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Money Velocity Is Crashing - Here's Why
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
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.
Since the collapse of that speculative bubble, the Fed's all-in expansion of money, credit and liquidity has failed to stem the absolutely unprecedented collapse of money velocity. Clearly, expanding money, credit and liquidity no longer generates any velocity.
Rather, the inescapable conclusion is that Fed policies have effectively crashed the velocity of money. How is this possible?
Longtime correspondent Eric A. proposed an insightful explanation. Here is Eric's commentary:
"You know how you say that the economy is locked up in fiefdoms, and they're picking winners and losers, as part of colluding the prices? Well this adjustment of prices locks out certain people, like say, the young from housing. So houses don't sell, they stagnate.
But what are we really looking at? Velocity.
Velocity is an indicator that buyers and sellers agree on a price, that the price is "right" and not an outlier. That's why you see a stock move on high volume "confirming" the move, because it means the prices wasn't "right" at the previous level, while more people agree the new price is fair.
If prices are allowed to go where they need to without pressure and manipulation, you will always have velocity, as the most buyers and sellers will always agree at some price. Because this is true, low velocity cannot happen in a free market. Which means the only reason for low velocity (in this or the previous Depressions) is that someone has somehow managed to get an edge that prevents them from selling, from liquidating, at the true price, i.e. the one the buyers will agree to.
This has another corollary, that the measure of velocity on the Fed's own chart is the measure of the level of unnatural price manipulation on the market. We can watch this aggregate indicator of their failure in real time, by the Fed's own hand, and we can know the manipulation is ending when it rises.
So yes, the Fed, the governments, the insiders can manipulate to their heart's content, as they've been doing, but that unnatural pressure goes somewhere. And the pressure diverts into velocity. As we saw in the Great Depression, or the Roman Empire, velocity can stagnate for 10, 20, or 1,000 years until the manipulation ends, property rights are restored, and we have a free market.
History has shown that may be a bargain they're willing to make, but it won't do the rest of us a lot of good."
Thank you, Eric, for an explanation that intuitively rings true. Manipulating the PR optics (i.e. perception management) as a substitute for an open market doesn't make you omnipotent, it makes you a hubris-soaked fool.
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please explain to me how, since USA national debt in 2008 was $11 trillion, and now in 2015 it s almost $8 trillion more, HOW in hell can anyone say that US Economy has recovered????
how, FED? HOW??
Quick.....give that kid a free breathalyser.
They can say it recovered because they don't have to tell the truth. Propaganda is legal.
So what happens to the increasing money supply when velocity picks up?
The problem is; it can't.
Since all that 'money' represents debt; somebody has to work in exchange for it.
There aren't enough remaining debt-free wage-slaves willing to indenture themselves.
This explains why both political parties heartily support illegal immigration; too many 'paper promises' have been created to be satisfied by the current pool of debt-slaves...
This is why the inflationists continue to be wrong: We borrowed too much against the future; we already got our inflation in asset prices, but when a Ponzi collapses, the participants see the value of their 'winnings' collapse. Result? Deflation.
a small correction: "Since all that 'money' represents debt; somebody has to promise to work (or deliver something) in exchange for it."
debt is, at the end, a promise. a matter of... faith in the debtor. a kind of... goodwill
to make it even worse: debt is a kind of expression of optimism. in the future
no optimism in the future, "bad" debt. optimism in the future, "good" debt
You are technically correct; I merely skipped the middle step of 'promise' and went right to the heart of the matter: a promise to work is only valuable if one expects to ultimately receive the actual work.
Also, the delivery of a product implies someone 'working' to produce that product.
So, ultimately, all fiat currency is a debt instrument which requires that somebody else eventually work to redeem it.
or to forgive it. which, in technical terms, is a default one one side and the acknowledgment of a loss on the other side
and price inflation is a kind of default, too, usually initiated by currency inflation
I'd say most of the debt humans burdened themselves in history with was either forgiven or forgotten (like in wars) or... inflated away
That has to be too pessimistic. People loaing $ would be demanding higher interest rates, rates must reflect the default rate.
Not to say their are times of excess optimism, like now, but over the long run ...
