Interest-rates are proportional to the latter (points "pull" stashed Money "out of hiding")

    M = Money-supply
    MR = Money "hoarded" into Reserves
    MC = Money circulating (MC + MR = M)
    X = Demand for Money
    r = Demand for Credit = interest rate

    X MC = rate at which Money is hoarded [$/time]
    r MR = rate at which Money is dis-hoarded [$/time]

    X MC = r MR "in equilibrium"

    with fractional Reserves (f), and Money-multiplier (1/f), r MR ---> (1/f) r MR once re-circulated bills become Reserves, and "multiply" into new loans
     
    Last edited: Apr 24, 2012
  2. DSGE
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    DSGE VIP Member

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    You're trying to learn too much too quickly. And on an internet forum is not an easy way (or an at all advisable way) to learn a subject. You're already inventing poorly defined concepts like "rate of dis-hoarding" and your own notation. That's a terrible way to approach economics. If you're interested in monetary economics, go to your library and borrow a monetary economics textbook.

    The best money/banking textbook is The Economics of Money, Banking and Finance by Frederic Mishkin. It's very good. If it's not at your library (if it's a university library it'll be there), it'll be pretty easy to find a torrent.
     
  3. Widdekind
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    Widdekind Member

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    spending on Money ?

    naively, if "Interest-Rates are the Price of Credit", then the annual rate of borrowing (new Credit) multiplied by that year's Interest-Rate, at which said Credit was borrowed, resembles a "Price x Quantity" (Interest-Rate x new Borrowings). After 1980, annual borrowings were such, than annual "new Interest obligations" [billions USD] averaged circa +125 billion USD per year (nominal, not inflation adjusted):

    yearly "new Interest obligation" [billions USD] (from new borrows) over time
    [​IMG]
    If
    P x Q = [$ / widget] x [widget / year] = [$ / year]​
    for typical goods & services; then
    IR x B = [$ (repaid) / $ (borrowed)] x [$ (borrowed) / year] = [$ (repaid) / year]​
    i.e. "new Interest obligations" [$ repaid] resembles a "Price-tag on stacks of new (credit-)Money", de facto "bought" from banks, i.e. "spending on (new credit-)Money".

    Adjusting for inflation (1980 USD = 1):
    [​IMG]
    Prima facie, a "Reagan-era surge" (to c.$90B / year) was followed, by a modest drop (to c.$70B / year), until 2008.



    M/P ratio ?

    DSGE made a reference, in another thread, to a source, discussing Interest-Rates, as relating to the ratio of M/P (=Q/V ?). Index to 1982 (=1):
    [​IMG]
    Naively,
    M/P = Q/V = [widgets / year] / [transactions / year] = [widgets / transaction]​
    so that rising M/P ratios, since 1980, reflect economic actors (individuals, corporations, Government) "buying in bigger bites" (more 'widgets' per 'transaction').
     
    Last edited: Apr 24, 2012
  4. ThinkCritically
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    ThinkCritically Open to opinion

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    Velocity is simply the velocity of expenditures.

    MV=PQ

    Money in circulation*velocity of expenditures=Price*quantity


    The idea is that when spending decreases (-%ΔV) Prices (%ΔP) can be stabilized by the FED by changing the amount of money in the economy (%ΔM). The FED has a few ways that it can change the money supply.

    The first and most common way they do this is by changing the interest rate. An increase in the interest rate shrinks the money supply, and conversely a decrease in the the interest rate increases the money supply.
     
    Last edited: Apr 28, 2012
  5. Widdekind
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    Widdekind Member

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    from the CPI & GDP-Deflator, i scatter-plotted dP/P vs. dQ/Q, for the US economy, since 1960, i.e. %ΔP vs. %ΔQ
    [​IMG]
    in general, dQ/Q > dP/P, although both hover around +3% per year; all of the (flagrant) outliers reflect "Recession" years, when outputs stalled (dQ --> 0), yet costs still soared, as if the economy "slipped a gear".
     
  6. DSGE
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    DSGE VIP Member

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    Dude, remember that exposition you're supposed to do so that we can understand what the fuck you're talking about? How do you expect to have a conversation with anybody if nobody can follow you? What's the motivation for this graph? What are you trying to think about; what questions are you trying to answer? :cuckoo:
     

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