Crash course in fractions for portfolio managers

Dear Ms Park,

A fraction is when we divide the number above the line (called the numerator, which I shall abbreviate to 'num') by the number below the line (called the denominator, which I shall abbreviate to 'den').

So when we say one-quarter, we mean 1/4, or 0.25 or 25%, it's the same thing. The funny thing about fractions is, they are upside down. So although five is a bigger number than four, one-fifth (1/5) is smaller than one-quarter (1/4). It's very important to remember this, and that the rule only applies if the num stays the same, so although 1/5 is smaller than 1/4, 2/5 is bigger than 1/4! Confusing, huh?

I hope that you know what gross domestic product ('GDP') is, and that you also know what money supply is (put simply, it's like adding together all the money in people's bank accounts, or if you want to be really clever, it's like adding up everybody's mortgage - be careful not to mix the two up as one is a plus and the other is a minus).

For reasons best known to themselves, economists like dividing GDP by money supply and they call the result 'velocity'. So if GDP (the num) is about $15 trillion a year and money supply is $5 trillion (the den), the velocity is 3. So what do you think happens if GDP stays the same and money supply goes up?

Remember the example with 1/4 and 1/5? Yes..? Correct! If the num (that's the number above the line, which in this example is GDP) stays the same, and the den (that's the number underneath the line, which is this example is money supply) goes up, then your answer (which is 'velocity') goes down. It doesn't necessarily mean that the economy is doing worse (it might do, but not necessarily). No it doesn't. I just told you that GDP stayed the same, didn't I?

Right... we know that GDP in your country has more or less stayed the same (about $15 trillion) for the past five years (things aren't as bad as some people say, but not as good as other people say) and that money supply has gone up from about $7.7 trillion to $9.4 trillion, so it's not really surprising that velocity has gone down, from 1.95 to 1.6.

Yes... if we divide 15 by 7.7, we get the answer 1.95. If we divide the same number 15 by 9.4, the answer goes down to 1.6.

You can check your answer by multiplying back up again, if you like... no, too advanced. But the main thing you've learned today is that velocity is not really "plunging", is it? It's just that money supply is going up faster than the economy is growing. I think it's those naughty men in Washington allowing the Fed to print loads of money to give to the naughty men on Wall Street that causes this, but nobody is really sure.

Kind regards etc.