1
$\begingroup$

If the value of fiat currency is a function of the supply of money and it's velocity, is the accumulation of that currency detrimental to its stability?

I may be wrong in my understanding of the value of money but it goes something like this. A unit of a fiat currency over a period is worth the total value of transaction in the economy over the period, divided by the product of the total money in circulation over that period and the velocity of that money.

Assuming that is a more or less accurate description of the value of currency does existing sitting currency that is not being invested or spent in that period have any negative effects on it's overall value.

$\endgroup$
  • $\begingroup$ Many of these concepts are not real things, especially "velocity of money" which is the result of applying your equation and is not stable. In theory, if the amount of money in circulation went down, something else would have to change: the total value of transactions could go down measured in the monetary units, or the "velocity" could increase or some combination. A reduction in total value of transactions measured in the monetary units could reflect a real effect of fewer transactions or a nominal increase in the value of the monetary unit. But what actually happens is unpredictable $\endgroup$ – Henry Aug 7 '18 at 0:00
  • $\begingroup$ And to show that velocity of money is not stable or indeed solidly defined, try three different US money velocity charts over the last 60 years from the St Louis Federal Reserve: fred.stlouisfed.org/series/M1V fred.stlouisfed.org/series/M2V fred.stlouisfed.org/series/MZMV which have peaks in 2007, 1997 and 1981 respectively $\endgroup$ – Henry Aug 7 '18 at 0:05

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Browse other questions tagged or ask your own question.