Understanding Finance from scratch

Chapter 12 Once you see through the essence of money, you will understand the true meaning of finance——learn some currency knowledge every day (4)
For this reason, many "anti-Keynesian schools" have emerged in the economics circle, and an important representative is M. Friedman of the United States.In his view, the quantity theory of money is not a theory about output, money income or price level, but first and foremost a theory of money demand.In his view, since the money demand function is extremely stable, the price change is determined by the money supply.It is a characteristic of the quantity theory of money to study the impact on prices from the change of money supply.

For example, an increase in money supply will increase nominal income, leading to an increase in people's various consumptions, including consumption expenditures and investment expenditures, which can lead to an increase in social output and an increase in the price level.As to how much the increase in money supply affects output and how much it affects prices is an unresolved problem.

Well, that’s all we have to say about the theoretical evolution of money demand, and let’s talk about the second question: what factors are related to money demand.

Money demand should be positively related to the country's GDP (gross domestic product).The larger the country's GDP, the more currency the country needs.should be relatively close to a proportional relationship.For the same country, it is basically a proportional relationship.For example, for the same country, the total amount of currency in circulation in the country is consistent with the national economic aggregate.

For different countries, when the total GDP is the same, the amount of currency that needs to be circulated in the country is not the same.The reason is that the velocity of money circulation varies greatly across countries.The currency circulation velocity of each country mainly depends on the national character, financial policy and other national policies. We will elaborate on this point later.

In short, ideally speaking, the market's demand for currency must be resolved by the market itself.However, in the paper currency standard era, this demand may not be an objective requirement of the market, but has a lot to do with the country's economic policies.

Fast and slow money circulation

Statistics show that the velocity of currency circulation in China is lower than that of some foreign developed countries. In 1993, the nominal GDP of the United States was 65530 billion U.S. dollars, the M1 balance was 11284 billion U.S. dollars, and the V1 was 5.81, while China’s was 2.12, a difference of more than 2 times; the V2 of the U.S. in 1993 was more than 1.5 times that of China.China's currency circulation velocity V2 is comparable to that of Japan, slightly lower than that of the United Kingdom, and has a large gap with the United States and emerging countries South Korea.At the same time, the velocity of money circulation in developed countries such as the United States fluctuates very little, and the variance of V1993 from 1999 to 2 is only 0.0026, which also shows to a certain extent that the United States has a relatively high degree of financial development and strong economic stability.

The velocity of currency circulation varies greatly among countries, so what factors mainly affect the velocity of currency circulation?

Before answering this question, it is necessary to explain what the velocity of money is.The velocity of currency circulation refers to the number of turnovers (or exchanges) of a unit of currency within a certain period of time.After the commodity is exchanged, it will generally withdraw from circulation and enter production or daily consumption; and currency, as a medium to realize commodity exchange, is in circulation to continuously serve the realization of commodity exchange.Within a certain period of time, a variety of commodity exchange activities continue to continue, and the same unit of currency can serve multiple commodity exchanges, thereby achieving multiple turnovers.An example might make it clearer.In a certain period of time, A uses 10 yuan to buy apples from B, B uses the 10 yuan to buy oranges from C, and C uses it to buy grapes from D. The 10 yuan currency realizes a commodity value of 30 yuan within a certain period of time. The circulation rate is 3 times.

The velocity of money has a qualitative relationship with socioeconomic conditions: during periods of economic expansion, the velocity of money tends to rise; during periods of economic contraction, the velocity of money tends to fall.Generally speaking, the amount of change in the velocity of money is directly related to the scale of changes in income and money supply.Take the United States as an example.Contrary to the sharp decline in the velocity of money circulation from 1929 to 1933, the velocity of money circulation rose sharply during World War I, accompanied by a rapid increase in the stock of money and money income; while in the stage of moderate economic development, changes in the velocity of money circulation were relatively mild.

In addition, the velocity of currency circulation is also related to consumption habits.

For a nation or country that loves consumption, the currency circulation speed should be relatively fast.These countries are prone to inflation.Because such a country is relatively sensitive to the increase of currency, once the money supply is increased, the citizens who are willing to consume will have a great amplification effect on these increased currencies.

However, in countries composed of people who love savings or frugality, the velocity of currency circulation is generally slower.These countries are not prone to inflation.Such countries are less sensitive to currency increases.In such a country, the amplification factor for the newly added currency is relatively small, and inflation is naturally not easy to occur.

National self-perceived wealth possession (including fixed assets, financial assets and cash) will also affect national consumption behavior.The more wealth the people feel themselves, the more favorable it is to increase the consumption behavior of the people.The more wealth the citizens feel, the more timely the citizens will consume the cash in their hands, and the speed of currency circulation will be accelerated.

For example, a rise in stock prices will lead to an increase in the self-perceived wealth of shareholders and an increase in their daily consumption.

