by Frank Shostak
At the end of January, the yearly growth rate of our measure of US money supply (AMS) closed at 76.7 percent, against 4.8 percent in January 2020. It is tempting to suggest that this massive increase in the growth rate of money supply is likely to result in massive price inflation in the months ahead.
Based on the sharp decline in the velocity of money from 6.7 in June 2008 to 2.3 by December 2020, however, it can be argued that price inflation is not likely to accelerate in the months ahead. In this way of thinking, a decline in velocity offsets the effect of massive increases in money supply on price inflation. Here is why.
Over any interval of time, such as a year, a given amount of money can be used repeatedly in the purchase of goods and services. The money one person spends on goods and services is used by the recipient of that money to purchase goods and services from some other individual.