Guest Post: Money Velocity Free-Fall And Federal Deficit Spending

Tyler Durden's picture

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

The velocity of money is in free-fall, and borrowing, squandering and printing trillions of dollars to prop up a diminishing-return Status Quo won't reverse that historic collapse.

Courtesy of Chartist Friend from Pittsburgh, here are three charts overlaying the velocity of money and the Federal surplus/deficit. The charts display the three common measures of money: M1, M2 and MZM. From the St. Louis Federal Reserve site:

M1 includes funds that are readily accessible for spending. M1 consists of: (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) traveler's checks of nonbank issuers; (3) demand deposits; and (4) other checkable deposits (OCDs). 

M2 includes a broader set of financial assets held principally by households. M2 consists of M1 plus: (1) savings deposits (which include money market deposit accounts, or MMDAs); (2) small-denomination time deposits (time deposits in amounts of less than $100,000); and (3) balances in retail money market mutual funds (MMMFs). 

Money Zero Maturity (MZM) is M2 less small-denomination time deposits plus institutional money funds.

The correlation of deficit spending and money velocity is especially striking in the chart of M2 velocity.
Here is MZM velocity:
And M1 velocity:
Since correlation implies causation, ideologically unbiased observers will wonder: does declining money velocity lead to more deficit spending, or does deficit spending depress money velocity?
Alternatively, both declining money velocity and soaring deficits reflect a contracting, post-credit-bubble economy. It is interesting to compare when the various measures of money velocity bottomed and topped out:
-- M1 velocity rose straight through the inflationary 1970s (no surprise there), chopped around the expansionary 1980s and then climbed along with the Bull market in stocks from 1994 to a peak in 2007, matching the peak in stocks and housing almost perfectly.
-- M2 velocity first peaked during the height of inflation in 1981 (when interest rates also peaked), bottomed in 1987 and then tracked the stock market and economy higher, reaching a much higher peak in 1997, much earlier than M1 velocity. M2 fell substantially to a low in 2002 and then rebounded modestly to a lower peak in 2007, after which it collapsed.
-- MZM velocity topped out in the inflationary surge of the early 1980s, like M2, but unlike the other measures, it did not ascend to new heights in the 1990s or 2000s; rather, it has fallen steadily for 30 years since its 1982 top.
The most striking feature of these charts is the complete collapse of money velocity. MZM and M2 have collapsed to historic lows, while M1 has fallen back to 1982 levels.
In this context, we can view unprecedented Federal deficit spending as a misguided attempt to compensate for the implosion of money velocity. I say "attempt" because the Treasury borrowing and blowing $6 trillion over the past five years and the Federal Reserve printing $2 trillion, backstopping the parasitic financial cartel with $16 trillion and buying over $1 trillion each of mortgage securities and Treasury bonds has only kept the economy stumbling along at essentially zero growth while real wages have declined by 7% to 9%.
This stupendous creation of money and unprecedented fiscal stimulus has had zero effect on money velocity. This conclusively shows that fiscal and monetary stimulus are not fixing what's broken with money velocity.
Please see these entries for more on why this is so:
The Neoliberal Financial Skim (January 14, 2013)
Keynesian stimulus policies (deficit spending and low-interest easy money) create speculative credit bubbles. As the above charts illustrate, post-bubble economies do not respond to additional stimulus because the economy is burdened by impaired debt and phantom collateral.
In sum, the U.S. economy is a neofeudal debt-serf wasteland with few opportunities for organic (non-Central Planning) expansion. As a result, the velocity of money is in free-fall, and borrowing, squandering and printing trillions of dollars to prop up a diminishing-return Status Quo won't reverse that historic collapse.

Put another way: we've run out of speculative credit bubbles to exploit.

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idea_hamster's picture

When this chart turns up, look out inflation!

Sooo much liquidity, sooo many credit and debit cards (which boost velocity) -- it's going to be a rocket.

economics9698's picture

You are missing the intent of the money creation.  The intent is to allow those receiving the cash to be able to outbid those who have to work for a living. 

This is a theft ring and the only disappointment in not creating a bubble is that the Muppets are not playing the game. 

This is a banker’s game and they always win.  Because of the internet the Muppets finally figured it out.

The idea of the game is to get the Muppets playing the game along with the players.  When the game gets to this point when there is inflation the top 0.01% are well positioned to outbid the Muppets for physical assets.  When this money converts to physical assets there will be a huge transfer of wealth from the bottom 99% to the top 1%.

This is every bankers (cough, cough) dream, killing the peasants financially and then physically.

It is why we have revolutions and pogroms.

This is a sick game Bernanke is playing.

