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The yearly growth rate of US AMS jumped to almost 80% by February 2021 (see chart). Given such massive increase in money supply, it is tempting to suggest that this lays the foundation for an explosive increase in the annual growth of prices of goods and services sometime in the future

Some experts are of the view that what matters for increases in the momentum of prices is not just increases in money supply but also the velocity of money – or how fast money circulates. The velocity of AMS fell to 2.4 in June this year from 6.8 in January 2008. On this way of thinking, a decline in money velocity is going to offset the strong increase in money supply. Hence, the effect on the momentum of prices of goods is not going to be that dramatic. What is the rationale behind all this?

Popular view of what velocity is

According to popular thinking, the idea of velocity is straightforward. It is held that over any interval of time, such as a year, a given amount of money can be used repeatedly to finance people’s purchases of goods and services.

The money one person spends for goods and services at any given moment, can be used later by the recipient of that money to purchase yet other goods and services. For example, during a year a particular ten-dollar bill used as following: a baker John pays the ten-dollars to a tomato farmer George. The tomato farmer uses the ten-dollar bill to buy potatoes from Bob who uses the ten-dollar bill to buy sugar from Tom. The ten-dollar here served in three transactions. This means that the ten-dollar bill was used three times during the year, its velocity is therefore three.

…click on the above link to read the rest of the article…

How Politicians Are Creating the Worst Economic Crash in History

November 1, 2018

How Politicians Are Creating the Worst Economic Crash in History

Politicians have totally and completely misunderstood the trends within the global economy and as a result, they are actually creating one of the worst economic debacles in history. I have explained several times that the bulk of investment capital is tied up in two primary sectors – (1) government bonds and (2) real estate. Because of income taxes, real estate has offered a way to make money in capital gains without having to pay income taxes.

Money has looked to park in real estate around the world for many various different reasons as in Italy it was the escape from inheritance taxes as well as banks or in Vancouver to gain a foothold for residency fleeing Hong Kong. In Australia, there was the Super Annuation Fund which allowed people to use retirement funds for real estate. In New Zealand, the new government wanted to declare foreign investment just illegal and in Australia, they made it a criminal act for a foreigner to own property and not inform the government they were foreigners. Over in London, they imposed taxes on property which created a crash.

People spend more when they believe that they have big profits in their home. The recession of 2007-2010 was so bad recording the worst of all declines since the Great Depression all BECAUSE it undermined the real estate values. People then spent less because they viewed their home declined in value. As taxes have been rising and the average home value collapsed, the velocity of money kept declining. Especially as real estate values declined and interest on savings accounts vanished hurting the elderly who saved money for retirement and discovered their savings were producing less income, the velocity of money just plummeted. The velocity of money began to turn up finally in the USA ONLYwhen interest rates began to rise.

…click on the above link to read the rest of the article…

Velocity of Money Picks Up: Inflation Coming? Stagflation? How About Deflation?

May 2, 2018

Velocity of Money Picks Up: Inflation Coming? Stagflation? How About Deflation?

The velocity of money is picking up. What does it mean?

Velocity of money is defined as (prices * transactions) / (money supply). Economists substitute GDP for (prices * transactions).

This tweet caught my eye today.

Velocity of Money has increased for third quarter in a row after a long steady decline, strong evidence that inflation is heading higher. Given weak economy and tighter monetary policy, based on the data we have today, we are clearly entering a period of #STAGFLATION imho.

9:23 AM – May 1, 2018

I suspect that opinion represents the majority view, but does it make any sense?

Let’s investigate with a series of charts.

Velocity of Money vs. CPI

Velocity of Money vs. CPI (Percent Change From Year Ago)

The above chart is particularly amusing. There are periods of correlation, inverse correlation, and periods of major random meanderings of velocity while the CPI does nothing at all.

Velocity vs GDP

Since 1998, the year-over-year trend in velocity has strongly correlated with the year-over-year trend in GDP. In the stagflationary 1970s Velocity and GDP were often inversely correlated.

Velocity “Magic”, Tax Receipts, and GDP

I have written about velocity several times previously. Please consider some snips from Velocity “Magic”, Tax Receipts, and GDP.

Velocity Magic

Austrian economist, Frank Shostak, took apart conventional wisdom years ago with his column Is Velocity Like Magic?

“The Mainstream View of Velocity

According to popular thinking, the idea of velocity is straightforward. It is held that over any interval of time, such as a year, a given amount of money can be used again and again to finance people’s purchases of goods and services. The money one person spends for goods and services at any given moment can be used later by the recipient of that money to purchase yet other goods and services.

