T = 4, Mish, making you wrong on velocity

Mish: 

V = GDP / M2

It's important to note that velocity has no independent life of its own.

GDP can be thought of as Prices * Transactions or (P * T).

This leads us to

V = (P * T) / M2

GDP is computed over four quarters, under the assumption that most of the GDP settles over quarters.  What does settle mean? Value chains have cleared, the depreciation time of the economy is four quarters, approximately.  How erroneous is that? Mish's point is that it takes longer, or shorter to settle the GDP, though he does not say that.   

How much error is introduced when the GDP settling time is longer or shorter? We can measure that, using the slope of the implicit deflator index (ex post) an the cpi (current). If the settling time of the GDP is constant, then these slops will be about equal. They are not equal slopes, there is an ex post adjustment effectively changing the settling time. In fact the settling time is closer to 50 years, the time needed to figure out what prices really were. 

However, over a single year those slopes only vary by a few points, and that makes velocity accurate to about 85%. still quite useful.  In other words, the vast bulk of the GDP settles, or clears inventory, in about four quarters, the seasonal.  For consumer goods, this makes real sense as consumers plan seasonally.

But, to repeat the main point, velocity is fairly accurate. It makes perfect sense to interpret velocity as the transaction rate, or relative transaction rate when decomposed.  When velocity drops it generally means our value chains are shorter and we are a less complex economy.  Dropping velocity is characterized by the Fed constantly intervening in an unstable economy, and constant Fed interventions means government multipliers way below one.  Ignore velocity at your peril, but it is a stark warning about the cost of government, namely, we cannot afford it.