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Strategies & Market Trends : Asia Forum
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To: Sam who wrote (4093)6/1/1998 8:31:00 PM
From: Zeev Hed  Read Replies (2) of 9980
 
Sam, the Central bank knows exactly how much currency is in circulation, they take what was printed (minted) and subtract what was called back in and destroyed. All other factors in all the M's are calculatable from bank's report and the treasury. So to follow these is not too difficult (and the Barrons even gives a summary every week in their "lab"). Money velocity is much more difficult to estimate. In principle you should be able to divide the GNP by M1 (currency and "fast" bank accounts) and call it velocity. However the velocity of currency and checking accounts is not the same. Still you should get a good average. One of the problems you face is that a big chunk of the currency is actually in millions of mattresses all over the world (replacing gold as a "store of value) and the velocity of that hoard is nil. Why is it important to know the velocity? I believe that when velocity changes, the growth of M1 (and the other M's) is no longer simply related to the growth of the economy. I am postulating that the current malaise in world's economies is causing a slowdown in money velocity here (more green backs are going into mattresses or being used overseas in other economies as exchange means). If our economy is to continue and grow (without inflation), money should be created at the rate of growth of the economy (or you get a liquidity shortage, if the growth is slower, or inflation if you create more money chasing the same quantity of goods). If my thesis that velocity is declining is correct, than growth rate of the money supply above the growth rate of the economy is required. How much, by the same amount that frozen currency (frozen out of the US economy) has increased multiplied by our domestic velocity.

Zeev
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