…click on the above link to read the rest of the article…

Inflation Alert: The Velocity Of Money Has Finally Bottomed

February 8, 2018

Inflation Alert: The Velocity Of Money Has Finally Bottomed

Forget the Trump tax cuts, the Senate budget deal, the Fed’s Quantitative Tightening and the collapse in foreign buying of US Treasuries: after years of dormancy, the biggest catalyst for a sharp inflationary spike has finally emerged, and it is none of the above. Behold: the velocity of money.

Over the past decade we have shown this chart on numerous occasions and usually in the context of failed Fed policy. After all, based on the fundamental MV = PQ equation, it is virtually impossible to generate inflation (P) as long as the velocity of money (V) is declining.

None other than the St. Louis Fed discussed this in a report back in 2014:

Based on this equation, holding the money velocity constant, if the money supply (M) increases at a faster rate than real economic output (Q), the price level (P) must increase to make up the difference. According to this view, inflation in the U.S. should have been about 31 percent per year between 2008 and 2013, when the money supply grew at an average pace of 33 percent per year and output grew at an average pace just below 2 percent. Why, then, has inflation remained persistently low (below 2 percent) during this period?

The issue has to do with the velocity of money, which has never been constant. If for some reason the money velocity declines rapidly during an expansionary monetary policy period, it can offset the increase in money supply and even lead to deflation instead of inflation.

The regional Fed went on to note that during the first and second quarters of 2014, the velocity of the monetary base was at 4.4, its slowest pace on record. “This means that every dollar in the monetary base was spent only 4.4 times in the economy during the past year, down from 17.2 just prior to the recession.

…click on the above link to read the rest of the article…

One Chart Says It All

May 5, 2016

One Chart Says It All

People sense the ‘recovery” is bogus, and their rational response is to save more money rather than squander it.

Sometimes one chart captures the fundamental reality of the economy: for example, this chart of money velocity and the civilian-population ratio. (thank you, Joseph Y. for posting it on my Facebook feed.)

When the blue line is up, more of the population has a job. (the blue line is the Employment-Population ratio.)

The red line is money velocity, the rate at which money changes hands. (Money buried in the coffee can in the back yard has a money velocity of zero.)

As Joseph noted, the correlation between the percentage of people working and money velocity was strong until 2010. In the post-2009 recession “recovery,” the percentage of the populace with jobs rose modestly, but money velocity absolutely cratered to unprecedented lows.

(The one other disconnect was triggered by the 1987 stock market crash, which caused money velocity to dip even as more people entered the workforce. This absence of correlation was relatively brief.)

The correlation between more people working and money velocity is commonsensical. More people working = more household income = more spending = higher money velocity.

But something changed in 2010. Did the quality and compensation of work change? Joseph observed: People started going back to work after the official recession ended in Q4 2009 but they were working for lower pay. With lower pay comes less disposable income, hence the cliff-like drop off in velocity.

Another potential factor is higher inflation. Some recent estimates (Where’s The Beef? ‘Lies, Damned Lies, And Statistics’) suggest the gap between official inflation and actual inflation in rent, food, energy and medical care in the past 20 years has subtracted 20% from paychecks.

…click on the above link to read the rest of the article…

Deutsche Bank: Negative Rates Confirm The Failure Of Globalization

March 13, 2016

Deutsche Bank: Negative Rates Confirm The Failure Of Globalization

Negative interest rates may or may not be a thing of the past (many thought that the ECB had learned its lesson, and then Vitor Constancio wrote a blog post showing that the ECB hasn’t learned a damn thing), but the confusion about their significance remains. Here is Deutsche Bank’s Dominic Konstam explaining how, among many other things including why Europe will need to “tax” cash before this final Keynesian experiment is finally over, negative rates are merely the logical failure of globalization.

Misconceptions about negative rates

Understanding how negative rates may or may not help economic growth is much more complex than most central bankers and investors probably appreciate. Ultimately the confusion resides around differences in view on the theory of money. In a classical world, money supply multiplied by a constant velocity of circulation equates to nominal growth. In a Keynesian world, velocity is not necessarily constant – specifically for Keynes, there is a money demand function (liquidity preference) and therefore a theory of interest that allows for a liquidity trap whereby increasing money supply does not lead to higher nominal growth as the increase in money is hoarded. The interest rate (or inverse of the price of bonds) becomes sticky because at low rates, for infinitesimal expectations of any further rise in bond prices and a further fall in interest rates, demand for money tends to infinity. In Gesell’s world money supply itself becomes inversely correlated with velocity of circulation due to money characteristics being superior to goods (or commodities). There are costs to storage that money does not have and so interest on money capital sets a bar to interest on real capital that produces goods. This is similar to Keynes’ concept of the marginal efficiency of capital schedule being separate from the interest rate.

