What Does The Velocity of Money Have To Do With High Inflation?
All individuals, based on their own circumstances, decide whether to save, invest, or spend their money. What each person expects to happen in the future plays an important part of the decision. This is the prime reason why trying to treat the economy as a mechanical process is fundamentally wrong.
Central planners, and their use of "tools" and "models" to manipulate money always ends up in failure. Life is far too complex, and their "models" can never account for all of variables involved in each individual decision. We need sound money and free markets; not The Fed.
Hello everybody and thank you for tuning in to the Liberty Report.
With us today is Chris Rossini, our co-host.
Chris, nice to have you with us.
Great to be with you, Dr. Paul.
Very good.
Let's talk about money and gold and Congress and all the minor elements that we have to put up with.
But there was one thing that I will want to touch on in our rigorous segment, and that will be the issue of philosophy.
So I want to deal with that and how that has worked into the system of inflation.
But I wanted to comment a little bit on what was going on this morning because sometimes I'll listen to a business report and think, oh, that means there's inflation.
That means gold should go up.
But that's not the way it works.
You know, sometimes the markets are perverse to what actually happens.
It takes maybe 10 minutes, maybe it takes an hour, maybe it takes two days or a week for them to settle in.
One was today that an inflation signal, the CME, was PCE was a little bit higher than they thought.
And we think, well, that would be inflationary.
Maybe people would perk up gold a little bit.
No, they thought, oh, it might lower, it might raise interest rates to deal with this.
And therefore, people will go to the dollar, the dollar go up, and therefore gold has to go down.
But those are short-term things, and it's really difficult.
And that's one of the reasons why I think it's very difficult to speculate on gold minute to minute, hour to hour, day to day, instead of looking at the big picture of what gold really is.
And of course, today, this morning, you know, what have we been putting up for weeks?
The on-again, off-again debate on the solution to the debt ceiling.
And we've talked about that a lot.
They talk about fear-mongering with there's going to be a default.
If we don't do something, of course, my argument is they're defaulting all the time.
And that's just a distraction from dealing with what the real issue is.
And that's big government, because even though there's one party that talks about being more fiscally conservative, it's a bipartisan issue.
There's no doubt about it.
The images that are portrayed are a little bit different.
But we do have to admit that the radical left economists who associate with the Democrats actually believe that there is no problem with debt, just default.
You know, they're dangerous people because that's what we've been doing.
And that's why we're in a mess, and that's why the consumer is suffering.
So this is one of the reasons I've maintained an interest in gold for a long time, because I became fascinated with the whole subject back in the late 1960s and the predictions of the Bretton Woods breaking down because we were printing too much money and pretending gold ratio to a dollar was $35 or an ounce.
Everybody knew it was false.
Finally, it broke down and within 10 years it went up 20 fold.
So that has fascinated me.
So I follow this and find out that it's a big, big issue.
And that's why we continue to talk about it.
And that's also the reasons why spending is encouraged.
And when they come up with these decisions on debt, we're getting there.
We made a little bit of a move.
Even the proposal now that we're going to freeze spending for two years, it's not going to happen and won't make it matter anyway.
But anyway, we have to put up with that.
And that's why the markets are in chaos.
They've been in chaos off and on ever since, especially since 1971.
But it's worse now.
The fundamentals are worse.
The size of the debt is worse.
The size of the malinvestment is worse than ever.
The deception is worse.
So it will be ironed out, and the market is always telling us what to do.
But this is a reason that I have associated with the Birch Gold Group because they talk about gold and they talk about investments and they want to inform their customers and people of interest.
So they have worked with me.
We're partners in this.
And if you'd like to get more information from the Birch Group, you can text Ron at 989898 and they will send you some information on this subject and some information and some advice at times on exactly what you should do with your investment.
So if you're interested in that, text Ron at 9898 and you will be reaching the Birch Gold Group and they will send you some material.
There will be no charge for this and they will be involved in talking about the taxes issues that are involved and the fees that are involved.
But this is a good place to start if you'd like to get more information on the gold issue.
In the meantime, we'll continue to do what we're doing and this morning we're going to do it with Chris because Chris is my expert to go to because he is well informed.
And Chris, we want to talk about this.
And today we want to talk a little bit about an issue of velocity because the circulation of money is very important and it has a lot to do with pricing because inflation, we've talked so much about inflation.
It's a monetary issue and it is.
