I recently came across a very good question that pertains to the “inflation/deflation” question. The question is as follows …Could you shed some light on the Money Velocity vs the Money supply….. Who cares how much the fed print and gives to a big bank like Wells Fargo and they stash it in their vaults to make their balance sheets. You guys and all gold sellers always whine about “Printing Money”…. but who Cares! …if the man on Main Street is living from paycheck to paycheck….and in fact the Money Velocity M2 chart shows a net decrease since 1996 by about 30%? I think that’s why the gold and silver are worth less…who cares about the national debt if the red clicking numbers you print daily are going into a vault…might as well put it in a hole. I’m confused.”
The first chart is of the monetary base and the second is of “M2 velocity.” As you can see, the Fed has been cramming money into the system yet the “velocity” (turnover if you will) has been steadily dropping. This situation has always struck fear in the hearts of monetarists because it is an illustration of “pushing on a string” which is really what the above question at its heart was all about. The Fed can print all they want but they can’t make people spend the money or the banks lend it or use it to kick start the economy or credit system. This is true…for now but I think that this is already beginning to change and can also be “forced” to change by the Fed itself, let me explain.
First, the Fed can lower deposit rates to zero from the current .25% that they are paying the banks on deposits. This would force the banks to do “something” with their “parked” and idle free reserves. One would have thought that “movement” would have already begun but it has not, maybe because it is “easy money” for the banks or maybe they still remember 2008-2009 and still fear any and all counter party risk? The problem as I see it is that moving to absolute “zero” would be like flipping a light switch, it’s either on or it’s off as there is no “in between.” In this respect the Fed would basically be “all in” with both feet on the gas while throwing the brake pedal out the window. Using this last bullet would basically be an admission of total defeat and the currency itself would collapse in a hyperinflationary seizure as the banks are forced to “use” their tsunami of dollars.
Secondly and something that we are already seeing is that “cash” is actually beginning to “move.” No way you say? “There is no money on the streets” and “just look at the velocity chart, there is no evidence of it turning up”…yes I agree but what are foreigners doing with their dollars? Judging by the last 6 months or so, they are spending their dollars on our real estate. That’s right, dollars are coming back home in exchange for real estate. It’s been reported that 40% of all U.S. sales were done with cash; in fact, last month saw 60% of all Florida closings done without any financing! Yes I am sure that much of this activity is simply “washing” some dirty money and making it “clean” but it shows the money being “spent” which is a murmur in velocity. I view this as an “early” act of “getting out” of dollars… I believe that foreigners are spending these dollars “while they still can.”
For China’s part, they have done two quite distinctive things over the last few years. They have signed many trade deals that exclude the use of dollars while at the same time done deals where they are the “purchaser” of real assets and in nearly all cases the contracted “payment” is in dollars. Does this sound like a nation hoarding dollars or one that is trying to bleed down their balances?
I mention all of the above because velocity which has been declining for over 15 years is a funny duck in that it can change course literally overnight. I don’t believe that it will take any huge event to change the current mindset, “spending, bailing, dumping” dollars by foreigners has already started. You see, the “inflation” (or the fuel for it) has already been created and packed into the system. The hyperinflation that I speak of so often will be a “lack of confidence” event where dollars get spent for anything and everything. This lack of confidence will also be seen on the other side where the acceptance of dollars becomes reluctant…which then will become self-reinforcing.
Hyperinflation (which in reality is a panic out of a currency) can literally happen overnight with little or no warning just as stock market crashes occur. Think back to late August 1987, the conditions were ripe for a crash but anyone who called for one was laughed at. Less than 2 months later the market had been cut in half. Now, the conditions are ripe for a dollar panic that cannot nor will be stopped once it begins. We don’t even need any more QE or additional money supply, it has already been created. The only thing lacking for the greatest hyperinflation in all of history to begin is a break in confidence. Put simply, “velocity” (the ‘selling’ of dollars) will turn up once confidence finally breaks. Once turned, velocity will go straight up and the Fed will have no chance at “draining reserves” as the market size of dollars dwarfs their ability to sop up the liquidity. Once confidence breaks…it won’t nor can be restored and the sale of dollars won’t stop until a new substitute currency is introduced. Your job is to get from here…to there…with your wealth still intact.