Monday, May 31, 2021

Lots of New Money, But Still-Low Inflation. What Gives?

By Richard M. Salsman . He is a Senior Fellow at the American Institute for Economic Research. This is a great, very detailed article. It seems like the main point is that the velocity of money is not high enough to create much inflation even though the money supply has increased so much. So that means that aggregate demand for all goods and services is not strong enough to raise prices because people are holding money


"the money supply (M-1) has increased substantially over the past year (+350%), to $18.4 trillion, although most of that occurred in 2Q2020. But the demand for money (cash balances) also has risen a lot, which means money’s velocity (rate of speed in spending) has been plummeting. Whereas velocity is the multiple of nominal GDP to the money supply, money demand is the inverse (the multiple of money supply to nominal GDP, or the reciprocal of velocity). Fast-rising money demand (fast-declining velocity) signifies hoarding.  

Banks, businesses, and households tend not to hoard money in good times, or when they have confidence in the credibility and predictability of policymakers; they hoard in bad times, when they lack sufficient confidence. That is precisely the case today"


Anonymous said...

I have seen many people out spending money that i presume came from stimulus. Most of the this i recognize from people that generally don't take trips out of state an now they are doing so by the dozens. It should be just a matter of time before the money velocity catches up, but the people that aren't familiar with a certain lifestyle have been afforded an opportunity in this case I think.

Cyril Morong said...

Right. We will have to keep an eye on the spending to see if and when velocity picks up