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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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Good article, Bruno.
What is you opinion on the price of oil being artificially suppressed in order to prevent inflation from showing its face? Not even geopolitical risk is making waves in the price of oil.
That has been my theory for a while, but I'm a rookie.
USD chart vs CL chart...any questions?
...I confused myself. The USD is inverse to the CL. USD up and CL down.
Lubricating oil went from $1.00/qt. at ACE; to $2.00; then $4.00/ qt. In the last three years. Diesel Fuel is nearly three times what it was when Obama was elected. Just as a reference to a recent event; not that long ago. not long ago, at all. There's plenty of damn inflation everywhere you look.
Your observations are valid, of course. But I was referring to the price of crude that doesn't move even when airliners misteriously go down over conflict zones.
We're all rookies in this new slick willy moving target they are throwing at us. I'm convinced they are throttling oil to let the Russians know that they are large and in charge...........
In the end, they will lose. You can't print your way to prosperity, same as it ever was......
"In the end, they will lose. You can't print your way to prosperity, same as it ever was......"
No disagreement here. The quacks are running the hospital.
Your math is half correct and therefore half ass. Given a fixed output, certainly doubling M in the GDP = M * V equation would halve velocity. But that can't be physically done in a real sense.
Certainly the Fed tried to do that, sequestering their printed money in the banks. But we know that is a leaky bucket because the stock surge is the obvious result of that head fake. But the Fed also held interest rates artificially low, crushing savers and distorting price discovery systemically. So my point is the drop in money velocity was MORE than that expected by the simple math relation of M being inversely proportionate to V. Come on, that is freshmen econ math.
The money pumping distorted markets, put paper in the hands of non productive financial classes who know not what to do with it but blow bubbles like the MBSs. Everyone in the real world knows they are fucked and have constricted transaction velocities across the board.
The only thing wierd is the final collapse hasn't happened.
"Given a fixed output, certainly doubling M in the GDP = M * V equation would halve velocity."
No. "Given a fixed nominal GDP," yes. But who sez that's a given? The whole point of the central banksters monkeying around with M, is to goose nominal GDP in hopes of priming the pump for growth in the real economy.
As a matter of fact, if nominal GDP were somehow fixed, by definition inflation would be impossible. Or for that matter deflation.
"if nominal GDP were somehow fixed, by definition inflation would be impossible. Or for that matter deflation."
WRONG.
1. In the classic sense inflation and deflation are changes to the money supply. Lending is where money comes from and when lending changes from the nominal baseline inflation or deflation in the braod sense is occouring.
2. What is perceived as inflation or deflation would have to do with changing prices. To associate these changing prices with classic measures of inflation or deflation there would have to be lending/moneyness creation associated with the changes in prices.
Even IF GDP were somehow fixed it would have nothing to do with spending within various asset groups and industries. One year manufacturing of new extremely fuel efficient but expensive automobilies could be very high moving inflation into car prices and deflation in fuel/energy. Changes in the money supply might be induced by the auto manufacturer loaning money into existance via vendor financing deals ala GM Capital/Ally Bank in this case.
The next year the same amount of GDP could be realized in telecommunictions with the advent and mass sales of a popular new iPhone or some such could also simultaneously affect the cost of communications. Apple can borrow money cheaply from banks and also has a vendor financing arm as well, so there is another possible venue for inflation of the supply of moneyness even as price changes move through associated industries...
Then the next year real estate prices could suddenly be rising absorbing and inflating mightily. Banks ramp up loans and there we are with increases in the moneyness.
While any of these changes are happening other parts of the economy might be starved of capital and/or credit/moneyness and thus experience what would be perceived as deflation/falling prices...
Nominal GDP could remain at the same level for years or decades while prices in various sectors swing wildly for all sorts of reasons.
Disruptive technology. Demographics. Cultural shifts.
Political interference in industries such as health care where the government can borrow and spend in ways that the private economy cannot...
The forces of inflation and deflation can co-exist in the same economy; it is merely the distribution of price changes that would define the perception of either at an given moment in any given industry or price measured...
AGAIN: The classic definition of inflation is an increase in the money supply/credit issuance.
WHERE the inflation manifests is another issue.
