Is there such a thing as too much money? by Fred E. Foldvary,
Senior EditorWhat is inflation? There are two economic meanings
of inflation. The first meaning is monetary inflation, having to
do with the money supply. To understand that, we need to
understand that the impact of money on the economy depends not
just on the amount of money but also on its rate of turnover. We
all know that money circulates. How fast it circulates is called
its velocity. For example, suppose you get paid $4000 every four
weeks. You are circulating $4000 13 times per year. Then suppose
you instead get paid $1000 each week. Your total spending is the
same, but now you are circulating $1000 52 times per year. The
velocity of the money is 52, but the money you hold has been
reduced to one fourth its previous amount, although the money
held times the velocity is the same. The effect on the economy
is the money supply times the velocity. Monetary inflation is an
increase in the money supply, times the velocity, which is
greater than th