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Visualizing the Vanishing Money Velocity Vortex
by Bruno de Landevoisin @ StealthFlation
Having recklesly impaired the original clean source of healthy naturally effervescent American spring water abundantly spouting up from the bedrock below, the misguided monetary authorities have dangerously attempted to artificially inseminate the clouds above, in the hopes of drenching the parched U.S. soil with torrential rain, so as to generate their much heralded and forever promised green shoots. Regrettably for us all, when these artificially seeded clouds eventually do burst, they will produce nothing but the toxic inflationary rains of StealthFlation.
Under the imposition of StealthFlation, the Velocity of Money lies dormant while increasing Inflationary risks build below the surface.
The inflationary risks are deliberately concealed and remain latent due to the synthetic suppression of determinant free capital marlet forces. However, the grossly excessive supply of money has definitively been created, and it will debase the currency via inflation, it's just a matter of time.
When an economy is healthy, there is much buying and selling and money tends to move around quite swiftly. Unfortunately, the U.S. economy is manifesting the precise opposite of that these days. In fact, the velocity of M1 & M2 has fallen to near all-time record lows. This is a very serious sign that the underlying economy has entered a period of extreme stagnation.
In its infinite wisdom, the Federal Reserve has been attempting to counter this economic standstill by absolutely flooding the financial system with new money. As it always does, this has created monumental financial and fixed asset bubbles, however, it has not addressed what is fundamentally and structurally wrong with our economy. On a very basic level, the amount of real economic activity that we are witnessing is not anywhere near where it should be, and the anemic flow of money through our economy is proof certain of the ongoing dilemma.
Clearly the transmission mechanism between the relentless synthetic origination of fresh money by the monetary miracle men and the velocity at which that new money is circulating in the real underlying economy on the ground is completely disconnected, FUBAR. Why is this? Well, it’s really not that difficult to comprehend.
First of all, much of the supposed economic activity generated today is not being driven from the the bottom up by the healthy deployment of excess savings naturally created from genuine self-sustaining productive economic activity at the fundamental level, but rather in an unnatural fashion, force fed from the top down via the easy street ZIRP/QE induced debt financing incessantly being encouraged by our misguided megalomaniac monetary authorities.
Perhaps even more malignant, the largest capital market of them all, namely the U.S. bond market has been put down by the Fed’s activist zero bound anesthesiologist. Thus, the utterly comatose American treasury market is no longer facilitating the natural growth of traditional savings income streams generated via secure interest bearing accounts and prudential savings products throughout the financial system’s depository structure. In short, the healthy income flows constructively generated from legitimate savings produced from genuine economic activity, namely people going to work every day, has been effectively terminated by these wizards of wanton monetary policy at the wayward central bank.
Let's face it, if the major pension funds can't generate 5-6% per year holding conservative debt instruments in order to meet their massive obligations, they are up a creek without a paddle. They require substantive returns in order to remain solvent. The Fed understands this all too well, they are most concerned on that score, and so should you be.
Having thoroughly shut down the sound, well established and effectives channels of capital formation, which have consistently engendered bona fide and constructive growth over the years through the virtuous avenues of productive savings, the foolish authorities have left themselves utterly hamstrung with only one risky road to travel down. Indeed, now that they have totally cracked the transmission on our fiscally busted and broken down American bus, they have become 100% reliant on the equity market to drive their top fuel funds into the U.S. economy via the wealth effect. Pedal to the metal at 2,000 SPX mph. Make no mistake my friends, we are on a crash course from hell, and we will hit the wall.
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A few general remarks:
Money velocity is a fudge factor that was invented to make the infamous Fisherian "quantity equation" work. The equation is a tautology that conveys no useful economic information whatsoever. As to "velocity", its current decline tells us only one thing: the rate of money printing has vastly exceeded the rate of GDP growth. If the Fed and the commercial banking system were to stop creating new money from thin air tomorrow, "velocity" would inevitably rise. Would that tell us anything useful? Nope.