…click on the above link to read the rest of the article…

Trapped Inside The Zero-Bound: Crossing The Economic “Event Horizon”

January 14, 2016

Trapped Inside The Zero-Bound: Crossing The Economic “Event Horizon”

A friend of mine, a very successful tech CEO who is also profoundly astute in matters of finance, once asked his economics prof during a lecture on interest rates in his university days “could interest rates ever go negative?”.

The professor, gazing over his glasses and down his nose at what obviously had to be an imbecile in his lecture hall calmly set aside a second of his podium time to shoot the idea down: “No.”, he said quite simply, as if he couldn’t believe he had to be explaining this to university level students, “it has to be a positive number….”.

My colleague believed him. After all, being in technology he was familiar with the computer code analogy of a negative interest rate, that being the dreaded divide by zero error. Coders take great pains to avoid these because if it actually happens, the currently running program basically “shits the bed” and all bets are off.

If the currently running program was generating a balance sheet, it may set the line printer on fire instead. If it’s deploying an airplane’s landing gear it may jettison everything in the cargo bay. It’s impossible to guess what will happen. So when people who viscerally understand the kind of consequences the ERR:DIV0 can cause extrapolate it out to an entire economy, they’re the ones that end up “shitting the bed”. It’s really bad.

I always knew that ZIRP was bad, but I just thought it would be normal, run-of-the-mill bad. You know, where most normal people get screwed for a long time, and then “suddenly” everything comes unglued and the financial system implodes, followed by a government intervention while the usual suspects (free markets and capitalism) get hung from telephone poles.

…click on the above link to read the rest of the article…

Bob Janjuah Warns The Bubble Implosion Can’t Be “Fixed” This Time

January 7, 2016

Bob Janjuah Warns The Bubble Implosion Can’t Be “Fixed” This Time

Having correctly foreseen in September that “China’s devaluations are not over yet” it appears Nomura’s infamous ‘bear’ Bob Janjuah has also nailed The Fed’s subsequent actions (hiking rates into a fundamentally weakening economy in a desperate bid to “convince markets that strong growth and inflation are on their way back”). In light of this, his latest note today should be worrisome to many as he warns the S&P 500 will trade down around 20% to 25% from current levels in H1, down to the 1500s and for dip-buyers, it’s over: “I now feel even more certain that debt-driven asset bubble implosions cannot merely be ‘fixed’ with even more debt and another round of central bank-driven asset bubbles.”

As Janjuah said in September (excerpted):

I believe there is more weakness ahead – both fundamentally and within markets – over Q4 and perhaps into Q1 2016.
I repeat my view that the Fed does not need to hike based on fundamentals, but I would not be at all surprised to see the Fed hike in late 2015, in an attempt to convince markets that strong growth and inflation are on their way back. Any such hiking cycle by the Fed would I believe be extremely short-lived and quickly give way to renewed dovishness.

While I think a US recession is merely possible rather than probable, the evidence is growing in my view that a global recession is more probable than possible.

Where is the Fed “put”, and what would such a “put” look like? It is very early in the process and lots will depend on global policy responses and data outcomes, but I am happy to declare my view: the next Fed “put” is not likely until the S&P 500 is trading in the 1500s at least (so more likely to be a Q1 2016 item rather than Q4 2015); and in terms of what the Fed could do, clearly QE4 has to be in the Fed’s toolkit.

…click on the above link to read the rest of the article…

The Velocity of the American Consumer

December 19, 2015

The Velocity of the American Consumer

I was reading something yesterday by my highly esteemed fellow writer Charles Hugh Smith that had me first puzzled and then thinking ‘I don’t think so’, in the same vein as Mark Twain’s recently over-quoted quote:

“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”

I was thinking that was the case with Charles’ article. I was sure it just ain’t so. As for Twain, I’m more partial to another quote of his these days (though it has absolutely nothing to do with the topic:

“Eat a live frog first thing in the morning, and nothing worse will happen to you the rest of the day.”

Told you it had nothing to do with anything.

Charles’ article deals with money supply and the velocity of money. Familiar terms for Automatic Earth readers, though we use them in a slightly different context, that of deflation. In our definition, the interaction between the two (with credit added to money supply) is what defines inflation and deflation, which are mostly -erroneously- defined as rising or falling prices.

I don’t want to get into the myriad different definitions of ‘money supply’, and for the subject at hand there is no need. The first FRED graph below uses TMS-2 (True Money Supply 2 consists of currency in circulation + checking accounts + sweeps of checking accounts + savings accounts). The second one uses M2 money stock. Not the same thing, but good enough for the sake of the argument.

