Showing posts from January, 2021

Again no inflation? Velocity of money and the E-P ratio reexamined

A lot of investors are wondering when exactly can we expect inflation to hit our economies? An economist's answer - only in the long run.  This bad joke is turning out to be true. Despite the huge, unprecedented (sic!) rise in money supply over the past year, it is unlikely we will experience a rapid increase in inflation over the coming two years. Why is this so?  Let's start with a fascinating development on the money markets. Velocity of money , that important indicator derived from Fisher's quantitative theory of money (MV=PQ) measuring the circulation of money in the economy (how fast goods are bought and sold), became detached from the real economy approximated by the employment-population (EP) ratio.  For those new to the blog, I have been particularly fond of tracking these two indicators, and for a very good reason - I find them a realistic portrayal of the situation in the real economy. The velocity of money has, thus far, been a great indicator of economic activ