The reason why the economy is so sluggish, is not in spite of, but because of the money printing and interest rate suppression activities of the Fed. Creating money from thin air cannot add one iota to the economy's real wealth. The amount of available real capital remains exactly the same. What it achieves is the redistribution of real wealth from later to earlier receivers of newly created money and an increase in capital malinvestment as relative prices in the economy become distorted. The addition of fiduciary media to the system makes it appear as though savings had increased, when in reality the savings-consumption ratio has remained the same. So people are induced to undertake investments not supported by the real resources available and at odds with current and future patterns of consumer demand.
Obviously such a malinvestment of scarce resources cannot possible help the economy. It creates at best a temporary illusion of prosperity, while in reality, wealth is destroyed.
The PARADOX OF REGULATED NIRP or "PORN". Unleveraged yields are driven too low unless you want to get out on the skinny end of the branch. Prices have been driven higher to a point where even levered yields are too low given the possibility of reversionary losses and negative cash flows. So if you are generating cash, it goes in the mattress.
The velocity of me throwing my pennies, nickels, and dimes in the street has accelerated. They are of no value to me. I still roll quarters because it is still worth making a $10 roll, but the rest of the worthless coins hit the sidewalk for the beggars. I can't be bothered with them taking up space in my pockets. I have no need to manage such worthless tokens.
Must be nice. I still manage those worthless tokens out of necessity.
Logged in just to give this article 5 stars and wish I could give another 5 for the comments.
Great stuff Bruno. I think we all agree that this isn't going to end well. Every turn is now rife with not just moral hazard but virtually the same financial conclusion. The path that is taken then is just the one that buys more time.
Great post. Really cuts throught the FedGovMSM fog machine.
Now, I mean no disrespect, but I have to ask:
Bruno de Landevoisin, is that your actual name? It sort of sounds like an ethnic version of
Art VandelayUnlike Mi Naem, which is totally real.
C'est moi..............
Pushing on a string syndrom...
excelent read. What are your thoughts on gold?
Thank You Tyler For The Weekly Bruno de Landevoisin Posts...
I Look Forward To The Laddie's Weekly Scribes...
Like Cog Dis... His Share Is A Breath of Fresh Air... His Poetic Prose and Revealing Logic Make the Pain of the Banksters Treason and Tyranny... More Bearable.
Lads... They May Take Everything From Us... But They Won't Get Our Wits... :o)
....To Him and to All Z-Hedger posters i share this Haiku Below... The Bankers Think They Rule The World...
I Think Its More Like This...
I Am Strong Like Bull
Hear Me Roaring You Peasants
Obituary…
Why are my Poptarts and my boxes of cereal smaller? Oh, it's not inflation? It's just "clipping?" Got it.
The news jargon du jour "Shrinkflation."
GIS pays 3.11 % div 100 shares at $52.71 will give you $164 dollars per year $114 after 30 % tax or $9.57 per month to buy the box.
There the bastards are buying your breakfast..... for ever.... no inflation problem.
If you had done this in 2009 100 shares were $3000 and you would have cap gain over 2 grand.
Think like the rich, for about $275,000 you can cover all inflating expenses.
Do whatever it takes to raise that much.
Funny I just pulled this chart up this morning on a whim.
So... bullish right?
fuck.
Arrest the FED and prosecute them for treason. Obama too.
Can I clasp the hand cuffs?
Altucher 20,000
"Zero bound anesthesiologist".... Good one. It's like inducing a coma because if the patient wakes up they die. Call it "strealthcare" it's the ACA equivalent of financialized healthcare.... "affordable" as long as the patient is permanently sleeping and able to preserve the value of their Sunstein default opted in organ donations.
Maybe they will maybe they won't but one thing is clear regardless of what you call it the "Federal Reserve Nightmare" or the "Yellen conundrum", the box Ben Bernanke made when he painted both himself and the Federal Reserve in a corner remains. Bernanke has by passing the chairmanship to Yellen escaped from the QE trap but left the rest of us fully in its grasp.
With a policy of loose and cheap money and an inflation target of just 2% the Federal Reserve continues to please those gambling that not fighting the Fed guarantees profits. I wish someone would let the Fed know we have already passed their inflation target.
As many Americans are forced to pay higher food, gasoline, and health insurance premiums any thought that inflation is not higher has come from the false illusion brought from lower payments on things like auto loans and mortgages. This is a one off and will not continue. Trouble lurks ahead. More on this subject in the article below.
http://brucewilds.blogspot.com/2014/06/exit-strategy-from-qe-remains-elu...