BTW : Yellen's rate hike made my blog's economic prediction rate 100%.
https://thinkpatriot.wordpress.com/2015/11/10/a-measure-of-propagandas-p...
I am so thrilled I may make another.
Actually the velocity of money can increase. All the FED has to do is decrease the money supply.
V = GDP/M (there are only two variables, this isn' rocket science, it's primary school algebra)
CogDis showed some incredible cognitive dissonance himself whith the question, "what happens to the increasing money supply when velocity picks up?"
The only time when both velocity and the money supply increase simultaneously is when when GDP is growing faster than the money supply (i.e. real economic growth)
Nominal GDP can remain stable or even grow while Real GDP falls off a cliff.
Think bringing a wheelbarrow full of $100's to buy a loaf of bread.
The government's calculation of GDP isn't fucked up enough for you, so now you want to drag the their INFLATION STATICS (manipulations) into the equation???
On a short enough timeline (and depending on your defintion of inflation)... yes.
But how often (in a major economy) is there significant price inflation without a corresponding increase in the money supply?
Almost true, except V depends to a very large extent on Keynes' "animal spirits". When times are good, V increases because people expect to get more money in the future. When times are bad, people tend to save for rainy days, and V falls. (Hence, the constant exhortations to 'buy MOAR' - trying to combat people's good sense, which gets all the way back to FDR's "The only thing to fear...".)
Adding to M doesn't help - it's the old 'pushing on a string' problem. The only way is to restore confidence in the people, and when you've got a cohort of Western leaders who seem not only content with, but hell-bent on accelerating, their countries' demise, that's going to be hard to do. Bambam, Merkel, Hollande, Cameron, the Dauphin - all more worried about seeming 'rayciss' than ensuring their peoples have a demographic future, more worried about kids calling other kids names than billionaire banksters gaming the system, more worried about entrenching 'quotas' than encouraging merit, etc.
Negative interest rates are one way to goose V. I'm sure the move to electronic cash will soon be followed with an expiry date on your e-money: spend it or lose it. The banksters are not going to give up without a fight.
You are conflating the quantity theory of money with MV. The examples cited in your first paragraph are components of GDP (so they're already accounted for). Negative interest are also unlikely increase MV, as US household savings are modest, and not only would the money have to be withdrawn from the banking system, but it then must be spent on consumption in order to increase GDP. All investment is not I (as in GDP=CIGX) buying shares of FaceFuck or iCrap does not generate GDP (which is how Fedline can clear over one quadrillion dollars per year, demonstrating that the speed of circulation in the US money supply is actually over 80, instead of the 1.5 value for MV2 that is often confused with turnover).
right! Ave credit card debt $15,350.00 ? WTF? Not incl subprime auto loan and student?
US is a country of FOOLARSES
as often, it depends on how much. let's say... more
Where's Law's of Physics??? He been shouting about this for months if not years.
propaganda is seldom lies. propaganda, more often then not, is truth, more truth... and the omission of some truth... which makes the whole message incomplete, resulting in misdirectiction
for example: "NidStyles is since long a ZH commenter. NidStyles sports an avatar that is a anarcho-liberal flag"
two facts, solid propaganda, with one omission. the resulting mis-direction is that people might construe you are an anarcho-liberal or a libertarian
Simple:
GDP = C + I + G + (Ex - Im)
Where, G = Government Spending
We spent ourselves to prosperity!!!
[If it weren't so ridiculous, it would be tragic...]
Whoa, wait a minute here with these complicated mathematical algorithms...
Is this some sort of circular reference, since C and I both contribute to makeup G, right? The only way G can get larger (in a sane world) is for there to be less of C and I....what am I missing here?
That is why we have Obamacare now. That little cherub of political chicanery that was put over on the Sheeple now gives the BLS the unfettered ability to conflate Consumption, Investment, and Government Spending however they want, thus making GDP a simple plug figure of no real meaning.
>>>ability to conflate Consumption, Investment, and Government Spending however they want, thus making GDP... of no real meaning.
