Showing posts with label Velocity of Money. Show all posts
Showing posts with label Velocity of Money. Show all posts

25 June 2009

Jesse's Question for the Day


The expansion of credit in a fractional reserve banking system seems to be geometric.

The spending in the wage - price function, as captured by the velocity of money, seems to be more arithmetic, on the order of 2 or so.

Can money creation then fail to overcome the output gap if monetization is permitted and government spending has been and continues to be robustly in excess of tax receipts?

A refusal of banks to lend would tend to dampen the geometric power of credit expansion and a potential source of money creation. It also would tend to dampen velocity of money.

An undeveloped thought which this blogger is just beginning to consider, offered in the hope that someone might offer some useful data or existing theory on the subject.

And on a separate but somewhat related topic, the flip side of deflation is not hyperinflation as it is an extreme. People who based their risk portfolio only for the extremes of an outcome cannot consider themselves hedged since they are likely to be killed in the middle, the most probable, over a reasonable investment horizon.