Velocity and Inflation

Since 2008, the Federal Reserve has more or less printed over $3.2 Trillion in three rounds of “Quantitative Easing”, now tapering off to zero. Many have speculated that this has to result in inflation for the simple reason that there are more US Dollars out there than ever before. That’s based on the most fundamental principle of any market, supply and demand –more of these things called “Dollars” around and the value has to drop, meaning it takes more of them to make a reasonable exchange with something real.

It hasn’t worked out that way. Inflation remains less than 2% per year as it has since the financial crisis that started in 2007. How on earth can that be?

The answer is that the number of US Dollars in the world is only one part of the equation. The “velocity of money”, or the number of times they turn over in the economy, is equally important. Data since 2007 shows what every freelancer and job seeker knows – it’s a tough world out there, and people are pretty slow to let go of the dough they have.

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