Watch the Velocity of Money — Not Their Mouths’

I promised last time to write on the “velocity of money” in an informatative and interesting manner (yawn, yawn) so here goes.

The Velocity of Money… measures the rate at which money goes from one transaction to another in an economy, and is usually measured as a ratio of GNP to a country’s total supply of money.

Here is a very long-term measure of it, courtesy of the good folk at Hoisington investment management from a couple of years back:


At the time, in Q314, real US GDP was annualising at a meagre 2.2% annual rate which appeared to confirmed economist Irving Fisher’s observations within his famous 1933 paper “The Debt-Deflation Theory of Great Depressions”, that falling money velocity is a symptom of extreme over-indebtedness.

Whilst former Fed Chief, “Helicopter Ben,” who had spent his whole academic career studying the 1930’s global depression, saw no relationship here and plowed on creating ever more debt, along with his compatriots at the other major Central Banks, a simple-soul such as myself couldn’t help but observe the similarities with the 1920s V the 1980/90s, when velocity boomed, only to be followed by its collapse, despite the ballooning of CB balance sheets…both then and now.

Fast forward to today, ironically as Draghi the ECB boss is droning on about how he’ll continue to expand his balance sheet to kick-start CPI and economic growth, it’s time for a second observation :


For all of the velocity of “jawing” by the CBs the facts point to a collapse of the global velocity of money, similar to that shown for the US above. US GDP is now annualising at just 1.1% with CPI dead.

A third and final chart shows the US velocity of money once more, as a like-for-like with the first chart but this time since the pre-financial crisis in 2006. Overlaid is the obscenely bloated near $5 Trillion Fed balance sheet, inverted to better show the relationship.


It pictorially shows just how the Central Bank activities have compounded the post financial crisis debt problem and confirms that you should watch the charts and not their respective mouths.









One response to this post.

  1. […] « Watch the Velocity of Money — Not Their Mouths’ […]


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