Monday, February 3, 2014

Can the Fed control M1 Velocity?



Monetarists say the Fed could have kept velocity at about 9, and instead it let velocity drop to 6.5 after the crash. But with the deficit climbing so rapidly, the private sector needed to accommodate Congress. The deficit dropped from 3% of GDP to 10% of GDP. The lower the deficit the higher the velocity as can be seen in the chart. Cause and effect is immaterial, we have never seen any solution in the last thirty years in which the deficit was that large with the velocity also high, sorry. So the monetarists have no solution, just a theory of things that never happened. Beckworth says otherwise:
Okay, maybe there is another way to say it. The Bernanke Fed failed to meaningfully address the endogenous fall in the money supply and the decrease in money velocity. 

Dave has no historical basis in fact for his claim. At this point the only thing that gets velocity up is keeping the budget near balance.

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