Quantity vs. Velocity

There are two types of money supply; Temporal, and Atemporal.

The temporal money supply is the quantity of money, often referred to as the monetary base. The monetary base is something that exists in reality.

An atemporal money supply, is something that exists only on paper, as a mathematical construct. What an atemporal money supply attempts to measure or indicate, is the velocity of base money.

Quantity, refers to the amount of money in circulation, wheras velocity, refers to the rate at which money circulates.

Let's see if I can illistrate the difference.

If I have $5, we might point out, that I actually have posession of that money in the present. We can call this present money. However, if I loan that $5 to Bob, I no longer have that money in the present. Bob does.

At some point however, Bob will pay me back. That's how a loan works. As such, we could say, that I have an asset of $5. However, to be specific, the asset is denominated in future dollars. I don't literally have the $5 in the present. I'll have it in the future.

Thus, it's helpful to distinguish between present dollars and future dollars.

Now... let's break the loan process down into three stages.

Stage 1: I have $5.
Stage 2: I give Bob the $5.
Stage 3: Bob give me back the $5.

If we take a hypothetical snapshot at any given point during that process, we will see, that there is never more then $5 in reality at any one time. The money is never in two places at once.

As such we would say that the temporal money supply (the money supply at any given monent), is $5.

Now, what if, during stage two, when Bob was in posession of my $5, we pretended that time did not exist, and we added my asset of 5 future dollars, together with Bob's 5 present dollars? We would end up with $10. However, it wouldn't be 10 present dollars, nor would it be 10 future dollars. It would be 10 atemporal dollars.

What is ever-so-important to understand here, is that atemporal dollars do not exist in reality. They are a mathematical fiction that we construct in order to get a better idea of the rate at which money is circulating in the economy. Notice, that we are counting the same money, more than once, because we are counting it, every time the money changes hands. Thus, we are not measuring the quantity of money; we are measuring the velocity of money.

Unfortunately, even professional economists believe they are looking at the quanitity of money, when in fact, they are looking at a mathematical contruct which is actually indicating the velocity of money. This is how the myth that commercial banks create money out of thin air is perpetuated.

Once we understand the difference between quantity and velocity, an interesting question arises:

Does an increase in the velocity of money, have the same effect as an increase in the quantity of money?

We'll save that question, for another time.

Category:

Education

Tags:

• quanity
• velocity
• of
• money
• m1
• m2
• m3
• multiplier

[theVAGINAntichrist]

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[stealthswimmer]

No, when a bank makes a loan it does create more money. This is because the bank practices fractional reserve banking. Under fractional reserve banking, there is always a "money multiplier" effect. That's intro economics. Banks don't keep all of the money deposited in their vaults. Some of it is loaned out again....but they still have it written on their books or computer that the money is still in their vaults.

This doesn't create physical money, but is credit expansion and acts as money.

[D4Shawn]

I've never said that expansion of the money supply has no impact. I said I'm not particularly in favor of it.

[WheresTheInterest]

"I don't think it (the Fed creating money) does any good."

Then you're saying that M in MV=PQ can never be changed since 1) Commercial banks cannot increase the supply of money, and 2) The Fed has no impact when they try to increase the supply of money.

Something somewhere doesn't add up.

As for being in favor, I think we can agree. Is deflation really all that bad? And deflation by the way would be the decrease in M or V or both. If V is constant M would go down, how would that happen?

[D4Shawn]

I don't think it does any good. I never said I was in favor of the Fed increasing the money supply.

[WheresTheInterest]

"Only the Fed has the power to create money."

Okay, let's say the Fed had the Treasury print a bunch of dollars or the Fed just added a bunch of numbers to some computer somewhere. What good does that do? How does that increase M in MV=PQ?

[D4Shawn]

Why would they borrow money from the Fed if they can just magically create money like you say? What do they need the Fed for?

[D4Shawn]

If I loan you money, and you don't pay me back, that means I've lost money; not created it.

If a commercial bank loans money, and they don't get paid back, that money is gone.

The whole reason they need to get bailed out is BECAUSE THEY CAN'T CREATE MONEY.

If they could create money, the Fed wouldn't have to bail them out. Only the Fed can create money.

[D4Shawn]

No. Loaning something does not fucking multiply it by two. It transfers it from one person to another. How hard is that to understand? If you can't understand that, then you are seriously brainwashed or something.

Only the Fed has the power to create money. When a commercial bank makes a loan, it does not create money.

How can you seriously not know what a loan is? If I loan you my car, that doesn't mean there are two cars now. You people are crazy religious nut jobs.