THIS: clearly shows a massive increase in credit issuance:
http://research.stlouisfed.org/fred2/series/GFDEGDQ188S
5135199 new Village-idiot
0It means that little new fiat currency is being created because no one is taking on any more debt, or most people and/or businesses are paying down their debt thus eliminating currency from the system.
Either way it's deflationary
"businesses are paying down their debt thus eliminating currency from the system."
WTF are you smoking??? This is simply not true.
Corporate deleveaging is one of the easiest of oft repeated lies to disprove.
St. Louis FED data shows that leverage has not diminished even if Treasury emittance is excluded and The FED is not alone in publishing alarming data cncerning leverage in the system.
WTF does this look like to you: http://www.businessinsider.com/corporate-debt-outstanding-2014-7
THAT doesn't even include shadow funding bullshit that is being hidden let alone ANY of the off balance sheet derivatives pyramiding!!!
...umm, we may have a winner ;-)
The inflationary risks are stealth due to the synthetically suppressed rates of interest, 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.
Interest rates will keep declining for the forseeable future. The Fed may be done with QE, but China and Japan are blowing the doors off and Europe is just getting revved up. Treasury bonds and bills are a bargain relative to any other sovereign, and the dollar is rising, oil and gas exports are on a rising trend and the deficit is falling.
If the Fed wants interest rates to rise next year, they will have to start selling off their treasure trove of securities, on which they will realize beaucoup profits. Bernanke may have made the genius trade of the century.
geez, is this sarcasm?
It's all good......................;-)
I disagree. We need to properly define what it is we are talking about or our conclusions are going to be erroneous, even dangerous.
I am willing to have my assertions challenged and to be eduacted as to mistaken information.
Understanding cannot be granted a priori. Not by me either.
I think that I have provided ample evidence that the published St. Louis FED statistics indicate a very high sustained rate of inflation has been evidenced since the extraordinary interventions began in 2008-09 and has continued unabated to the present.
No one has come forward to challenge the FED stats I have posted links to. I invite a challenge of those stats or a conversation as to what the stats may mean in the sense of real purchasing power in the economy.
I also invite a broader discussion of the behavioral and spending choices change within the economy aka hedonic adjustments.
Just like the Soviet Union's Central Committee has proven that a centrally-planned real economy is a bust, the United States Federal Reserve is proving that a centrally-planned financial economy is a bust.
The actor playing Uncle Sam is collapsing on the world stage .
Is there a Bilderberger in the house ?
See http://andreswhy.blogspot.com/2012/12/biderbergerssuperheroes-or-supervi...
From the chart, it is interesting that money velocity increases as interest rates increase and decrease as interest rates decrease.
Interest payments must be a key component of money velocity. I wonder how much of that is private, or going to individuals, not banks?
This is counter to what we have been led to believe. One might next assume that deflation stimulates the real economy.
@notsobadwlad
Agreed. Personally I'm an Austrian. I have seen no economic school talk about the correlation of velocity with all the money printing per mentioned above and the peculiarities of the current inflationary environment, or minimal evidence supporting it at current. Goldbugs sell their wares and preach terrible inflation. Fine. I like gold as a holding for several reasons but I don't think any economic school has complete hold on the reality we live in today. This is a completely uncharted course. I don't think it ends well. No one knows when or what fills the vacuum.
They can put the dollar price of gold anywhere they want it, 100:1 LBMA tricks, unlimited naked short futures & options with no regulator in sight, ETF tricks etc.
The price of physical gold and silver will eventually disconnect from the phony futures contract idiocy. To price any PM in any fiat is illusory, moronic, and fraudulent. It is a system in which only liars and cheats and crooks and criminals ultimately will prosper......by bending laws and rules in their behalf and at their behest and infesting any regulatory institutions with their own demons.
So you advise against holding gold?
Hold and hide physical gold and silver......They will be coming for it,....as soon as they finish confiscating your savings, pensions, real property, clothes on your back, paid-for burial plots, and any unclaimed remnant of compensation you receive for services rendered.
Canoe accidents had better happen in deep, dark, cold, murky waters.
Productivity has been being stolen from the productive for the last 40 years.
Until the accrued and with-held productivity gains of labor are paid to labor there is really no hope of a recovery.
We are done being your mule.