In his piece, Charles seems to portray the two, money supply and velocity of money, as somehow being two sides of the same coin, but in a whole different way than we do. He thinks that the money supply can drive velocity up or down. And that’s where I think that just ain’t so. I also think he defeats his own thesis as he goes along.

…click on the above link to read the rest of the article…

Money Velocity Is Crashing–Here’s Why

December 17, 2015

Money Velocity Is Crashing–Here’s Why

The inescapable conclusion is that Fed policies have effectively crashed the velocity of money.

That the velocity of money has been crashing while the money supply has been exploding doesn’t seem to bother the mainstream pundits. There is always a fancy-footwork explanation of why whatever is crashing no longer matters.

Take a look at these two charts and tell me money velocity doesn’t matter.First, here’s money supply: notice how money supply leaped from 2001 to 2008 as the Federal Reserve pumped liquidity and credit into the economy, and then how it exploded higher as the Fed went all in after the Global Financial Meltdown.

Now look at a brief history of the velocity of money. There are various measures of money supply and various interpretations of velocity, but let’s set those quibbles aside and compare money velocity in the “golden era” of the 1950s/1960s and the stagflationary 1970s to the present era from 2008 to 2015–the era of “growth”:

Notice how the velocity of money remained in a mild uptrend during both good times and not so good times. The inflationary peak of 1979-1982 (Treasury yields were 16% and mortgages were 18%) generated a spike, but velocity soon returned to its uptrending channel.

The speculative excesses of the dot-com era pushed velocity to unprecedented heights. Given the extremes in velocity, it is unsurprising that it quickly fell in the dot-com bust.

The Federal Reserve launched an unprecedented expansion of money, credit and liquidity that again pushed velocity up in the speculative frenzy of the housing bubble. But note that despite the vast expansion of money supply, the peak in the velocity of money was considerably lower than the dot-com peak.

…click on the above link to read the rest of the article…

The Yield Curve and GDP – a causal relationship?

October 31, 2015

The Yield Curve and GDP – a causal relationship?

One of the most reliable indicators of an imminent recession through recent history has been the yield curve. Whenever longer dated rates falls below shorter dated ones, a recession is not far off. Some would even say that yield curve inversion, or backwardation, help cause the economic contraction.

To understand how this can be we first need to understand what GDP really is. Contrary to popular belief, GDP only has an indirect relation to material prosperity. Broken down to its core component, GDP is simply a measure of money spent on goods and services during a specified period, usually a year or a quarter.

However, since money itself is a very fleeting concept we need to dig deeper to fully understand the relation between the slope of the yield curve and GDP. The core of money is its function as the generally accepted medium of exchange, but today that is much more than the cash in your wallet. For example, the base money, provided by the central bank, consist of currency in circulation and banks reserves held at the central bank.

From these central bank reserves the commercial banking system can leverage up, through fractional reserve lending practice, several times over. It is important to note that broader money supply measures, such as M2, is merely a reflection of banks leverage on top of base money. As a bank makes a loan to a borrower the bank creates fund which can be used as means of payments to whatever the borrower wants to spend the newly acquired money on. Obviously, these money claims will in turn create new deposits, which can be used to create new loanable funds and so on ad infinitum.

…click on the above link to read the rest of the article…

Highly Respected Economist Warns: “Hyperinflation Is On The Table… It Will Be Completely Uncontrollable”

October 20, 2015

Highly Respected Economist Warns: “Hyperinflation Is On The Table… It Will Be Completely Uncontrollable”

Thibaut Lepouttre is a highly educated and well respected economist from Belgium. But unlike many of his counterparts who often toe the line of mainstream politicians and financial pundits, he’s not one to sugarcoat the seriousness of the current global economic, financial and monetary environment. According to Lepouttre, while the Federal Reserve has worked feverishly to prevent a widespread destabilization of the system, their machinations will soon be revealed as an abject failure.

Whereas many of his colleagues suggest the possibility of inflation is an unlikely scenario, Lepouttre says that we will see it begin to manifest in the near-term in the form of higher prices for essential resources. In his latest interview he explains why we’re within the prime target dates for inflation to take hold, the snowball effect that will lead to uncontrollable hyperinflation, and how to strategically position assets ahead of this unprecedented monetary event.

There is no doubt that the Federal Reserve has almost run out of options to get the economy going.

(Watch at Youtube)

Let’s go back to the basics of the economy. It takes a while when money gets printed before it really gets circulated in the system. In normal economic times, it takes like 24 to 36 months before a newly printed $100 bill is really brought into circulation, and you can see the trickle down effects of that.

