From Alhambra Investment Partners:
One less mainstream piece of this
inflation hysteria boom is the velocity of money. In case you haven’t
yet heard, monetary velocity is rising. From that we are supposed to
infer all the usual – wages, inflation, higher rates, and utter
destruction in bonds if not the whole Western economic structure.
The first part is technically true.
Money velocity increased in at least two primary stock indications.
Against both M2 and MZM, velocity has accelerated for two straight
quarters (through Q4 2017). The former has risen from 1.426 in Q2 2017
to all of 1.431 in Q4; the latter went from 1.295 to 1.299 in those same
six months.
Money velocity is, to put it mildly,
bunk. Changes in it are in most cases merely functions of accounting.
The equation of exchange presumes MV = PQ, and therefore (changes in) V
tells us something with regard to (changes in) P. Henry Hazlitt all the
way back in 1959 was having none of it:
I have said nothing above
about the much-discussed “velocity-of-circulation” of money, and its
supposed effect on prices. This is because I believe the term
“velocity-of-circulation” involves numerous irrelevancies and
confusions. Strictly speaking, money does not “circulate”; it is
exchanged against goods.
Since 2008 the changes in velocity are
explained entirely by either slight increases or decreases in nominal
GDP balanced against large increases (or now smaller decreases) in the
proportion of whatever stock measurement attributable to the leftovers
on the liability side of the Fed’s balance sheet (bank reserves)....MORE
