Exhibit 1. During periods of inflation and hyperinflation, money is losing value, so the holder has an incentive to withdraw cash as soon as he can and take it to the market to buy bread before it goes up in value even more. So the velocity of money would be extremely high. Deflation would be the opposite. Money would be rising in value, even if only so slightly, so there is an incentive to hold on to it. The last measurement of M2 velocity is 1.572, which is the lowest it has ever been since measurement started in 1959.
Exhibit 2. Gold. During hyperinflation, the price of gold would increase rapidly as people would seek to maintain their wealth. But during deflation, the price of gold would drop. The last closing price (1/18/13) was 1687.00, up only 27.10 in the last year. So the price of gold is flat.
Exhibit 3. Ratio of M2 / TCMDO. Almost all money has comes into its existence from borrowing. For the purpose of this article, I will assume that all money is created this way. So money is a derivative, and its serves its master, the debt that created it. So the important thing to look at is not the total amount of money, but its ratio to debt. If the ratio is increasing, then debt would be easier to pay back. Conversely, if the ratio is decreasing, then debt would be more difficult to pay back. And the debt that matters is private debt, not public debt. So the calculation is very simple - M2 to TCMDO.
| Quarter | M2 | TCMDO | Ratio |
| Q4 2008 | 8032 | 53273 | 15.1% |
| Q3 2012 | 10067 | 54460 | 17.6% |
Conclusion: I entertained the idea briefly that we are in deflation not inflation. If it weren't for the Fed intervening, this may have been true, but obviously we are having inflation. I think M2 will be an important number to watch, and I think the M2 velocity will start increasing this year.
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