Velocity Of Money Is No Longer A Huge Inflation Factor

Let's talk about the velocity of money! The speed at which money flows through the economy is often tied to speculation about the future of inflation. It may be important, but it is no longer a big factor when it comes to inflation. We have entered a cost-push inflationary cycle and these tend to be self-feeding. This translates in to more inflation ahead.

Today, small businesses are suffering the most pain of cost increases since larger enterprises have a lot more ability to get cheap funding. More small businesses forced to close may result in stagflation in this economic cycle rather than deflation which is normally associated with downturns. This is a reason for concern on both the employment and inflationary front. Not only do small businesses employ a huge number of people but they generally resist raising prices due to close relationships with their patrons.

 

As for the velocity of money;

 

Velocity is the speed in combination with the direction of motion of an object. Velocity is a fundamental concept in the branch of classical mechanics that describes the motion of bodies.

The scalar absolute value (magnitude) of velocity is called speed.

The faster money moves through the economy is sometimes tied to demand in that John or Jo will take all their money on payday and spend it immediately if their demands are high. In such a situation, retailers and vendors will rush to replenish goods to refill shelves. During low demand, they will spend the money slowly over time and the vendor will pull from inventory rather than place new orders.

Please consider the possibility that what is considered a "slowing in the velocity of money" is rooted in where money or wealth is being placed. Another factor could be who holds the bulk of money in circulation. As inequality has grown and more wealth shifted into the hands of a few, the idea these few will park their wealth and money for long periods of time feeds into why velocity is falling. Then, please consider, that a shift in investor attitudes causing a shift away from intangible to more tangible investments could spark a surge in both velocity and inflation. 

Over time, changes in the way people handle transactions, such as using more or less charge cards or debit cards as well as the way financial institutions facilitate such transactions may affect how velocity is viewed. Still, how much the velocity of money affects inflation is difficult to assess. This leads us to the question of whether inflation is being driven by demand factors or simply increases in cost being passed along. 

Much of the inflation we have witnessed in recent years has been attributed to supply chain shock as well as a large increase in the money supply. Huge government deficits and spending as a result of Covid and efforts to get the economy moving post Covid have acerbated the situation. This brings up the question of what we should expect going forward. Demand-pull inflation, cost-push inflation, or if the economy continues to fall, stagflation. 

Mixed into this brew is the idea trade is good for all parties concerned, trade deficits, the value of fiat currencies, and tariffs. Several flaws regarding the idea that "free trade" is the answer to many of our problems have revealed themselves in recent years. In short, it is time to honestly look at the role of trade and why it should be considered a double-edged sword. While the idea behind trade has a great deal of merit it is often given far more credit for economic growth than it should. 

With government spending predicted to grow in coming years, and a continued debasement of fiat currencies, deflation is unlikely. No matter how those in the know or in charge of such policies seek to spin it, they can’t lead countries out of what appears to be persistent economic trends. While the rate of price inflation is easing, core inflation remains stubbornly high.

The problem is continued government spending. The Fed’s efforts to ease inflation and the easing rate of inflation are both about to run into major resistance. A recent article published in The Daily Signal told how The Tax Relief for American Families and Workers Act of 2024 is nothing of the kind. Instead, it is a mixed bag that includes welfare expansions, corporate windfalls, and inflationary deficits.

It is logical to envision that huge government deficits will result in further inflation and increasing interest rates as the government generates new money without increases in real productive capacity. such spending tends to crowd out private borrowing. In short, bigger government acts as an impediment or roadblock to increasing supply while increasing demand. While the velocity of money does affect inflation, government spending is where economist should center their focus.

 

(Republishing of this article welcomed with reference to Bruce Wilds/AdvancingTime Blog)