Monetary velocity or the turnover of money is at record lows, partially the result of massive excess bank reserves via central bank stimulus. Will velocity accelerate serving as a major catalyst for growth?
I do not know why very little has been written about monetary velocity. In some regards the lack of attention is similar to the lack of attention that was given to the labor participation rate (LPR), a topic that now is garnering considerable attention.
According to the Chicago Fed, monetary velocity or the turnover of money averaged 1.7 to 1.9 from 1960-1990, hitting a peak of 2.2 in 1997. Today it is at a record low 1.42, eclipsing January’s 2016 nadir of 1.49. As noted above, major reason for this lack of turnover are gargantuan excess bank reserves amounting to over $2.5 trillion versus the historical average of about $1 billion.
Another reason for the lack of turnover is anemic credit demand, partially the result of bureaucratic intrusion that stifles risk taking, fearing the wrath of the regulatory authorities. The lifeblood of capitalism is the formation of capital and as noted the formation of such has been greatly diminished by political over reach.
When will this change? All Federal Reserve officials have commented monetary policy has done all the heavy lifting since 2008 and now has diminished capacity, stating effective fiscal policy is both required and demanded.
While I will refrain from commenting about the current political environment, the lack of effective fiscal policy is a major reason for the rise of non-establishment candidates. Anyone is better than those who are today in Washington.
Precedent is lacking regarding the amount of fiscal stimuli that the global central banks have injected into the financial system. The only era that remotely comes close to today is the 1920s when France was demanding German reparations and the Bundesbank turned on the proverbial printing press to repay the Gauls. Germany experienced hyperinflation and sowed the seeds for the rise of Hitler.
Referring back to the Chicago Fed, the Chicago Fed stated that if monetary velocity accelerated to the historical norm, inflation would be rise into the mid-teens. Wow! If this were to occur, the sovereign debt markets would be obliterated, ushering another financial crisis.
Speaking of which, there are only two ways to overcome debt; default/restructure or inflate.
The Western economies are asset backed economies, defined as buy something today and pay for it with tomorrow’s dollars, dollars that are worth less than today.
At some juncture, this massive stimulus will generate inflation, but the question is when and at what degree.
Speaking of monetary policy, the Minutes from the June FOMC meeting were released. There was little change in the perception regarding the timing of higher interest rates. The dollar slipped, crude rose and equities rallied. Treasuries were flat.
Last night the foreign markets were up. London was up 0.95%, Paris up 1.12% and Frankfurt up 0.64%. China was flat, Japan down 0.67% and Hang Sang up 1.03%.
The Dow should open nominally lower ahead of upcoming jobs reports. The 10-year is of 4/32 to yield 1.39%.