MachoMan's picture

The internet didn't cause the muppets to figure it out...  the fact that the tribute payments to them (e.g. welfare) are now bouncing (inflation) and the endless money spigots otherwise known as houses have crashed, it becomes incredibly obvious.  The muppets are thus incentivized to finally care...

[this isn't the first time this has happened...  (the internet hasn't been around too long, but the boom/bust cycles have)].

trav777's picture

our system is one of debt money.  If someone doesn't borrow, the system collapses.

Don't worry, these debts can't be repaid anyway.  Bankers can do basic math.  It's never been about the principal

walküre's picture

The debts can't be repaid but in the meantime, the debts are clogging up the system to the point where the system will break down. Just so that the debt holders can enjoy life a little longer. Entitlement and privilege my ass. The only thing they're entitled to is to die one certain day like the rest of us and their privilege is to die a free man or woman.

Papasmurf's picture

It's okay though.  If you don't borrow, they will borrow for you. 

walküre's picture

Have the muppets really figured it out or are the muppets simply too broke to keep playing?

When inflation hits, the wave of debt default will be apocalyptic to the banksters. Their wealth is tied to debt and derivatives. They are not holding this wealth in real assets and cash. Imagine the banksters trying to get out that door when SHTF and converting their wealth to anything tangible. There's not enough cash in circulation and there aren't enough assets they can buy and take possession.

If they need inflation to kill us all, they need to literally flood the streets with cash and at that point all debts are meaningless.

Let 'em go for it.

economics9698's picture

Most of the rich Muppets I know are heading to T-bills and municipal bonds.  Very few Kramer’s out there in stocks.  They generally think you are a loon if you mention gold or silver.

walküre's picture

That just confirms why they're called muppets. Best returns last year have supposedly been in stocks and once the muppets jump from bonds into equities, the selloff will happen. Good thing not everyone is buying gold and silver or it would be a bubble.

There won't be any advance notice on the evening news when this system of fraud, theft and propaganda collapses. Let the muppets feel safe in their investment skin. It's impossible to guarantee everyone's survival in a monetary collapse.

pslater's picture

"Most of the rich Muppets I know are heading to T-bills and municipal bonds. Very few Kramer’s out there in stocks. They generally think you are a loon if you mention gold or silver."


That's why they're called muppets......

linrom's picture

Cash will be King

This is the thesis of Robert Pretcher. When TSHTF, cash will be king. It will be in short supply and in great demad.  The best interview by Pretcher, ever.

trav777's picture

Yep.  I was king of the USSR when it collapsed because I was ALL IN on cash rubles

linrom's picture

Ok, good point.  But, you need to listen to Martin Armstrong and the point that he makes about what differentiates CORE and non-CORE economy.


A Lenin Ruble coin goes for at least a $1 on ebay now as a collector's item.

no say's picture

maybe with to fed using proxy buyers they can end around a bond collapse?

Nels's picture

From the link: "Hyperinflation unfolds ONLY when nobody buys the bonds and that forces government to create money to pay debts."

So, what happens when it's only Hellicopter Ben buying the bonds?  I thought we'd all agreed that the Fed buying the bonds out of freshly printed digits was the same as creating money to pay the debts.

proLiberty's picture

"... The intent is to allow those receiving the cash to be able to outbid those who have to work for a living. 

This is a theft ring and the only disappointment in not creating a bubble is that the Muppets are not playing the game. ..."


When coupled with a tax on income defined as the nominal rise in prices of assets like land, this is not just theft, but the grandest scheme of theft in all human history.  Who would have imagined that someone could steal wealth by embezzlement from a perfect stranger half way across the ocean.  Yet that is exactly what happens when the Federal Reserve Corporation, or the ECB or the BOJ create a river of currency.



michael_engineer's picture

The intent could also be to fund the government in that way so that taxation on the rich can be lessened and banking bonuses funded without the middle and lower classes fully realizing they are being stuck with the bill.

Buck Johnson's picture

In a nutshell, in a nutshell.

Radical Marijuana's picture

"... killing the peasants financially and then physically ..."

Yes, economics9698, that is what I keep thinking about too. 

However, while the mathematical numbers are amenable to abstract intellectual understanding, the mass murder numbers that logically follow, as the established money/murder system changes gears, are a lot less able to imagine! What is worse, I do NOT think this is merely the "bankers ... dream."

The astronomical amplification of the financial frauds to quadrillions of units, leveraged over the moon, logically depends upon the history of the murder system that made that money system able to be made and maintained. Privatized fiat "money" is effectively the privatization of the asserted governmental monopoly on robbery and murder, which became the enforcement of taxation, which drove the ability of money made out of nothing to become the State Religion of the USA, and by extension of the de facto global reserve currency, the State Religion of the Whole World.