It's the big issue.
But there's a lot of other issues that go along that challenge just the literal money supply because there's the human beings and individuals are individuals that can make mistakes and they want to get all the information they can.
So this is something that I think that we want to know as much as we can about what are the things that might play a role in inflation.
And when people think about inflation, they only think prices and prices going up.
Of course, we think the big culprit is spending on all the printing of money.
But there's a lot of other elements because there's a lot of human activity going on.
And you can't predict exactly what human action will bring because sometimes, just like I pointed out, I looked at these those and the prices are going up.
Why wouldn't gold go up a little bit?
No, gold went down.
It's understandable, but that means that you just can't have a set rule.
And that's what I want to talk a little bit about, Chris, is about, you know, it's the various things that might come to mind that we have to entertain and have a knowledge about other than just the money supply, although it is the key to what inflation is all about.
Yes, Dr. Paul, money supply can come down and interest rates go up and yet prices are still rising.
And there's a psychological aspect to that.
You know, everybody, all of us, we each individually are making decisions all the time with our own money in our own environments on whether to save money, invest it, or spend it.
Those are the three main things that we're doing with our money.
Now, if we expect that the purchasing power of our money will fall, which we normally do in this country, then we're going to get rid of the money faster.
If we expect that the dollars will gain value, and that's unfortunately something that we're not familiar with, you know, with sound money we would be.
Money would actually gain value and you'd be able to buy more with it, then you would hold off on spending it because you'll be able to buy more later.
And this is not a mechanical process.
This is psychological.
This is based on individual thinking, like Dr. Paul mentioned, human action.
It's not based on mathematical formulas and models, which is what the PhDs in Washington use, and that's why they're constantly behind the eight ball.
You know, the Fed during my lifetime, when I think about inflation, it's been gradual.
It hasn't been anything out of the extraordinary.
But when you think about the last 20 years, they're printing trillions and trillions at a time.
And now I'm going to the supermarket, and some things are 100% more than they were a couple months ago.
This now changes the psychology of people.
They are going to start to think, you know, this money is getting more, it's becoming worthless faster and faster, and they're going to want to get rid of it faster.
And that's why inflation can continue, even if the money supply starts to come down.
Very good.
You know, in the 70s, I was closely watching what the markets were doing.
And the concentration back then was the money supply, more so, because it was important, and they looked at the money supply, and they anticipated and tried to calculate what will the Fed do, or what will the Congress do, which is difficult.
There are market reactions which can be put into the category more subjective, and human activity that is, like Chris points out, is not predictable on the short run.
On the long run, I think we can predict that bad things come from the fact that people inflate and pay up all their debt and create a malinvestment and end up in very, very bad conditions.
Of course, our goal is to try to prevent that.
I'm not so sure it can be preventable, but we should prepare to know how to protect ourselves and we should know how to salvage a system if necessary.
After Civil War, we were off the gold standard for 15 years and we went back on the gold standard and it was a smooth activity.
It worked okay.
And we got back on the gold standard.
But today it's very, very hatcap.
And the marketplace reacts to every single word and phrases about what the Fed's going to do.
These meetings and what policy is.
Then they read between the lines and this has effect on sometimes trillions of dollars of things up and down trying to outguest what the Fed's going to do.
But what really is difficult, the Fed doesn't even know what they're going to do.
So how can you figure out what the Fed's going to do when they don't know what they're doing?
One time I kept pestering one of the Federal Reserve Chairman, what's the definition of a dollar?
And he couldn't do it.
And I said, well, it says it's promised to pay.
Oh, yeah.
I said, what happens if you take it to the Treasury?
We pay off.
You give me a Federal Reserve note, I'll give you another Federal Reserve note back.
I mean, that's where the debate has been.
But there's a lot of activity.
The money supply and the Fed's important.
They manipulate purposely the interest rates, which means they take it away from the market.
Because all this mischief could be, the investment community, the people could be more alert to it if the interest rates were allowed to be marketed in spite of all the mess they're doing.
No, they mess it up and then they have to, oh, interest rates are going up faster.
That's not good.
That would be bad for the economy.
So they have to come in and manipulate the interest rates.
So it just goes on and on.
It's a bad system.
That's why sound money has a lot to offer if people get annoyed and don't understand and they want to understand where do they get the money to fight these wars we don't have and we don't have authority to go into.
That's the thing we have to ask because we're off the track.