Very good pdf from Bank of England through Google search
Money creation in the modern economy
You have to understand that printed money has a built in destruction date.
The baby boom created lots of money and it dies like them in time.
Growth is based on more debt but the baby boom is retiring and not adding as they did.
The baby boom was supplanted by the murder of 60 million American babies in American abortitoriums, bringing about a destructive, unsustainable, negative population growth; which is now being supplanted by a socially and economically unassimilable invasion of millions of criminal, culturally retrogressive, parasitical, uneducated, unprepared, medically unvetted, unquarantined, unamerican, antiamerican, peoples who aren't even acquainted with the appropriate use of toilet paper; which the faux-Hebrew/Babylonian/Khazarian/progressive jihadists demons infesting the Ovomit regime believe will quickly replace the 60 million taxpaying wage slaves which were murdered in the wombs of their American mothers by sanction of the Satanicly-inspired demoniacs infesting the federal judiciary and thus save them from the consequences of the collapsing economic fraud they have foisted upon the U.S., and other nations of the Western World.
Congratulations to those of you who have promulgated this horror and impending chaos. I truly hope it is you who are beheaded first. Few will mourn your demise.
More than 60% of those babies would vote DEM
Hey Owl, your prose is a hoot!
I would suggest the freshly issued fiat money actually did leak the bottles it was placed in long ago.
Yes, but it ended up parked back at the FED, or most of it, and not loaned out into the general economy. In short we're witnessing the wholesale federalization of the capital markets.
I disagree. We are seeing plenty of inflation and velocity. Only people that refuse to believe what they see around them think there is no inflation or velocity.
The levels of debt in the private economy as well as at ALL levels of Government, federal, state and local are ballooning outrageously.
The equities markets have mightily inflated. We are a hell of a long way from 666. Velocity.
Internet bubble 2.0. ramping profitless memes into the billions. Hella velocity.
I would argue that stock buy-backs are pure uber-velocity. Money buying up stuff that disappears is nothing but consumption even if what is being consumed are stock shares being consumed by their issuers.
Take a close look at the quarterlies from BofA and tell me that this bankrupt hulk should be trading anywhere but the pinks., and yet: the credit/money handed to the banks had to go somewhere.
The bond/debt markets have inflated. Even junk is flying. Puerto-not-Rico is in far worse shape thanDetroit was pre-bankruptcy and it still issued debt in the last year. Phantom money chasing phantom yields.
Property values have inflated or re-flated as the case may be. It should have crashed. The Hedgies and foreign money came in and gobbled up RE or it would have collapsed and not gotten up for decades.
The cost of healthcare, education, and the government bureaucracies in general have inflated.
Beef inflated. Sugar would have inflated but sugar is broke and can't pay back the .GOV loans of the last decade and more. Without interventions and bailouts sugar whould be in deflation.
Some of the inflation has been exported: literally. Spending on foreign aid and foreign wars is not being fully accounted. The Pentagon is a black box of spending. So is the NSA. So is the CIA. No one really knows how much cash has been flown on pallets into Iraq and Afghanistan except that it was so damned much that it was loaded on pallets. No one really knows how much cash has been sunk into mercenary adventures in Israel, Egypt, Syria, Lybia, etc. through the DOD and State Dept...
There has been a hell of a lot of inflation and plenty of velocity but it isn't showing up in the statistics because of where it is showing up and because the statistics are bullshit when the data doesn't suit the administration and the recipients of the spending/bailouts/propping..
Why in hell would anyone receiving free money call attention to it and risk losing their graft and subsidies? No one is going to tell you that they are being provided with a smorgasboard of free or nearly free money, subsidies, no-recouse loans and way too easy credit that all allow them to leverage real assets and rentier streams. No one is that fucking stupid.
Just because The FED or Obama's press douche says something or puts some charts and statistics up on a web site doesn't mean that it's truthful information. Anyone that thinks the European technocunts are the only people that lie when it gets serious is an ignoramus.
DO ANY OF YOU REALLY BELIEVE THAT THIS IS GOING ON WITH NO VELOCITY??? :
http://research.stlouisfed.org/fred2/series/GFDEGDQ188S
Politician liar-scum claimed those footballs of $100s were really Saddam's impounded oil-for-food profits, remember? Move on...
