Monday, September 5, 2011

Before somebody else points this out...

My third graph from 4 September:

Velocity (blue), and Income relative to M1 Money (red)

The similarity of the trends was supposed to shock you, as at first glance it shocked me.

However, income is income. Both the blue line and the red line show a version of income. For both lines, the income number is divided by M1 money.

And as we have seen here, the different versions of income tend to run parallel. So we should expect to see the red and blue run parallel on the above graph.

Okay. But the fact remains that The irregularities in Velocity arise from irregularities of money growth, not from irregularities of income. In my first graph from 4 September, income (the blue line) tends to show regular increase except during the recession of 2009.

In the NIPA graph (linked above) all of the measures of income tend to show regular increase, except during the recession of 2009.

It is not generally the income component that creates variations in the velocity of M1 money. It is generally the money component that creates those variations.

But let me not generalize too much. I am looking specifically at the three speed-bumps in M1 money growth that occurred between 1982 and 1995. Those speed bumps created what looks like very odd behavior in the velocity of money. Those speed-bumps are entirely responsible for that odd behavior.

Those speed-bumps are important, I think.

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