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Wednesday, June 04, 2003

Sometimes the Velocity Goes Up

Just a snippet from my wise but witty brother, we should remember declining velocity of money circulation is not the only problem, sometimes it can accelerate. Normally after public finances collapse and the credibility of the central bank comes into serious question. The Japan problem does come to mind. If one day government debt implodes, just where will the BoJ be with all that worthless paper as reserves?

One thought that has been going through my mind recently is that everybody remembers the Weimar Inflation but nobody mentions the Hungarian Inflation of 1944-46. The issue of paper money was even more excessive. The circulation of the pengo increased from 12000million in 1944 to 36,000,000million in 1945 and to 1000million times that amount in 1946. When the note issue reached its maximum it was a number consisting of twenty-seven digits. As in Germany in the earlier period, the velocity of circulation also increased, and so prices rose by an even greater amount than the note issue-a number with thirty digits. Then the pengo was replaced by the florint.

You know my view that more research needs to be done on VELOCITY as a way of helping us understand the present problem.

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