The Money Mystery Ch: 17

Velocity and its Impact on Economy

• Velocity is the rate at which money changes hands. It’s a crucial economic factor influencing inflation, deflation, and overall economic health.
• High velocity leads to inflation. A dollar changes hands quickly, facilitating more transactions and pushing prices upward.
• Low velocity leads to deflation. A dollar changes hands slowly, resulting in fewer transactions and declining prices.
• Velocity can be a more dominant force than money supply. Even with an increased money supply, deflation can occur if velocity drops significantly.
• The Great Depression is an example of low velocity. People hoarded cash during the Depression, fearing spending, leading to deflation despite increased money supply.
• Japan's deflationary experience is another example of low velocity. Despite significant yen printing, deflation persists due to low velocity caused by public fear.

Global Economic Uncertainty and Velocity

• There are significant variations in velocity across different areas of the economy. Some sectors, like internet stocks, may have high velocity, while others, like raw materials, may have low velocity.
• Fear can dramatically affect velocity. During times of uncertainty, people may hoard cash, leading to lower velocity, or spend it rapidly, fearing future value loss, leading to higher velocity.
• Global events influence velocity. War, political upheaval, and economic turmoil create fear and uncertainty, leading to unpredictable velocity swings.
• The future of velocity is uncertain. With the potential for both inflation and deflation, individuals and businesses need to understand this factor and how to prepare for its fluctuations.