Money velocity has recently declined far below any point during the Great Depression of the 1930s.
Tyler Durden argues that the real state of the US economy, measured by velocity of money, is today far worse than it was during the Great Depression, and federal monetary easing is a disastrous policy certain to produce the same result very shortly in the United States that it did in Weimar Germany.
Velocity of money is the frequency with which a unit of money is spent on new goods and services. It is a far better indicator of economic activity than GDP, consumer prices, the stock market, or sales of menâ€™s underwear (which Greenspan was fond of ogling). In a healthy economy, the same dollar is collected as payment and subsequently spent many times over. In a depression, the velocity of money goes catatonic. Velocity of money is calculated by simply dividing GDP by a given money supply. This VoM chart [above] using monetary base should end any discussion of what â€thisâ€ is and whether or not anybody should be using the word â€œrecoveryâ€ with a straight face.
In just four short years, our â€œenlightenedâ€ policy-makers have slowed money velocity to depths never seen in the Great Depression. Hard to believe, but the guy who made a career out of Monday-morning quarterbacking the Great Depression has already proven himself a bigger idiot than all of his predecessors (and in less than half the time!!). During the Great Depression, monetary base was expanded in response to slowing economic activity, in other words it was reactive (hereâ€™s a graph) . They waited until the forest was ablaze before breaking out the hoses, and for that theyâ€™ve been rightly criticized. Our â€œproactiveâ€ Fed elected to hose down a forest that wasnâ€™t actually on fire, with gasoline, and the results speak for themselves. With the IMF recently lowering its 2012 US GDP growth forecast to 2%, while the monetary base is expanding at about a 5% clip, know that velocity of money is grinding lower every time you breathe.
The Fedâ€™s refusal to recognize the importance of velocity of money quickly goes from idiotic to insidious. Hereâ€™s a question: If I give you 50Â¢ and as a result of that transaction, you owe me $1.00, what interest rate have I charged you? Obviously, Iâ€™ve charged you 100% interest. ….
In 2011, every dollar of GDP growth created $2.08 in debt. In real life, thatâ€™s 108% interest plus the nominal rate, and our twisted leaders want you say, â€œThank you sir, may I have another!â€
2011 wasnâ€™t an anomaly either; itâ€™s the new normal.
Read the whole thing.
Hat tip to the News Junkie.