[quote=EconProf]Yep, “velocity” of the money supply, or the rate at which it changes hands, has slowed considerably, thus offsetting the growth in money supply, however measured.
The original monetarist, Milton Friedman, claimed velocity was fairly constant over time, which led him to state that money supply growth over a certain range of 2 to 4 percent or so each year, would lead directly to inflation. As Mish has so abundantly shown, this has not happened and is not about to happen. Too bad Milton is no longer around to defend, or explain, his thesis.[/quote]
Back in 1929, GDP fell 45% peak to trough, M2 fell 35%, so the velocity of money had to fall too.
Here’s a more recent chart
Clearly the velocity falls during recessions. This time, we also have a rebound in the personal saving rate (from 2% during late Bush years to 6% now) and that has the effect of suppressing the velocity.
Also, I doubt that Friedman expected the relationship between money supply growth and inflation to hold regardless of unemployment. If the velocity is constant, money supply growth leads to nominal GDP growth, but that results in higher employment before it contributes to inflation.
And Friedman did not live in an era of wild finance, when just the internal cash holdings of Goldman Sachs (which is, technically, not even a bank) account for something like 5% of M2. (edit: on the second thought, I’m not sure if Goldman’s holdings are part of M2. But the point is still partially valid.)
