Velocity of Money
March 1, 2023
This analysis will examine the velocity of money (VM) and its implications for the current economic climate. We will begin with a historical perspective on the VM and its trends leading up to March 2023. We will then provide an updated view of the VM as of March 2023, taking into account recent economic developments and their impact on inflation and the economy’s overall health.
The above chart indicates that without constant money infusions, no long-term economy exists. A healthy economy has an upward-trending VM. The steep decline started after the Fed’s massive intervention in 2009. Since then, the trend has been negative; believe it or not, this is one of the best measures of real inflation (in a world that does not operate on “hard” money principles). A rising VM is usually associated with higher prices, but in this case, higher prices are generally warranted as a rising VM indicates that the economy is improving.
The velocity of Money from Feb 2009
If you look at the above chart, the economy has been sick since 2009, indicating that no matter what the Fed states, it will continue to juice the economy with money. They will intervene occasionally to create the illusion that they are doing the right thing. One can also then argue that almost every inflationary move since 2009 has been artificially created, as there has been no uptick in the VM.
The velocity of money from 1970 to 1982
Now, look at the velocity of money during the inflationary period that started in the 70s and ended in the 80s. VM was rising. Yet since the advent of the internet (when it went mainstream roughly in the mid’ 90s), one could argue that inflation based on the VM formula has been declining. One could also say that all the inflationary events had a specific trigger behind them, for example, limiting the supply of critical goods, disrupting supply chains, and using psyops to create the illusion that you need to buy now or lose big tomorrow.
The Tulip Mania occurred when hard money principles were quite strong. If one knows how to use MP effectively, one could lay the groundwork to create inflationary forces in any market segment.
This is the danger of having large amounts of money; you can manipulate the trend by artificially using these massive amounts to create or destroy demand.
The Current Economic Climate: 2023 Outlook
The decline in the velocity of M2 stock is a worrying trend that suggests the economy is not in good shape. This trend needs to be reversed before inflation can become a major issue. The market is heavily reliant on hot money to stay afloat, which is why it has been performing poorly since mid-2022. Although there have been rallies, they have all failed, and most stocks are trading below their 200-day moving averages. This indicates that only a few companies are propping up the market indices.
What Velocity of Money Tells Us:
The velocity of money chart indicates that real inflation is not a significant concern at present. The inflation we are experiencing is likely due to a combination of gross negligence and sanctions against Russia. Before the war with Russia, inflation was not a significant concern. However, the more important takeaway from the velocity of money is that it suggests the economy is unhealthy and cannot withstand a high-interest-rate environment. In other words, if interest rates were raised to levels that would be considered normal in a healthier economy, it would struggle to function.
Overview of the Velocity of Money
The velocity of money refers to the speed at which money changes hands in the economy. A high velocity of money means money is being spent quickly, while a low velocity means that money is being saved and spent slowly. While a high velocity of money can indicate a healthy economy, it can also pose significant dangers.
One of the primary dangers of a rising velocity of money is that it can lead to inflation. As money changes hands more quickly, demand for goods and services increases, increasing prices. This can create a self-reinforcing cycle where prices continue to rise, leading to further increases in the velocity of money and inflation.
Another danger of a rising velocity of money is that it can exacerbate economic bubbles. When money is being spent quickly, it can create an artificial demand for assets such as stocks and real estate. This can lead to price bubbles that eventually burst, causing significant economic damage.
Additionally, a rising velocity of money can create financial instability. When money is being spent quickly, it can be difficult for policymakers to manage the economy effectively. Interest rate hikes may not slow the economy, and fiscal policy may be less effective at stimulating growth.
In summary, while a rising velocity of money can be a sign of a healthy economy, it can also pose significant dangers. Investors should be aware of the risks associated with a high velocity of money and consider diversifying their portfolios to mitigate them.
FAQ:
Q: What is the velocity of money (VM)?
A: The velocity of money refers to the speed at which money changes hands in the economy.
Q: What does a high velocity of money mean?
A: A high velocity of money means money is being spent quickly.
Q: What does a low velocity of money mean?
A: A low velocity of money means that money is being saved and spent slowly.
Q: What are the implications of a high velocity of money?
A: A rising velocity of money can lead to inflation, economic bubbles, and financial instability.
Q: What does the VM indicate about the current economic climate?
A: The decline in the velocity of M2 stock suggests the economy is not in good shape and it cannot withstand a high-interest-rate environment.
Q: What is the historical perspective of the VM?
A: The VM has declined since the Fed’s massive intervention in 2009. However, the VM was rising during the inflationary period in the 70s and 80s.
Q: How can large amounts of money manipulate the trend of the VM?
A: By artificially using these massive amounts, one can create or destroy demand and manipulate the trend of the VM.
Q: What is the outlook for 2023?
A: The economy relies heavily on hot money, and most stocks are trading below their 200-day moving averages, indicating that only a few companies are propping up the market indices.
Q: How can investors mitigate the risks associated with a high velocity of money?
A: Investors should be aware of the risks associated with a high velocity of money and consider diversifying their portfolios.
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