Although the increase in house prices can lead to an increase in the perceived wealth of the people, some people need to buy a house, so they have to spend less and save more money to buy a house.The rise in house prices, when the vast majority of citizens own houses, will lead to an increase in the overall daily consumption of the people, leading to an increase in the velocity of money circulation.It would be hard to say if a large part of the citizens did not own their own houses.

The increase in national welfare is also conducive to increasing the daily consumption of the people.The increase in national welfare is equivalent to the increase in national wealth, and it is normal for daily consumption to increase.National welfare reduces some of the worries of the people, and there is no need to save too much. Naturally, it is also conducive to increasing the daily consumption of the people.

Finally, the deposit reserve ratio will also affect the overall velocity of currency circulation.A higher deposit reserve ratio is equivalent to hoarding more currency and not participating in market circulation.Reducing the money supply in the market is equivalent to reducing the circulation velocity of all currencies.

But on the other hand, some citizens will store their own currency and not consume it.These currencies are naturally difficult to circulate.The existence of banks can make it easy to lend these currencies to willing consumers.Even considering the existence of reserves, the effect of banks is to promote social consumption behavior, promote the circulation speed of currency, and reduce the currency demanded by society.

In a word, the existence of banks will promote social consumption.The size of its promotion effect has an inverse relationship with the size of the deposit reserve ratio.If the deposit reserve ratio is not large, the existence of banks can increase the velocity of money circulation and reduce the social demand for money.

The "money illusion" that makes your wallet more deflated

"Moonlight Clan" Xiao Li was very excited at the end of the month: the CPI has recently risen, and the boss has also thoughtfully raised everyone's salary by 600 yuan. With 600 yuan, you can buy a beautiful short down jacket, a pair of long-cherished boots, or a set of cosmetics...Xiao Li believes that this small unexpected wealth will make his next month more comfortable.

When the end of the second month came, Xiao Li felt very strange. It was 600 yuan more, but at the end of the month, he was still struggling.I didn't have any big expenses this month. Why didn't I seem to buy anything with the 600 yuan?

Xiao Li's question is probably also a question of many people in life: I just went to the bank to withdraw a sum of living expenses, and I just paid the full amount of the bonus, so how could it be used up in a blink of an eye? !

There is a special part of the front of your brain called the ventromedial prefrontal cortex, which directly affects your decision-making ability.We are not trying to popularize biological knowledge, but just want to tell you that the reason why you feel that a lot of money is "disappeared in a blink of an eye" is likely to be the ventromedial prefrontal cortex.

The ventromedial prefrontal cortex is central to the "money illusion". The word "high salary" can still stimulate the brain, even just thinking about it will make the brain excited.The higher the salary, the more intense the pleasure produced by the brain.Perhaps this is not surprising, but interestingly, these conclusions also hold true when we want to buy high-ticket items.For example, when prices are skyrocketing and our actual purchasing power is declining, our brains will still be excited as long as money is mentioned.Therefore, when people are shopping, they often ignore the information that has been distorted by inflation and impulsively raise the psychological price above the actual price. This is the currency illusion.

The monetary illusion, proposed by the American economist Irving Fisher in 1928, is the inflationary effect of monetary policy.It refers to a psychological illusion that people only respond to the nominal value of a currency while ignoring changes in its actual purchasing power.He told people that when managing money, one should not only focus on the price drop or rise of which commodity, and whether the money spent is more or less, but that the brain should be used to study the purchasing power of "money" and the value of "money". What are the potential values ​​and other aspects? Only in this way can we truly plan and budget carefully and spend as much money as possible.Otherwise, under the influence of the "money illusion", the "wishful thinking" will find itself at a disadvantage in the end.

Robert J. Shiller, a professor of economics at Yale University in the United States, once said that it is the erroneous logic caused by the currency illusion that gave rise to the real estate bubble. They mistakenly believe that housing prices have risen more than other prices, thereby exaggerating the investment potential of real estate.”

Currency illusion usually occurs during the period of inflation. When inflation occurs, individuals cannot understand the extent of inflation or price rise, and can only judge by the prices of a few commodities in the local area that they come into contact with.In this way, personal price information is incomplete, and individuals can only focus on their own monetary income.For example, when wage earners negotiate individual or collective wages with enterprises, they may regard the nominal wage increase promised by the enterprise as the actual wage increase.In fact, real wages may not have risen, and may even have fallen.In this way, the business obtains additional profits through the illusion of money.

Not just individuals, but even the stock market has a similar illusion of money.For example, when the absolute price of a stock or investment product is low, investors will always think it is cheap. According to logic, since it is cheap, then this "bargain" has a theoretical basis for rising.Since it is cheap, things with low absolute prices are naturally popular with investors.This is how low-priced stocks are speculated.

(End of this chapter)