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 or something else as the denominator. This leads to numerous measurements of velocity.

M2 velocity is shown in these charts.

Velocity vs GDP

It’s possible for GDP to rise or fall with velocity either rising or falling.

Tax receipts can fluctuate independently as well thanks to tax policy changes and capital gains collected on rising asset prices.

Velocity Magic

Austrian economist, Frank Shostak, took apart conventional wisdom years ago with his column Is Velocity Like Magic?