You are wrong.
Those are all no velocity. Stock buybacks use money that isnt used to hire workers and enriches only management. 401k funds that hold the stock show a gain of course but we know retail isnt in the stock market.
The largest wealth repository of (retail) Americans is housing. The last time the Internet bubble was going up so was housing, and fast. This time housing is below the 2007 peak. House appreciation for most families was like Mum getting another parttime job. Every year families took $10-20k tax free out of their homes equity and spent it in the real economy.
The Case Shiller index begs to differ. Housing isnt reflating:
http://ca.spindices.com/indices/real-estate/sp-case-shiller-us-national-...
You also quote beef and sugar prices as high. Wow. Sugar. Really? The last time we had a whiff of inflation oil was $140/bbl (2008).
Now its having a hard time keeping over $90.
People spend more on oil than sugar. Falling oil prices are deflationary. And, if it was part of your argument, both falling oil prices and housing deflation would be major arguments to support the current record low velocity and deflation today.
Sorry; writing too fast and mis-spelled. I agree about sugar. It would be likely be INFLATING if the subsidies were not present or if producers that have been given loans that they cannot repay were allowed to fail.
Just because housing is still off the peak means that it is not reflating?
How are leveraged stock buybacks not a form of velocity? That might be because nothing is actually being produced that can flow through the economy. Increasing systemic leverage whilst moving assets around isn't creating supply or demand.
What metrics are we discussing? Which conception of the credit/money supply are you using?
Doesn't the magnitude of credit/moneyness creation sans economic activity imply that traditional measures are unreliable?
IF the maginal utility of credit is declining AND the credit being emitted broadly being misallocated why would tradional measures of velocity be pertainant?
When all-cash foreign money dries up for homes and PE unloads their rentals, which is soon after 20-30% price gains, housing price correction bigtime. watch. Even China cracking down on money fleeing.
Domino sugar went from 5lb bags to 4lb bags.......... the price per lb IS going up
Well, that certainly is another take, and very true in many respects. All I would add is that the velocity which you speak of is exactly the type of synthetic money velocity that is a detriment to the real underlying productive economy.
Strict acedemic measurments are what they are.
Even IF those strict acedemic meansurments are accurately reported and publicized they do not necessarily expose the actual economic impact of the policies that these statistics are being used to promote and defend.
How the hell can The FED claim that inflation is under 2% while publishing systemic credit information such as I have linked to?
How can anyone take seriously the sort of obscene weighting and hedonic adjustment games that the statisticians use to alter and cherry-pick the data that is available?
IMHO, velocity is collapsing for several reasons.
!. Because the economic utility of the fiat system has been reached and each increment of new credit is not resulting in economic activity. New credit emission is being used to prop preexisting credit emissions and pyramid leverage in non-productive sectors in order to prevent deafaults in those non-productive sectors. The system is not being aloowed to clear as it is designed to do via defaults. Liquidations are simply being prevented by misallocation of some amount of new credit.
2. Real interest rates are still broadly negative. There is little incentive to create economic activity when credit pyramiding and purchasing of existing revenue streams is subsidized even if the margins are eroded by 'inflation' of the price of those revenue streams. This is bubble territory. Purchasing of marginal revenue or even possible future revenue streams makes sense in an economy where borrowing is subsidized/practically free and further productivity gains can be squeezed from existing sources or even extrapolated as likely within the context of the implied risk suppression associated with the amount and duration inherent in the subsidy.
3. People and businesses experiencing financial repression and who perceive that lawless activity are incentivized to hoard and save despite the availability of subsidized credit available.
Note that the actual spreads on mortgages are actually quite high. The perception is that only politically favored interests are being offered the subsidized credit. Large institutions and the wealthy who don't actually require the credit subsidies are absorbing the greater portion of it and effectively gouging smaller institutions and asset-poor individuals.
As is with the perception of 'inflation' in the ballooning of prices of certain goods and services sectors, credit is both subsidized/offered at negative real rates in some economic sectors ( Banks ) and less so or not in others ( mortgage spreads ).
