Economists neglect the most fundamental concept in their specialty, velocity, the primary multiple in Gross Domestic Product. Velocity defines the turnover of goods and services multiplied by the liquidity available within a functioning economy. Money supply times velocity equals Gross Domestic Product.
The Burough of Economic Analysis (BEA) publishes money supply as M1 and M2 along with GDP by month and usually as percentage change, not totals. BEA does not mention or publish velocity. The Saint Louis Federal Reserve, however, does provide a graph showing velocity by year. In listing GDP, the BEA looks at actual sales and productivity numbers and the actual money supply. Velocity as a factor does not play directly in their calculations. Velocity therefore remains a secondary derivative, a remainder of GDP divided by M1, and velocity does not get the attention it deserves.
Velocity as a 1 or 2-digit number, multiplied by M1 in the trillions, plays a more important role in the economy than money. — In my book, Globalization or Democracy, I’ve titled the Chapter, dealing with velocity and its significance for the macroeconomics of deficit trade, as E = M x c2. In 2008 velocity reached around 15. Today velocity struggles to move above 1. Velocity expresses the prosperity side of the GDP’s multiple.
The Federal Reserve might take note that jacking around with the money supply falls far short. Any slight improvement in velocity goes much further.
Politicians, bureaucrats, journalists, lawyers and political economists without having to work for a living seem not to know the basics of business on the street. Businessmen, usually with degrees in business economics, and a vast number of the self-employed know very- well the critical nature of volume, velocity and productivity. Take the restaurant owner for example. Inflation raises his costs and lowers his customer volume. Unless he has a high margin, over 50%, he will raise prices on his menu, rather than lower prices to attract more customers. Raising interest rates further stifles business and places added burden on his inventory.
Rather than borrowing more money by issuing higher yield treasury notes, the Fed might target productivity by spending its excess money supply on self-multiplying forms of productive infrastructure. For example: energy, transportation, housing, indigent, psychiatric and recovery elements of healthcare, and deregulation where safe to do so. Enforce the rule of law and promote healthy forms of education and entertainment. Above all, stress local productivity, manufacturing farming and distribution. Place a premium on exports and balanced trade. Tariffs can finance much of our recovery, and don’t let misguided political bureaucracy and political economists reject tariffs, balanced trade or critical military industries. Velocity is the energy you feel on the street.
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