We deserve the pay that we have damned well earned and which has been with-held for the last 40 years.
We will take it eventually be means of our productivity instead of allowing you to steal from us.
You are running out of time to pay the fuck up -with compund interest commensurate with the inflation you have created in your little scam.
We will no longer accept being cheated out of our wages and will no longer accept the credit you have offered in lieu of payemnt of earnings.
This is your final warning...
http://www.youtube.com/watch?v=wEdgzndKuog
Amen which is why I sold my business in May and went away at 46 .i worked 14 hrs a day and saw my pay going down down down by these greedy insurance companies. Thier repayment is coming and ill pay no taxes from May forward. Who won when you cant use the sweet off my beau to do your evil manipulation.
From a pissed off American
FUCK YOU !!!
Join the underground economy. Keep what you earn.
Starve The Beast!
The biggest, most evepensive buildings in every major city are occupied by banks and insurance companies. The highest paid exectives on average run banks and insurance companies.
What is wrong with this picture?
... and yet we are LEGALLY MANDATED to solely use the fiat currency the banks create from thin air and to purchase insurance whether we want it or not.
Again, what is wrong with this picture?
People will not be free until they are free of the parasites.
Public guillotining in every state capital and the District of Criminals should be SOP.
greedy insurance companies is right. They don't even pay their claims. Now in healthcare they got the govt paying them! and they now have the govt bailing them out to pay for obama(doesnt)care. Any doctor that is still practicing .... well ... they all must be either cardiologists.... or from india
There is no doubt that both finance and government are nonproductive parasites, riding on the back of labor and sucking its generative forces.
A lot of this money lays dormant on balance sheets as (goodwill and intangible assets) and in inflated stock prices. It could easily be removed from the system through a cleansing round of deflation and one-time adjustments.
Obviously the highly leveraged hedge funds would be decimated.
Most likely there would be no need to cut deeper into significant corporate debt restructuing.
The biggest concern is whether retirement funds would still be able to serve their purpose.
The game has already ended. We're witnessing the epilogue now, and soon the world will come to the realization that we're past the END, and i'll be time to open up the next book, and I fear it'll get ugly in Chapter 1... Best of luck to ALL out there.
RIGHT
Why cant more people see it?
All Fiats through out history have fallen
All Reserves through out history have fallen
All empires through out history have fallen.
Its not a question of if but rather when and I'm afraid the time is near.
Some Folks bought some food, some folks bought some PM, some folks bought some lead.
There is a reason they don't teach real history in our schools and universities.
There would be mass lynchings worldwide.....and there should be.
I think just more mediocrity is coming and people will be content to not bite the .govt hand that feeds them, while competition will be less robust as emerging businesses get shunned by regs and compliance costs that only the big corporations can deal with (the big corporations are the very beneficiaries of these as they are moats for them and of course things like Walmart getting transfer payments for so much of its income).
Stocks might well keep doing well as the big businesses in the club so to speak and entrenched will do better than ever with easy financing available via .govt subsidies and de facto bailouts anyway in many cases. The SME side I think looks much gloomier. In short, a neo feudalism is emerging but not one that was at least more laissez faire like in Europe way back when, but a police state ever encroaching.
Same goes with housing, too, as actually less debt is being taken on I would think as it is all cash from foreigners or the big businesses in the club so to speak who scoop up numerous to-be rentals. So housing is maybe not going to crater per se as less leverage there with all cash, but still this is all subsidized by ZIRP, QE and implicit backstops.
Short the hopium probably not via something like UVXY or SPXU, short ES, etc, but rather via income producing assets and gold and silver and essentials like food and energy. And as these stored up fiat notes get out into the economy more and more, even nominal highs in stocks will get eroded more and more by actual real returns Zimbabwe style.
Where is the value of holding rentals when you cannot evict and the tenants cannot pay the rent.
There cannot be a viable society when most of the population is unemployed, homeless, and desperately hungry. Who would grow food when there is no one to whom the grower can sell it.
Most likely the way they want to do it, but I would rather see a quick flush and reset, where asset holders still hold the valuable assets they own, but that financing, leverage and balance sheet vapor have been dropped to more normal historical levels.
IMO, Banks and their cronies SHOULD bear the main brunt, but would be no worse for wear, since fiat created from air can return to the same source and since they are the source of the problem.