The HAMP program is a good example of a disconnect even within the mortgage landscape. Some people are being offered subsidized rates on credit and/or credit against over-leveraged assets. Loans are being issued against property well in excess of appraisal -in effect a naked print by classic standards of monetary emission against equity- by the GSEs.
These are not natural markets. Classic MTM rules regarding valuation have been suspended. Money market cash is being leveraged outside the traditional conduits and used in what traditionally have been perceived as unorthodox practices. The measurement of statistic information has been altered and adjusted and to some extent is simply being falsified.
I don't have enogh information to provide details as to what the inner mechanics of all of these systemic contrivances are; but, I damned well know when I see a chart showing a vast increase in systemic debt that the credit/moneyness is going somewhere whether or not it is also showing up in other raditionally associated published metrics; and I damend well know what beef and gasoline and health care and education costs were and are.
I am confident that we have more inflation than the statics are revealing.
I am also confident that we also have more velocity in the system that the statistics are revealing, although much of it simply isn't where we are being told to expect it and/or it is hidden in parts of the system that do not lend to or are hidden from proper accounting of it.
Lastly: I am very much confident that we are also being lied to on an ongoing basis. Much of the published information is government and corporate propaganda -and bullshit.
+1 nailed it
For the record, I do very much agree that there exist substantive real infaltion in the underlying economy, especially in financial and hard assets, as well as fundamental needs but not wants.
Having said that, my piece was working within the confines of the government's reported data on money velocity and attempting to build a case as to how it creates a facade of a non inflationary environment, i.e. StealthFlation.
Hope that helps, but we are on the same page in many other respects.
www.zirpqe.wordpress.com
We concur on many points. Where we perhaps differ my brother is as follows:
The reason that QE and TARP have not been inflationary is that money center banks have kept the cash to meet liquidity requirements and shore up their damaged balance sheets. If they loaned the money out to businesses or home buyers, we would reap the whirlwind.
The inflationary risks remain stealth due to the synthetic suppression of rightful free capital market forces, which can not be sustained indefinitely. However, the excess supply of money has definitively been created, and it will debase the currency via inflation, it’s just a matter of time.
www.zirpqe.wordpress.com
QE and TARP are designed to shore up banks and financial systems. Its woorking as designed, what is not working is credit expansion, but increased asset prices have improved NPLs and defaults. .
Just to throw a quick 2 point observation to both of you, Bruno and Throx, throw it into your mix of considerations, amongst other factors
"The reason that QE and TARP have not been inflationary..."
1. - You guys need to remember USD is the world reserve currency and more USD is used outside of the US than inside. To look for signs of inflation you need to look further than the shores of the US alone. Perihpery nations outside the OECD that rely on USD for trade and national reserves yet do not have a strong enough domestic economy to influence their terms of trade or implement financial controls are a good place to start, those types of nations are usually both reliant on the USD and totally at its mercy.
2. - ZIRP was a lot more than just a radical attempt to jolt banks into lending, it was also acting as a fan actively blowing the paper confetti printed by QE out the door to the rest of the world. Money and capital always flow to where perceived returns are high and avoid where they are low(until they start fearing for safety and then reverse course). By creating a low-return environment at home through ZIRP, capital will actively leave US shores on its own to search for better returns elsewhere, taking the inflationary pressures of those dollar piles with them.
"The reason that QE and TARP have not been inflationary is that money center banks have kept the cash to meet liquidity requirements and shore up their damaged balance sheets. "
I agree that this is likely a factor in the lack of velocity.
Isn't it also ironic that the longer the Bnaks hoard and repair themselves the longer the FED will provide them with free/negative real interest rate funding -and the longer the rest of economy suffers and can be preyed upon by those very same subsidized cartels?
WHY invest earned capital in the productive economy when you can borrow at negative real interest rates and garnish income streams in parasitic/rentier pursuits?
......But,....but,....but, it doesn't count as inflation if the government crooks and criminals don't include the increases in any accounting category. They can't account for the inflation if the phony, farcical, system they are using to make such assessments doesn't even perceive the situation.
great photo of fake plane exhaust up top. most likely it is to keep heat in atmosphere, depite those that say clouds keep sun from warming planet. they keep heat in, something we need now that bathers in palm beach no longer drift along with the current.