The AFFORDABLE CARE ACT is indeed the icing on the above conflation cake; it's also a great example of the title of a government program being the exact opposite of its effect, and probably its intent as well.
Millions of American consumers may no longer be able to spend on mammoth SUVs, jet-skis, and assorted shit from China, but worry not: those consumption dollars are going into the pockets of executives, and numerous worker bees, within the insurance industry, Big Pharma, and all levels of government. It's still win-win-win!
http://www.khs-robinson.com/uploads/5/7/1/3/5713510/_what_is_in_gdp_ws.pdf
rebuilt used goods for the serfs to defer costs is a small factor also.
Wait...you didn't formulate that!
We didn't spend ourselves into prosperity... WE BORROWED OURSELVES INTO PROSPERITY.
Of course, it will never be repaid. and that's the day it all collapses. bye bye miss american pie.
We will rape you financially into submission small people.
Wall Street and The Federal Reserve -
nice tesseract !
thank you, I made it myself :)
Well, if CHS hadn't taken the retard route with, "There are various measures of money supply and various interpretations of velocity, but let's set those quibbles aside..." your question (and his) might have been correctly answered. The velocity of money has nothing to do with velocity. It is strictly the money supply divided by GDP. Whether there is an economic recovery is simply a reflection of whether GDP is growing or shrinking over time. However, with the $8 trillion increase in debt, and corresponding increase in the money supply, the denominator in that equation has increased significantly, while the numerator has increased only marginally hence the drop in the velocity of money.
ah, the rancid stench of... factual reasoning. spoilsport, you
The descrete components of GNP are not the same today as they were 30 years ago.
With reselling of countless imports whether in a box ready to be moved to final buyer or added value in the food chain, the "real" domestic inputs today are marginal or non-existent especially with transfer pricing fine tuned to avoid taxes.
So the macro calculation is not comparable as an indicator of economic activity - today the situation is much much worse than all macro indicators claim to show
I could write a dissertation on the discrepancies between how GDP is calculated (which is actually different from the textbook formula) and how actual economic activity can best be measured. However, as it pertains to the velocity of money- the specific calculation(s) of GDP over the given interval are about as impactful as the "Bank of Mattress" fallaciously conflated with the velocity of money by internet financial experts worldwide, which is to say- they are utterly insignificant when compared to the impact of the FED's actions on the money supply.
Recovered only for banks.
This is the stuff recoveries are made of
the debt does not need to be repaid in this moment, that's the trick. in some future moment things will have to be settled. i hope my daughters get REALLY good jobs.
TOO MUCH DEBT.
That YUUUGE spike that kicked off with the dot.com bubble fueled enormous debt.
That's a shitload of money that needs to be unwound, before more debt growth can occur.
Ergo, there is no velocity b/c no one has any discretionary money. all income is currently paying for current debts, which were mortgaged from future incomes. The banks reap what the sowed.
+1,000
Ding! Ding! Ding!
We have a winner!
So, back to that complicated mathematical algorithm,
If C has reached debt saturation and cannot consume any more and if I has reached debt saturation and cannot invest any more, and net exports are hugely negative...that leaves only G...and G is adding debt on so fast but will eventually reach debt saturation.
So, what you are saying is there is too much debt? Wow, who could've guessed that one.
Why don't we just forgive all debts and start over again, this time we shoud reach this point much, much faster knowing the outcome!
And, let's be clear, the debt that is choking out the economy is PRIVATE DEBT, not the public/government debt everyone wants to talk about. Not that government debt isn't a problem, but there's at least 5 times more private debt out there, and a lot of it is in fact bad debt.
I sold my old house and bought a new one (to me) in 2009 from a flipper. The flipper had picked it up from the bank that had foreclosed on it in 2008. The guy who lost it in 2008, about 6 months later he happened to walk into a pawn shop about 6 months while it was being robbed, and he was murdered. Weird, right?
Well, I still get nasty-grams in the mail addressed to this guy who's been dead these 7 years, from the slimeballs who own this dead guy's Second mortgages, HELOC, what-have-you. By now such debts have been written off and sold into the secondary collections market. But that means somewhere, at some level, this debt is on the books as debt that might be collected by someone in some way.