This runaway system of fraud backed by force became electronic and atomic! It is BOTH real, and surreal, at the same time. It controls the real world, through a system which is huge lies, backed by lots of violence. When that system drives itself through its own madness, due to too much triumph of too much fraudulence, the consequent collapse to chaos will starkly reveal the ways that the the peasants ARE first being killed financially, and then PHYSICALLY!

Basically, the 99% plus of the people that act like political idiots, ARE sheep that were routinely being fleeced, and thereby set up to be slaughtered. The changing of gears from their mass fleecing to their mass murder appears to be inevitable and unavoidable, BUT unimaginable!

The system we are inside of is basically the development of the social pyramid system that is most metaphorically referred to as Babylonian. (Although it appears to be independently recreated again, and again.) Anyway, I raise that metaphor with reference to the masses of muppets, in order to explain that metaphor of manipulation.

To put it is a sufficiently rude way, muppets basically have a fist up their ass, controlling them. It is my understanding of ancient Babylonian culture that people were punished (and therefore made examples of to control others) by being forced to die slowly by being impaled on a stake up their ass.

Metaphorically, the world we are living in is the same sort of social organization as from Babylon, winding through history to today. The basic social system of legalized lies, backed by legalized violence has not changed, except for scientific and technological progress enabling people to promote lies, and enforce those lies, with more and more effectiveness. The ability to be dishonest, and back that up with violence, has reached the point of a globalized Neolithic civilization, where the financial frauds are electronic, and the threat of force to back those up are atomic bombs.

The masses of people are muppets, that were forced through history to adapt to being manipulated, while those who resisted were made examples of, in order to terrorize the rest. Therefore, the runaway systems of financial frauds were able to grow exponentially, matched by the exponential growth of the forces that were used to threaten everyone to continue behaving in ways that the State Religion of "Money Made Out Of Nothing" demanded they must behave.

I agree that vastly more of the muppets are being forced to figure out the ways that they are being raped, and that the Internet makes it possible for more of them to discover more of the truth, IF they want to find out. However, I see no signs that they are able to do anything practical to stop that from happening. Furthermore, I see nearly zero indications that enough of them are understanding the chronic political problems which made the social pyramid systems evolve in the first place.

Therefore, I repeat my observation that we live inside of a Combined Money/Murder System, which is really the same as a religion, which is only obscurely connected through to the physical world, since those connections are the tangled mess of the history of backing up lies with violence, in order to make and maintain the systems of frauds backed by force. I.e., money made out of nothing, that everyone is forced by the state to pay their taxes with, and treat as legal tender, despite the absurdity of that situation. What we have today is "FAITH BASED MONEY." However, that "faith" is actually fraud, backed by force. Through those means, the masses of muppets were systematically defrauded, worse and worse, more and more, at an exponentially accelerating rate. The "bankers ... dream" IS "... killing the peasants financially and then physically ..."

The well-established, astronomically amplified, systems of fraud backed by force AUTOMATICALLY become runaway social insanities, and therefore go towards psychotic breakdowns. There is nothing new about this, since that style of Neolithic civilization is thousands of years old. However, what is NEW is science and technology enabling it to become trillions of times BIGGER!


This article is discussing some of the profound problems with the concepts of "Keynesian stimulus policies," as "solutions," which are creating "moar" problems, as Zero Hedge liked to say, in many previous articles. Keynes may be regarded as the intellectual whipping boy of the banksters, or an intellectual hired gun, whose job was to appear to rationalize fraud, by making it somehow sound sensible and justified.

One of my favourite quotes from John Maynard Keynes is:

"The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."

Another of my favourite quotes from a famous economist is from John Kenneth Galbraith:

“The process by which banks create money is so simple, that the mind is repelled.”

My experience is that the vast majority of the muppets do not understand that their "money" was made out of nothing, and they do not want to understand. They do not want to understand that their money is backed by nothing but murder. They do not want to understand that they are members of "We the People" that almost all act like political idiots, and therefore, they have allowed the "hidden forces of economic law" to drive everything towards their destruction.

However, as things obviously get worse, faster, more muppets are forced to begin to think, since their morbid social habits are impeded by the established systems malfunctioning, such as what this article points out, in some particular ways. Those who want to can now use the Internet to find out things that they previously would have had a very difficult time to discover. What tiny groups of intellectuals were always aware of are now things that way more of the muppets can learn about, if they want to take the time to do so ... However, I believe that the tragic truth is that is too little, too late. Those "peasants" are already being killed financially, and therefore, it is almost impossible to imagine the series of political miracles that would be necessary to prevent them being killed physically, in the worst possible ways, which are utterly unimaginable!

