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Velocity of Money

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September 14, 2009 – Comments (9)

Mauldin has a good write up explaining the velocity of money.

Here is the conclusion:

While there are some who are very sure of our near future, I for one am not. There  are just too damn many variables. Let me give you one scenario that worries me. Congress shows no discipline and lets the budget run through a few more trillion in the next two years. The Fed has been successful in reflating the economy. The bond markets get very nervous, and longer-term rates start to rise. What little recovery we are seeing (this is after the double-dip  recession I think we face) is threatened by higher rates in a period of high unemployment.

Does the Fed monetize the debt and bring on real inflation and further destruction of the dollar? Or allow interest rates to rise and once again push us into recession? (A triple dip?) There will be no good choice. The Fed is faced with a dual mandate, unlike other central banks. They are supposed to maintain price equilibrium and also set policy that will encourage full employment. At that
point, they will have to choose one over the other. There are no good choices. I can construct a number of scenarios. All end with the same line: there are no good choices.

 I tend to agree with the "there are no good choices" in getting out of this mess...

9 Comments – Post Your Own

#1) On September 14, 2009 at 10:11 AM, Melaschasm (55.44) wrote:

I mostly agree.  I am expecting a double dip recession because I think that the Fed will be forced to let interest rates rise significantly as soon as we start to have actual economic growth. 

As much as I do not like the ease money policies of the Fed, at least those are likely to be reversed when inflation starts to get ugly.  When it comes to federal spending, inflation is just an excuse to make even bigger increases in spending, which is the opposit of what should be done.

 

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#2) On September 14, 2009 at 10:14 AM, kaskoosek (59.72) wrote:

This has nothing to do with velocity. Some people are misusing the term. You can easily have a currency collapse with very little velocity.

 

Velocity is simply higher economic activity, it is not related to the strength of a currency. 

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#3) On September 14, 2009 at 10:16 AM, kaskoosek (59.72) wrote:

Some people need to study economics before spouting nonsense.

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#4) On September 14, 2009 at 10:17 AM, outoffocus (22.82) wrote:

There were never any good choices.  The conundrum was the make the short term choice vs. the long term choice.  The fed chose the short term choice which will lead to long term pain.

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#5) On September 14, 2009 at 10:22 AM, PeteysTired (< 20) wrote:

Congress shows no discipline and lets the budget run through a few more trillion in the next two years

When has Congress shown any discipline?  Not since the Reagan era.  Every year they have spent more than the previous year.  EVERY YEAR!  Oftentimes, the spending increases outstripped the population growth or inflation.  In addition, no President has ever held their feet to the fire.

They (Federal Reserve) are supposed to maintain price equilibrium and also set policy that will encourage full employment.

How has that been working for them?????

People, the US crisis is not about health care.  This crisis is about the Fed DEBT and the inabilities of the Federal Reserve to help anyone, but BANKs and whoever they are gaving money to that we don't know about.

I really had hope for Obama, but in my opinion he is not that much different than Reagan, Bush, Clinton and Bush...maybe a little smarter than the 2nd Bush :)

 

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#6) On September 14, 2009 at 11:51 AM, jstegma (29.15) wrote:

Velocity of money is definitely a factor in the inflation/deflation situation. 

When has there ever been a low velocity currency collapse?  If you are expecting high inflation you spend your cash ASAP.  Everyone does.  And that increases velocity big time.  No one starts keeping their money in the mattress when the currency is collapsing.  But they do when deflation is occurring, and it feeds a vicious cycle as more people begin to hoard cash and cash becomes less and less available.  The currency collapse has to be accompanied by a high velocity of money.  The preceeding events that lead to the collapse could occur when velocity is low, but the currency won't collapse until velocity increases.

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#7) On September 14, 2009 at 12:06 PM, chk999 (99.97) wrote:

I used to be a Mauldin fan, but seeing as he was calling for a "muddle through" economy before the big fall, I'm not impressed.

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#8) On September 14, 2009 at 5:09 PM, kaskoosek (59.72) wrote:

 jstegma

Iceland. Velocity has nothing to do with a currency collapse. Capital outflows lead to a collapse and not velocity. 

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#9) On September 15, 2009 at 2:25 AM, dwot (43.46) wrote:

Some people need to read the whole article before spewing off.  If you read the article he explains velocity of money but then he goes into how you can't plan for these other things.

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