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Velocity of Money - WHAT?!

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Wheylous posted on Mon, Mar 5 2012 6:46 PM

We learned in class today about the velocity of money.

MV=PQ

The equation appears to make sense. What doesn't is the graph the teacher presented (Page 26 of this slideshow: https://docs.google.com/viewer?a=v&q=cache:80Sbp3i3tYwJ:dmc122011.delmar.edu/ba/online_support/macro_powerpoint/Ch%252017m.ppt+velocity+of+money+south+western&hl=en&gl=us&pid=bl&srcid=ADGEESjCqQoEZ-Di9nXcH5qyTCoV9c_QFKYTgeL4JZ3q0IUzsBYBEx7TY5ccxMsxA7XY1XYMQRBTpHdSbcEI9mqEH1JDNevYELvYD0urCpWWwMzBFtO9JuWpPU5Xo5010tFGINkVOt-T&sig=AHIEtbRN6bgwD_82cmtlamgs2SUHRor3NA )

 

The graph shows velocity essentially constant. How in the world could such an economic variable remain constant over this gigantic period of time?

My teacher insisted that this made sense. I looked up other charts and I found these:

http://goldseek.com/news/MillenniumWaveAdvisors/2008/4-26mw/4.jpg

http://en.wikipedia.org/wiki/File:M2VelocityEMratioUS052009.png

These appear to make some more sense. Was the scale of the first graph off? I was absolutely dumbfounded when I saw that straight line.

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1. Kel Kelly writes:

(and velocity, or the number of times each dollar is spent, could not change very much if the money supply remained unchanged).

I don't know his reasoning, and why a change in money supply would change velocity.

2. Why do you think there is some reason it cannot stay constant over a long time?

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1) That seems like an interesting insight, but he doesn't explain why

 

2) Why would some weird variable, "the average number of times a dollar changes hands", be constant over time? It seems like there would be a lot of factors that affect the frequency of exchange. It appears that it is such a far-fetched thing that it would be relatively useless to calculate. The fact that money was transferred doesn't tell us anything about how intense a desire was satisfied. Plus, the other graphs I present show that it did change over time.

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Rand wrote about this, the velocity of money being a typical Keynesian panacea:

He [the economically illiterate poltician] observes that people get food, clothes, and all sorts of objects simply by presenting pieces of paper called checks—and he observes that skyscrapers and gigantic factories spring out of the ground at the command of very rich men, whose bookkeepers keep switching magic figures from the ledgers of one to those of another and another and another. This seems to be done faster than he can follow, so he concludes that speed is the secret of the magic power of paper—and that everyone will work and produce and prosper, so long as those checks are passed from hand to hand fast enough. If that savage breaks into print with his discovery, he will find that he has been anticipated by John Maynard Keynes.

-Rand "Philosophy, Who Needs It?"

The reason governments like speedy exchange is because they take a cut of every transaction.

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I would recommend reading this article "Is Velocity Like Magic?" by Frank Shostak:

https://mises.org/daily/918

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Anenome, Rand provides no argument against velocity.

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Wheylous:

Anenome, Rand provides no argument against velocity.

True, she just observes that it's a common fallacy on the other side.

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Looking at the other graphs you posted, it just seems that the one in the slide show has all three variables represented on the same scale, which obviously is going to hide any detail in variables with low numbers.

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Great find, Tex.

Wheylous, I think the implied argument in that quote from Rand is that the burden of proof is on the one who gives significance to velocity to show why it is significant. Because common sense tells one that it has no significance.

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I do not think my teacher explained why it was important. He just taught us that MV=PQ.

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Just today I ran into Rothbard's take on MV=PQ in Man, Economy, and State.  He covers it in pages 831-851:

https://mises.org/document/1082

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