For most people the concept of inflation is essentially linked to the money offer, that is to say: the more a Central Bank enters liquidity into the financial system (quantitative easing) the more the inflation will rise!
This statement that media and money managers overestimate is however incomplete: to start inflation is essential that the VELOCITY OF MONEY increases.
But what is the money speed circulation?
It is the spending frequency of a unit of money in a given time frame.
In an imaginary economic system there are two people, a mechanic and a baker, they both own 50€. The economic system is therefore founded on 100€. If the mechanic spends 50€ buying bread at the bakery and the baker spends 50€ repairing his car at the mechanic’s, what do we get? We get that the system is always founded on 100€ but, since the same money changed hands twice, you can say that the money speed circulation is 2!
This process is the main reason of the product price increase (inflation), without which neither quantitative easing nor rate lowering will ever be effective!
The fact explains why Japan, despite all the political monetary experiments, is still in deflation after 26 years.
In the chart below you can see the money speed circulation of Japan.
[social_sharing style=”style-13″ fb_color=”light” fb_lang=”af_ZA” fb_text=”like” fb_button_text=”Share” tw_lang=”en” tw_button_text=”Share” g_lang=”en-GB” g_button_text=”Share” alignment=”center”]