If stock buy backs are velocity then eating your own tail is "beef... It's what's for dinner."
Beef inflation IMHO is the equivalent of higher education inflation.... the last dying gasps for breath of a non-sustainable tenure price increase enabled solely by government supported student debt. Yes emerging economies convert to meat for protein but developed ones are finding their protein increasingly in kale for example. Volcker promoter Pippa Malmgren makes your same argument, but I'm not buying it.
I drove by Chic-Fil-a yesterday and there were two customers but Chipotle had a line out the door. Which one serves organic tofu? Which one had blow out quarterlies hawking beans, rice and lettuce?
Have you ever eaten at Chipotle? Chipotle sells more than beans and rice.
Further: when you charge 85% to 90% of the price of a dish containing nothing but beef for a dish containing mostly beans and rice and lettuce you are pretty sure to be profitable.
It's true that demographics and eating habits are adjusting in the U.S. but I don't think that it is because developed economies have magically transformed the preferred eating habits of their populations by offering up legumes and soy products. Typically as an economy matures exactly the opposite happens: the growth of spending power fuels consumption of more expensive meat proteins. IF the consumers in the U.S. are chosing beans and soy it is becasue their purchasing power has been debased and they have been forced to resort to substituting other proteins for meat.
In .GOV statistics speak this is called 'hedonic adjustment' and it is in fact a sign that productivity and purchasing power are being stolen.
Here's an experiment for you to try.
Tell a group of people that you have a coupon that will refund the cost of a meal of any price at a Chipotle restaraurant. See how many people choose meat and not when price is of no concern. IF they think it will not cost them anything and it won't cost you anything they will be free to eat whatever they really want to.
I can already tell you that almost everyone is gonna eat meat unless they are vegetarians or on some kind of diet.
People aren't generally giving up beef because of some dietary or moral shift in the populace. People are giving up beef because they can no longer afford it due to the theft of their productivity gains and purchasing power.
Converting to a plant-based diet does not correlate 100% with a loss of purchasing power. Government sponsored animal protein campaigns such as "got milk", "pork the other white meat" and "beef it's what's for dinner " are designed to equate animal protein with protein. People are simply catching on to the deception and changing their eating habits. What % are changing behavior voluntarily is the metric of interest.
Inflation is rampant; it's constantly astonishing to see people who appear to believe in some crazy "official inflation" statistic. The prices of everything we buy are going up dramatically. T here's hella inflation right now; and plenty more on the way. Enough to wake up even the nodding Susans who somehow manage to listen to the 2% BS they're fed, now.
"In its infinite wisdom, the Federal Reserve has been attempting to counter this economic standstill by absolutely flooding the financial system with new money. As it always does, this has created monumental financial and fixed asset bubbles, however, it has not addressed what is fundamentally and structurally wrong with our economy."
concur sir
testing testy test
Velocity is not a fundamental, it's just a mathematical construct. When you increase the money supply gigantically without increasing economic activity commensurately, velocity automatically falls. It would be weird if it didn't.
the matrix is just a construct
Understood, however, since we know that much of the freshly issued money hasn't made its way into the underlying economy, why would it have correspondingly effected the mathematical velocity construct you have pointed to?
Something else is a foot, and it ain't pretty. Perhaps we should call it DeathFlation
I would suggest the freshly issued fiat money actually did leak the bottles it was placed in long ago.
Originally money was a commodity (mass or energy, gold or oil). Then banks issued receipts, and you get commodity backed currency, in which the receipt/currency is information. What we have now is digital currency zeros, pure information with no underly commodity (or very loose links). As pure information, that keyboard created fiat can certainly flow around all barriers immediately.
For example, Friday I opened a brokerage account (for real) with X dollars. I could buy on margin with those fiat positions which are at least backed by stocks in the real world. So say i buy on margin and have a 2 X position. Not uncommon. But i also in the real world have a small startup that needs capital. I can probably get some investors using the 2 X stocks as collateral. Now I have a 4 X empire.
All this would have happened even though I'd only started with 1 X because the information of wealth in fungible, unlike physical wealth.
Ditto the Fed Reserve and its nit wit sequester of bank funds. That monetary genie is long ut of the bottle because there was no way to contain leveraging on that information.