Velocity of Money Rather than Quantity Driving Prices

[ddd1600]

As an industry grows more mature, more competitors join the 'fight' and price elasticity only becomes stronger. So no, this whole "I need to spend more time with my family" shit works only in a monopoly supplier situation, and even that's a maybe.

[thesilverjournal]

Velocity of money is a myth and does not work like this. What Khan is missing is that people don't just bury their gold in the ground, they invest it and look for a return. Even if they put their stored money in a bank, they are looking for a return on their savings through a money market account and in turn that money market account buys Treasuries. Prices should actually go down in a good economy because the supply of products grows. The reason prices rise is because the Fed prints too much.

[dingusding]

More interesting stuff on the subject, search wikipedia on Quantity_theory_of_money

[scwallac]

Actually, Sal, what you've demonstrated is that prices are driven by supply/demand and productivity. The builder had a shortage of labor supply, and so prices were driven up. Or, maybe the builder just built houses too slowly, i.e. he had low productivity, thereby driving up the prices.

Prices are driven by supply, demand, productivity and money supply. I don't see how your video demonstrates velocity of money as a price driver.

[phoebus1011]

@scwallac Sal makes sense. Take for example stock prices. Stock price goes up only when there is such a high velocity in money.

[scwallac]

@phoebus1011 Disagree. Stock prices go up due to buyer expectations of future earnings or future value. of that stock. Prices could also go up if the company executed a stock buy-back (which would be analogous to contracting the money supply). Velcotiy of money not related. Not sure why you would draw the conclusion.

[billychen13]

does velocity of money drives up price, yes, does quantity of money drive up prices? duhhhh? what if these two people (farmer and builder) get 2000 coins each?

[ManlySlut]

@billychen13 The main factor here is the demand:supply ratio.

The high price came from the sudden increase in demand that came from the farmer's surplus irrespective of supply.

It's the same scenario as inflation. The more money, the more transfers aka higher velocity of money, therefore prices go up due to overconfidence in supply.

[ManlySlut]

@ManlySlut *supply of money, aka people buy more when they have more money.

[billychen13]

@ManlySlut so basically u agree with me ie increase in money supply causes higher prices.

[ManlySlut]

@billychen13 Yes, but not always. Khan has a video explaining how it can cause deflation as well.

[scwallac]

@billychen13 To expand your thought....What is the farmer and builder can suddely go out and get credit very easily at very low rates. Now the farmer can pay more money to the builder. Credit expands the money supply, and prices go up.

[billychen13]

@scwallac To expand your thought, new money is "created" by people taking credit but at the same time other people are paying down their debts and that money is "destroyed". However when the interest rate is artifically low, more people take on debt than those paying off due to the cheap money and as a result u get the asset bubbles like the dot com and housing bubble. Right now its the government taking on huge debt using money created by the fed out of thin air. hence the inflation

[atmark666]

liquidity is like a string of rubber band if you pull, its get tight and pull what ever the rope tied to.

but when you loosen it it would not move things that tied to.

[nbsr1]

At some point because of investment all the parties will start producing more, driving the prices downward. You'd be perhaps right if the investment itself was growing exponentially indefinitely but there is no such thing as indefinite exponential growth.

[utubehayter]

Why are you resorting to strawman arguments? You made up your "common misconception" as "purely" based on quantities of money!

It is quantities on both sides. Supply and demand... its not that hard!

BTW, even your crummy strawman "four gold coin" economy actually shows very well how a fixed quantity money system has a natural check on price inflation and even assuming that everyone is just a creature of "feeling", would still lead to only a mild downturn. Funny how you missed the best part