Transactional Velocity Effect Proof

After the erection of many a straw man, ad hominem comment and disingenuous asshattery from a reader posing as "learned", we did a little extra curricular research and guess what the Nat dragged in?

A scholarly work titled: Income and Transactions Velocities in the UK which touches upon the very subject matter as my common sense missive: The Transactional Velocity Effect of Speculation and Financialism in which I concluded:

As type (2) non consumption (PCE) or non GDP generating transactions rise:

1. the broad money stock rises exponentially

2. the currency in circulation rises nominally

3. dollar demand rises

4. credit demand rises, however

5. the velocity of credit creation slows, and...

6. transaction velocity of the monetary base declines

Exhibiting that non consumption PCE or non GDP generating type (2) transactions would seem to have a reverse relationship with both monetary base and credit creation velocities.

Key phrase above: would seem to have. And now, I wish to reiterate several regurgitation's from the poser: "My point, of course, was and is that the missive doesn't have a point. It is fundamentally confused about both transactions and monetary economics, and has nothing to teach us.

Still people chart it (income velocity) and refer to it, and then give us articles like this one, in which they speculate about transactions (financial system ones, at that) and their relation to "velocity", when those transactions have no direct relationship even to the income.

The whole thing is the worst possible morass of pseudoscience and insulating a failed theory against empirical falsification, a welter of confusion and sloppy thinking, devoid of economic principle. Hiding in a pretense of mechanical analogy and pretended definitional rigor, which is entirely specious, and exists only to sever contact with reality on the one hand, and the main body of economic theory on the other.

Since your article was making a claim about a supposed impact of financial circulation on that velocity - and there isn't any, and they all have nothing to do with each other - that is kind of an important omission.

Those who understand each, empirically and theoretically, carefully distinguish among them. Those who do not write flip and inaccurate things like "increasing transactions have caused a fall in velocity" and think it tells us something meaningful.

You are certainly free to hypothesize about relationships between actual transactions and any of the other items. But when they aren't there, and when you haven't even noticed that they aren't there, and when the reason you haven't is that you haven't even seen actual transactions and need to have the data pointed out to you -then it becomes necessary for your readers to provide the context and corrections that will enable other SA readers to understand how basely your claims based on such evidence or reasoning, actually are. I hope this helps."

It most certainly does, and now we proudly present excerpts from:

Centre for Global Finance

Working Paper Series (ISSN 2041-1596)

Paper Number: 01/10

Title: Income and Transactions Velocities in the UK

Author(s): Iris Biefang-Frisancho Mariscal and Peter Howells

The purchase of existing dwellings, is a category that has increased substantially over the last fifty years and become extremely volatile in the last thirty, while financial transactions, whose motive we might describe (in broad terms) as speculative has also increased dramatically and become more volatile.

Evidence comes from the Council for Mortgage Lenders and the London Stock Exchange whose own data on turnover confirms the increasing importance (and volatility) ofhousing and financial transactions and shows both growing far more rapidly than GDP in the last fifteen years.

Both the demand for credit and the demand for money may be influenced by total transactions, rather than just the subset involving the purchase of final output. Households certainly borrow to finance the purchase of secondhand houses and any household or firm that is simultaneously holding financial assets while it has an outstanding debt to its bank is, in a sense, borrowing to finance the purchase of financial assets. And since loans create deposits, what does this imply for the outstanding money stock?

The recognition that the demand for credit and money may be related to total transactions has a long history. But the absence of a reliable PT measure, for a sufficient length of time and at sufficiently high frequency has been a major problem for empirical work. Typically, any attempt to recognise that demand might be affected by non-GDP spending has to resort to proxies.

The paper by Leão (2005) also recognised that the behaviour of total transactions might have some effect on M1 income velocity. Leão's argument was that an increase in non-GDP transactions would require an increase in the holding of transactions balances and thus a switch from (US) M3 to M1. Hence a fall in the M3/M1 ratio, proxying a rise in the T/Y ratio, would be associated with falling M1 velocity. His estimations appeared to confirm this and much the same findings (as regards M3/M1 and the T/Y ratio) had appeared earlier in Pollin and Schaberg (1998).

Our argument is that a rise in (total) transactions relative to income should increase both the demand for credit (and hence the deposit counterparts) and the demand for money, relative to income and hence income velocity should fall.

Very simply, if total transactions increase more rapidly than income transactions, broad money will expand more rapidly than income and so income velocity will fall.

Conclusions: (Real) broad money rises proportionally with (real) non-GDP transactions, thus reducing velocity proportionally with the rise in non-GDP transactions.

Both sets of results indicate a similar role for non-GDP transactions. A decrease in non-GDP transactions in our model also leads to a rise in velocity.

The importance of non-GDP transactions was recognised and measured with a proxy by Leão. This paper benefits from including an explicit non-GDP transactions variable and the results show a significant reverse relationship between income velocity and non-income transactions.

Furthermore income velocity falls at the same rate as non-income transactions increase. This implies that the income velocity equation can be re-written as a broad money demand equation showing that M4 grows at the same rate as total transactions. It follows that money demand equations that ignore wealth effects in the UK are mis-specified.

Centre for Global Finance

Bristol Business School

University of the West of England

Coldharbour Lane Bristol BS16 1QY

Telephone: 0117 32 83906

Email: cgf@uwe.ac.uk

Website: www.uwe.ac.uk/bbs/research/cgf/

Google the quoted phrase to find complete text:

"Income and Transactions Velocities in the UK"

The Nattering One muses... in other words, amongst their conclusions, and references to others who came to similar supportive conclusions, these gents (whose work predates my missive) posit the same relationships, and have supplied mathematical proofs for most of the assertions contained in the "flip, basely, inaccurate, and less than meaningful" non academic, common sense based missive written by one, "moi", who "does not understand".

Imagine that? To summarize "The World According To The Poser": "those who do not "understand" write things that are less than meaningful, and about relationships that "aren't" there, flip, inaccurate, a welter of confusion, entirely specious, devoid and sloppy... and then it becomes necessary for readers (like the poser) to provide the context and corrections that will enable other SA readers to understand how basely the authors claims based on such evidence or reasoning, actually are."

And let us not forget these choice boners from the poser: "when those transactions have no direct relationship even to the income." and how my missive "was making a claim about a supposed impact of financial circulation on that velocity - and there isn't any, and they all have nothing to do with each other."

Just how is that working out right about now? "Mister Know it All" and his chat room acolytes should wallow in the mire, while enjoying the tasty foot, crow, and mouthful of feathers. When you've digested that, there's a chalkboard in the back of the room, a chair in the corner, and a pointy little hat to wear until class is dismissed.

Further commentary and a compliment:

"Didn't elaborate on his conclusions (The Poser) because they were vitiated on false premises.

"Is it ever so boring to be a mere cataloguer of economic facts, a lugubrious clerk in the warehouse of petty history, a dull slave to every percentile variation in the GDP?"

Some people are conceptual thinkers, others are not.

Anyone that thinks you can't control Vt has never mapped bank debits.

And your credentials? Two of the greatest economists that ever lived have already validated it (my posit). It needs no support. China and Russia could wreck havoc with our system if they caught on."

- Salmo Trutta

Thank you Salmo. The "learned" one isn't the first pompous poser I've dealt with, who are full of themselves, think they know it all, and can rant about it all day long like a little schoolgirl lost in a fantasy. When dealing with pretentious, disconnected and rude posers such as this, there is nothing quite like vindication. How sweet it is.