The guy is dead. He appears to have no family. Whatever possessions he had were liquidated while George W. Bush was still President.
We really need to purge the books of debt that isn't going to be repaid. Yes, I know; that means some of the Elites are going to be exposed as insolvent, outside their ability to coerce people into paying maintenance on debt that will never be paid in full. Without doing that, the economy is fundamentally rigged and will continue to behave strangely. There won't be any real way to assess risk or discover price as long as there is so much bad debt being held on the books. An element of fraud taints every transaction until that is resolved. But the wealthiest and most powerful have huge incentives to see that it is never sorted out, until an overwhelming disaster that would make these problems look like trifles. Ironically, the refusal to purge this debt and the fraud we all know about makes an overwhileming disaster more likely, not less; but by then the Elites will have used their current advantage to cement their permanent advantage and impunity, or at least that's their plan.
another way to make a comparison is to imagine snow falling down on the mountains, forming glaciers, which then feed a small river
the speed of the small stream does not depend directly from how much snow is falling on the mountains. only... eventually
without snow or glaciers, no stream. but as soon as you get spring, part this white stuff becomes... liquid
Perfusion, nigga.
https://en.m.wikipedia.org/wiki/Perfusion
You can have an optimum amount of plasma for your mass. But if all of it is in your head, yer right fucked.
You have a million dollar mortgage, 2 big ass car loans and credit card debt and then your "rich Uncle Sam" pays it all off. You would feel pretty good and you would rightly describe your financial situation as "recovered". Same thing with the economy. The Fed & Uncle Sam took on 8 extra trillion to make people feel "recovered". It's like magic!
Clearly we need a carbon tax and gun control, this situation is awful! Politicians and their donors raping the shit out of consumers again and again and again. Wow
Er so the fed gave most of the money to large banks and wall street benefitted while working shmucks could buy less and less with their post tax dollars.
Seems like the real story here is the difference between economic metrics used to judge 'the economy' and how the 'real economy' is doing, fair?
Its kinda slightly like W/L records for major league pitchers. You dont know very much about a pitcher from being given W/Ls - you want to see era, whip, and run support too.
Right now, the real economy is throwing junk, but 1-9 are roided up Dominicans.
Long bitch tits and tiny nuts.
Wouldn't say that to Jose Bautista. He flips more than bats.
Transitory
Bitch Tits will be Martin Skhreli's prison name. They will probably knock out all his teeth to aid in his 30 daily blowjobs. Good luck asshole!
nah, they'll just fuck 'im right in the ass
The key term: Circulation: an act or instance of circulating, moving in a circle or circuit, or flowing.
We have a one way system.. Dollars go right into the pockets of "American" corporations never to be seen again. Far less if any comes back out than goes in. Thus closing or ending the circuit. Free Trade destroyed the "circuit" by changing the way money circulates and changing the entire wealth distribution system in this country. I think the explanation is very clear Greed is winning.
Cease your microaggressions.
The TPP's gonna keep baby cozy and warm...
Today Im still free, so Im going to let my microaggressions flow freely! While I still can. Don't ever go gently into that good night! its a waste when you do.
Here's another little one.. In a fiat system money consolidates to evil/greed, so as the system matures/consolidates money ends up in the hands of evil/greed because they will lie, cheat and steal to get it, where as "good" people will not do those things. Our system is pretty mature? So evil and greed hoard the money in the system preventing circulation and velocity. Evil and greed control all the money in the world right now, basically... They are skimming off everything. This i believe is the reason for the "velocity" problem which I choose to call a circulation problem. Nothing will change until this is addressed, it can only get worse. This is a "structural" issue.. Not sure if the FED understands "structural" or not?
The proof is that somewhere between 20-100 people in this country own over half the wealth. This is what it has consolidated to. Therefore how could it "circulate" anymore? That is one sided and not in your favor or mine. The only way to take money out of Greeds hands is to rip it out because they insist on it and thats how they got it. Its why we call it Greed. Thats why money does not circulate. We havent decided yet to rip it back out.
Does not matter. This article assumes there is some correlation between what is happening in the real world. Stocks up, Dollar up and Gold down and that is the headlines that will play out till they bankrupt the country!
