Bridging the Hole Between Lacy Hunt and Hugh Hendry on Cash Velocity

Faucets Coogan – December nineteenth, 2022

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One way or the other I missed the next dialogue between Hugh Hendry and Dr. Lacy Hunt a number of weeks again and, whereas I’d usually not put up a video from greater than every week in the past, I’m posting this one as a result of I’ve two cents to share.

Whereas vast ranging dialogue covers many topics however the two very completely different personalities come to a head on the idea of cash velocity and its utility in predicting inflation and credit score cycles.

As I see it, Dr. Lacy Hunt is correct concerning the mechanics of just about all the things he says however right here’s the issue: cash velocity cannot be measured. It’s strictly an inferred determine. No person sits round counting the variety of occasions each greenback (or greenback approximate) will get spent. We couldn’t if we tried.

On the contrary, velocity is calculated by dividing GDP or Gross Nationwide Product (GNP) by the cash provide. That’s it. No surveys, no information gathering, no nothing. It isn’t a measurement. It’s a ratio.

That’s the place Hugh Hendry’s instinct to maintain elevating the query of Euro-dollar cash creation is available in. If cash velocity is GNP divided by the cash provide, however you’ll be able to’t precisely measure offshore greenback creation, and offshore greenback creation is larger than home greenback creation, then what use is the speed quantity you get on the finish? It tells you the ratio between an incomplete measure of the cash provide and an incomplete measure of whole transactions.

Certainly, neither GDP nor GNP are meant to be measures of whole transactions throughout the international greenback system. Each are targeted on productive output, not transactions, and exclude the shopping for and promoting of used items, shopping for property like ‘used’ properties, monetary transactions, companies changing present gear, and so forth…

After all, Friedrich Hayek understood and defined this eons in the past.

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