I see you look at velocity of money very differently to my understanding of it. Your example of creating bogus shares by shorting could also be applied to VOM. For example:
1) I earn $10. I spend that $10 on a new pen. The store takes that $10 and pays the supplier, who uses it to pay his employee, who goes out and spends it again, etc. The velocity of money increases.
2) I earn $10. I put it in my savings account. My bank then loans $10 to a man starting a building supply business, who then extends $10 of credit to his customer, who in turn extends $10 in credit to his customer, who spends the money. The velocity of money increases.
3) I earn $10. I stuff it in my mattress. The velocity of money decreases since no other transactions take place on the basis of that $10. The government prints more money to finance the other transactions. The money supply increases.
4) Under 2) above: at some point the building supply man must pay off his $10 loan to the bank, so he calls in the loan he made to his customer who then in turn must call HIS customer who has already spent the $10 and cannot pay, so none of the others can pay off their loans either and a series of defaults result. Think "It's a Wonderful Life".
5) Under 3) above: at some point I will dig my $10 bill out of the mattress and spend it or put it in savings, and another series of transactions based on my $10 results in addition to the ones created by the new money printed thereby doubling the number of transactions. The money supply has increased and the velocity of money is increasing. This overheats the economy resulting in price inflation to absorb the oversupply unless the new money is withdrawn from circulation.
It's a lot more complicated, of course, but you get the idea.
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