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Comment by hardwaresofton | Hacker News Reader

> some uninformed comments about "velocity of money" decreasing and that's the reason we won't have inflation (this was during the "transitory" phase of inflation denial).

Far be it from me to defend ARK but this statement I've seen repeated by CFAs -- velocity of money is linked to inflation -- it's the only reason we didn't see inflation in the "real" economy earlier, no?

Since financial assets were still moving freely (and sovereign bond yields were crushed), they felt the immediate effects of inflation. It's obviously idiotic to say that velocity of money will be decreasing going forward or something (did she say this? surely not?), but it seems like the recent increase in inflation is due to the real economy opening back up (and velocity returning to normal) along with lingering supply side shocks.

Would love some correction if I've got this the wrong way 'round.

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Wasn't the lack of inflation driven by countervailing deflation from moving supply chains into lower cost regions like Eastern Europe and China? It's been a good 30 year run but that chicken is now coming home to roost.

That sounds like reasonable analysis, but I do want to point out I was thinking much shorter term -- like literally in the last 3 years and this situation specifically.

I do agree You're right that we are probably seeing the effects of globalization policy though, but I can't say I've thought much about that long of a time frame.

Understood. There's a certainly a difference between short term effects such as interest rates driving currency exchange rates vs. secular trends that depress currencies permanently. It seems as if some of the latter are becoming visible in a very short timeframe. The US has not experienced this kind of rapid shift since WW II.

Yes. Also technological improvements have kept costs down (and hence prices) in some sectors, such as consumer electronics.

Mass onshoring will likely drive higher prices.

Cathie Wood thinks that more technological improvements are coming to counter-act this, and might even cause deflation. Most commentators are unconvinced.

The lack of inflation was literally the lack of use of the "extra money". When the fed started buying assets and giving "new money", a lot of banks held onto that money instead of using it. The fed paid interest on holdings at the federal reserve bank.

It took a while for banks to extend themselves based on capital like they did prior to 2008. Once they did, the full extend of the "new money" drove inflation.

I would say more precisely it was a major variable in our ability to have huge economic growth, huge money printing all while having low inflation and a very low volatility in the amount of inflation. Of course, anything in this domain is going to have many dimensions but exporting our inflation was a major variable.

It is tough being mid 40s and realizing my entire adult life was a golden age that is gone forever.

>I've seen repeated by CFAs -- velocity of money is linked to inflation

It can be, as increased demand can increase the velocity of money, but it's not directly or intrinsically connected (as you can also just suddenly trade something back and forth many times without prices changing and the velocity would have increased).

Really, it's demand/supply which determine prices.

In theory:

(real GDP)×(price level) = (money supply)×(money velocity)

In general terms its probably a decent model. But ya, there are situations where it's not completely internally consistent.

There is very little econ on the CFA.

Well to be fair sometimes there's very little econ in public markets!

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