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Scary Drop in Velocity of Money: Is Deflation Knocking?

"1/2 of the economy is ignored" Aggregate demand = our means of payment money supply times its rate of turnover. (MV) & (PT) = nominal gdp. Economics is about the rates-of-change in the flow of funds. It doesn't matter if (as you say) 1/2 of economic activity is ignored. Why? Because aggregate demand and nominal gdp are measured the same way (using rates-of-change). That way you match oranges with oranges and end up with the correct relationship.

Your velocity figure is wrong. Income velocity is a contrived figure. It's the transactions velcocity of money that represents the actual exchange of money.

The Fed's Bubble Trouble

"since the only way the Fed can buy bonds is by printing money, the more bonds they buy the more inflation they will create"

This is, of course, wrong. The FED could purchase the entire 2009 budget deficit with no effect on prices (inflation), and it would hold up the price of government securities (temporarily).