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Albert Sung is the author of the Katchum Macro-Economic Blog, monitoring breaking economic news on a day to day basis. He started investing in 2008 because of the economic crisis and holds a masters degree in chemical engineering. Previously, he worked several years as a process engineer at... More
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  • Key Correlation Between Money Velocity And Hyperinflation 1 comment
    May 24, 2012 12:28 PM

    Just found an interesting site that gives information about the correlation between hyperinflation and money velocity.

    => http://www.goldonomic.com/inflation.htm

    The key measure to follow is money velocity of the broad measures of money supply M3 or MZM (which resembles M3). When money velocity spikes, hyperinflation has set in as people scramble for tangible assets.

    Froom Goldonomic.com:

    "Hyperinflation starts when the public is unwilling to hold the money for more than the time it is needed to trade it for something tangible to avoid further loss. A good indicator that Hyperinflation has started will be a sudden increase in the Velocity of Money. [ P = M x V ]. This alone can increase the general level of prices. Even with a falling M3!"

    So be warned, when the following graph spikes up, it's time to get into real tangible assets! You can see that in 1980 we had the hyperinflationary crisis where gold spiked into a bubble when everyone feared inflation.

    Chart 1: MZM Money Stock

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    59) Alfred Marshall, the Cambridge economists, is responsible for developing the cash-balances approach to money. For example, if individuals collectively desire expanding their cash balances (increasing the period over whose transactions purchasing power in the form of money is held), they will initiate a chain of events which will lead to a net reduction in their aggregate holdings of cash. That is, an over-all increase in the demand for money leads to falling prices, a decline in profit expectations, reduced borrowing from the banks -- and therefore a smaller volume of cash balances. Money thus is truly a paradox - by wanting more, the public ends up with less, and by wanting less, it ends up with more. All motives which induce the holding of a larger volume of money will tend to increase the demand for money - and reduce its velocity. Therefore, if there is a flight from the dollar, there will be hyperinflation in terms of dollar denominated assets.
    7 Jul 2012, 05:19 PM Reply Like
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