I'm pretty sure a lot of the disagreement between people, when it comes to economic discussions, arises because we are talking about different economies. I generally talk about the one that produces GDP. And I generally see financial activity as a parasite on the economy like heartworms on a dog.
Many people, like Scott Sumner, I think, generally talk about the financial economy: I talk about the medium of exchange. Sumner talks about the medium of account.
The trouble with Scott's view is that finance is a parasite. The productive economy is the host. The parasite cannot live without the host. Left unchecked, the parasite kills the host.
What people are those?
Sumner says velocity follows the interest rate because when the interest rate goes down, people hang on to more of their cash. And when the interest rate goes up, well, I guess when the interest rate goes up they switch out of cash and into forms of money that pay interest.
For that to be true, you have to be looking at people who have money they can choose to hang on to. I'm not among those people. Most people are not those people. Most people struggle to get by, clip coupons, get extra miles out of worn tires, and have little or no savings.
It's an inequality thing. A few people have most of the money. Most of us have little. Who are the people that hold on to their cash when interest rates go down? The ones who can afford it.