The problem in the current economic situation is the fact that the velocity of money is much slower than it used to be. Due to the lower velocity of the money, it takes much longer before you feel the trickle down effects. So instead of the 24 to 36 months, it’ll take, I’ll say 60-72 months before we see any of the trickle down effects into the real economy.

…click on the above link to read the rest of the article…

A Question of Money – Interest – Bankers

September 8, 2015

A Question of Money – Interest – Bankers

QUESTION:

Mr Armstrong, interesting article today, the story of the store of value (at least long term) has always confused me. One can look at saving accounts also as an asset as it yields the interest payment and one relinquishes the access to the money. No difference to bonds.

But your article causes some questions: as you stated before the FED buying bonds does not increase real money supply, so what caused the decline of purchasing power of money in the asset class of equities? Is it that the manipulating of interest rates distorted the actual confidence and time preference in the economy which can be measured by the velocity?

You posted earlier that the velocity has declined. People do not want to invest but save which is not an option for big money as it doesn’t yield any or very little return. Hence enterprises buy back shares and smart money has no other option.

Interest rate hike by the FED, eventually increasing retail participation, a cooling world economy, sovereign debt crisis and the flight to the Dollar. The outcome of your computer, a rise in US stock markets including a possible phase transition, seems comprehensible.

The only thing what leaves me with amazement is what do they really intend? I don’t believe that the families who run the banking system, operating for centuries in money business, do not understand that. I can only assume that for being protected by government the banking cartel buys the governments time and keep financing the deficits.

Best regards,

ANSWER: The problem in so many areas is that we can focus on one issue, but the answer is a complexity of variables.

…click on the above link to read the rest of the article…

An Important Economic Indicator – Money Velocity – Crashes Far Worse than During the Great Depression

June 6, 2015

An Important Economic Indicator – Money Velocity – Crashes Far Worse than During the Great Depression

Underneath the Propaganda, the Economy Is In BAD Shape …

We noted 3 years ago that the velocity of money – an important economic indicator – is lower than during the Great Depression.

Things have gotten even worse since since then …

By way of background, the velocity of money is the rate at which people spend money.

In other words, it’s the speed at which a dollar moves from one person to the next through the economy.

The Federal Reserve Bank of St. Louis explains:

The velocity of money can be calculated as the ratio of nominal gross domestic product (GDP) to the money supply … which can be used to gauge the economy’s strength or people’s willingness to spend money. When there are more transactions being made throughout the economy, velocity increases, and the economy is likely to expand. The opposite is also true: Money velocity decreases when fewer transactions are being made; therefore the economy is likely to shrink.

The St. Louis Fed labels the velocity of money as “Gross Domestic Product/St. Louis Adjusted Monetary Base” … and provides the following data on the velocity of money between the start of the Great Depression and today:

Here’s the money velocity right before the Great Depression hit:

Here’s the money velocity from the darkest point during the Great Depression:

…click on the above link to read the rest of the article…

The Coming Crash of All Crashes – but in Debt

May 17, 2015

The Coming Crash of All Crashes – but in Debt

Why are governments rushing to eliminate cash? During previous recoveries following the recessionary declines from the peaks in the Economic Confidence Model, the central banks were able to build up their credibility and ammunition so to speak by raising interest rates during the recovery. This time, ever since we began moving toward Transactional Banking with the repeal of Glass Steagall in 1999, banks have looked at profits rather than their role within the economic landscape. They shifted to structuring products and no longer was there any relationship with the client. This reduced capital formation for it has been followed by rising unemployment among the youth and/or their inability to find jobs within their fields of study. The VELOCITY of money peaked with our ECM 1998.55 turning point from which we warned of the pending crash in Russia.

The damage inflicted with the collapse of Russia and the implosion of Long-Term Capital Management in the end of 1998, has demonstrated that the VELOCITY of money has continued to decline. There has been no long-term recovery. This current mild recovery in the USA has been shallow at best and as the rest of the world declines still from the 2007.15 high with a target low in 2020, the Federal Reserve has been unable to raise interest rates sufficiently to demonstrate any recovery for the spreads at the banks between bid and ask for money is also at historical highs. Banks will give secured car loans at around 4% while their cost of funds is really 0%. This is the widest spread between bid and ask since the Panic of 1899.

We face a frightening collapse in the VELOCITY of money and all this talk of eliminating cash is in part due to the rising hoarding of cash by households both in the USA and Europe. This is a major problem for the central banks have also lost control to be able to stimulate anything.The loss of traditional stimulus ability by the central banks is now threatening the nationalization of banks be it directly, or indirectly. We face a cliff that government refuses to acknowledge and their solution will be to grab more power – never reform.

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