Milton Friedman’s basic theory was MV=PT. The supply of Money times its Velocity or turnover equals the Price level times the number of Transactions. Milton assumed the Velocity was relatively fixed and that therefore the control of the supply of money was the basis for controlling inflation. Experience has proven that the velocity is no where close to fixed and has fluctuated widely, usually in response to fiscal friction costs and consumer and investment concerns. The likely reason that prices have not inflated and that the recovery has been so week this cycle is that the velocity has remained low.
In 1976 Friedman suffered a crippling intellectual trauma that for the rest of his life seriously affected his thinking. The king of Sweden awarded him a Nobel Prize for economic science, specifically for his errors— his monetary theory and his permanent income hypothesis. In an intellectual lapse common among Nobel laureates, Friedman continued to defend these ideas long after their validity had collapsed empirically.
The one thing we know from empirical experience is that velocity is not constant. Not even close. Through most of the twenty-first century, velocity has fallen like a rock one year and soared like a rocket the next. The money multiplier— a velocity enabler measuring how much economic activity the Fed’s monetary base or “high-powered money” supports— swings between 3.1 and 12. Over the seven years following the 2007– 2008 financial crisis, the U.S. monetary base rose, as just noted, from $ 800 billion to $ 4 trillion, but velocity plummeted. In Japan velocity has been sinking for two decades after soaring wildly in the 1980s. In the United States, as Louis Gave of Hong Kong’s Gavekal economics asserts, “velocity is eminently volatile and impossible to forecast.” 7
Gilder, George. The Scandal of Money: Why Wall Street Recovers but the Economy Never Does (Kindle Locations 667-676). Regnery Publishing. Kindle Edition.