#Economics
time. The velocity of the M1 money supply rose from
about 4 in 1960 to 7.5 in 1980, before falling to 6.3
in 1993. Then it rose steeply to 10.6 by 2008,
before it plunged sharply to 6 again in 2015. It is
still falling today.
This plunge in velocity explains why Federal Reserve
money printing since 2008 has not produced much
ination. Many analysts and bloggers have been
saying for years that Fed money printing would
produce an outbreak of ination. If velocity actually
were constant, the 300% increase in the Fed's
balance sheet would have produced massive
ination by now.
The collapse in velocity shows why that has not
happened. The money is available, but people are
not spending it. Instead, they are saving it or paying
off debts — a form of deleveraging.
The quantity theory of money is a useful tool for
conducting thought experiments about alternative
scenarios because it sets certain important
economic variables in a relationship with others.
But as a guide to policy or as a fore