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Friday, December 05, 2008
The velocity of money
The velocity of money (how fast a dollar moves through the economy) is slowing rather dramatically. It could fall another 10% and just get back to the average for the last 107 years. Given the growth in population, inflation, productivity, and other factors, the money supply will need to grow by 7% annually for the next several years to keep the economy at equilibrium. GDP (gross domestic product) is essentially the velocity of money times the supply of money. If the velocity slows down, the money supply needs to rise just to stay even.
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