Friday, October 3, 2014

Velocity: Percent Change

Last April, under the title Velocity and the Great Moderation, I showed this graph of percent change in the velocity of M1 money:

Graph #1: Percent Change from Previous Quarter, M1 Velocity
M1 velocity was tame till 1980, and rambunctious thereafter.

But I was looking at that graph just now, feeling sorry for myself because the velocity of M1 only goes back to like 1960. Suddenly I had a brain fart:

Graph #2: By using two series I get data all the way back to 1869!!!!!
Here's the "Percent Change" version of Graph #2:

Graph #3: Percent Change in Velocity, Annual Data
Two things.

On Graph #3, shortly after 1875, there is a period of a decade or more where the percent change in velocity almost continuously negative. Below zero. It was a time of rapidly falling velocity, as you can see on Graph #2.

It was also a time of deflation following the Panic of 1873, which Marcus Nunes describes as a ‘nonevent’. Marcus writes: "in the 1870s and 1880s the economy performed robustly in spite of a drawn out fall in prices".

Deflation, associated with a consistently negative rate of change in velocity.

The other thing happened just about a hundred years later, around 1975, when for a decade or more the percent change in velocity was almost continuously positive. Above zero. It was a time of rapidly rising velocity, as  Graph #2 shows.

It was also a time of inflation. It was the time of the so-called Great Inflation.

That's interesting, I think: Two divergences from the norm, in opposite directions. There must be some kind of rule that goes along with this.

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