# What would cause the velocity of money (V) to increase / accelerate (or at least stop falling)

Given that:

MV=PY

Or

P = (M)(V) / Y

Where M is the money supply, V velocity of money, P price level and Y real GDP

1. Considering that the current rate of M2 is increasing at 7% per year over the last 12 months, and real GDP is now forecasted to decelerate from 1.9%/year to maybe as low as .4% by the end of Q4 2019, (according to the Atlanta Fed), am I correct to assume, going forward, that even the slightest sustained increase in (V) would rocket inflation from our current 1.7% per year to something resembling an inflation rate of over 7% in the very near future?

My primary question is this: what event(s) or scenerio(s) can you think of that would cause the velocity of money (V) to start increasing / accelerating again; or at the very least, stop falling like it has over the last 9 years?

Would V be expected to increase as a result of a mass exiting of the stock market (frigtened stock market investors liquidating their retirement holdings into cash and then spending it)?

For instance, the stock market starts falling and worried baby boomers start cashing out their retirement accounts and then start spending it on things like medical care, prescription drugs, on retirement housing, vacations, RVs, ect?

Or maybe baby boomers start dying and their children start taking the inheritance money and spending it all on consumer goods; buying sports cars, electronics, vacations, boats, ect?

• "stop falling like it has over the last 9 years" Could you please back this claim up with a reference? – Giskard Nov 21 '19 at 7:52
• @Giskard I believe you could get this by looking at the QE (huge increased in money) vs. nominal GDP. The residual (V) would be falling as in this picture. – Art Nov 21 '19 at 9:13
• If any answer does what you want, please consider ticking it as correct. A reputation of 1 is enough to do it. I remind you this because newcomers often forget to do so. See What should I do when someone answers my question? That being said, welcome on EC. – keepAlive Nov 22 '19 at 0:04

[...] what event(s) or scenerio(s) can you think of that would cause the velocity of money (V) to start increasing / accelerating again [...]

That commercial banks stop using injected liquidities to "consolidate" their balance sheet instead of credit-stimulating demands. Extract from one of my previous answer, illustrated on Europe:

What I mean by "consolidate" is that the subprime crisis and its consequences have contaminated the Euro-zone's commercial banks through securitization, interrogating the default risk associated to their assets and liabilities. Injected liquidities have thus often been used by commercial banks to anticipate these potential defaults on the one hand, and to elevate their fractional-reserve ratios on the other hand so as to comply with the Basel III framework.

Indeed, there is a strong relation between fractional reserve banking (FRB) and the velocity of money, see, e.g. this.

Would V be expected to increase as a result of a mass exiting of the stock market (frigtened stock market investors liquidating their retirement holdings into cash and then spending it)?

I do not think so. Simply because I do not see stock market investors redirecting their capital toward commercial banks, i.e. toward FRB-to-velocity engines. That being said, why not (!). It all depends on their psychology.

For instance, the stock market starts falling [...] ?

The mechanism that you are so involving can only very indirectly change the velocity of money. According to me, this is not to be considered as key driver.

• Any question @recoverybubble ? – keepAlive Nov 22 '19 at 20:16
• As of September 2019, the US the FED has started injecting capital through overnight market repurchase agreement operations - also known as "repos"; and hasn’t stopped. markets.businessinsider.com/news/stocks/… Is this the US equivalent of what you are describing that is happening in the EU? – recovery bubble Nov 22 '19 at 21:24
• @recoverybubble Actually, repos are involved to "change the price of money" and so to stimulate (in one direction or the other) the behaviors of commercial banks (CBs). What I describe is related to the fact that CBs, while benefiting from these money-price changes, do not "propagate" them to their final borrowers (to you, to me, private companies, etc...) by lending money in a less restrictive way. Indeed, central banks send signals to change $V$, but the entities that ultimately really influence it are the commercial banks. – keepAlive Nov 22 '19 at 21:54
• @recoverybubble So yes, repos are a way to inject liquidity in the "system", (identically to what I imply for EU). But still, commercial banks must consequently "play the game", which they have not yet generally done. – keepAlive Nov 22 '19 at 21:55