Velocity and Inflation?

Finally letting go of our reasons for a market dip or free fall theme, we now look to monetary velocity and rumors of acceleration in such.

In Velocity of Money, Econbrowsers Menzie Chin and James Hamilton pick at Friedman's equation, and go on to make the point as we have many times in the past, in that there is a critical distinction between the FED creating reserves in QE, as opposed to printing money...

The demand for reserves has increased by a trillion dollars since 2008. The demand for currency held by the public has not. The supply of reserves could therefore increase a trillion dollars without causing inflation. The quantity of currency held by the public could not.

And plain math explains why an increase in money supply implies nothing about inflation, and in fact reduces velocity...

Even if there’s no particular relation between the quantity of marbles [money supply] and the stuff we care about (inflation and real GDP), you could still go ahead and use the equation above to define the velocity of marbles. 

But what you’d find is that when marbles go up, the marble velocity goes down, and it makes no difference for output or inflation. 

OK, so let’s look at the velocity of M1. It turns out to look a lot like you’d expect the velocity of marbles to behave– when M1 goes up, the velocity of M1 goes down by an almost exactly offsetting amount.

And this key observation of behavior in holding and spending money...

Obviously the interest in an equation like MV = PY comes not from using it as a definition of V for some arbitrary choice of M. Instead there must be some kind of behavioral idea, such as that there is some desired value of M1, or monetary base, or marbles, that people want to hold.

An important theme which we shall revisit: "behavioral idea... desired value... that people want to hold",  and their conclusion?

someone who insists that inflation (P) must go up just because the monetary base (M) has risen may have lost their marbles.

Take aways? Increases in money supply, even from wage growth and as much as we might want them to, do not necessarily or always correlate with inflation... especially when the circumstances are less than normal, QE, ZIRP, NIRP, QT viz. There Is Something In This More Than Natural.

Hamilton and Chin see the resultant pattern, have grasp of a piece of the puzzle, but for scope and scale of their exercise, do not fully address the underlying causes and potential consequence. 

More to come in Friedman's Velocity?, stay tuned and no flippin.