Need For Speed?

Summary

Discussion of the potential effects on equity, bond, commodity, capital and asset markets regarding:

Transactions Velocity (Vt); Required Reserves; Is Money Printed in QE?

Monetary Aggregates (M1;M2;MZM); Monetary Base (MB).

Monetary Policy; Relevance; Dynamics.

The bowl was brimming with 400+ comments posted at our missive, In The Toilet? Impressive indeed and those comments led to a bowl full of learning, which is why we are here, so we wish to thank all of the constructive commentators for their contributions.

Heuristics?

In some of those comments a prolific commentator, Lawrence Kramer requested a "heuristic" explanation from one of my mentor's, Salmo Trutta, of the how's and why's of transactions velocity and it's mechanisms with RR (required reserves). The Nattering One interjected on the Need For Speed...

"Heuristic, I'm in the mood to make some moogie, so lets try, bare with me ;->

Transactions velocity is a statistical average of money that moves AND money that is mostly at rest. Computed as the ratio of debits to average balances in demand deposit accounts, excluding IBDD interbank and US Government accounts. Being the denominator of both income velocity (Vy) and transactions velocity , the money supply represents the link between the two. Loosely, M1 - active; M2 component - idle

Vt reflects the volume of transactions (debits) and PAYMENTS of most all economic actors found in the mirror RR. That churn or turnover in "means of payment - cash on hand or in pocket" transactionsreflects the health or lack thereof in business and household incomes, and payments for goods and services.

Since that income and those payments are an integral part of our economic system, through this metric, you can indirectly measure and infer real GDP and true inflation rates. Due to the cyclical nature or ebb and flow in RR, you can even "divine" those metrics ex ante.

Now lets tilt the mirror... changes in credit conditions affect rates of interest, which are an allocator of funds between alternative uses, making changes in velocity ratios a very interesting barometer.Looking at Vt this way, those changes or ROC's are a mirror in which changes in the liquidity position of the various sectors of the economy are reflected.

It usually takes time before monetary policy actions; open market ops; changes in the discount rate or in reserve requirements "shake down" and permeate the entire credit structure. After the initial reactions to a change have been "worked out" by the various sectors and in money using processes, changes in velocity are a CLEAR signal to those authorities, as to how those actions have actually affected the liquidity position of the economy as a whole.

I hope this helps and don't make me regret it.... wink, nudge, LOL."

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