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Velocity “Magic”, Tax Receipts, and GDP

Courtesy of Mish.

Reader Jeff asks “Since we appear to have record tax receipts in a  record low-velocity environment, could we expect tax receipts to increase if the velocity of money picks up?”

Velocity vs Tax Receipts

Velocity is defined as (prices * transactions) / (money supply). Economists substitute GDP for (prices * transactions).

Real GDP is a flawed measure of output because it ignores asset bubbles, even home prices in its measure of pricing.

Moreover, there is no universal agreement whether to use M1, M2, MZM, Austrian Money Supply or something else as the denominator. This leads to numerous measurements of velocity.

M2 velocity is shown in these charts.

Velocity vs GDP


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