Furthermore, although I believe that far more than one in million people now understand that their "money" is being made out of nothing, I believe that still less than one in a million understand that their "money" is backed by murder. Their minds are repelled by how simple the situation is, that economic reality is just organized crime on a larger scale, and must necessarily be.

Bernanke, as the symbolic head of the Federal Reserve Board, is surely "playing a sick game." However, so far, I do not perceive many of the muppets understanding the deeper reasons for why that game is being played in the way that it is. Overall, I see almost zero public understanding of the chronic political problems which are inherent in the nature of life, which Neolithic civilization became the most expedient solutions for, which benefited the elites, which made and maintained that set of solutions, as systems of force backed frauds.

secret_sam's picture

+1.  You say good stuff, but not concisely.

hungrydweller's picture

Not so fast my friend.  PMs will be the next bubble.  First comes the initial recognition that they are severly undervalued when true inflation realization sets in.  Then comes every Tom, Dick and Mary wanting to get their share.  Those who get in early sell on the hockey stick and buy back in later.

TrumpXVI's picture

I doubt it.

PMs will rise a bit more, perhaps a good bit more, but I'm very doubtful of a panic driven "bubble" originating from the general public.  The average person doesn't have the savings to drive a PM bubble of any great magnitude.  I don't think that the average person even has the financial where-with-all to buy a single one ounce gold coin.  Doing that would leave them completely devoid of all available cash.

ATM's picture

When money dies it tries to by everything. PMs willl most certainly explode in price and it may not be from demand of the general public. It may very well be demand driven by central banks in a mad scramble.

donsluck's picture

Don't discount other countrys' desire to be top dog. The one with the most gold will be the new reserve currency. This will take time, but it won't be the USA, as evidenced by the Feds' inability to return Germany's gold in a timely manner.

Nick Jihad's picture

PMs cannot be in a bubble. An ounce of gold will ever and always be worth exactly one ounce of gold.

Snakeeyes's picture

Money velocity is in a free fall along with the M1 Money Multiplier.

LawsofPhysics's picture

Correct.  A very different scenario when compared to the great depression.

Seasmoke's picture

there always is another bubble to exploit

Silverhog's picture

Someday researchers and historians will look back at these charts and say "Holly Shit what the Hell were they doing!"

MachoMan's picture

Not really...  we've made tributes to the stupidity on facebook, youtube, etc.  They'll have ample research materials...

zrussell's picture

More like intergalactic summer vacationers sifting thru the remains of an extinct planet!

The Axe's picture

Ha ha  the VIX products  are fucking broken

hungrydweller's picture

12.70!!!  That's Benny flow baby!

HD's picture

Warren Buffet looks down at his rapidly cooling bathwater - sitting with his BOA rubber duck in hand, "No more bubbles?" and starts to cry uncontrollably.


El Hosel's picture

.... You sure thats a duck he is holding?

HD's picture

Yes. It's name is becky and makes bath time fun!

Never One Roach's picture

Those look like my grades through college after I met Buffy.....

hungrydweller's picture

The Vampire Slayer?!  You know her!!!  Sweeeeet!

q99x2's picture

They can try giving it to me and I'll do all kinds of things with it.

Xibalba's picture

Borrow more!  Spend More!  Rinse repeat.  It'll work eventually, right? 

El Hosel's picture

Hmmm, looks just like the velocity of the VIX. Bad is good and good is better.

ATM's picture

The borrow part is right but not the spend. Borrow all you can and buy real things and repay with worthless paper.

It's a well worn prescription to becoming filthy rich.

Glass Seagull's picture


Great charts.  Too bad so few Americans will see these, and if they do, the point won't register with them.   

PulledPorkBBQ's picture

The last graph is perfect view of the blow-up of the Liar Loan Economy in 2008.    Fraudulent lending --> false prices.  Now that private money wants to see your income before loaning you anything, movement of money (creation of credit) is hugely reduced.  There aren't too many people who have the free cash-flow to take on more debt.

Nick Jihad's picture

There are also a lot of folk (like me) looking at the negative real returns that retired people are earning on their savings, who say to themselves "I need to save a LOT MORE MONEY than I thought I did!".  Multiply this by an entire boomer generation that stands on the brink of retirement, and the consequence for velocity should be obvious.

MachoMan's picture

Exactly.  I know Trav and others (me) have harped on it a few times, but even with 0% interest rates, you can't borrow AND make any money...  therefore, there is no credit demand for new speculation.  [there is credit demand to avoid deleveraging, but that's another ballgame].

Sizzurp's picture

The fed is pushing on a string.  Not to worry, Krugman wants to try the trillion dollar coin.  That ought to change velocity a bit.  

economics9698's picture

Raise the fed funds rate to 5%, I bet that would change the velocity.