I think the fragility is so high right now with all the leverage that when this does come crumbling down it will be an epic reset and only God knows what will follow. Freedom's trend is to the downside and that is more crucial than anything.
Even technological improvements these days seem to only fuel the surveillance state capabilities and there are diminishing returns as people sit on their iPads but don't know how to do practical things and do math and grammar proficiently.
I think they think they are smart enough to be able to curb rising prices, and this conceit along with all their other 'targeting' that central planners love will be their demise. They think they can push some buttons and get things 'normalized' but have no way to account for the opportunity costs and degree of malinvestment they are stoking. Inflating the money supply can lead to prices rises in a lagging fashion as initially all the cheap credit spurs production and hence the illusion of plenty, but then the liquidation of the malinvestment ensues as the undertakings were unwarranted and in this mass carnage supply goes way down and the stock of real wealth out there is much less, not to mention the confidence being shot in the currency (which is sad that it takes all this for people to get it as if they just understood basic Austrian principles which are really just common sense and full of integrity, they would revolt against the current system).
I believe they have been very lucky that in the crashes of the past decades people have flocked to the 'safety' of US fiat and Treasuries, and I hope people here and abroad wake up to the con and quit playing games and realize trade doesn't 'need' USD to be facilitated.
Have you ever wondered why they feel the need to surveil? It is an interesting question, no? I suspect that they are first of all living in constant fear ... tough life.
Secondly, if they feel that they are destined to replace gods (God) who have (has) no need to use electronic equipment to surveil (think about it and think that prayer is real ... and the implications), then they of course will need to have an approximation of the ability... or so they think.
Fear? Perhaps? Total control/power -- more likely.
No wage leverage, no inflation. Velocity of money has stopped because wages halted two decades ago and were replaced with credit lines that are now maxed.
No inflation till disposable income returns.
The money has collected in illiquid holdings of the wealthy, banks and foreign countries ... so no distribution and no recirculation.
The low money velocity implies that only a small fraction of the money is being circulated.
"The money has collected in illiquid holdings of the wealthy, banks and foreign countries ... so no distribution and no recirculation.
The low money velocity implies that only a small fraction of the money is being circulated."
This may be the case to some extent. I also believe that the maginal utility is collapsing.
I also believe that many of the statistics are being falsified or defined so as to achieve the same result as falsification. The unemployment rate touted on TV and by the FED has little to do with the labor participation rate or growth in real inflation adjusted hourly compensation, etc..
Money is only created when someone asks for a loan, the USD is a debt note. It also is destroyed when you pay down debt. The Fed is asking for a loan when it prints money and buys bonds. That money is not circulated so not inflationary.
What will climb in value is the circulated USD as more of them are destoyed as we pay down debt.
Money is not created when YOU ask for a loan, it is already in existence and has simply flowed into your cup from somewhere else.
Money is also not destroyed when YOU pay down debt, it has simply returned to your lender(with profit interest) so they can lend it somewhere else and let it flow into someone else's cup.
Yes there is the case of fractional reserve lending, and 90% of what is lent to you is created by the bank you borrowed from, but this is well known to central banks, and has already been factored in when central banks turn on the printer. ie. Central banks know if they hand out 10 bil to the commercial banks with a 10% reserve ratio requirement it will end up as 100 bil money supply into the economy.
Money is created when the Fed prints it, because who the fuck are they loaning it from? They are the lender, they don't loan shit from nobody.
It's the US govt that's loaning from the Fed. The Fed purchase of UST is a loan to the US govt.
It's the job of the Fed(and all central banks) to create money(ie, print them), the only difference is that a responsible central bank should only 'print' as much money as needed to facilitate the transaction needs of economic activity. In other words, they should only print in moderation.
Got to disagree with that Wild. When I go to my bank, they have the capacity to loan out money, or invest it in USTs or stock market all of which are money creation. Simply stating that a bank has to have reserve ratios does not matter.That money they are allowed to spend CREATES M1. When it goes back into the Federal controlled bank it becomes vanished, unless the bank wants to spend it again in the community, which they might not and instead get a UST guaranteed bill.The problem with that is that only benefits the .gov, most of whom should be hung on a rope.