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Strategies & Market Trends : The Residential Real Estate Crash Index
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To: gpowell who wrote (47466)1/19/2006 6:10:14 PM
From: GraceZRead Replies (1) of 306849
 
Velocity, eh?

I once asked ahhaha about a money multiplier measure that the Fed maintains and I got this pretty humorous reply:

A bunch of useless nonsense invented by clowns who like to do arithmetic.

Sometime ago on my thread I lambasted some idiot for making a big deal
about some ridiculous measure which purported to do this or that, but the
measure was a division of two unrelated non-categorical quantities. It was
like saying South Carolina generates 50 million bales of cotton each year
and adds 50,000 miles to its roads each year so South Carolina is fast
because it makes 1000 bales per mile.

Let's say you divide currency by reserves. That gives you one of the money
multipliers. What does it mean? Dollars supported by reserves. Oh now you
get it, but you shouldn't because I sneaked the word "supported" in there
to try to make you think the term multiplier was meaningful. That is, if
the multiplier is declining, does that mean people don't want to create
demand deposit through loan making relative to the amount of reserves being
made available? Not necessarily. In the old days we used to have another
term that was similar in concept. It was called "velocity", the "money
velocity". Originally it meant the velocity of turnover of money, currency,
i.e., how quickly dollar bills went through stores and factories and ended
up back at the mint or federal reserve bank. Then it evolved into meaning
the ratio of currency to GNP, then to money supply to GDP, then to total
money to drugs consumed. That's when they gave up on velocity. Now they
call it multiplier. Idiots all.

Here's the measure I asked him about:

research.stlouisfed.org
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