4 ms·

You're confused. (M2 * M2V) / GDP = 1[0] That's the formula to calculate M2V. New supply is not created due to the drop in velocity, velocity drops when new

You're confused. (M2 * M2V) / GDP = 1[0] That's the formula to calculate M2V. New supply is not created due to the drop in velocity, velocity drops when new supply is added. When M2 rises and GDP stays the same, M2V drops. As you can see from your own chart, when the economy came back to normal in 2015, they did not remove it from circulation. And yet velocity, when the economy was booming, was still dropping. M2 is constantly rising. This is forced because we have trade deficits that force us to accept debt equal to those deficits. The impact was rising asset prices. The value of goods was not touched at all. Money is not neutral. [0]: https://fred.stlouisfed.org/graph/?g=F3kb https://fred.stlouisfed.org/graph/?g=F3kb

arcticbull 5y ago
I'm not sure I see it that way but open to being wrong. Velocity does not by necessity drop when new supply is added. Velocity is how quickly money changes hands in an economy - an increase in economic activity is an increase in velocity. GDP is calculated from supply and velocity, not the other way around, yeah? [1] Adding supply by decreasing interest rates can stimulate economic activity, increasing both the supply and velocity commensurately. The economy slowed down, money stopped changing hands as people were locked inside, and the Fed lowered interest rates and allowed the supply to rise to incentivize economic activity. The pandemic scared people into saving. The new money is in fact to your point invested, which has led to an increase in certain asset prices, but at a rate that far outpaces inflation (i.e. the same quantity of Apple shares will today buy you a lot more bread than a few years back). [2] As for 2015, the supply was actually contracted in that the fed began unwinding its balance sheet. It was doing so at a good clip. As you can see here [3] the balance sheet dropped from 4.5T to 3.75T before the pandemic. However, to the extent inflation remained well controlled, it shouldn't be particularly critical to do so. [1] https://www.investopedia.com/articles/investing/051415/how-calculate-gdp-country.asp https://www.investopedia.com/articles/investing/051415/how-c... [2] https://fred.stlouisfed.org/series/PSAVERT https://fred.stlouisfed.org/series/PSAVERT [3] https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm https://www.federalreserve.gov/monetarypolicy/bst_recenttren...
- ItsMonkk 5y ago
  > GDP is calculated from supply and velocity, not the other way around, yeah? No. Your graph shows that the Fed only starting to unwind their balance sheets in 2018. Why was the Velocity of Money dropping during a boom phase? It's because it's calculated like I said. Our trade deficits force us to take our greater and greater amounts of debt. During recessions - where people and companies are unable to take out the debt - the government is forced to back us. The growth of GDP has been constantly dropping because our economy has been keeping alive more and more zombie companies. Many of these companies are taking out debt, and funneling that debt directly back into their stock through buybacks. These buybacks increase the demand of their stock and reduce the supply, which raises prices, which raises their market cap, which allows them to take out more debt! Since their market cap has risen, Vanguard and Blackrock and all of the other index funds are now forced to buy more, which pushes even more demand to these stocks. With the growth of debt, the Fed can now unwind their balance sheets. The cycle continues...

arcticbull 5y ago

I'm not sure I see it that way but open to being wrong. Velocity does not by necessity drop when new supply is added. Velocity is how quickly money changes hands in an economy - an increase in economic activity is an increase in velocity. GDP is calculated from supply and velocity, not the other way around, yeah? [1] Adding supply by decreasing interest rates can stimulate economic activity, increasing both the supply and velocity commensurately. The economy slowed down, money stopped changing hands as people were locked inside, and the Fed lowered interest rates and allowed the supply to rise to incentivize economic activity. The pandemic scared people into saving. The new money is in fact to your point invested, which has led to an increase in certain asset prices, but at a rate that far outpaces inflation (i.e. the same quantity of Apple shares will today buy you a lot more bread than a few years back). [2] As for 2015, the supply was actually contracted in that the fed began unwinding its balance sheet. It was doing so at a good clip. As you can see here [3] the balance sheet dropped from 4.5T to 3.75T before the pandemic. However, to the extent inflation remained well controlled, it shouldn't be particularly critical to do so. [1] https://www.investopedia.com/articles/investing/051415/how-calculate-gdp-country.asp https://www.investopedia.com/articles/investing/051415/how-c... [2] https://fred.stlouisfed.org/series/PSAVERT https://fred.stlouisfed.org/series/PSAVERT [3] https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm https://www.federalreserve.gov/monetarypolicy/bst_recenttren...

ItsMonkk 5y ago
> GDP is calculated from supply and velocity, not the other way around, yeah? No. Your graph shows that the Fed only starting to unwind their balance sheets in 2018. Why was the Velocity of Money dropping during a boom phase? It's because it's calculated like I said. Our trade deficits force us to take our greater and greater amounts of debt. During recessions - where people and companies are unable to take out the debt - the government is forced to back us. The growth of GDP has been constantly dropping because our economy has been keeping alive more and more zombie companies. Many of these companies are taking out debt, and funneling that debt directly back into their stock through buybacks. These buybacks increase the demand of their stock and reduce the supply, which raises prices, which raises their market cap, which allows them to take out more debt! Since their market cap has risen, Vanguard and Blackrock and all of the other index funds are now forced to buy more, which pushes even more demand to these stocks. With the growth of debt, the Fed can now unwind their balance sheets. The cycle continues...