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Pastimes : Clown-Free Zone... sorry, no clowns allowed
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To: Les H who wrote (156882)3/24/2002 2:21:09 PM
From: Tommaso   of 436258
 
My understanding is that when people begin to get rid of money because it is a declining store of value, there is indeed an increase in velocity that is both a consequence and a further cause of inflation. Ultimately a rise in prices is limited by the amount of money available, but overgenerous issuing of fiat currency certainly does lead to increased velocity as people try to exchange all cash balances as rapidly as possible for material goods. But this is more a reflection of an inflationary process that is already well under way than it is a cause of it. Decreases in velocity do reflect a confidence in tha value of the currency and in an extreme form reflect the deflationary preference for holding cash because its value is appreciating.

As I understand it, all sorts of other variables can enter in.

Maybe not too bad an analogy might be to say that when a river begins to flow too swiftly to be contained in its banks, you have a flood. The original cause was heavy rainfall, not the swiftness of the current, but the immediate cause of the levees breaking is the river current.

So it does make sense to try to measure velocity and it is an index of inflationary psychology.

I used to listen to an economist named James Waller who knew the economist Henry Hazlitt and would critique Hazlitt's ideas about monetary velocity. (Hazlitt argued that velocity had no significance, if I remember correctly.)
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