Why There's No Inflation Threat

A few conversations about the fear of money supply expansion triggered this explanation, which was first pointed out (to my knowledge) by Bruce Bartlett, former policy advisor during the Reagan years. Money supply (red) has indeed grown. However, the velocity, (blue) or perhaps a better term, frequency of exchange of the money supply has been slowing for years, and then fell flat down when COVID struck. And as long as that slow pace continues, inflation should not rear it's head. It's one thing if too many dollars chase too few goods. If it happens at only 15 miles per hour, prices aren't going higher any time soon.

The Federal Reserve defines "velocity" as: "The velocity of money is the frequency at which one unit of currency is used to purchase domestically produced goods and services within a given time period. In other words, it is the number of times one dollar is spent to buy goods and services per unit of time. If the velocity of money is increasing, then more transactions are occurring between individuals in an economy. The frequency of currency exchange can be used to determine the velocity of a given component of the money supply, providing some insight into whether consumers and businesses are saving or spending their money"

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Donald R. Davret, Investment Advisor Representative

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