The only spending going on right now is the share buybacks....take that out..and the market tanks...the joe on the street is not spending as much...and the new college grads are not either...one is scared..one is in debt up to is eyeballs
Errr, Charles, you got the tense wrong.
Did you not hear about the rate hike?
Money velocity has crashed OR been crashing.
The interesting question is, will it continue to crash?
You implied an answer with your use of tense without actually explaining how that continued crashing might come about.
[You could, for instance, have discussed possible impacts of increased IOER on the loaning habits of affected banks].
Some push pencils, and some push strings. Your masters are the string pushers.
And how will this affect the price of happy meals?
Well, since America voted in a Saul Alynski president, you get Saul Alynski PR......
Basically the lying will continue until morale improves........
There is the money velocity that is generated by financial institutions spinning it between themselves, and then there is the money velocity generated by people actually working and earning. The former is sustained by the later. It is becoming increasing less profitable to work, so more and more are squeezing into the financial markets to make the "easy" money. This isn't sustainable. The financial markets act as a turbocharger ,spinning up velocity from the heat generated by the combustion of the work generating engine. The turbo amplifies the output, but if the engine stops combusting, stops generating heat, the turbos become pretty paperweights. Rather than providing more and better fuel to the engine, or even increasing its displacement, we are just adding more turbos.
Somebody take a look at the Baltic Dry and tell me if it is as bad as I think it is.
Baltic Dry is an index of shipping costs, not volume and it only refers to dry, bulk like coal, iron ore, grain, etc. Volume is only down slightly in bulk dry, but overall shipping still up 15% to 20% from just 5 years ago.
The actual volume isn't down that much . But since the number of ships is not elastic, small changes in shipping volumes, up or down, result in drastic changes in shipping costs.
Likewise there have been a lot of new ships built the past couple years, and with that extra capacity coming on stream, only makes the overcapacity problem worse, and prices lower.
So no, it's not as bad as the BDI implies. It's just that it's a great statistic to put fear into people.
This sums it up.
Ye are of your father the devil, and the lusts of your father ye will do. He was a murderer from the beginning, and abode not in the truth, because there is no truth in him. When he speaketh a lie, he speaketh of his own: for he is a liar, and the father of it.
I have some doubts that this explanation of low velocity is all there is to it. Isn't there also a "hopium" effect? You see this in home real estate markets where sellers hold out in the hope that prices will go back up to previous levels while the buyers are no longer earning enough, wealthy enough, or optimistic enough to pay that much. Yet, there is no manipulation or collusion, just a difference over what is a "fair" price between sellers and buyers.
"Isn't there also a "hopium" effect? "
Sure, but:
a) that is always in effect, irrespective of the state of the economy
b) the exaggerated version that you detect is largely the result of asset bubbles blown by the Fed (i.e. people believe that their assets should remain mispriced), buttressing CH-S's main point
With 75 % of the population maxed out in debt and the other 24 % scrambling to tuck it away to retire ( now they say 1000k is the magic number LOL )
how can there be any velocity? The only way this can turn around is if Central banks became " not for profit " and began giving massive donations to governments
from the interest, anything else is a pipe dream
"...is that someone has somehow managed to get an edge that prevents them from selling, from liquidating, at the true price, i.e. the one the buyers will agree to."
A good insight, but not worded quite right. Holders of overvalued assets with current liabilities that need to be funded (i.e, just about every financial institution in 2008) WANT to be "prevented" from selling. That is, they want an alternate source of cash for funding their liabilities so they can "extend and pretend". THIS is the source of the collapse in velocity, as the cash from the Fed has simply acted as a placeholder on the balance sheets of the banks, and has not been active in the economy.
Thanks you ZHers for the great insight.
This has been one of the most coherent discussions on a long time!
Look, they are now including hookers and blow in calculating GDP which inflates the number. But, as the Johns lose the ability to pay the hooker for the full service they settle for a quickie handjob. So handjobs become included in GDP. As the John loses the ability to pay for the handjob he resorts to masturbation. Thats about where we are right now.