Many subscribe, wrongly so, to the quantity theory of money. We are in an era that is much different from even the day of Milton Friedman.
In this video we discuss how velocity of money was the missing component from his work. He had the luxury of it not being an issue as he was in a stable periond. Today, we are in a much different environment.
▶️ 3Speak
If we want to inflate the balloon (grow economy), we need to increase average force exerted on its surface = pressure. We can do that by either increasing the amount of air (increasing money supply) or by increasing air's average kinetic energy = temperature (velocity of money). Actually, we could also increase stretchiness of the surface material (loosen regulation?) but we need to be careful not to go too far or risk exceeding its tensile strength. I wonder how far it would be possible to draw that analogy. Maybe laws of thermodynamics apply to economy?
Thank you for this video. Together with the other one, I think I am understanding these things more, especially the importance of the concept of the velocity of money.
Summary:
In this video, Task discusses the quantity theory of money and why he believes it is flawed. He delves into the concept of the velocity of money and how it affects the economy, taking into consideration the works of economists like Milton Friedman and Lacey Hunt. Task emphasizes the importance of understanding the velocity of money in relation to the money supply and how it impacts economic activity. He explains that a stable velocity of money can lead to misconceptions about the correlation between money supply and inflation, debunking the quantity theory of money. Task also touches on how recessions and market behavior are influenced by the velocity of money. He concludes by stressing the significance of considering the velocity of money when analyzing the impact of monetary policies.
Detailed Article:
Task's discussion in this video revolves around debunking the quantity theory of money and emphasizing the crucial role of the velocity of money in the economy. He starts by expressing his skepticism towards traditional economic theories, particularly the idea that the amount of money determines price increases. According to Task, this belief is flawed, especially in the modern era with different forms of money and changing economic dynamics.
Task mentions Milton Friedman, a noted monetarist economist, and his view that inflation is a monetary phenomenon. However, Task highlights Lacey Hunt, an economist known for his practical application of economic theories in investing. Hunt's extensive research on Friedman led him to conclude that Friedman's focus on the amount of money disregarded the velocity of money. Task explains that during Friedman's time, the velocity of money was stable, leading to oversights in his theories due to the constant velocity factor.
The discussion then shifts to the importance of understanding the velocity of money, which represents the speed at which money circulates in the economy over a given period. Task stresses that a steady decline in the velocity of money over the past four decades has significant implications for economic activity and monetary policies. He gives examples of how recessions and external factors like COVID lockdowns can cause sharp drops in the velocity of money, affecting consumer spending, business investment, and lending practices.
Task argues that the traditional focus on increasing the money supply during economic downturns overlooks the impact of declining velocity, leading to ineffective policies like quantitative easing. He emphasizes that without considering the velocity of money, analyses based solely on money supply metrics like M2 can be misleading. Task criticizes mainstream economists and commentators for neglecting to discuss or highlight the importance of velocity in shaping economic outcomes.
Towards the end of the video, Task underscores the interplay between money supply, velocity of money, and economic performance. He warns against overlooking the velocity factor, as changes in the velocity can have more significant repercussions on economic stability than mere increases in the money supply. Task concludes by teasing a more in-depth exploration of how the velocity of money influences price levels, promising further insights in the upcoming video.
In summary, Task's video serves as a critical analysis of traditional economic theories, advocating for a broader understanding of the velocity of money and its implications on macroeconomic outcomes. He challenges conventional wisdom and calls for a more nuanced approach to examining economic phenomena beyond simplistic interpretations based solely on money supply metrics.
Notice: This is an AI-generated summary based on a transcript of the video. The summarization of the videos in this channel was requested/approved by the channel owner.