The economy is dead, 2014 – money velocity. The velocity of money is the frequency at which one unit of currency is used to purchase domestically produced goods and services within a given time period. If the velocity of money is increasing, then more transactions are occurring between individuals in an economy. It often is a good indicator of actual business activity. So how are we doing?
We can see in the thumbnail chart, that the economy in 2014 is dead and is at historic lows. The thumbnail chart shown is for M2 of the money supply. I think this chart is better as it captures more of what Main Street is doing. M3 is more institutional and M1 is perhaps not broad enough. That being said when looking at MZ money supply money velocity, it has been on a steady decline since 1980. Yet another chart that has a trend change during this time period.
But some do not agree that money velocity is a useful metric. Former Federal Reserve Gov. Laurence Meyer said in a recent interview that velocity of money shouldn’t concern markets, and he dismissed the metric as a guide in setting central bank policy. The concept is not very useful, Meyer said. “Monetary policy is about affecting rates, which affect financial conditions and affect aggregate demand.” Kind of a gobble-de-gook response, isn’t it? “The word “money” is never said in our office and probably not by the staff at the Fed either,” he added. “Money doesn’t appear in any modern macro model. We have got to get over that, OK? We’re beyond that now.”
Is Meyer correct? In a sense yes. If you are talking about the things that matter in today’s economy, it is true, the money velocity at ground Main Street level does not matter to financial markets. Main Street and Wall Street are disconnected today, and the Fed is just pointing this fact out. The Fed is not working for Main Street any more, they are working to keep Wall Street afloat. Meyer basically just admitted this.
Is it not funny how the M2 velocity chart tracks well the plight of Main Street – this is of no concern to the Fed. This disconnect will continue until the people rise up and demand change. The people are not yet feeling enough pain today to do this, but the trend is continuing and accelerating, as this point will surely come one day. This is useful to understand in our fundamental analysis of the markets.
Blue Point Trading, William Thompson