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Velocity of Money

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The major averages enter the final hour with modest losses after the trade war retuned following Trumps statements that an additional 200 billion worth of Chinese goods would be subject to tariffs in the coming months.

One of the more significant economic concepts pertains to the Velocity of Money or how rapidly it changes hands through an economic transaction which of course translates into Gross Domestic Product or GDP, low Velocity of Money equals low GDP and high velocity of course equals high GDP. Since the Great Financial Crisis despite endless chatter about how wonderfully the economy is doing the reality is that it struggles to maintain 2% GDP growth in the post bust period despite trillions in stimulus and emergency level interest rates. After peaking in 1997 with a value of 2.2 the Velocity of Money has fallen steadily since and now sits at a 69 year low of just 1.43 at the end of 2017, a figure considerably below the long-term average of 1.74 dating to 1900. More than a few pundits have pointed out that slowing velocity of Money is a symptom of wealth and income inequality, something that has reached record levels as the top 10% tend to save while the other 90% tend to spend. Debt of course has been substituted for income in the modern era resulting in 2 economically disastrous bubbles, while a 3rd waits in the wings. In addition to sharply slowing velocity we have also seen considerably less bang for the buck as each new Dollar of debt creates less, and less economic growth. Another reason GDP struggles to maintain 2% growth. As an example business debt had a ratio of 3.42 in the early 50’s, or $1 of debt produced $3.42 in economic growth. Fast forward to the present and this ratio has slipped to just 1.39 per Federal Reserve Data.

This is Caleb Lawrence Registered Investment Adviser Scotts Valley Drive and Willis Road in the Scotts Valley Plaza, Suite 202 or call me toll free at 888-RICH PIG / 888-742-4744.

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