We're off the track of the Constitution, on spending, on the principles of liberty, and certainly off track for the principles of money that the founders intended.
Absolutely.
And, you know, in our business, we look back at history, you know, history of money, hyperinflations.
And I've studied hyperinflations.
And, you know, each time you go through each episode, that the thought crosses my mind, why didn't they just stop?
They go from millions and billions and trillions and quadrillions and all these zeros.
And the thought crosses your mind, why didn't they just stop?
And, you know, now when you look at what we're going through and the political pressure that is put on even Jerome Powell just for raising rates to a mere 5%, there is pressure on him from the Democrats.
He's causing all these, he's going to cause all this unemployment.
The media, that's it.
They're going to pause.
No more raising rates.
And even people themselves, you know, because they're so addicted to free money at 0%.
So they want it back.
So now you could almost get a sense.
And I don't believe hyperinflation is imminent here, but I could get a sense that this is what it looks like.
No matter what the central banker wants to do, he may think this is crazy.
The pressure from everyone, from politicians to the media to business to the people, will, I guess, force them to ultimately hyperinflate.
I could see that that's how it can happen if it gains that much momentum.
Now, again, I don't think that that's imminent, and hopefully we never live through that because that is a total disaster.
But you can see the psychology on how people are so addicted to cheap money and credit.
Very good, Chris.
You know, you asked the question about why don't they just stop?
And you point it out because you know that it makes sense to stop.
But there's also, you know, the dependency.
And you mentioned that people get too dependent.
They don't want to lose what they're getting, even though the final end is very, very bad.
And even now and slowing up, just look at this, what they're doing on the budget.
Addiction to Cheap Money00:03:35
They want to cut a nickel out of a billion-dollar budget.
And they can't even do that.
So the people who believe that there's going to be pain, there are many, and there will be some pain.
You can't say it's painless.
But I like to compare this to something like a drug addict.
A drug addict, you know, on a half-sober day, say, you know, I got to get off this.
I got to get off this.
So he gets off his alcohol or drugs.
And it's not easy.
And the addiction is tremendous to go back.
So there will be those things.
And the noise gets greater.
The same noise that came from the special interest to create the monster, this monster system of debt and monetization of debt.
They get louder and frightened and scared because they're addicted.
And yes, there will be a price.
But the only answer I can give for that, if you don't, the patient dies.
If you don't stop your drug addiction, you die.
And if we don't stop this addiction, yes, the economy dies.
And I think that's why people are tearing at each other and there's so much anger, anger, because I don't think, even though one side is a little more conservative than the other, they're not really talking about how serious this is.
And the whole thing is, maybe half, let's say half the people.
I met a lot of people in Washington.
I agree with you, but it's not doable.
The people are going to scream and holler, and there'll be a revolt.
And you have to think about that.
That's why information on why you do something, if you have to treat a patient and the treatment is rather paid for and they're going to be laid out for a while, you can't get rid of the cancer.
Yes, you have to accept that.
You have to accept that if you want the treatment.
And right now, the society, even though there are more and more people, and that's what this debate about, more and more people know now there has to be some treatment.
There has to be the stopping of this addiction, and yet they can't do it because it keeps going back to the special interest.
It isn't one special interest, say the military industrial complex.
They can combine with the pharmaceutical industrial complex.
So they can come together and they gang up and they become a mob.
They become 51% of the people and they can dictate, oh, yes, but what we want is democracy so that we can vote ourselves whatever we want.
And of course, that's the worst thing you can do if the people have the right to vote anything they want unless they're demanding more freedom.
That's what I want them to come together on, demanding more freedom and solve some of these problems.
Chris?
Excellent, Dr. Paul.
I'll finish up.
One of mankind's big challenges, each individual's challenges, is understanding how little we actually know.
That is the big problem with government, you know, and that's why the U.S. Constitution, as imperfect as it was, it was meant to keep government small.
It failed.
Unfortunately, we now have the biggest government ever in the history of the world, so it obviously failed.
But they tried, you know, and you can see just the hubris of people in power.
They don't understand what they don't know.
And, you know, they think that they're going to fix something with a regulation and they create new problems, two new problems for every regulation, and they just keep multiplying regulations and multiplying problems.
Can't Fix Currency Velocity00:06:29
Same thing with foreign policy.
They think that they could go across the world and remake a country.
They fail miserably, but they just move on to another country and fail again.
And again, in our case, with our empire, the failures are piling up.
It's the same with central bankers.
They believe that they can price fix and counterfeit money to better society.
If that's all their goal, who knows?
But in any case, they make society much worse because they do not understand all of the subsequent consequences that are produced by their interventions.
And every time they change policy, they make a whole new set of problems.
COVID was another example.
They just multiplied problems with every single move that they made.
And, you know, ultimately, you reached a point where the Soviets reached where you're totally frozen.
There is nothing you can do to make anything better.
And that's why ultimately we have to get back to free markets and sound money.
They are superior.
They are not problem-free.
There are going to be problems in free markets with sound money.
The only difference is the problems will be more localized.
It won't be one person in the WHO that's going to ruin the entire world or one person in the Federal Reserve that's going to ruin the entire country.
They will be localized.
And there will be problems that have to be resolved more locally rather than this central planning fantasy.
And that's what we, you know, we hope to push those ideas to get us to that point.
Wonderful, Chris.
And I want to talk now a little bit more detail about the velocity, velocity, because velocity and money is velocity.
It speeds up.
It means this money is circulating faster.
Instead of a dollar being used once a day, it might be used 10 times a day because they're frightened about prices going up.
And that's when things get really bad.
So the circulation of money increases.
So if somebody has a dollar, a real dollar, and they put it in, and then they spend it five times into one day because they're frightened, that means the theoretical money supply is actually increased because it's being used.
But that's the market answering the question about what do you do about all this?
So the people are reacting, the market's reacting.
Well, if I don't spend it, the prices are going to go up.
And this is what happened with the runaway inflation.
People realize and have stories about wheelbarrow loads of paper money, and they get it in the morning, by afternoon, they need two wheelbarrow loads of money because they can't spend it fast enough, which just compounds it.
And I was having a little struggle totally understanding this back in the 60s and 70s.
And I had met Dr. Hans Senholt, an Austrian economist that was at Grove City College for a long time.
He was also a student and got his PhD under Mises.
So I called him up once.
I said, I'm just sort of trying to figure this thing out on velocity and money.
He says, oh, in his German accent, he says, oh, he says, I don't like that word velocity.
He wanted a more economic description.
He called it the propensity to spend.
So if the propensity to spend is increased, the money circulates faster.
And philosophy describes it pretty well.
But he liked that word, propensity to spend.
And what causes that propensity to do things rapidly, and of course that is the destruction of the value of money.
You try to catch up.
And it will vary from time to time where they are on the destruction of the currency and whether there's a war being started.
Because people might start doing it without a direct increase in the money supply.
If the war breaks out one day, it says, oh boy, wars lead to printing money and inflation.
So they might react to the anticipation of that.
And that means they might, you know, circulate their currency much faster.
So that is a big difference.
That means it introduces a notion of subjectivity and subjective value that people value that.
And yes, I don't think you can ever fix the price of gold or the value of gold.
What you do, you can fix a definition of gold, and the market has to define the value of gold.
So when you see philosophy, that's the market trying to sort things out.
And that is important for people to understand why that happens.
It's sort of related somewhat to the fractional reserve banking, because not only can they use the dollar over and over again, banks can, you know, one time reserves are 40%.
Well, reduce the reserves to 30%.
Now, the money supply, you know, amazingly increases just by saying you either don't have anything or 2% or 10%.
They pretend 10%.
But they just, so the reserves aren't there.
And guess what?
What does that lead to?
That leads to bankruptcies on the runs on bank because people figure it out.
And that's what happened in 1971.
There was a run on the bank.
There was a run on our promises to pay gold by foreigners.
So the run on the bank, they had to quit.
So that is perceptions that come about.
So there is a perception that the value of the currency is one thing, but you can't fix things.
That was one of the problems with the bimetallism.
They had gold and silver in our early history, and they fixed the value of each to one to the other.
But you can't do that.
You should let it circulate and decide what the ratio should be between the two.
So the market, if you listen to the market, is really trying to save us from ourselves.
And they want to liquidate debt.
And the market, I think, would like to liquidate the taxes too as well.
But anyway, this is an interesting subject, very, very important.
But I don't think we talk very much about velocity, money in circulation and fractional reserve, because that distorts the whole notion that the government prints one billion dollars and it goes to somebody and he spends it.
It's a lot more complex than that.
And the freer the market is, the complexity can be sorted out and understood much easier.